India: Derivative Action By A Shareholder: Director Liable For The Breaches Of Its Fidiciury Duties

  • Civil courts are appropriate fora for the institution of derivative suits.
  • Director making an undue gain liable to pay such amounts to the company.
  • Section 397 and 398 of the Companies Act, 1956 do not completely bar the jurisdiction of a civil court


The Delhi High Court ("Court") in Rajeev Saumitra vs Neetu Singh1 while dealing with a derivative action has held that a director was liable to pay to the company any undue gains realised from breach of duties prescribed by Section 166 of the Companies Act, 2013 ("2013 Act").

Section 166 of the 2013 Act provides for fiduciary duties of directors such as the duty to act in good faith, the duty to act in the best interests of the company, its employees, the shareholders, and the community and for the protection of the environment, etc. As per Section 166(5) a director is prohibited from making any undue gain or advantage by virtue of its directorship in the company and is liable repay any undue gains to the company.


The Plaintiff and Defendant were both directors of Paramount Coaching Centre ("PCC") and held 50% of the shareholding each. The Defendant incorporated another company, in which she was the controlling shareholder and also set up a one person company, that were competitors to PCC ("Competing Businesses").

The Plaintiff in his capacity as shareholder of PCC filed a civil suit claiming inter alia that the Defendant:

  1. caused wrongful losses to PCC; and
  2. was profiting from the operation of the Competing Businesses by usurping the goodwill accrued in PCC and the intellectual property of PCC.

The suit was instituted by the Plaintiff on behalf of PCC as a derivative action since PCC was unable to pass a resolution for the institution a suit in its own name, as 50% of the shares were held by the Defendant.


The Defendant objected to the maintainability of the derivative action on several grounds including that the appropriate remedy in the given circumstances was to approach company law board for oppression and mismanagement, that the suit filed was in respect of the plaintiff's individual membership rights, and that the defendant started a competing business under certain compelling circumstances.

The Court relied on the judgment in Starlite Real Estate (ASCOT) Mauritius Ltd. & Ors. v. Jagrati Trade Services Pvt. Ltd.2 to find that

"In a derivative action, the company would be the only party entitled to sue for redressal of any wrong done to it. However, since a company is an artificial person, it must act through its directors. Where the wrong is being done to the company by the directors in control, the company obviously cannot take action on its own behalf. It is in these circumstances that the derivative action by some shareholders (even if they are in a minority) becomes necessary to protect the interest of the company. The minority shareholders sue on behalf of themselves and all other shareholders except those who are defendants, and may join the company as a defendant."

Adverting to the decision of the Delhi High Court in Norma (India) Ltd v. Sameer Khandelwal and Ors3 the Court noted that

"It is settled law that jurisdiction of the company law board under the Companies Act in relation to Section 397 of the said Act is a concurrent jurisdiction which may be exercised by civil courts where allegations pertaining to oppression and mismanagement partake the character of a civil dispute."

The Court further noted that a director was not permitted to retain secret profits which were made by using information, property or opportunities that belonged to the company. A company could seek accounts for the secret profits made, damages for fraud or the rescission of a transaction that enabled the director to made secret profits.

The Court observed that in case a director placed itself in a position where its personal interests were in conflict with its duties to the company, without the consent of the company, the director would be liable to "pay over to the company which he or she has betrayed by disloyalty".

The Court was of the opinion that the Defendant had acted in contravention of Section 166(5) of the Companies Act by seeking to usurp the goodwill and intellectual property of PCC. The Court found that any undue gain made by the Defendant was payable to PCC.


Duties of a director were initially elaborated by judges since companies law was not exhaustive in relation to the duties that were owed by a director to a company. From general principles such as a duty to exercise a reasonable degree of skill and care in carrying out duties and to act in good faith; the law relating to the duties of directors has evolved into specific duties owed by directors to the company, shareholders as well as various stakeholders. India has followed the approach favoured by common law jurisdictions like the United Kingdom to codify wide ranging principles relating to the duties of directors.

An interesting question is whether a director who is resigning/ retiring can make preparatory steps towards setting up a competing business. The doctrine of corporate opportunity pits a director's freedom to exploit its own skills and talent against fiduciary duties owed by it to the company. In Foster Bryant Surveying Ltd v. Bryant,4 the English Court of Appeal was of the opinion that a merit based approach would have to be taken: where a director had acted dishonestly and had diverted business he would be liable for breach of his duties whereas if his conduct was without fault he would not be liable.

Nominee directors are appointed to monitor the activities of the company in order to ensure transparency and probity of company affairs. Contemporaneously, their role extends to ensuring that the interests of the nominating institution are duly protected. Therefore, a nominee director has to ensure that the interests of the concerned parties are in harmony.5 In case any conflict of interests arise, a nominee director is expected to serve the interest of the board in preference to the group that appointed him.6

The Court's decision indicates that a nominee director may be made liable for any breach of its duties under Section 166 of the Companies Act. However, the jurisprudence on this subject indicates that a nominee director of a company is entitled to follow the wishes of his nominator, if he is of the bona fide belief that the nominator's interests and the interests of the company are identical.7

Derivative suits are an important facet of corporate governance and are integral part of the arsenal of remedies present before a shareholder to assert its rights. However, the law in India still remains unclear. Section 245 of the Companies Act allows for the initiation of a class action suit by a member or a depositor only behalf of the members or depositors of a company.

In United Kingdom, principles of common law that govern derivative actions have been crystallised in the relevant legislations allowing a person to seek reliefs on behalf of a company. Considering the impetus given towards codification of common law principles in the 2013 Act, it is time that the principles relating to a derivative action also be codified.


1. Decided on January 27, 2016 by the Delhi High Court in I.A. NO. 17545 OF 2015 and CS (OS) NO. 2528 OF 2015.

2. Decided on 14th May, 2015 by the High Court of Calcutta in G.A. No. 2437/2014 and CS No. 284/2014

3. 2007(93) DRJ 318

4. [2007] EWCA Civ 200

5. See Scottish Co-operative Wholesale Society Ltd vs. Meyer, (1958) 3 All ER 66, held where the nominee director pleaded the interest of the nominator and ignored that of the host company resulting in suppression of the share value of the latter company, the nominee directors were guilty of oppressing the shareholders of the latter company. Boulting vs. Association of Cinematograph, Television and Allied Technicians, (1963) 1 All ER 716 (CA)

6. Bennets vs. Board of Fire Commissioners of New South Wales, (1967) 87 NSWWN 307

7. Levin vs. Clarke (1962) NSWR 686 (Aust) and in Re, Broadcasting Station, 2GB Pty. Ltd., (1964-5) NSWR 1648 (Aust)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Ashish Kabra
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions