Director’s violation of duty cause for derivative action

Prior to the enactment of the Companies Act, 2013, issues relating to directors’ obligations and fiduciary duties were uncodified. Delhi High Court in Rajeev Saumitra v Neetu Singh & Ors considered directors’ duties under section 166 of the 2013 act, particularly the duty to act in the best interest of the company. The court also considered whether shareholders may take derivative action, on behalf of the company, against an errant director, and answered in the affirmative.

Given that derivative actions in India are rare, this ruling offers shareholders remedial measures against directors acting in breach of their fiduciary obligations, which now are crystallized in section 166.

Dispute

The case involved Rajeev Saumitra and his wife, Neetu Singh, the directors of Paramount Coaching Centre, each holding 50% of the company’s shares. During her tenure as a director of Paramount, Singh established a one-person company, called KD Campus (KDC), with primarily the same object and purpose as Paramount. Inevitably, the interest of Paramount and KDC were in direct conflict. Disputes arose when Singh profiteered at the cost of and to the detriment of Paramount, by luring its clients to KDC. There was also a conflict regarding the use of the mark Paramount by KDC.

Shreya Ramesh is an associate in the litigation team at Bharucha & Partners.