What is a fiduciary relationship?
A fiduciary relationship arises under common law where Party A and Party B agree that Party A will act on behalf of or for the benefit of Party B in circumstances that give rise to a relationship of trust and confidence. Generally speaking Party A will have discretion or power that may affect Party B’s interests.
In determining whether a fiduciary relationship exists it is necessary to consider the substance of the relationship in respect of its commercial context and the entirety of the obligations. Simply labelling a relationship as fiduciary is in itself not enough to give rise to a fiduciary duty.
Who owes a fiduciary duty?
In a commercial context fiduciary duties exist in the day to day operations of a business as directors owe fiduciary duties to the company that appoints them as director. This principle that a director owes fiduciary duties to the company arises under equity and is further codified under the Companies Act 2006. The duties owed by the director are to the company, although in certain circumstances should the shareholders form the view the director is in breach of their fiduciary duties they may in certain circumstances bring a derivative action which is usually brought on behalf of the company.
When appointed as a director it is important the director is familiar with the fiduciary duties they are required to adhere to during their appointment. Reference to sections 171-177 (inclusive) of the Companies Act 2006 reveals the duties of a director, they are:
- Duty to act within the powers conferred on the director
- Duty to promote the success of the company
- Duty to exercise independent judgment
- Duty to exercise reasonable care, skill and diligence
- Duty to avoid conflicts of interest
- Duty not to accept benefits from third parties
- Duty to declare interest in proposed transaction or arrangement
The above duties commence upon an individual being appointed as a director to the company. It is important to note in the event the director resigns from their role as director the duties generally cease, however, the duty to avoid conflicts of interest and the duty to not accept benefits from a third party, both continue to apply beyond the appointment. Therefore, should the ex-director exploit property, information or an opportunity that they became aware of during their time as a director of the company, they would be in conflict with the duty to avoid conflicts of interest. Similarly, should a director receive a benefit as a result of things said, done or omitted by them during their directorship they may be in conflict with the duty not to accept benefits.
In the event a director is in breach or threatens a breach of his fiduciary duties the company should consider seeking legal advice in respect of the remedies available to them, which include:
- Injunction
- Setting aside a transaction, restitution and account of profits
- Restoration of company property held by the director
- Damages
The remedy for breach of duty of care, skill and diligence is usually damages. A breach of a duty by a director may also be grounds for the termination of a director’s service contract.
It was noted above of the provision under the Companies Act 2006 that allows the shareholders of a company to bring a derivative action against the director. This action can be brought in respect of an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company. A director need not benefit personally from a breach in order for a derivative claim to be brought.
A director can be relieved from liability by the company should they regulate a decision made by a director which may amount to negligence, default, breach of duty or breach of trust in relation to the company.
If you wish to consult Ai Law in respect of the duties owed by a fiduciary please contact our offices on 0151 294 4722 or info@ai-law.co.uk.
