What are a director’s fiduciary duties?

Directors of limited companies have a set of statutory duties laid out under the Companies Act 2006. These duties reflect the principles of common law and equity. They are intended to instil trust and confidence, and ensure that directors act in the best interests of the company.

The key fiduciary duties of directors under the law are as follows:

Duty to Act within Powers (Section 171)

A director must act in accordance with the company’s constitution (its articles of association) and must only exercise their powers for the purposes for which they were conferred. This means directors cannot act outside the scope of their authority or for improper purposes.

Duty to Promote the Success of the Company (Section 172)

Directors must act in a way they consider, in good faith, to be most likely to promote the success of the company for the benefit of its members (shareholders) as a whole. In doing so, directors must consider:

• The likely long-term consequences of their decisions.
• The interests of the company’s employees.
• The need to foster the company’s business relationships with suppliers, customers, and others.
• The impact of the company’s operations on the community and the environment.
• The desirability of maintaining a reputation for high standards of business conduct.
• The need to act fairly between members of the company.

Duty to Exercise Independent Judgement (Section 173)

Directors must make their own decisions based on their own judgment. They must not simply follow the instructions or advice of others unless acting in accordance with an agreement duly authorised by the company. This duty ensures that directors do not abdicate their responsibilities.

Duty to Exercise Reasonable Care, Skill, and Diligence (Section 174)

Company directors must exercise the care, skill, and diligence that would be exercised by a reasonably diligent person with:

• The general knowledge, skill, and experience that may reasonably be expected of a person carrying out the same functions as the director in relation to the company.
• The general knowledge, skill, and experience that the director actually has.

This duty imposes both an objective and a subjective standard, taking into account both the general expectations of a director and the specific skills and experience of the individual director.

Duty to Avoid Conflicts of Interest (Section 175)

A director must avoid transactions or indirect interests that conflict, or possibly may conflict, with the interests of the company.

This applies particularly to the exploitation of any property, information, or opportunity, and it covers both actual and potential conflicts.

The company may authorise a conflict if certain conditions are met, typically through a decision by disinterested directors or shareholders.

Duty Not to Accept Benefits from Third Parties (Section 176)

Directors must not accept any benefit from a third party that is conferred because of their role as a director or as an inducement to do (or not do) anything in their role as a director. This duty helps to prevent corruption and undue influence.

Duty to Declare Interest in Proposed Transactions or Arrangements (Section 177)

If a director is directly or indirectly interested in a proposed transaction or arrangement with the company, they must declare the nature and extent of that interest to the other directors before the company enters into the transaction or arrangement. This duty is intended to ensure transparency and that the board is fully informed.

What happens if a company is in breach of a fiduciary duty?

If there is a breach of a director’s fiduciary duties, the consequences can be serious. They may involve legal, financial, and reputational repercussions for the company.

It is important to note that fiduciary duties are typically obligations of the directors or officers of a company, rather than the company itself.

A company, as a legal entity, does not owe fiduciary duties but can be held accountable for the actions of its directors or officers who breach their fiduciary duties. Outlined below are some consequences that may arise if a breach occurs:

Legal Action Against the Directors or Officers

Derivative claims:

Shareholders may bring a derivative action on behalf of the company against the directors for breach of fiduciary duty. This type of claim is brought in the name of the company, and any recovery benefits the company rather than the individual shareholder.

Directors’ liability:

Directors or officers who breach their fiduciary duties can be held personally liable. They may be required to compensate the company for any losses incurred as a result of the breach. They may also be required to return any profits made from the breach (accounting for profits).

Injunctions:

The company or its shareholders may seek an injunction to prevent a director from continuing with actions that would breach fiduciary duties.

Rescission of Transactions

If a transaction is entered into in breach of a fiduciary duty, the transaction may be rescinded or unwound. This means that the parties would be returned to their positions before the transaction occurred, essentially nullifying it.

Disqualification of Directors

Directors found to be in serious breach of their fiduciary duties may be disqualified from serving as a director of any company for a certain period of time.

This is governed by the Company Directors Disqualification Act 1986. Disqualification can last for up to 15 years, depending on the severity of the breach.

Reputational Damage

A breach of fiduciary duty can seriously damage the reputation of the company and its directors. This could lead to a loss of trust among shareholders, customers, and business partners, potentially impacting the company’s market position and financial stability.

Regulatory Action

In certain cases, regulatory bodies (such as the Financial Conduct Authority (FCA) in the UK) may investigate and take action if the breach of fiduciary duty involves financial misconduct, insider trading, or other regulatory violations. This can result in fines, sanctions, or other penalties.

Potential Criminal Liability

Although fiduciary duty breaches are typically a matter of civil law, in cases where the breach involves fraud or criminal activity (such as theft or embezzlement), the directors or officers involved could face criminal charges. Conviction could lead to fines, imprisonment, or both.

Impact on Corporate Governance

A breach of fiduciary duty may lead to broader corporate governance reviews or reforms within the company. This could involve changes in the board composition, enhanced oversight, or new policies to prevent future breaches.

Shareholder Activism

Significant breaches of fiduciary duties may lead to increased shareholder activism. Shareholders may push for changes in management, board composition, or corporate policies to ensure better governance and protect their interests.

Settlement

Often, companies and directors may seek to settle disputes arising from fiduciary breaches out of court to avoid prolonged litigation, negative publicity, and further financial losses. Settlements can include compensation to the company, changes in governance practices, or other agreed-upon remedies.

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