Law on Corporate Opportunity: India at a Crossroads

The equitable rule of corporate opportunity, which aims to balance the fiduciary duty owed
by a director to the company and the director’s serving of individual entrepreneurial interests,
has been varyingly applied across several jurisdictions. Most notably, while the courts in the
United Kingdom are viewed traditionally as strict enforcers of this rule, the approach of US
courts is deemed to be more flexible.1 The approach of Indian courts, however, remains
unclear to this date; with Vaishnav Shorilal Puri; Seaworld Shipping and Logistics Pvt. Ltd.
v. Kishore Kundanlal Sippy,2 the only Indian case which truly delves into the rule of
corporate opportunity, showcasing a muddled application of the two distinct approaches. This
article will analyse the strict approach of the UK courts specifically, and it will be argued that
a pragmatic application of this approach is most suitable to India’s company law framework.

The premise behind the corporate opportunity doctrine is fundamentally sound, insofar as it
ensures that a director is precluded from exploiting, for personal benefit, information that
he/she receives by virtue of his/her role as a director. In that sense, the doctrine is merely an
extension of the fiduciary duty of a director to the company, a cornerstone of company law,
into an obligation to render undivided loyalty to the company.3 However, the problem arises
when this rule is applied so rigidly so as to preclude directors from availing any opportunity
of a corporate character, thereby stifling ‘directorial entrepreneurialism’.4 Such strict
application of the rule has been long prevalent in the UK, and it is best reflected in the
landmark cases of Keech v. Sandford5 and Regal (Hastings) v. Gulliver.6

In Keech, a child had inherited, as a beneficiary, the lease on a profitable property near
London. Upon the expiry of the lease, the landlord refused to renew the lease for the benefit
of the child. Subsequently, the trustee, Mr. Sandford, availed the opportunity of the lease in
his favor. When this matter was brought to court, a harsh perspective on the fiduciary duty of
loyalty was propounded and the trustee was held liable to account. Essentially, the mere
placing of oneself in a position of conflict of interest was seen as amounting to a breach of

1
S.V. Joga Rao & Y. Shiva Santosh Kumar, Understanding the Law on Corporate Opportunity: Inputs for
India, 55 Journal of the Indian Law Institute 531-545 (2013).
2
[2004] 120 Comp Case 681
3
supra n1
4
ibid
5
(1726) Sel. Case. Ch. 61 (Ct of Chancery)
6
[1942] 1 All ER 378
trust. Lord Chancellor King’s plea that this “rule should be strictly pursued, and not in the
least relaxed”7 has been effectively complied with, as his reasoning in Keech has gone on to
form the basis of the stringent application of the corporate opportunity rule.

Moving squarely into the realm of company law, the case of Regal (Hastings) was the first to
import the principle propounded in Keech and uphold a strict corporate opportunity doctrine.
In this foundational case, a company, Regal, owned a cinema hall and wanted to purchase
two others. To do so, it incorporated a subsidiary, Hastings Amalgamated Cinemas Ltd., with
a share capital of £5,000. It was agreed that Regal would subscribe to shares worth £2,000,
with the remaining shares to be subscribed to by the directors of the subsidiary, which
included Mr. Gulliver. Eventually, the shares of both companies were sold for a profit. The
question before the court was whether the directors could be held liable to account to Regal
for their profits. Affirming the liability of the directors in this case, Lord Russell expounded
upon the rule obligating fiduciaries to account for profit. It was held that the absence of bona
fides, fraud or other factors (for instance, whether at all the company would have otherwise
received the profit) were irrelevant, and the application of the corporate opportunity rule
merely hinged on the fact of a profit accruing while acting as a fiduciary.

Nevertheless, courts in the UK have adopted a more practical approach to the corporate
opportunity rule in the recent past. Rather than blindly applying a rigid rendition of this rule,
courts have employed a fact-specific analysis, with the bona fides of directors’ actions,
source of information about the opportunity, commercial impossibility for the company to
take on an opportunity et al now swaying the courts’ ultimate decisions.8 The cases of
Balston Ltd. v. Headline Filters Ltd.9 and Island Export Finance Ltd. v. Umunna10 are
particularly emblematic of this pragmatic approach. Notably in Island Export, Hutchinson J.
opined that precluding a director from availing an opportunity after the end of his
directorship, merely because he had acquired knowledge of this opportunity in his role as a
director, would go against public interests.11

7
supra n5
8
supra n1
9
[1990] F.S.R. 385
10
[1986] B.C.L.C. 460.
11
ibid
In the Indian domain, Vaishnav Shorilal stands out as the foundational judgment elucidating
the law on corporate opportunity. Herein, the Puri Group and the Sippy Group had equal
shares and equal number of directors in two shipping companies, SSCO and SSTS. The
dispute arose out of the Sippy Group’s claims that the Puri Group diverted the agency
business of SSTS with an international shipping company (‘Contship’) to a company floated
by the Puri Group (‘Seaworld’). Though the Company Law Board ruled in favour of the
Sippy Group and held the directors of the Puri Group accountable, the Bombay High Court
overturned this decision and found Contship’s unwillingness to deal with the Sippy Group,
asserted by Contship through its affidavit, to be a material factor in its analysis. Intriguingly,
the Court delved into a detailed analysis of Section 88 of the Indian Trusts Act, 1882 (a relic
of India’s colonial past) while formulating its decision as well. Further, despite
acknowledging that the Puri Group’s actions were hardly bona fide, the Court still ruled in
the Puri Group’s favour. Inexplicably, the Court took into account factors relevant under the
US corporate opportunity doctrine, such as the unwillingness of a third-party to contract with
the company,12 while purporting to act in accordance with the common law rule espoused in
the UK. Thus, Vaishnav Shorilal failed to truly lay down a cohesive approach to the
corporate opportunity rule that could be consistently followed by Indian courts, and the law
on corporate opportunity in India still lacks clear direction.

It is key to note that since the judgment in Vaishnav Shorilal, India has gone on to enact the
Companies Act, 2013. Section 166(4) of this Act is of great relevance, insofar as it
encapsulates the ‘no-conflicts principle’ vis-à-vis directors of a company.13 Read alone, it
could be argued that this provision argues for a strict application of the corporate opportunity
rule in India, along the lines of the rulings in Keech and Regal. However, this author argues
that in light of the aforementioned jurisprudential developments pertaining to the corporate
opportunity in the UK, and the Bombay High Court’s ruling in Vaishnav Shorilal (flawed as
it may be), Indian courts must adopt an open-ended interpretation of Section 166(4).
However, extending this interpretation to include factors which find no place in the Indian
company law framework, as was done in Vaishnav Shorilal, is equally problematic.
Essentially, rather than positing a rigid corporate opportunity doctrine which leads to

12
supra n1
13
S. 166(4) of the Companies Act, 2013 reads: “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.”
inequitable decisions against directors, Indian courts should aim to develop a just and
equitable corporate opportunity doctrine which harmonizes the fiduciary duties of directors
with the notion of directorial entrepreneurialism. The pragmatic approach put forth in the
cases of Balston and Island Export, thus, serves as a roadmap towards enforcing a
commercially, and legally, sound corporate opportunity doctrine in India.