Breaches of Fiduciary Duties v Public Interest Duties
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) with the purpose of protecting the public interest and preventing 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 – be that misleading potential customers, discriminating against certain categories of creditor or defrauding members of the public. This purpose if focused solely on maintaining the integrity of the UK economy and market place.
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
- 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. This is commonly referred to as a fiduciary duty.
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.
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.
At Francis Wilks & Jones we have 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.
Please call any member of our Director Disqualification team for a consultation now on 020 7841 0390. Alternatively please email us with your enquiry and we will call you back at a time convenient for you.