When a person acts as a director of a company, they are subject to a number of duties to ensure that they act properly. These are set out in legislation, common law and in various corporate governance codes. Our superb team can advise on all aspects of these duties.
Directors have a range of duties, most of which are now set out under company legislation.
When a company nears or enters insolvency, these duties shift from duties to the company itself, to the duty to protect the company’s creditors.
What is a fiduciary duty?
Fiduciary duties cover the duty of trust and confidence between parties, and stem from the common law duties of skill and care and good faith. These duties evolved over the years, and most of these are now codified under company legislation.
Who owes these duties?
Duties are owed by any director, or person occupying the position of the director by whatever name called. This includes:
- directors registered at Companies House (executive and non-executive);
- de facto directors – a person that, on the face of it, acts as and is treated as a director of the company, but has not been registered as such at Companies House; and
- shadow directors – defined in company legislation as ‘a person in accordance with whose directions or instructions the directors of the company are accustomed to act’. They are not registered at Companies House.
Directors’ roles within a company can vary widely, and not all directors act in the same capacity. Despite this, all directors are subject to the same duties under company and insolvency legislation. This includes non-executive directors brought in to oversee maybe just one aspect of the company.
What are the fiduciary duties?
Most fiduciary duties have now been set out under company legislation. However, the common law duties still exist in a slightly different form. They establish trust and confidence, bringing in the wider principles of no conflict and no profit.
The main fiduciary duties are:-
- to act within the powers conferred by the company’s Memorandum and Articles of Association;
- to avoid a conflict of interest;
- to act in the best interests of the company;
- not to fetter one’s own discretion; and
- not to make unauthorised profit.
To a large extent these duties are self-explanatory. However, it is common for directors who are also shareholders to find that the edges can be blurred when they are acting in both capacities, particularly in times of high pressure.
Directors duties are wide and cover all aspects of running a company, including when dealing with employees or creditors. Other examples include when considering the appropriateness of delegating responsibilities to other non-directors, or when considering the position of shareholders with different interests. These duties apply too, for example, to the duty of confidentiality to avoid disclosure of company information contrary to the company’s interests, and extend as far as other statutory duties such as health and safety legislation, anti-bribery law and insolvency law.
The duties overlap into group company situations. For example, with the ‘no conflict’ principal directors must take care not to act in a way that competes between companies.
It is vital that all directors are fully aware of their duties and responsibilities, to avoid breaching these.
Remedies for breach
The court has wide powers to set aside or to restore a transaction made contrary to a fiduciary duty. The company, or an aggrieved individual director or shareholder may apply to the court. To read more – see our pages – Types of Claim Against Directors.
There are some obvious remedies available, depending on what the breach is. For example
- if the director has profited from the breach, they might be required to account for that profit to the company by way of repayment;
- an injunction might be granted if appropriate, or damages for breach of duty by the director.
If the company enters into an insolvency event in due course, then there are other remedies and penalties for breaches of directors’ duties under insolvency legislation. An insolvency office holder may take recovery action against a director or a connected party following a breach of duty. Read more in our pages on defending claims by liquidators or administrators.
It is also likely that any breach of fiduciary duty found by a liquidator will be reported to the Insolvency Service, who may take proceedings to disqualify the director, depending on the severity of the breach.
A director of any company, be it a small family run private company, up to a large Plc, must be very mindful of all of their duties both under company legislation and their fiduciary duties or they may face financial or disqualification penalties in the future. It is in everybody’s interests, including the company and the shareholders that a set of principles of good dealing such are set out in the fiduciary duties and legislation are adhered to ensure that mis-practice does not take place.
At Francis Wilks & Jones we frequently advise directors and shareholders who are concerned to meet their duties. An objective independent expert can often help with a tricky problem for a director who isn’t sure whether they may be in breach their duty or not. If you are a company director or a shareholder or an affected person who would like to discuss any aspect of these duties more closely, please contact one of our expert team at Francis Wilks & Jones who will be happy to help you.