Summary
- The distinguishing obligation of a fiduciary is the obligation of loyalty.
- A company director has a duty to safeguard a company’s assets, and is entrusted with the management of the company’s affairs.
- The Companies Act 2006 codified a director’s duties.
- It is possible to attribute fiduciary duties in circumstances where a person is not registered as a company director but meets the definition of either a shadow or de facto director.
- In circumstances where a director breaches their duties to the company, both the company itself and its shareholders have options to take legal action against the director(s) in breach.
- A breach of fiduciary duty becomes fraud when the fiduciary’s dishonest actions, such as deliberate deception, self-dealing, or misrepresentation, are intended to cause loss to another party or for personal gain, and that party relies on these actions and suffers harm.
The relationship must be one that requires the exercise of judgment and making of discretionary decisions on the part of the fiduciary; alternatively, giving advice where the fiduciary exercises a substantial degree of power over the other.
The classic definition of a fiduciary was set out by Millet LJ in Bristol and West Building Society v Motthew [1998] Ch 13 as follows:
“A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary.”
There are different facets of the core obligation of loyalty as alluded to by Millet LJ in his judgment; namely the no conflict and no profit rules. In short, a fiduciary must not:
- Put themselves in a position where their personal interests conflict, or where there is a real possibility of conflict, with their fiduciary duties.
- Make a profit from their fiduciary office.
Directors’ duties
In this article, Tenet will consider the position of a company director. Whilst not strictly trustees, company directors are often held in the same regard given the degree of control they exert over company assets. A company director has a duty to safeguard a company’s assets, and is entrusted with the management of the company’s affairs. As a result, a company is entitled to the undivided loyalty of its directors.[1]
The Companies Act 2006 codified a director’s duties as follows:
- To act within their powers (s.171 CA 2006)
- To promote the success of the company for the benefit of its members (shareholders) as a whole, having regard to a non-exhaustive list of factors (s.172 CA 2006)
- To exercise independent judgement (s.173 CA 2006)
- To exercise reasonable care, skill and diligence (s.174 CA 2006)
- To avoid conflicts of interest (s.175 CA 2006)
- Not to accept benefits from third parties (s.176 CA 2006)
- To declare certain interests they have in a proposed transaction or arrangement with the company (s.177 CA 2006)
These general duties are regarded as fiduciary in nature save for the duty to exercise reasonable care, skill and diligence.
Shadow and de facto directors
It is possible to attribute fiduciary duties in circumstances where a person is not registered as a company director but meets the definition of either a shadow or de facto director.
- Shadow director – a person in accordance with whose directions or instructions the directors of a company are accustomed to act. Normally, someone with a financial interest in the company, such as a shareholder, with real influence in the corporate affairs of the company without assuming the role of director.
- De facto director – a person who has assumed responsibility to act as a director, although never actually or validly appointed as such. There is no one definitive test for identifying a de facto director; the question is one of fact and degree.
- Director de son tort – the concepts of executor de son tort and trustee de son tort have existed in law for centuries. De son tortis a legal term, from Law French meaning “of his own wrong,” used to describe someone who assumes a legal responsibility without proper authority. An executor de son tort is someone who “intermeddles” with a deceased person’s estate without being properly appointed as an executor or administrator. In the Court of Appeal judgment in Mitchell & Anor v Al Jaber [2024] EWCA Civ 423, Lord Justice Newey stated that he could see no reason why these principles could not also apply in relation to a person who assumes to act as a company director. The context of the case was a director of a liquidated company found liable for breach of fiduciary duties having caused shares held by that company to be transferred away after it had entered liquidation. The judgment has been appealed to the Supreme Court.
In direct contrast to these scenarios where the law seeks to attribute fiduciary duties to a person not registered as a director, the reverse can also be true i.e. a registered director that is excluded from management may have his fiduciary duties reduced to the point of extinction as in the case of In Plus Group Ltd v Pyke [2002] EWCA Civ 370.
Breach of fiduciary duties
In circumstances where a director breaches their duties to the company, both the company itself and its shareholders have options to take legal action against the director(s) in breach. Some of the most common breaches will involve the misappropriation of company funds or assets, causing an identifiable loss to the company. However, remedies are also available in circumstances where there is no identifiable loss to the company but where the director has benefitted financially as a result of their position. For example, where a company director sets up another company in competition with the company of which they are a director making use of information and opportunities that came to them in their position as director. This would be a clear breach of the no conflict and no profit rules governing fiduciaries and would entitle the company to seek an account of profit.
