What Calcutta HC held on fiduciary duty owed by Directors of a Trustee Company to Investors

A suit brought against JP Morgan Mutual Funds India Private Limited (JP Morgan) recently led the Calcutta High Court to emphasise that the directors of a Trustee company cannot wash their hands off liability in negligence suits, given the fiduciary duty owed by them to the investing clients..Justice Moushumi Bhattacharya made the observation while dismissing applications moved by five directors of JP Morgan’s Trustee company to delete their names from the list of parties arraigned in the main suit brought against JP Morgan..The plaintiff, ITC Limited, had made certain investments based on a Scheme Information Document (SID) issued by JP Morgan in 2014. However, owing to the alleged negligence and breach of duty by JP Morgan, ITC instituted a suit alleging a loss exceeding Rs. 39 crores..Appearing for the applicants/directors, Senior Advocate Jishnu Saha submitted that there were no specific allegations made out against the directors of their having made any individual assurances to the plaintiff. Therefore, the plaintiff did not have any remedy against the directors as such. On this primary ground, a plea was made that directors’ names be deleted from the array of defendants to the suit..The Court first noted that names could be struck off the array of parties in a suit, only if it is found that they are unnecessary for the adjudication of the suit under Order 1, Rule 10 of the Code of Civil Procedure (CPC)..In this case, however, the Court observed that the directors of the Trustee company could not claim that they are completely irrelevant to the adjudication of the suit..The Court pointed out that the fiduciary duty owed to clients by JP Morgan, as advertised in their SID, is also shared by the directors of its Trustee company. Reference in this regard was also made to a 2015 additional statement to the SID issued by JP Morgan, which furnished details regarding the expertise of the directors..In this backdrop, the Court opined that the role of the directors in inducing clients to make investments in JP Morgan Mutual Funds cannot be dismissed. As noted by Justice Bhattacharya,.“The projection given [in the SID] is of the trustee having at its helm a group of directors who are eminently suited to monitor and make a sound judgment in relation to investments made in the Trustee Company. The statement was framed in a manner so as to induce investors to put their money in the care of these highly qualified persons for maximum returns….… If the starting point of the trust reposed by the plaintiff is the Scheme Information Document, can it be said that the defendants/applicants can exit the suit altogether before the adjudication commences for answering the questions raised in the suit?”.Further, it was noted that the SEBI (Mutual Fund) Regulations, 1996 also cast a duty on the directors to ensure that the plaintiff’s funds were safely invested. This was also advertised in the SID..This apart, the Court also observed that cases of negligence by corporate entities essentially depend on the mental element of the entity. This element can only be assessed with reference to the mental element of the directors and managers of such corporate entity..Bearing these aspects in mind, the Court was inclined to hold that, the directors were also necessary parties to the suit..As noted in the judgment, it is not necessary that the Court delve into the merits of the allegations raised to determine whether a party is necessary to the suit. Rather it was sufficient that the plaint raised the probability that the party could be necessary to the case..“Without going into the small print of the chain of events leading to the plaintiff approaching this court, it cannot be doubted that the defendants/applicants were fastened with a duty of care to look after the funds of the plaintiff, as had been represented in the scheme documents..The scope of enquiry in the present applications is not to adjudicate on the truth or falsity of the statements made in the plaint including whether the defendants were accountable for the alleged loss and injury suffered by the plaintiff, but whether from the statements made in the plaint read together with the Scheme Information Document, the defendant nos. 6 to 10 can be said to be parties in whose absence all the questions raised in the plaint can be effectively adjudicated….… In the view of this court, once it is recognised that a probability exists for enquiring into the question whether a defendant is necessary or not in the scheme of the plaint as pleaded, the issue must be decided at trial and not in an application for rejection of the plaint or for deletion of parties.“.In light of these observations, the Court rejected the applications moved by the directors and ordered that the case be listed for trial within four weeks..Senior Advocate SN Mookerjee argued for ITC..Read the order: