March 18, 2019
In an ever-dynamic economic milieu, where the conventional duties associated with the time-honoured roles in a corporate framework have evolved in a playfield where it has become imperative to strike an equilibrium between directorial entrepreneurialism and the traditional notion of ensuring the director’s undivided loyalty to the company. This “balance”, with regards to the equitable rule of corporate opportunity, has been struck differently in different common law jurisdictions – with the Courts in the United Kingdom seemingly enforcing a stricter application of the corporate opportunity principle than the American Courts. In light of the grey area surrounding the Indian perception towards corporate opportunity and lack of case law, the United Kingdom cases are analysed and it is maintained that a pragmatic approach would be best suited for an Indian corporate context that often looks west for inspiration whilst developing regulatory frameworks.
The ‘doctrine of corporate opportunity’ has its roots in the director’s fiduciary obligation of undivided loyalty towards their corporation. The doctrine prohibits an officer or director of the company from diverting or accruing undue personal gratification, from an opportunity that came to their knowledge only by virtue of their official capacity as an officer or director of the company.[1] The object of the doctrine is justifiable in as much as it was elucidated in Percival that the directors must not act in a manner detrimental to the company whilst obtaining – an undue and unfair advantage themselves.[2] The pursuance of the ‘strict approach’, especially by the Courts in the United Kingdom in a manner wherein the “rule should be strictly pursued, and not in the least relaxed”[3] culminated in the ‘doctrine of corporate opportunity’ being effectuated overarchingly, in a manner that curtailed the directors’ very spirit of entrepreneurialism – the cornerstone of the true free market.[4]
This ‘strict application’ of the corporate opportunity doctrine was further strengthened following the landmark judgement in Regal (Hastings) v. Gulliver & Ors.[5] The owners of a cinema hall – Regal Cinemas – wished to acquire two additional halls. The company decided to form a subsidiary by the name of ‘Amalgamated’ (with a share capital of £5,000) for the same, which would facilitate them to purchase the lease of the two cinemas. The directors of the subsidiary agreed to subscribe to shares worth £3,000 amongst themselves and the remaining shares worth £2,000 were to be distributed proportionately amongst their shareholders. The shares were subsequently sold for a profit. Thus, arose the issue of diversion of corporate opportunity with respect to the liability of the directors. Holding the directors to be liable, Lord Russel elucidated that there was no relevancy with regard to the absence of bona fides, fraud and other elements and that the application of the doctrine would rest solely on whether the directors received any profits whilst acting as a fiduciary – such was the interpretation of the English Courts over just half a century ago.
Although the ‘strict application’ of the doctrine of corporate opportunity gradually eroded with the passage of time and has been gradually replaced by a more ‘pragmatic approach’ with greater emphasis being placed on the facts and merits of the matter. For instance, rather than blindly interpreting strictly, the Courts in more recent cases have begun considering facets such as the bona fide nature of the actions of directors in accordance with the facts, sources of such information about the opportunity as well as the commercial viability.[6] [7]
In a very recent judgement, the Supreme Court of the United Kingdom in the case of Eclairs Group Ltd. And Glengary Overseas Ltd. V. JKX Oil & Gas PLC[8] applied what is termed as the “proper purpose rule”. Instead of delving into the jurisdiction and extent of the directors’ powers, the rule stipulates that directors have a certain obligation towards the company in as much as they shall not exercise their powers in such manner as is deemed as “improper”. There further exist two conditions which must be followed accordingly:
- The ‘state of mind’ of the directors should in no way be congruent to that of an “improper nature”. For instance, the directors should not risk making unnatural profits at the cost of the company.
- The motive of the directors should not be to cheat or mislead the company – conversely, their intention should always be to ensure that they perform to the fullest of their abelites and benefit the company.
Thus, the application of ‘the proper purpose rule’ culminated in the eroding of the practice of ‘strict application’ of the corporate opportunity rule – permitting greater directorial entrepreneurship and autonomy.
The case of Vaishnav Shorilal Puri & Ors. V. Kishor Kundan Sippy & Ors. continues to be the only case to have truly tested the waters of the ‘diversification of opportunity’ in an Indian context. In this case the two parties – the Puri group and the Sippy group both had an equal number of shares and an equal number of directors in two distinct shipping companies namely SSCO and SSTS. The Sippy group alleged that the Puri group were attempting to create a different Company altogether, which would replace the agreement they had constituted together with an international shipping company named ‘Contship’ and that the Puris wanted all the profits. The Bombay High Court in this case asserted on the fact that Contship was unwilling to deal with the Sippy’s was an important factor to consider. The Court gave the judgement in favour of the Puri group even though they acknowledged the fact that their actions were not bona fide. So, the Court in this case didn’t look at the objective standard of the doctrine and failed to lay down a cohesive approach to the doctrine of corporate opportunity that could be prescribed consistently by the courts in India.[9] The Courts in India never really tried to apply a very strict application of the doctrine.
The judgement of Vaishnav Shorilal has become one of the most important judgments as it helped enact important provisions in the Companies Act, 2013. This case brought about the Section 166(4) of the companies act and this section is deemed to have a great significance as it talks about the ‘no-conflict principle’ in respect to the directors of the company. There is still no clarity in which way do the Indian Courts have to deal with the situation of diversion of corporate opportunity. If you just read the Section 166(4), it could be contended that this provision calls for a very strict application of the doctrine of corporate opportunity in India just as we read in the case of Regal cinemas in the UK.
As we have seen from the jurisprudential progresses in the UK and the court’s decision in the case of Vaishnav Shorilal in India, the Courts should adopt an open-ended approach in dealing with the doctrine of corporate opportunity vis-à-vis section 166(4).[10] In India also rather than having a rigid interpretation of the doctrine which leads to very hard decisions against the directors, the Indian judicial systems should aim to create a corporate opportunity system which equates the fiduciary duties owed by the directors to the company with that of directorial entrepreneurialism. Focusing or leaning on any single side of this argument could be confrontational, thus, we need to create a sound roadmap towards what we want to achieve and how we want to enforce the doctrine of corporate opportunity in India. The proper purpose rule applied and formulated from the case of Eclairs is a step in the right direction as you need to look at the purpose of the actions, strict liability on the directors is a very bold and dangerous step which could be detrimental to the directors.
[1] Corporate Opportunity. (1961). Harvard Law Review, 74(4), 765-778.
[2] Percival v. Wright 2 Ch 401
[3] Keech v. Sandford 25 ER 223.
[4] Joseph E. O. Abugu, “Director’s Duties and the Frontiers of Corporate Governance” ICCLR 322, 328 (2011).
[5] Regal (Hastings) Ltd. V. Gulliver & Ors. (1967) 2 AC 134.
[6] Island Export Finance Ltd. v. Umunna [1986] B.C.L.C. 460.
[7] Balston Ltd. v. Headline Filters Ltd [1990] F.S.R. 385.
[8] Eclairs Group Ltd. And Glengary Overseas Ltd. V. JKX Oil & Gas PLC UKSC 71.
[9] Vaishnav Shorilal Puri & ors. V. Kishor Kundan Sippy & ors. (4) BomCR 358 (2006).
[10] Section 166(4)- A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
Bhrigu A. Pamidighantam 
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