In Short
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Company directors owe fiduciary duties to their company, meaning they must act honestly and in the company’s best interests.
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These duties include avoiding conflicts of interest and declaring personal interests in company transactions.
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Breaching these duties can lead to legal consequences for directors.
Tips for Businesses
Directors should regularly review their duties under the Companies Act 2006 and check whether any decisions could create a conflict of interest. Keep clear records of board decisions and disclosures. Where personal interests may be involved, raise them early and ensure they are properly documented before the company proceeds.
Summary
This article explains fiduciary duties for company directors operating in the United Kingdom. Prepared by LegalVision, a commercial law firm specialising in advising clients on corporate governance and directors’ duties, it outlines the legal framework and common risk areas directors should understand.
If you are a company director, you are likely aware that the law places obligations on you when acting in your professional capacity. However, many directors find it hard to keep track of all the duties they owe their company. You may have heard of one set of duties, known as fiduciary duties, but you might not know what these entail. In short, a fiduciary duty refers to the most stringent legal relationship that requires company directors to act with the utmost good faith. This article will explain what fiduciary duties entail in more detail.
What Are Fiduciary Duties?
In a commercial context, a fiduciary duty describes the standard of conduct one party must show another party. A fiduciary duty arises when one person acts on behalf of another person in circumstances that require a relationship of trust and confidence.
For example, company directors act on behalf of the company. Although a company is its own legal person, it cannot act for itself. Hence, without a fiduciary relationship between a company and its directors, directors may not always act in the company’s best interests.
What Are the Consequences of Fiduciary Duties?
All fiduciaries, including company directors, must not act with self-interest. Instead, they must act in a way that benefits the other party. For company directors, you owe undivided loyalty to the company. Hence, the directors must act with the sole interests of the company in mind and cannot be influenced by their interests.
The law codifies this fiduciary duty in the Companies Act 2006 across seven general duties. These general duties require company directors to:
- 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 to accept benefits from third parties; and
- declare their interests in proposed transactions or arrangements affecting the company.
How Do I Avoid Breaching My Fiduciary Duty?
As you might infer, a fiduciary duty is a wide-ranging set of obligations that dictates how you should act as a director. You can generally comply with your fiduciary duty by asking yourself if any potential act or omission is in the best interests of the company. If it is not, then you are at risk of breaching your fiduciary duty.
To demonstrate how this plays out in practice, we will consider common situations that may create a risk of breaching your fiduciary duties.
Conflicts of Interest
A conflict of interest refers to any circumstances where your personal interests may conflict with the interests of a company. A common example might be when you know of a potentially lucrative piece of property for sale that would benefit your company if it purchased it. However, you also think the property would make a great personal investment, so you prevent the company from purchasing it.
To ensure you comply with your fiduciary duty, you could bring the potential purchase to the board’s attention. The board may then hold a meeting to determine if the company should purchase the property. If the directors decline, you can purchase the property for personal use.
This template helps you document important and major decisions or actions reached in board meetings.
Interest in Proposed Transactions and Arrangements
Suppose your company is looking to purchase a piece of land. Additionally, your husband owns a parcel of land that fits the company’s criteria. The law says you have an interest in the proposed transaction. Accordingly, the law requires you to disclose this interest before the transaction happens. If you do not, you will likely breach:
- the duty to declare an interest; and
- your fiduciary duty more generally.
Promoting the Success of the Company for the Benefit of All the Shareholders
A company is its own legal person. However, shareholders own the company. Hence, the law recognises that this creates a situation where directors have to navigate the interests of both the company and its shareholders. What the law seeks to avoid is a situation where a company director chooses to manage the company in a way that unfairly prejudices some shareholders at the expense of others.
To illustrate how this might happen, suppose you are one of several directors in 123 Ltd. One of 123 Ltd’s shareholders also owns another company, ABC Ltd, which provides accounting services. 123 Ltd is looking for a new accountant, and the directors agree to instruct ABC Ltd. However, another shareholder points out that ABC Ltd’s fees are ten times more expensive than its competitors.
On the face of it, as a director, you have not managed the company for the benefit of all the shareholders. This could therefore constitute a breach of your fiduciary duty.
Key Takeaways
The law says all company directors owe fiduciary duties to their company. This refers to a relationship that requires directors to act with the company’s best interests in mind. In other words, company directors cannot act in a self-serving way. There are additional duties that the law requires of company directors, all of which can be described as part of the fiduciary duty. For instance, this includes directors not acting where there is a conflict of interest or having to declare an interest in a proposed transaction.
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Frequently Asked Questions
A fiduciary is someone who is held to the highest standard when acting for the benefit of another person.
A company director is an individual who is involved in the running of a company.
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