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Fiduciary Relationship in the Corporate Aspects

Fiduciary Relationship
Source – Social Media

A Company is an incorporated body, having perpetual existence, formed by a single person (One Person Company), or group of persons (Partnership, Company, etc.). When we say that it is a body created by a group of persons that means there are many people working in the organization and it is the duty of every person to act according to the code of conduct, as well as he is bound to work in the (Fiduciary Relationship) with other of his co-members.

As the company is a very vast concept that includes multiple functions and various departments to perform, therefore, in order to avoid any conflict between departments and to maintain a healthy relationship among members in the company, a person must act within the limit of Fiduciary relationship, that works in the best interests of not only other members but also in the best interests of the company. 

Concept of Fiduciary Relationship

When we talk about the Fiduciary Relationship, it generally means the relationship in which a person is supposed to act legally on behalf of another person, in his best interests. Basically, it is a relationship of mutual friendship and trust or confidence between the parties.

People who work in Fiduciary Relationship

There are various conducts in the day-to-day life of a company that are executed through its members and all these members of the company are related to one another under this relation. But the major people who are considered and influenced by this relationship are:

  • Promoter
  • Directors
  • Shareholders

Promoter

A promoter is a person who does all the preliminary work before the formation of the company. Some of the functions of the promoter are- incorporation, all preliminary contracts, floatation, etc. Section 2(69) of the Company’s act mentions the term ‘Promoter’ which states that a person may be a promoter of the company even without being a director or a shareholder if he/she has been named so in the Prospectus or Annual Return of the Company.

In the case Twycross v. Grant, the term Promoter has been defined as one who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose.

Fiduciary Relationship
Source – Social Media

Many of us get confused when it comes to identifying the relationship of a promoter. Some say that they are agents of a company, some are of the opinion that they are trustees with the organization, but if there is no such existence of the company, then they are not able to act as its trustee or agent. The fact is that the promoter is acting as a fiduciary relationship with the company.

Lord Cairns in one of his judgments in the case Erlanger V. New Semberero Phosphate Co. cleared the relationship of a Promoter– “The promoters of a company stand undoubtedly in a fiduciary position. They have in their hands the creation and molding of the company. They have the power of defining how and when and in what shape and under what supervision, it shall start into existence and begin to act as a trading corporation.”

In a fiduciary relationship, it is the duty of the promoter to not generate any secret profits, during the preliminary contracts or during any of the transactions, and if supposedly, there occurs a situation that he ever makes that profit, he then will be bound to refund it back to the corporation. A company creates mutual trust with the promoter, and the promoter acts for the betterment and in the best interests of the company.

Board of Directors

The concept of the Board of Directors is very wide as they are the topmost authority in any organization. They are the ones who are responsible to create policies and schemes for the management of the organization. They are considered as an elected body that represents the shareholders of the company. 

Section 149(1) of the Companies Act, 2013 requires that every company shall have a minimum number of 3 directors in the case of a public company, two directors in the case of a private company, and one director in the case of a One Person Company. A company can appoint a maximum of fifteen directors.

Source – Social Media

Therefore, Directors are considered as a sine qua non, which means that they are the absolutely necessary condition for the day-to-day functioning of the company. 

Whenever directors enter into any agreement or contract it is assumed that they are in the fiduciary relationship with the company, and whatever activities they will be performing are performing with the (bona fide) intention and in the best interests of the company and if they ever tried to generate (mala fide) intention, or even tried to go parallel with the policies of the company, they are prohibiting the legal rules of their company. 

In the case Globe Motors Ltd. vs Mehta Teja Singh, the court held that directors of the company are in a fiduciary capacity and since the directors acted in their personal interest as opposed to the interest of the company, such agreement was liable to be vitiated.

As a fiduciary relationship with the company, directors are bound to frame legal, sound, and reasonable policies which are in the favor and interests of the company. They are also responsible to establish an environment where (no majority shareholder tries to misuse his power against any minority shareholder) or any other activities which create unfairness in the organization.

Shareholders

Shareholders are the people who buy shares of the company, and considered generally, as owners by determining the value of shares they have purchased. Shareholders are of 2 types:

  • Majority Shareholders
    An individual who owns 50% or more than that in any public or private organization.
  • Minority Shareholders 
    An individual who owns the value of shares that are less than that of majority shareholders.

When any shareholder acquires the title of a (Majority shareholder), in the organization, he is bound not to misuse his powers against the company or any of the minority shareholders. Due to the title of the majority shareholder, the person is entitled to take part in the company’s decision-making. He is eligible to give his ideas to the directors in the process of decision-making.

However, while giving his ideas and opinions to the directors he should act in the best interest of the company. He should keep in mind that the company for which is giving his opinions, he is also a member of the same. He should support and stand on the behalf of those minority shareholders who are not a part of decision-making and express their ideas in the Board Meetings, for the betterment of the company.

Conclusion

The position of Fiduciary Relationship in a company is, therefore, (sine qua non) in nature without which it is impossible for anyone to imagine the company’s growth in both legal and economical aspects. Due to the philosophy of this concept, there exists a relationship of mutual trust and belief between the parties, which creates a healthy and co-operative environment within the organization.

This concept creates harmony in the corporation as parties are fully aware that their co-members are performing the duties according to their ideas and for their betterment and best interests. Parties can always rely on the other person to whom the duties are assigned or delegated, and that also without any hesitation. Modern business not only in India but in every country is getting tougher with each passing day because of the competition.

So, the companies these days are having endless tasks to do within a particular period provided. Therefore, to avoid any kind of unnecessary delay for which the companies might have to pay, this (Fiduciary Relation), acts as a medicine for taking out companies from these kinds of dangers. If the duties are assigned in an effective manner and if the principles of Fiduciary Relationship are applied in a just and fair manner, then it surely provides countless benefits to the companies in various manners.


Submitted by Tarun Lohani, a fourth year law student at the Integral University, Lucknow.

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