Fiduciary Duties Explained
If you are a company director or in a position of trust, you will probably be deemed to be a fiduciary. That in turn means you have certain fiduciary duties and responsibilities, and it is important that you know and understand what they are.
Summary
A fiduciary is expected to act in good faith and in the best interests of their principal, rather than in their own personal interests. That means they have a duty to be fair and transparent with their principal, and not to mislead them. A fiduciary duty can arise in a number of circumstances and breach of a fiduciary duty is a serious issue that can result in legal proceedings and damages.
Who is a fiduciary?
In certain relationships, there is a presumption that there is a fiduciary duty. These include in the case of a director of a company who will have a fiduciary duty in respect of the company and its shareholder, a trustee who will have a fiduciary duty to the beneficiaries of the trust and a solicitor who will owe a fiduciary duty to their client.
It is possible to rebut the presumption of a fiduciary relationship, but evidence will be required.
In other relationships, the starting point is that there is no fiduciary responsibility but it is possible to establish (on the balance of probabilities) that there is a fiduciary relationship. This will depend on the circumstances of the case and factors such as the level of trust placed in someone, the amount of influence they have and the extent of their powers.
What are the fiduciary duties?
The fiduciary duty obliges the fiduciary to act in the best interests of those they represent and in the case of a director, they must act in the best interests of the company and shareholders.
All company directors owe fiduciary duties to their company. Much of the law relating to fiduciary duties is set out in the Companies Act 2006, however, directors also have a fiduciary duty under common law. The Companies Act 2006 outlines the following specific fiduciary duties, namely a fiduciary should:
- act within their powers as specified in the company’s articles of association and company law,
- promote the success of the company for its shareholders’ benefit,
- exercise independent judgment,
- avoid conflicts of interest,
- not accept benefits from third parties, and
- declare their interests in proposed transactions affecting the company.
These duties cover a wide range of circumstances.
Breach of fiduciary duty
A breach of a director’s fiduciary duties can occur in a number of ways.
Examples of breach of fiduciary duties by directors
Directors might breach their fiduciary duties if they:
- use confidential information acquired while they were a director for their own purposes and advantage after their directorship ended
- take preparatory steps during their directorship with a view to competing with the principal after their directorship has ended
- become aware of an investment opportunity which would benefit the company but fail to disclose it and later invest in the opportunity themselves
Remedies
A fiduciary who breaches their duties may be liable to the principal for any profit made or benefit received, as well as liable for loss sustained by the principal. A fiduciary can also be liable to shareholders and sometimes also to managers of or people working at the company.
In the event of a breach, the claim and remedies available will depend on the circumstances of the case but could include damages, equitable compensation, an account of profits (whereby the fiduciary must pay the profits they made as a result of the breach), rescission (cancelling a contract) or injunctive relief preventing the fiduciary from taking certain action.
Shareholders or the board of directors may have the authority to remove a director who has breached their fiduciary duties.
Recent case law
In the case of Cheshire Estate & Legal Ltd v Blanchfield & Ors, one of the issues for the Court of Appeal was whether the respondents (directors) had breached their fiduciary duties by taking preparatory steps to establish a competing business prior to their resignation.
The actions the directors had taken included:
- registering a company and securing a trading name,
- scouting for premises,
- opening a bank account, and
- contacting potential funders.
The Court of Appeal found it will not always be a breach of fiduciary duty to take preparatory steps without informing an employer and as long as the fiduciaries act honestly and in the company’s best interests until resigning. In the case, the Cheshire Estate & Legal Ltd v Blanchfield case, the court found the respondents not to be in breach.
The court also held that whether preparatory actions, short of active competition, are consistent with a director’s fiduciary duty to the company will depend on the facts of the case but “even an irrevocable intention to compete does not necessarily mean that merely preparatory steps are unlawful.”.
You can read more about this decision here: Cheshire Estate & Legal Ltd v Blanchfield.
If you would like to discuss any of the issues raised in this article, please get in touch.
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