Dual duty of a nominee director- The ball game between obligations to the company and the nominator

Dual duty of a nominee director- The ball game between obligations to the company and the nominator

Company law states that directors must fulfil their fiduciary duty and act in the company’s best interests. However, it may be challenging for a nominee director (nominee), who also has to take into consideration the interests of their nominator which may be conflicting. Should the nominee convey sensitive and private company information to their nominator or do they have a duty of confidentiality?

The nominator may expect the nominee to pass on valuable board information, but this expectation mismatch may cause the nominee to breach their fiduciary duties.

• Under the section 166(2) of the Companies Act 2013, a director is required to act in good faith to promote the objectives of the company.
• Section 166(3) of the Companies Act 2013 provides that a director must carry out his/her duties with reasonable care, skill and diligence, and must exercise independent judgment.

The genesis of formally incorporating above provisions in the Companies Act, 2013 can be traced back to the ‘Report on Company Law’ wherein the experts made the following remarks:

“5. …….It is also increasingly being recognized that the framework for regulation of corporate entities has to be in tune with the emerging economic scenario, encourage good corporate governance and enable protection of the interests of the investors and other stakeholders.”

While there is no specific provision which is governing the right of nominees to share information against their confidentiality obligations when it is dealing with sensitive information, precedent suggests the nominee is duty-bound to put the company’s interest before that of the nominator.

Interpretation of Fiduciary Duty by the Courts

The primary and the main duty of the directors is to exercise their powers in good faith and honestly for the overall benefit of the company. The Courts of England have also held that the Directors are bound by duty to act in the best interests of the company.

In Aviling Barford Ltd v. Perion Ltd [1], a director being aware that the company’s property was being sold for £350,000 when its real value stood at £ 650,000, was held to be in breach of his fiduciary duty. English Courts have also held that any information received by the Director during his tenure cannot be used by him to his own advantage.[2]

Interpretation of Fiduciary Duty by the Indian Courts

An identical perspective has been followed by the Indian Courts as well wherein it has been constantly held that directors are the primary decision makers in the company, and their actions are attributable to the company. Therefore, directors ought to act in its best interests.

Consequently Section 166 of the Companies Act 2013 stipulates that when the company is solvent, the directors are expected to fulfil their fiduciary duty, act in good faith and take decisions that would best serve the interests of the Company and its shareholders. Courts have held that directors act as agents, trustees or representatives of the company because of the fact that vis-a-vis the company they act in a fiduciary duty.

The duty of the Nominee Director towards the shareholders

Although, the directors of a company don’t owe a fiduciary duty towards the shareholders, there is a certain duty and loyalty that is expected. The Hon’ble Supreme Court of India has held on several occasions that that the directors of a company owe an obligation to the shareholders of the company to make all disclosures and to act in the best interest of the company, exercising due diligence and good faith.

The Hon’ble Supreme Court also stated that irrespective of whether directors are described as trustees, agents or representatives, they have a duty to act for the benefit of the company and must not derelict their duty towards the shareholders and the investors in the company.

Balance of the duty of the Nominee Directors by the court

In the common law countries like India, the appointment of nominee directors is a common occurrence, especially in the companies which have a big portion of stake in another and want to keep an eye on the activities of the company a shareholder has invested in.

The concept of a nominee director has been put forward in Section 149(7) of the Companies Act 2013. The idea behind the appointment of a nominee director is to safeguard the interests of the nominator, in a manner that doesn’t come in the way of his fiduciary duty as a director. However, is it also relevant to mention that, the fiduciary duties of a nominee director often clash with their duty towards the nominator. Consequently a nominee director has a dual and often conflicting role to play: one, as a nominee of the nominator, and second, as a director of the company, ensuring the larger interest of the company as a whole.

The conflict over who the nominee director owes his foremost allegiance to is not new, nor is it confined to the Indian context. Courts of other commonwealth and non-commonwealth nations including but not limited to England, Australia and New Zealand have oft been faced with similar challenge of balancing the role of the nominee director.

In cases such as Dale and Carrington Invt. (P) Ltd. and Ors. vs. P.K. Prathapan and Ors., and G. Vasudevan vs. Union of India & Ors, the Hon’ble Courts of India held unequivocally that that the directors of a company owe an obligation to the shareholders of the company to make all disclosures and to act in the best interest of the company, exercising due diligence and good faith.

In the case of Rolta India Ltd. & Anr. vs. Venire Industries Ltd. & Ors[3], the Bombay High Court, while dealing with the validity of pooling agreements entered into the shareholders of a company held that shareholders are entitled to consider their own interest without keeping in mind the interest of other shareholders. This is contrary to the position of directors. Directors being fiduciaries of the company and the shareholders and are duty bound to do what they consider to be in the best interest of the company and cannot abdicate their independent judgment by entering into pooling agreements.

In India, in the case of Ionic Metalliks vs. Union of India, the Gujarat High Court observed that the extent of a nominee director’s rights and the scope of supervision by the shareholders are contained in the contract that enables such appointments, or in the relevant statute. However, nominee directors must be especially mindful about not only acting in the interests of their nominators, but acting in the best interests of the company and its shareholders as a whole.

Therefore, a nominee director’s primary loyalty is to the person who nominated them, provided that this commitment does not conflict with the company’s interests. When a conflict of interest arises, the nominee director must decide to work in the best interests of the firm and the shareholders rather than just acting as a nominee.

[1] (1989) Bclc 626 Ch.D

[2] CarnLeigh Precision Engineering Ltd.v.Byrant; (1965)1 N.L.R 1293

[3] 2000 (2) BomCR 241