Trustees of mutual fund companies can no longer wash their hands of liability in negligence suits, given the fiduciary duty owed by them to investors. A ruling by the Calcutta High Court, in a dispute between five directors of the trustee board of JP Morgan Mutual Fund, and ITC Ltd, has underlined the responsibility of directors of trustee company of mutual funds for promises made to investors.

The observation was part of the judgment passed on a petition filed by the FMCG major against JP Morgan Mutual Fund and its trustee directors for incurring losses of over ₹39 crore on investments made in the scheme information document (SID) provided by the mutual fund house in 2014. ITC had claimed that it had incurred the loss due to ‘negligence and breach of duty’ by JP Morgan.

Interestingly, the five directors of the trustee board of JP Morgan Mutual Fund moved an application in the High Court seeking to remove their name from the case on the ground that the complaint by ITC does not disclose the circumstances in which they came to owe a fiduciary duty or the manner in which such duty has been breached.

Plea dismissed

Dismissing the plea, Justice Moushumi Bhattacharya observed that the directors of the trustee company cannot claim they are irrelevant to the adjudication of the suit as the SID was also shared with them and they have the fiduciary duty to ensure that JP Morgan Mutual Fund delivers on its promise to investors. A reference to the expertise of trustee directors was also made in the additional statement on the SID issued by the mutual fund in 2015, the order noted.

The court opined that the directors’ role in inducing clients to make investments in JP Morgan Mutual Fund cannot be dismissed.

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. The statement was framed so as to induce investors to put their money in the care of these qualified persons for maximum returns, said the judgment.

The court also observed that cases of negligence by corporate entities essentially depend on the mental element of the entity and can only be assessed with reference to the mental element of the directors and managers.

The judgment comes at a time when the mutual fund and capital market regulator SEBI has expressed concern over the role of trustees in mutual funds. SEBI Chairman Ajay Tyagi has said the trustees of mutual funds cannot be mute spectators. If they fail to act, SEBI will step in suo motu to ensure that investors’ interest is protected, he added.

Related Topics
comment COMMENT NOW