Abuse of Corporate Opportunity

Corporate Opportunity doctrine provides that – a director or an officer of a company

may not acquire a business opportunity for personal profit which rightfully belongs
to the company. The damages caused due to this can be recovered if the following
are established –

(a) that the opportunity came to the director in the course of his duties,
(b) that he has made personal profits therefrom.

To determine whether a transaction falls within the ambit of abuse of corporate

opportunity, one can apply following three tests:

(i) Interest or expectation test, i.e., whether the company has an established
interest or expected interest in the pre-existing relationship.
(ii) Line of business test – whether the activity is closely associated with the
existing or prospective activities of the company, and
(iii) Fairness test – what is fair and equitable under the circumstances.

To determine if an opportunity is a ‘corporate opportunity’ depends on the specific

circumstances of a case. For instance, if the company has been pursuing an
opportunity, or the opportunity has been offered to it, or corporate funds have been
expended in financing the opportunity, then such an opportunity will rightfully
belong to the company. On the other hand, if an opportunity has been offered to a
person in his individual capacity then it will not be a case of misuse corporate
opportunity. The consequence of abuse of corporate opportunity is that the
company can recover damages or claim the profits realized. But if the opportunity
has been rejected by the company by means of a disinterested vote of the board of
directors after fullest disclosure, then the opportunity is no more considered as a
corporate opportunity.

Exceptions to the Doctrine of Corporate Opportunity –

1. Business Judgment rule – This rule distinguishes between those actions of

directors which should be subjected to judicial challenge and those which
should not be so subjected. If the directors are personally involved or
interested in the alleged wrong doing which impairs their exercise of an
independent judgment then they can be held responsible. It means if the
directors acted in bad faith then only they should be held responsible.
2. Where the company is forbidden by law to take the opportunity.
3. Where the company is nearly defunct.
4. Where an opportunity has been rejected after full and informed discussion by
the Board.
5. Where it is ultra vires to take the opportunity.

Law relating to corporate opportunity in India

The provisions of Companies Act, 1956 relating to this are:

(i) The Board must sanction the contracts in which directors are interested
and if the Board refuses to give its consent then anything done in
pursuance of the contract shall be voidable at the option of the Board.
(ii) As per Section 299, the director must disclose his interest in a contract
entered into or to be entered into, on behalf of the company.
(iii) Section 300 forbids the interested director from participating in the
discussion or voting on a resolution relating to that transaction.
(iv) Particulars of contracts, companies or firms in which directors are
interested are required to be entered in the Register maintained for the
purpose which shall be open to inspection by any member of the
company.