Breaches of a Director's Fiduciary Duties 10 FAQs

Here you can download our Breaches of a Directors Fiduciary Duties 10 Frequently Asked Questions Answered booklet. An example of the useful information you can find in the booklet is featured below.

Introduction

Directors of Limited Companies have the benefit under Company law to trade a business as a separate legal entity whilst simultaneously being at arm’s length from any consequences of the Company falling into insolvency (or any other risks which the business may be presented with).

However, in exchange for the benefit of this protection, the common law and (more recently) Company law (via the Companies Act 2006 and other connected Company legislation) have imposed certain obligations which directors must adhere to whilst performing this role.These obligations are referred to as Directors’ duties and primarily focus on a Director’s Fiduciary duties but can also include certain non-fiduciary duties.Whilst every Company is very different from another (and therefore the application of a single rule of Company law to Directors duties is difficult to make) Directors are expected to act in all circumstances with honesty and integrity and in the interests of the Company or its stakeholders rather than their own personal interests.

1. What Are Directors' Fiduciary Duties

The word “fiduciary” is defined by common law as an individual or entity that acts for another in a particular matter in circumstances which give rise to a relationship of trust and confidence.

A fiduciary should act exclusively in the interests of the other party to the exclusion of their own personal interests. Fiduciaries include trustees, partners, liquidators, agents, mortgagees and Company Directors.

2. What Are Non-Fiduciary Duties?

Company Directors have certain non-fiduciary duties where no relationship of trust and confidence exists. A breach of these duties can also have consequences in certain circumstances.

Such non-fiduciary duties support the idea that Directors should always act with honesty and integrity in their dealings and examples of non-fiduciary duties include general public interest duties, where a Director is required not to act in such a way so as to provide a risk to the general public interest (for example in circumstances where there was no direct person or organisation with whom a relationship exists).

A breach of non-fiduciary duties may also include incompetence. Incompetence may not be a breach of a Director’s fiduciary duties but it may certainly refer to a breach of a non-fiduciary duty.

A breach of a non-fiduciary duty does not always lead to a legal consequence, whereas a breach of a Director’s fiduciary duties can have very serious personal liabilities for Directors.

3. Who Does a Director Owe Such Fiduciary Duties To?

A Director’s fiduciary duties is primarily owed to the Shareholders of the Company, which essentially comprises of the Company in a global sense. Such fiduciary duties do not apply to specific Shareholders or specific groups of Shareholders, as they can quite often be divided, but must be addressed in respect of Shareholders as a whole and thus the reference to Shareholders is generally construed to mean the Company.

For example, some Shareholders may also be employees of the Company and seek to increase their personal remuneration out of limited Company’s funds to the detriment of any dividend or profits that may be available to Shareholders as a whole.

In many small owner managed Companies this may be preferable, or alternatively it may not be preferable for obvious tax reasons.

However, when deciding to increase any such remuneration, benefits or other payments to employee shareholders, the Directors are under a duty to consider the reason for such increases and whether it is truly in the Company’s interest as a whole, rather than just those specific shareholders who may have requested it.

4. What Are The Exceptions to Such Duties?

There are of course circumstances where a Director’s fiduciary duties are different, perhaps by reason of the reasons the Company exists.

Some Companies are not incorporated or set up to provide profits and dividends to Shareholders. The most common example are Companies limited by guarantee. However, other non-limited by guarantee Companies which (for example) may be registered as charities may have completely different objectives (and therefore it will never be a breach of a Director’s fiduciary duties not to pursue profit).

This will largely be determined by the Company’s constitution and its Articles of Association. There may also be shareholder agreements which dictate the strategic direction and corporate governance of the Company and these documents are critical when determining whether a Director has breached his fiduciary duties.

Other circumstances may also exist whereby a Director does not have to prioritise Shareholder interests.

For example, if the Company is insolvent (either its assets are less than its liabilities or it is unable to pay debts as and when they become due) then a Director’s fiduciary duties lay more with the interest of Creditors rather than Shareholders.

A Director should not seek to direct assets to Shareholders where the Company is struggling to trade and creditors may as a result be at risk should the Company be placed into insolvency. In such circumstances a Director would be in breach of his/her fiduciary duties and may be liable for Misfeasance (please see our booklet entitled “Misfeasance” which provides more detail on this area).

Directors should also be aware of their non-fiduciary duties in respect of, for example, the proceeds of crime legislation and anti-money laundering matters (amongst many other non-fiduciary risks).

IN ORDER TO FIND OUT MORE ABOUT THIS SUBJECT AND THE ANSWERS TO THE QUESTIONS LISTED BELOW, DOWNLOAD OUR HANDY TIPS BOOKLET HERE.

ALTERNATIVELY, CONTACT THE TEAM ON 020 7841 0390

5. Why Can't I Do What I Want With My Business?

6. Directors’ Personal Interests & Personal Risk

7. Standards Expexted of Directors

8. Reliance on Professional Advisors

9. How Do I Avoid Being Personnaly Liable For a Breach of My Fiduciary Duties?

10. Consquences of a Breach of a Director's Fiduciary Duties

Should you require any further assistance at all with these matters, then please contact one of our corporate specialists on 020 7841 0390 and we will be happy to discuss this with you.