[Opinion] The Conundrum of A Nominee Director

Harshit Jain – [2023] 157 taxmann.com 380 (Article)

Research Question

How have the conflicting duties of a Nominee Director put him in a position of dual loyalty and how it has been resolved by the courts of various countries? Is there any better possible solution in contrast to the current solution?

Research Paper

Introduction

A company is an artificial person having a separate legal identity but does not have a mind to make decisions and therefore some human agency is required for their effective functioning. Such human agency is known as the ‘Board of Directors’. They are the lifeline of the company as they are the representatives of shareholders and are also responsible for making the majority of decisions of the company. The duty of the director to be loyal to the company forms the basic backbone of directorship duties. There can be various types of directors on the board appointed for any specific purpose. One such type of director is a ‘Nominee Director’.

Role of a Nominee Director

In terms of company management, various companies offer the position of a nominee director in their company structure so as to cater for the interests of various stakeholders. The ‘interest’ of these stakeholders is generally in the form of financial support by advancing loans or investing in shares. The primary reason behind the appointment of a nominee director is to protect and put forward the interests of such stakeholders in the company. These stakeholders are generally banks and financial institutions as they have acted as a backbone for the company in terms of extending heavy finances to them. These lending institutions have a major chunk of money invested in the company and are in a debt cum equity position with the company. Therefore, it becomes necessary for such lending institutions to have someone on the board as these investments have a direct impact on the profitability of such stakeholders. Hence, the nominee director acts as a nexus between the nominator and the company to ensure that both their interest goes in line with each other. However, the nominee director does not have separate roles, duties, and responsibilities from that of other directors in the company. The Act has laid down the general duties of the directors and does not go in a detailed manner to list out any specifications for a nominee director disregarding the special purpose for which they are appointed. The non-distinction of duties should not be a matter of concern though, but only till the time there is no overlapping of interest of the company and the nominator. Being the director of the company, the nominee director holds the same responsibility towards the company as that of other directors and is bound by the duties enumerated in the Act. The directors hold a fiduciary relationship with the company and it is their duty to put the interest of the company over and above the interest of any third party and even their personal interest should be subdued. They have a responsibility to work in the bona fide interest of the company and must not use their position of power to pocket personal gain. The rule has also been inscribed in the statutory act which clearly mentions that the director shall not get involved in any of his interests, directly or indirectly which goes against the interest of the company.

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