If you are the director of a company, then with this role goes hand-in-hand a range of fiduciary duties that you’re obliged to fulfil. It’s also important to point out that any type of company director is bound by these duties – and that includes de facto directors who aren’t registered with Companies House, non-executive directors and shadow directors.
In this guide, we will take a look at the nature and consequence of breaches of fiduciary duties and also, from the point of view of the company, what action can be taken by a company against a director who commits a breach.
- What fiduciary duties do directors owe to companies?
- How are these fiduciary duties typically breached?
- What action can shareholders and/or the company take against a director that breaches their fiduciary duties?
- What consequences/remedies do directors face for a breach of fiduciary duty?
- What is the limitation period for a breach of fiduciary claim?
What fiduciary duties do directors owe to companies?
Fundamentally, if you’re the director of a company then there is an expectation that you act in good faith and with the company’s best interests at heart. Running concurrently and also woven within this expectation are your legal obligations, as enshrined within statute (the Companies Act 2006) and the common law duty to act with skill and care. These duties are expanded upon below:
- The overarching duty to act within your powers under the company’s constitution: A director’s powers will be set out in the company’s Articles of Association and should, in all circumstances, be exercised for the good of the company.
- The duty to promote the success of the company: This duty states that a director must act in a way that they consider, in good faith, would be most likely to promote the success of its members (shareholders) as a whole. This means there is a need to consider when decision-making the interests of the company’s employees/shareholders and the fairness of any actions (insofar as both major and minor shareholders are concerned), its stakeholders, reputation, and the community concerned – along with the need to promote healthy relationships with customers and suppliers, the possible long-term consequences of decisions made on the company and the company’s impact on the environment.
Equally, decisions made by the board can only be justified as made in the best interests of the company.
- The duty to exercise reasonable care, skill and diligence: This duty is applicable to both executive and non-executive directors, and the benchmark for this is that of a reasonably diligent person with the general knowledge, skill and experience that could reasonably be expected from a person carrying out that director’s functions. (N.B. If you have a particular professional skillset, for example, as a lawyer or financial professional, then you can expect to be held to a higher standard in matters related to these fields.)
- The duty to avoid conflicts of interest: Transparency in disclosure regarding any type of conflict of interest is key here, and any such disclosure will necessitate the board of directors adhering to the company’s constitution in determining whether the potential conflict can be approved if sanctioned in the appropriate manner. Because this duty extends to both actual and potential situational and transactional conflicts, erring on the side of caution is crucial on the part of the individual director facing a conflicted situation.
- The duty to exercise independent judgment: What this means in simple terms is that it’s incumbent upon you as a director to consider all relevant factors when exercising judgment, and to form your own view on each particular matter.
- The duty to declare any interest in proposed arrangements or transactions: It’s vital that full and frank disclosure is made in this scenario and it is in fact likely that the company’s Articles of Association will outline further details and procedures around this duty.
- The duty not to accept benefits from third parties: There is often a fine line when it comes to this duty and as such, it’s advisable to check whether the company has a written policy in relation to it so that the duty is not unwittingly breached.
How are these fiduciary duties typically breached?
Our business dispute solicitors typically see situations where a company director neglects to act in the best interests of the company because in not doing so, they will gain for their own or other people’s commercial benefit, or where a director funnels business away from the company to their own business/seizes a commercial opportunity for themselves. Other scenarios include accepting gifts or benefits without proper disclosure and also from the angle that any such gift or benefit can lead to a lack of objectivity in a director’s decision making.
What action can shareholders and/or the company take against a director that breaches their fiduciary duties?
Whilst the breach of a director’s fiduciary duties is a legally complex area that requires specialist advice regarding potential action in the form of a derivative claim brought by the shareholders in the company’s name (where a claim is made for the company’s loss – a concept which is beyond the scope of this article), the primary point to make is that a breach of any of the above fiduciary duties can potentially have a significant and detrimental impact on the company as a whole. Breaches can lead to civil action and, in some instances, disqualification proceedings or criminal action. Consequences and remedies in respect of action that can be taken are discussed further in the next section below.
(It's also worth highlighting here that other directors of a company can bring a claim in addition to its shareholders; the key point to note being that it must still be done in the company’s name and with a view to recouping the company’s loss, any such action will therefore have to be sanctioned by a majority of the Board.)
Claims for breach of fiduciary duty are also available to a Liquidator of a company against its former directors
What consequences/remedies do directors face for a breach of fiduciary duty?
The company has a range of legal options available to it where a director has breached a fiduciary duty and it follows naturally that the nature of the remedy will depend on the type and seriousness of the breach itself and as mentioned above, this can in some circumstances take the form of criminal action. In many cases, some of the following consequences and remedies are faced by an offending director:
- Financial repercussions: The breach of a fiduciary duty can in some situations lead to a director being pursued through the courts for a financial remedy to compensate the company for the loss caused by the breach. This can be as grave as the forced sale of their home and personal bankruptcy if the director cannot pay the damages awarded to the company.
- Injunctive relief: Again, this would necessitate the involvement of the courts to prevent the director from doing something such as continuing with an action that is or will cause irreversible harm to the company in terms of it share value, profits or reputation, for example.
- Shareholder proceedings: It’s possible for individual shareholders to take action but in the same way as derivative claims, this is a complex process and is only an available option in limited situations.
- Removal as a director (temporarily pending further investigations or permanently): The terms of the company’s individual constitution will dictate this process, but the underlying principle is that a director can be removed from office if more than 50% of its shareholders vote in favour of the removal. Consideration needs to be given to how this would impact on the directors contractual and statutory employment rights.
- Regulatory proceedings: In addition to the above consequences, a director may find themselves subject to disciplinary proceedings from an appropriate regulator.
- The setting aside of a transaction: This action may be a possible and suitable step in certain scenarios where a breach has occurred.
If you believe a director has breached their fiduciary duties, or you are a director facing a potential claim for breach, you can contact us and arrange a call with a business dispute solicitor. We will guide you through the process and can explain the different options available to you and/or the company.
What is the limitation period for a breach of fiduciary claim?
Broadly speaking, the limitation period for bringing a breach of fiduciary claim against a director (whether an executive or non-executive director) is six years – except in cases where that breach is fraudulent. This legal position makes sense in light of the fact that it’s not unusual for former directors’ conduct to become clearer a considerable time after an event giving rise to a breach has taken place.
The breach of a director’s fiduciary duties is a complex area that almost certainly requires specialist advice to navigate. It’s wise to seek advice immediately if you believe that issues are afoot within your company, so that any damage to it can be mitigated as quickly as possible.