This article is written by Mohammad Azhar, Ideal Institute of Management and Technology , School of Law affiliated to GGSIPU , B.A. LL.B. (5th Year) during his internship at LeDroit India.
Abstract
Fiduciary duties , especially duty of loyalty and the duty of care are the two main duties that comes under the director of the company while making deals and coming under contracts with different companies . The fiduciary duties are basically legal duties and compliance of the director of the company under which the agreement is formed . Duty of loyalty requires acting honestly, in good faith, and avoiding conflicts of interest. Duty of care mandates diligence, skill, and reasonable decision-making. This article explores both duties under India’s Companies Act, including Section 166, and illustrates key differences through Indian and landmark foreign case law. It also examines nominee directors, oversight obligations, and recent developments in corporate compliance.
Introduction
Duty of Loyalty
Meaning
The Duty of Loyalty requires directors to act with absolute good faith, ensuring that the interests of the company, its shareholders, employees, and the wider community are always placed above their personal interests. Under Section 166(2) of the Companies Act, 2013, a director must act in good faith to promote the objectives of the company and safeguard the interests of its stakeholders.
Core Principles
- Avoidance of Conflicts of Interest – A director must not engage in any activity where personal interest conflicts with the company’s interest.
- Prohibition on Self-Dealing – Directors cannot use their position to secure undue personal benefits.
- Corporate Opportunities Doctrine – Any business opportunity that properly belongs to the company must first be offered to the company before a director can consider it personally.
- Confidentiality – Information gained in the capacity of a director must not be misused for personal advantage.
- Full Disclosure – Even the possibility of a conflict of interest must be disclosed to the board or shareholders for approval.
Legal Basis
- Section 166(2) of the Companies Act, 2013:
“A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community, and for the protection of the environment.”
Consequences of Breach
- Personal liability to compensate the company for any undue gain or profit.
- Loss of directorship and reputational harm.
- Legal actions under the Companies Act, as Section 166(7) provides for penalties for contravention of fiduciary duties.
- Unlike breaches of the duty of care, breaches of the duty of loyalty are rarely excused under the business judgment rule.
Illustrative Breaches
- Entering into a contract with the company that personally benefits the director, without disclosure and board approval.
- Exploiting a business opportunity meant for the company for personal gain, without first presenting it to the board.
Landmark Case Law
- Regal (Hastings) Ltd v. Gulliver, (1942) 1 All ER 378
The House of Lords held the directors personally accountable for profiting from a corporate opportunity without first disclosing it to the company. Even though the company itself had not suffered a financial loss, the directors were required to return the profits because their actions breached the duty of loyalty.
(Indian Kanoon) - Canadian Aero Service Ltd v. O’Malley, [1974] SCR 592
The Supreme Court of Canada ruled that senior company officers were liable for diverting a corporate opportunity for their personal benefit. The Court emphasized that fiduciary duties extend not only to formal directors but also to senior officers who are in a position of trust, requiring them to act in the company’s best interests.
(CanLII)
Duty of Care
Meaning
The Duty of Care obliges directors to perform their responsibilities with due diligence, prudence, and informed judgment, similar to how a reasonably careful person would act in comparable circumstances. Directors are expected to make decisions in good faith and in a manner that they reasonably believe serves the best interests of the company.
Essential Principles
- Informed Decision-Making – Directors must gather and assess all relevant facts before taking action.
- Active Participation – Attending board and committee meetings, reviewing reports, and engaging in discussions is mandatory.
- Seeking Expert Advice – Where decisions involve complex or technical matters, directors should rely on professional opinions or reports.
- Independent Judgment – Directors must avoid blindly following others and exercise their own reasoned judgment.
- Prudent and Reasonable Conduct – Any decision should reflect thoughtful consideration of the company’s objectives and potential risks.
Legal Basis
- Section 166(3) of the Companies Act, 2013 states:
“A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.”
Consequences of Breach
- Directors may face civil liability for losses caused by negligent or reckless conduct.
- Shareholders can initiate actions against directors for gross negligence or failure to act responsibly.
- Section 166(7) prescribes penalties for contraventions of fiduciary duties.
- However, under the business judgment rule, directors are generally protected if they acted in good faith, on an informed basis, and without conflict of interest.
Illustrative Breaches
- Consistently missing board meetings and failing to review essential financial or legal documents.
- Approving major transactions without conducting any due diligence or risk assessment.
Relevant Case Laws
- Dale & Carrington Investment (P) Ltd. v. P.K. Prathapan, (2004) 1 SCC 212
The Supreme Court of India underscored that company directors must act with due diligence, prudence, and in the overall interest of the company. The Court reiterated that directors cannot exercise their powers arbitrarily or for personal advantage, and any breach of their fiduciary obligations invites judicial scrutiny. - Kailash Nath Agarwal v. Pradeshiya Industrial & Investment Corp. of U.P. Ltd., (2003) 4 SCC 305
The Court highlighted that failure to exercise proper care and caution in managing company affairs may lead to personal liability for directors. Negligent conduct or disregard for fiduciary duties exposes directors to both legal and financial consequences.
Both duties aim to ensure directors act responsibly, ethically, and for the benefit of the corporation rather than their own self-interest. Breaching these can have severe legal and reputational implications for both the individual and the company.
Indian Legal Position
Under Section 166 of the Companies Act, 2013, the fiduciary responsibilities of directors are expressly laid down in law. Directors are legally obligated to act in good faith, prioritize the company’s and stakeholders’ interests, avoid any conflict of interest, and perform their duties with due care, skill, and diligence.
Conclusion
Fiduciary duties most prominently the duty of loyalty and the duty of care serve as the foundation of a director’s legal and ethical responsibilities toward the company. These duties are not merely formal obligations; they are essential to maintaining trust, integrity, and accountability in corporate governance. A director who acts with loyalty ensures that personal interests never override the company’s welfare, while the duty of care compels informed and prudent decision-making that safeguards long-term growth.
Judicial precedents, such as Regal (Hastings) Ltd v. Gulliver and Dale & Carrington Investment (P) Ltd v. P.K. Prathapan, highlight that courts are vigilant in examining any breach of fiduciary responsibilities and will hold directors accountable for self-dealing, negligence, or misuse of corporate opportunities. Indian law, through Section 166 of the Companies Act, 2013, has codified these obligations, ensuring that directors are both legally and morally bound to uphold these standards.
Ultimately, strict adherence to fiduciary duties promotes sustainable business practices, protects the interests of shareholders, employees, and the community, and reinforces investor confidence. Compliance with these duties is not only a statutory requirement but also a hallmark of principled and effective leadership, shaping a corporate culture rooted in in fairness, responsibility, and long-term value creation.
Keywords:
- Fiduciary Duties of Directors
- Duty of Loyalty
- Duty of Care
- Section 166 Companies Act 2013
- Corporate Governance
- Conflict of Interest
References
- Regal (Hastings) Ltd v. Gulliver, (1942) 1 All ER 378
Read on Indian Kanoon - Canadian Aero Service Ltd v. O’Malley, [1974] SCR 592
Read on CanLII - Dale & Carrington Investment (P) Ltd v. P.K. Prathapan, (2004) 1 SCC 212
Read on Indian Kanoon - Kailash Nath Agarwal v. Pradeshiya Industrial & Investment Corp. of U.P. Ltd, (2003) 4 SCC 305
Read on Indian Kanoon - Section 166, Companies Act, 2013
Read on Indian Kanoon