Certain instances of breach of fiduciary duties will involve serious issues of dishonesty such as fraudulent misrepresentation or the fraudulent concealment of information for dishonest purposes, such as diverting business opportunities, misusing company assets for personal benefit, or misleading investors. Such breaches are treated as civil fraud. A breach of fiduciary duty becomes fraud when the fiduciary’s dishonest actions, such as deliberate deception, self-dealing, or misrepresentation, are intended to cause loss to another party or for personal gain, and that party relies on these actions and suffers harm. Tenet’s expertise [https://tenetlaw.co.uk/services/] in dealing with fraud means that we can quickly identify these traits and provide practical and straightforward advice to launch a claim.
Derivative claim
A principle established in such historic cases as Foss v Harbottle 67 E.R. 189, is that the proper claimant when remedying wrongs committed against a company, whether by directors or third parties, is the company itself. The ability to decide whether to sue is generally vested in the board of directors. However, this may be difficult in circumstances where there are few directors, and those in breach have command of the Board.
To remedy that situation, where certain specified types of wrong are committed by company directors, the court has a discretion to permit a company’s members to bring a claim in their own names on behalf of the company. Pursuant to Chapter 1 of Part 11 of the Companies Act 2006, members of a company are entitled to seek relief from the Court on behalf of a company via a statutory derivative claim.
Derivative claims are commonly thought to be complex, but this is mainly due to the additional hurdle of obtaining the court’s consent to continue the claim at the outset. Another factor to consider is that any remedy is the company’s remedy, for example, if company funds have been misappropriated then the remedy would be for those funds to be repatriated to the company, not to compensate its shareholders for any loss in the value of their shares.
Unfair prejudice petition
Under s.994 of the Companies Act 2006, a member of a company may petition the court for relief where the affairs of the company are being, or have been, conducted in a manner that is unfairly prejudicial to the interests of members generally, or some part of its members.
A member can clearly show prejudice if the economic value of their shares has significantly decreased or been put in jeopardy by the conduct complained of. Allotting further shares in a company for the improper purpose of diluting a minority shareholding is obviously unfairly prejudicial. Non-compliance by directors with their duties (especially fiduciary duties) will ordinarily indicate that unfair prejudice has occurred, particularly where such breach involves the misuse or misappropriation of company funds. In certain circumstances, serious mismanagement leading to significant financial loss may also be considered unfairly prejudicial conduct. In addition, certain failures to abide by a company’s articles of association, any shareholders’ agreement and the Companies Act itself (such as a failure to hold general meetings or provide accounts) may also be considered unfairly prejudicial.
Possible remedies are set out in s.996 of the Companies Act 2006 and include an order to:
- regulate the conduct of the company’s affairs in the future;
- require the company—
- to refrain from doing or continuing an act complained of, or
- to do an act that the petitioner has complained it has omitted to do;
- authorise civil proceedings to be brought in the name and on behalf of the company by such person or persons and on such terms as the court may direct;
- require the company not to make any, or any specified, alterations in its articles without the leave of the court;
- provide for the purchase of the shares of any members of the company by other members or by the company itself and, in the case of a purchase by the company itself, the reduction of the company’s capital accordingly.
Conclusion
Where the board of directors is controlled by an innocent majority, then it can cause the company to bring a straightforward claim for breach of fiduciary duty against the director(s) in breach. However, where the directors in breach control the board, the matter becomes more complex as it falls to the company’s members to take action in their own right. Such legal action can be complex and expensive, but Tenet has expertise and experience in guiding clients through claims such as these offering practical and measured commercial advice.
How can we help?
Should you suspect that a director has acted in breach of their fiduciary duties, please do not hesitate to get in touch. Our team can offer professional legal advice and help you gather evidence to support your case and provide the vital legal support you need. To discuss your circumstances and learn more about how we can help please contact the author: Esther Phillips
Esther Phillips is an experienced litigator specialising in fraud and financial crime with expertise across a wide breadth of commercial litigation matters ranging from straightforward breach of contract claims to complex cross-border litigation.
We hope this article has provided valuable insights and information on breach of fiduciary duties. Tenet is a Fraud Law Firm with an experienced team of specialist fraud and financial crime lawyers, who are dedicated to providing up to date and engaging content on disputes and compliance law relating to fraud and financial crime from a legal perspective.
If you have any specific topics or interests that you would like to see covered in future articles or would like to contribute your own perspectives to our Tenet Fraud Hub, please reach out to Paula Crowther.
[1] Boulting v Association of Cinematograph Television and Allied Technicians [1963] 2 Q.B. 606
