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What is fiduciary duty? (case law) establish the principle

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02/02/18 Free Law Essays Reference this

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What is fiduciary duty? (case law) establish the principle

For most purposes it is sufficient to say that directors occupy a fiduciary position and all the powers entrusted to them are only exercisable in this fiduciary capacity [1] 

The directors of companies have been variously described as agents, trustees or representatives, but one thing is certain that the director’s action behalf of a company in a fiduciary capacity and their acts and deeds have to be exercised for the benefit of the company. They are agents of the company to the extent they have been authorized to perform certain acts on behalf of the company. In a limited sense they are also trustees for the shareholders of the company. To the extent the powers of the directors are delineated in the Memorandum and Articles of Association of the company, the directors are bound to act accordingly. As agents of the company they must act within the scope of their authority and must disclose that they are acting on behalf of the company. [2] 

A Director of a Company indisputably stands in a fiduciary capacity vis-à-vis the Company. He must act for the paramount interest of the company. He does not have any statutory duty to perform so far as individual shareholders are concerned subject of course to any special arrangement which may be entered into or a special circumstance that may arise in a particular case. Each case, thus, is required to be considered having regard to the fact situation obtaining therein and having regard to the existence of any special arrangement or special circumstance. [3] 

Though the court conceded that “it is impossible to lay down a law which will have universal application”, it went on to enumerate at least two instances where the directors owe a direct duty to the shareholders. The first is when the directors take it upon themselves to advice shareholders and the shareholders act on such advice. This arises especially in cases where the shareholders are faced with the choice of accepting or rejecting a take-over bid. [Paragraph 79] The second is in a case of “transaction of sale and purchase of shares between the director and the shareholder”. [Paragraph 75] However, this was clearly not meant to be an exhaustive enumeration. Consequently, the Supreme Court ruling in Dale and Carrington v. P.K. Prathapan [(2005) 1 SCC 212] seems to add a third category of cases to this list. The court in that case opined:

It follows that in the matter of issue of additional shares, the directors owe a fiduciary duty to issue shares for a proper purpose. This duty is owed by them to the shareholders of the company.

Dale & Carrington Invt. P. Ltd. and Anr. v. P.K. Prathapan and Ors

The fiduciary capacity within which the directors have to act enjoins upon them a duty to act on behalf of a company with utmost good faith, utmost care and skill and due diligence and in the interest of the company they represent. They have a duty to make full and honest disclosure to the shareholders regarding all important matters relating to the company

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The duty of directors to exercise powers conferred on them only for the purpose for which such powers were conferred is a well-established principle. However, the decision in Dale and Carrington arguably supports the view that every breach of the ‘proper purpose’ doctrine is a violation of the directors’ duty to the company’s shareholders which gives rise to an independent cause of action to the shareholder. 

The misuse of corporate assets by the director will impose liability to account upon him [4] and every director must realize that he must not use the assets of the company as if they were his own. A director is accountable to the company for the use of its assets including business connection, goodwill, customer lists or trade secrets for the benefit of the rival concern. [5] 

A director must avoid any conflict of interest or doing of any act that would be at variance with the duty of loyalty and good faith he owes. Rix LJ says in Foster Bryant Surveying Ltd v

Bryant and Ors, [6] “

A requirement to avoid a conflict of duty and self-interest means that a director is precluded from obtaining for himself, either secretly or without the informed approval of the company, any property or business advantage either belonging to the Company or for which it has been negotiating, especially where the director or officer is a participant in the negotiations.

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