LEGAL CORNER – May 2016 – CASE LAW:
- Whether the Director is authorised to use the trademark of the company at his/her discretion and complete the business of the Company?
- Whether such action by the director leads to breaches of directors’ duties under section 166 of the Companies Act, 2013?
- Whether a shareholder can file derivative Suit under such circumstances?
The plaintiff, Rajeev Saumitra is engaged in the business of imparting education under the banner of Paramount Coaching Centre Pvt. Ltd. The defendant is plaintiff’s wife, Neetu Singh, who runs the One Person Company named K.D Campus Pvt. Ltd.
The dispute relates to the claim by Rajeev Saumitra that while Neetu Singh was a director and shareholder of Paramount, she began engaging in competing for activity with that of the company, and set up K.D. Campus in parallel and began luring the students (customers) of Paramount away. It was alleged that she, therefore, breached her duties as a director of Paramount. There was also a dispute relating to the use of the PARAMOUNT name and mark for deceiving the customers and clients.
The defendant was a 50% shareholder and director of Paramount, she had the ability to block any resolutions of Paramount seeking to proceed against her. The plaintiff had no alternative but to pursue a derivative suit against the defendant for the breach of Section 166 of the Companies Act, 2013.
Considering the entire gamut of the matter and facts and circumstances of the case, Court made the following observations:
Duties of a director
- The defendant, a director of Paramount, had acted in bad faith and her actions were in violation of her fiduciary obligations as a director. Being guilty of the breach of Section 166 of the Companies Act, 2013, she is liable to repay to the company, the undue gain already made under sub-Section 5 of Section 166 of the Act and the Director of the company is not to assign his office unless the breach is stopped.
Maintainability of derivative actions
- A derivative suit is filed by a shareholder in their own name, on behalf of the company and for the benefit and advantage of such a company, against a third party (Including ‘insiders’ such as directors or other majority shareholders) who may be acting against the company’s interests. In a derivative action, the benefit of the action and the remedy is intended for the company and not the individual shareholder initiating the action.
- The breach of directors’ duties would give the plaintiff shareholder the right to pursue a derivative action against the defendant on behalf of Paramount.
Duties of shareholders
- Pursuant to the defendant’s status as a majority shareholder of Paramount, the court observed, “It is true that a share is a property, which its owner may treat in any way he desires. These options, however, are not unlimited … A controlling shareholder who wishes to sell his shares owes a duty of loyalty to the company with respect to the sale, and must act in good faith and honesty toward it, and he will be in breach of his duty if he sells his shares to a buyer who to the best of his knowledge will strip the company of its assets and lead to its insolvency
After considering all the observations and facts of the case, judge disposed of the Interim Application with the following directions:
That the defendants shall not use the mark PARAMOUNT, its goodwill in any manner in its Company and not poach teachers, students or staff members of Plaintiffs company and within two weeks shall remove the word PARAMOUNT from all hoardings, advertisements, brochures and other materials and shall not open any new centre within the range of 100 meters where the centre of Plaintiff already exists. She shall furnish the true account from February, 2015 till December, 2015 and every quarterly till the decision of the suit; the first statement would be filed by 15th February 2016; (iii) she will not create any hurdle in smoothly going of Plaintiffs company and she shall perform her fiduciary duties under the Act and sign all the requisite papers and shall not create any hindrance of running business of Plaintiff directly or indirectly. The defendants are allowed to continue with the business. In the case of any breach, the plaintiff is entitled to move before Court for modification of order and then the Court may pass any appropriate orders.