Breach of Fiduciary Duty Solicitors
Every company has to stick to high ethical standards, especially those in leadership roles with fiduciary duties.
Company directors of all types, even those not officially listed with Companies House have these duties, which they must take seriously. If they don't, they could cause harm to the company or, in some cases, put it at risk.
At Lawhive, our network of corporate solicitors is ready to offer expert advice at affordable fixed fees if you're dealing with a breach of fiduciary duties.
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What action can shareholders or the company take against a director who breaches fiduciary duties?
What are the legal consequences of breaching fiduciary duties?
What is a fiduciary duty?
Fiduciary duty is the connection between someone in a position of trust (a fiduciary) and the person they're helping, known as the principal or beneficiary.
When someone takes on a fiduciary role, such as a company director, they're legally responsible for taking care of the beneficiary's interests, being loyal to them, acting honestly, and keeping their information private.
Fiduciary duties make sure that the person or organisation in the position of trust acts fairly, honestly, and in the best interest of those they're helping.
Importantly, they're supposed to avoid situations where their interests clash with their duties. And, if they do find themselves in such a situation, they must prioritise the interests of those they're responsible for.
Who has fiduciary duties?
In the UK, lots of roles and positions are considered to have fiduciary duties because they involve a high level of trust and responsibility.
They include:
Company directors and officers
Company directors and officers make decisions that affect the company and its shareholders. Therefore, as part of their fiduciary duty, they must put the company's interests first, not their own, when making decisions.
Trustees
Trustees are responsible for managing trusts where assets are held and handled for others. They must handle these assets carefully, fairly, and in line with the wishes of the person who set up the trust.
Legal guardians
Legal guardians have a special responsibility when they're in charge of dependents who can't make decisions for themselves. Crucially, they have to act in the best interests of the people they're looking after.
Solicitors and barristers
Laywes must put their client's best interests first, keep their information private, and steer clear of situations where their interests might conflict with their duty to their clients.
Financial advisors and brokers
These professionals advise clients on financial matters and must prioritise their clients' interests over their own, providing advice that benefits the client.
Executors and administrators of estates
People in charge of handling a deceased person's estate (executors and administrators) have a fiduciary duty to manage the estate assets in a way that benefits the beneficiaries the most.
Partners in a business partnership
In a business partnership, partners have a responsibility to each other and the partnership. They must act fairly and with loyalty when making decisions and managing the partnership's affairs.
What are the duties of a fiduciary?
The main fiduciary duties include:
Loyalty
Care
Acting in good faith
Keeping things confidential
Providing clear accounting
Avoiding conflicts of interest
Being impartial.
Whether they're handling finances, making business decisions, or managing an estate, fiduciaries are expected to follow these standards to protect the interests of those they serve.
What fiduciary duties do directors owe to companies?
If you're a company director, people expect you to be honest and always do what's best for the company. Alongside this, there are legal duties outlined in the Companies Act 2006.
They aim to encourage good governance and safeguard the interests of shareholders and people involved with the company.
Duty | |
|---|---|
Duty to act within powers | Directors are required to follow the company's rules, including its articles of association, and they should only use their powers for the reasons they were given them. This helps prevent directors from going beyond their responsibilities or misusing their authority. |
Duty to promote the success of the company | Directors should make decisions that they believe, in good faith, will best promote the company's success for the benefit of all its members. This means thinking about the long-term effects of their choices, as well as considering the interests of employees, relationships with suppliers and customers, the community, and the environment. |
Duty to exercise independent judgment | Directors must make decisions independently, without undue influence from others. This means they should not allow their decisions to be swayed by other parties if they conflict with the interests of the company. |
Duty to exercise reasonable care, skill, and diligence | Directors are expected to perform at a level of competence that's reasonable for their role and to use any specialized skills or knowledge they have. They need to be well-informed and ready when making decisions or taking actions for the company. |
Duty to avoid conflicts of interest | Directors must steer clear of any situations where they might have a personal interest that clashes, or could clash, with the interests of the company. This doesn't just mean financial conflicts; it includes any situation where their loyalties might be divided. |
Duty not to accept benefits from third parties | Directors should refuse any perks or favors, including bribes, offered by third parties because of their position as a director or their actions/inactions in that role. Accepting these benefits could lead to biased decision-making. |
Duty to declare interest in proposed transaction or arrangement | If a director has any involvement, whether direct or indirect, in a proposed deal or agreement with the company, they need to disclose the details of that involvement to the other directors. This openness helps handle possible conflicts of interest. |
These duties form the bedrock of a director's responsibilities and are upheld by the law to safeguard companies, their shareholders, and other stakeholders from wrongdoing or mismanagement.
Directors who neglect these duties could face legal repercussions, including being personally liable for any losses suffered by the company due to their actions.
What is a breach of fiduciary duties?
A breach of fiduciary duties is when someone in a position of trust doesn't prioritise the best interests of those they're responsible for, or when they act in a way that goes against the expected standards of loyalty, care, and good faith.
Failure to act in the best interest
When fiduciaries prioritise their benefit over the interests of those they're supposed to serve, they're not acting in the best interest of the beneficiaries. For example, if a company director uses confidential information to make personal profit from stock transactions.
Mismanagement of assets
Mismanagement of assets happens when fiduciaries are negligent or irresponsible with the assets they're in charge of, causing avoidable losses or harm. For instance, a trustee makes risky investments with trust funds that lead to substantial losses.
Conflict of interest
A conflict of interest arises when a fiduciary has activities or interests that clash with the duties owed to the beneficiary or principal. For instance, if an estate agent represents the buyer and the seller in the same deal without fully disclosing and getting consent from both parties.
Failure to maintain confidentiality
Sharing sensitive information without permission or using it for personal advantage is a breach of fiduciary duty. For instance, lawyers sharing confidential client details without consent is a straightforward violation of this duty.
Neglecting to provide adequate information
Fiduciaries must keep those they serve informed about matters that affect their interests. If they fail to do so, such as a financial advisor not informing a client about significant risks associated with an investment, it breaches their duty.
Unauthorised benefit from a position
Accepting kickbacks, commissions, or any unauthorised benefits from a third party related to the fiduciary position without full disclosure and consent is a breach. This could involve a company director accepting bribes to influence decision-making.
Failure to follow the terms of an agreement or law
Not following the terms outlined in a trust document, company bylaws, or failing to comply with applicable laws and regulations can also result in a breach. For example, a director acts beyond the boundaries of their authority as defined in the company's articles of association.
What are the legal consequences of breaching fiduciary duties?
When fiduciary duties are breached, there are legal consequences that can address the violation, compensate for the harm caused, and prevent future breaches.
One common consequence is paying damages to the party harmed by the breach, meant to cover any financial losses suffered. For instance, if a company director personally profited from a harmful deal, they might need to return those profits.
Another remedy is recission, where a transaction made due to a breach of fiduciary duty is undone to restore the parties to their pre-breach state. For example, if a contract was entered into because a fiduciary failed to disclose a conflict of interest it may be rescinded.
An injunction may also be granted to stop harmful behaviour, especially if it's ongoing. Or, if assets were acquired through a breach, the court may impose a constructive trust, ensuring those assets are used or returned as legally expected.
Similarly, an account of profits requires the fiduciary to pass any profit made through the breach to the affected party.
In serious cases, the fiduciary may be removed from their position.