Summary
- Directors owe seven fiduciary duties under the Companies Act 2006, including avoiding conflicts of interest and declaring any personal interest in a proposed transaction.
- A shadow director carries the same duties as a formally appointed director, even without a formal appointment.
- Breach exposes the director personally, through an account of profits, damages, or disqualification under the Company Directors Disqualification Act 1986.
- This guide explains fiduciary duties for company directors operating in the United Kingdom.
- LegalVision’s corporate lawyers advise UK directors on declaring conflicts of interest, structuring board decisions to withstand shareholder challenge, and responding to allegations of a breach of duty.
Tips for Businesses
Disclose any personal or financial interest in a proposed transaction to the board before it proceeds. Keep dated minutes recording every conflict declaration and board decision. Review contracts, property deals and third party arrangements for undisclosed director interests each quarter. Speak to a corporate lawyer at LegalVision about drafting a conflict of interest policy and director declaration process.
A fiduciary duty is the highest legal standard a director owes a company: an obligation to act in good faith and put the company’s interests ahead of personal gain. The Companies Act 2006 codifies seven general duties, including acting within the company’s constitution, promoting its success, exercising independent judgment, avoiding conflicts of interest and declaring any personal interest in a proposed transaction. Every director in England, Wales, Scotland and Northern Ireland owes these duties from the date of appointment, whether the director draws a salary or holds shares. A breach exposes the director personally, not just the company, and courts can order the director to repay any profit gained from it. 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.
Remedies available for a breach of fiduciary duty
claim under the Companies Act 2006 on the company’s behalf, even where the board itself declines to act. A court can order the director to account for any profit made from the breach, unwind the transaction, or award damages to the company.
Persistent or serious breaches can also trigger disqualification proceedings under the Company Directors Disqualification Act 1986, barring the individual from acting as a director for up to 15 years. Insurance rarely covers deliberate breaches, so directors carry personal exposure in most cases and cannot rely on the company to absorb the loss. Boards can reduce this risk by ratifying a disclosed conflict through an independent shareholder vote, provided the articles of association allow it.
A shadow director faces the same exposure, since the law treats anyone who directs the board’s decisions as a director regardless of formal appointment. Where a dispute already exists, LegalVision’s guide on resolving director disputes sets out how mediation and arbitration can resolve conflicts before they reach court, which is often faster and cheaper than litigation.
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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.
“Most breach of duty disputes I see do not start with a director acting dishonestly. They start with a director who never raised a personal interest with the board because it seemed too minor to mention. Once that transaction is challenged, the size of the interest stops mattering and the failure to disclose becomes the whole case”
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
What is a fiduciary?
A fiduciary is a person held to a high legal standard when acting for another party’s benefit, rather than their own. Company directors act as fiduciaries of the company, meaning they must put its interests first in every decision they make.
What is a company director?
A company director is a person appointed to manage a company’s affairs, whether formally appointed, a de facto director acting in that role without appointment, or a shadow director who directs the board’s decisions from behind the scenes.
Can a shadow director owe fiduciary duties?
Yes. UK law can treat a shadow director as a director for legal purposes, even without a formal appointment. This means a shadow director owes the same fiduciary duties as an appointed director and faces the same liability for breaching them.
What happens if a director breaches their fiduciary duty?
A company or its shareholders can pursue the director through the dispute resolution process set out in the shareholders’ agreement, then mediation or arbitration. Court action can follow, though it usually costs more and takes longer to resolve.
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