Company directors are bound by law to act in the best interests of their company in their dealings as directors. This is a fiduciary relationship based on trust and good faith. The role is also governed by legislation, including the Companies Act 2006.
If a director breaches their fiduciary duties and the company suffers a loss as a result, the company, its shareholders, an administrator or a liquidator may take legal action against them.
What are Fiduciary Duties?
The principle behind fiduciary duties is that an individual must prioritise the interests of another over their own interests. A fiduciary relationship arises in a range of situations, including between trustees and beneficiaries and between partners in a partnership. In the case of company directors, the director must put the company’s interests first.
This includes complying with the Companies Act 2006, avoiding any conflict of interest and prioritising the best interests of the company when making decisions.
What Fiduciary Duties Do Directors Owe to a Company?
Directors’ duties, including fiduciary duties, include the following:
- To act within their powers, which will be set out in the company’s Articles of Association and legislation.
- To promote the success of the company, which includes considering what will benefit the company when making business decisions as well as when dealing with company members.
- To exercise reasonable care, skill, and diligence means that a director must act in the way that a reasonably diligent person would act, including someone with the same skillset as the director. For example, if a director is an accountant, they will be expected to exercise the level of care, skill and diligence as another accountant would.
- To use independent judgment means that a director must make a decision based on their own consideration of the facts.
- To avoid conflicts of interest, including using their position or knowledge as a director to profit personally or owning an interest in a rival business.
- Not to accept any benefit from a third party that is offered on the basis of an individual being a director.
- To declare in full any personal interest a director may have in a transaction they enter into with the company.
What Happens If a Director Breaches their Fiduciary Duty?
If a director breaches their fiduciary duty, it is open to the company to take action against them. The company can ask the courts for a range of remedies, including:
- An injunction to prevent the breach of duty from continuing
- An order for compensation for losses sustained by the company
- An order requiring property to be returned to the company
- An order setting aside a transaction entered into in breach of fiduciary duties
- An order disqualifying a director from acting as a company director for a specified period of time
A company can also ask its shareholders to act to remove the director.
If the company is insolvent, the insolvency practitioner can take legal action against a director if they discover evidence of a breach of fiduciary duty. They can seek to recover financial losses from a director personally if the director is guilty of wrongful trading or fraudulent trading.
How Can UK Shareholders Hold Directors to Account for Breaches of Fiduciary Duty?
In some cases, a company’s shareholders may be able to make a derivative claim on behalf of the company if a director has breached their fiduciary duties and the company has suffered a resulting loss.
The shareholders will need the court’s permission to make a claim, and the court will consider whether the case would be in the best interests of the company. It will also look at whether the shareholders are acting in good faith and whether it would be possible for them to bring an action on their own behalf rather than on behalf of the company.
If a claim is successful and compensation is ordered, this is paid to the company and not to the shareholders.
What is the Time Limit for a Breach of Fiduciary Duty Claim?
A claim for breach of fiduciary duty should generally be brought within six years of the date of the breach.
If the breach was fraudulent or a director has taken money from the company, there is no time limit for making a claim.
Contact Our Commercial Litigation Solicitors
If you are concerned about a director’s breach of fiduciary duty and you need to take action to protect your position or your company, contact us today, and we will provide the advice you need.
To speak to one of our expert commercial litigation solicitors, ring us on 0330 173 3980, email us at info@witansolicitors.co.uk or fill in our contact form, and we will talk through your situation with you and discuss how we can assist.
