Breaches of fiduciary duties v public interest duties

I would strongly recommend using FWJ for director disqualification matters. Tactically and commercially they played it just right and I am now able to get on with my business life without the worry of disqualification hanging over me

A director we defended in disqualification proceedings

While a director of a limited company may be perceived to some sense to be protected from personal liability, this does not protect a director from irresponsible, negligent or fraudulent behaviour.

For this reason, over many years legal cases have developed what are referred to as “fiduciary duties” which a director owes in the performance of his/her duties. These duties, developed over a number of years, were codified in Sections 171-177 of the Companies Act 2006.

Breaches of public interest duties in director disqualification proceedings

Director disqualification proceedings following insolvency are issued by the Secretary of State (in the absence of a voluntary disqualification undertaking). Their purpose is to protect the public interest and prevent a repetition of such misconduct.

The grounds for issuing such proceedings, and the court making a finding that the director has been liable for misconduct, are numerous but most commonly found in a small amount of circumstances. Read about some of the most common grounds for an allegation and finding of misconduct.

Unfitness for the purpose of director disqualification proceedings is focused solely on the public interest, for example

• misleading potential customers;
• discriminating against certain categories of creditor; or
• defrauding members of the public.

This purpose of the legislation is focused solely on maintaining the integrity of the UK economy and market place.

The concept of fiduciary duties

Breaches of public interest duties in director disqualification proceedings following insolvency are issued by the Secretary of State with the purpose of protecting the public interest and preventing a repetition of such misconduct.

Some of the most common allegations of misconduct can include:

• implementing a policy to discriminate against HMRC;
• acting while disqualified;
• misusing a directors’ loan account (usually for personal benefit);
• carrying out a business or otherwise acting contrary to the public interest;
• drawing illegal dividends; and
• breaches of Financial Service regulations.

The purpose of such allegations is to prevent any repetition of such misbehaviour and accordingly protect the public interest. However, it provides no opportunity for creditors or third parties to seek redress to recover their losses as a result of such misconduct.

Breaches of fiduciary duties

A fiduciary is an individual or entity which holds a position of trust, confidence and fidelity to other parties in a specified capacity or role.

Accordingly, as custodians of a company’s assets and business interests, a director as a fiduciary holds duties to

• act in the interest of the company;
• act solely for the purpose s/he is entrusted with this role;
• act with loyalty and fidelity; and
• not to prioritise his/her personal interests over that of the company or its shareholders.

The fiduciary duties of directors were historically set down as a result of a number of legal cases which set out the interests which the directors serve, together with the need for independence, the need to act objectively, the need to adhere to the original purpose of the company and the need to ensure good company management.

Following the introduction of the Companies Act 2006, these duties were codified into the following (summarised for the purpose of this article):

• section 171 – to act within his/her powers, as governed usually by the company’s constitution and any other agreement;
• section 172 – duty to promote the success of the company;
• section 173 – duty to exercise independent judgment;
• section 174 – duty to exercise reasonable care, skill and diligence;
• section 175 – duty to avoid a conflict of interest;
• section 176 – duty not to accept benefits from 3rd parties;
• section 177 – duty to declare an interest in a proposed transaction or arrangement entered into by the company.

There are of course other duties imposed on all limited companies, which a director should ensure are adhered to – for example the requirement to file accounts and the requirement to record beneficial owners of the company.

Difference between the two sets of duties

The difference between the two above sets of duties is to ensure a balance between the stakeholders in a company (which can include lenders, creditors, customers, employees and third parties) and the need to maintain a legitimate transparent economy.

Any breach of the above duties can mean that the limited liability status of a company is stripped away and the directors then become personally liable for their decisions. This can include disqualification as a director.

There are many other legal areas where a personal financial liability can be imposed for debts or losses as a result of any such breach of a director’s fiduciary duties.

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At Francis Wilks & Jones, our team has considerable experience in advising directors on the difference between their fiduciary duties and their public interest duties, and defending directors through to trial on such issues. Contact a team member today and we can help.

Over the ten years we have worked together, FWJ continue to achieve exceptional results year on year. Andy Wilks and the team have been a pleasure to work with and have always provided pragmatic, commercial and accurate advice on a wide range of matters. FWJ have become an integral part of our business and we cannot recommend them highly enough.

A longstanding client whom we have advised on various matters