Fiduciary Duties: What Is The Fiduciary Duty Of Directors?
March 8, 2024
Fiduciary duties are the responsibilities that directors owe to their companies and all connected to them – customers, partners, shareholders and of course, staff.
In the UK, these duties are primarily codified in the Companies Act 2006, which outlines what is expected from directors.
We would always suggest speaking to a professional advisor about your individual circumstances.
In this article we’ll cover the essence of directors' fiduciary duties. We cover their implications and the potential repercussions of failing to adhere to these responsibilities.
Understanding the fiduciary duties of directors
Director fiduciary duty refers to several key aspects. These include a fiduciary duty to:
- Act within their powers: Directors must act in accordance with the company's constitution. They must only exercise their powers for the reasons they were given.
- Promote the success of the company: This requires directors to act in a way they consider, in good faith, to be most likely to benefit the company's members as a whole.
- Exercise independent judgement: Directors should not be swayed unduly by others and must make decisions independently.
- Exercise reasonable care, skill and diligence: Directors need the knowledge, skill, and experience that may reasonably be expected. They must use any personal skills or experience they have.
- Not accept benefits from third parties: This duty prohibits directors from accepting benefits that are offered because of their position as a director.
- Avoid conflicts of interest: Directors must avoid situations where they have, or can have, a direct or indirect interest that conflicts with the company's interests.
- Declare any interest in proposed transactions or arrangements.
These fiduciary relationships are designed to promote trust and confidence in how directors manage their companies' affairs. It ensures that their actions benefit the company and its shareholders, rather than serving personal or any other person’s interests.
Recently we’ve explained what a private company limited by shares is in a comprehensive guide.
Primary fiduciary duties during insolvency
During insolvency, directors’ overall duty to the company owners is shifted and is now owed to the creditors.
Your duties are to run the company in a way that does not negatively impact its financial health.
Part of your company director duties during insolvency is to avoid taking on any further debts and ensure that you continue keeping good records.
For more information, here is our guide on how director duties are affected by company insolvency.
What are the consequences of failing your fiduciary duties?
Failure to comply with fiduciary duties can have major implications for directors. A breach of fiduciary duty is not taken lightly and can lead to civil penalties.
In severe cases, it could lead to criminal charges if the violation involves fraudulent or dishonest activity. Additionally, directors in breach of their fiduciary duties may face disqualification from holding similar positions in the future.
It is, therefore, imperative for company directors to fully understand and comply with their fiduciary duties. This is to protect themselves, the company and its shareholders from potential harm.
As a director, not acting in the best interests of the company could lead to claims of misfeasance.
What is misfeasance?
Typical misfeasance claims involve the misuse of company money or property, violating directors’ fiduciary duties.
Four common examples are:
- Hiding assets
- Taking an excessive salary
- Transactions at undervalue
- Preferential payments
Misfeasance is closely linked to insolvency. When a company becomes insolvent, a liquidator is appointed, who will closely scrutinise the actions of the directors in the lead up to the company’s insolvency.
If it emerges that a director has failed in their fiduciary duties and committed misfeasance, they can be personally liable for company debts. Also note that in terms of liability during insolvency shadow directors are subject to the same fiduciary duties as official directors too.
Following a misfeasance claim, a court order may force the director to repay or restore any money or property that is subject to the claim.
And a misfeasance claim can result in disqualification from director positions for up to 15 years, under the Company Directors Disqualification Act 1986.
Final thoughts: Directors’ fiduciary duties and insolvency
The fiduciary relationship is a cornerstone of corporate governance and ensures that directors act in the best interests of their companies. Understanding and complying with these duties are crucial for the success of any business.
We hope you found this guide useful – for more, take a look at our blog. Recently we’ve covered whether you can restore a dissolved company and explained what contingent liabilities are.
If you are concerned about your company’s financial situation, we can help. Hudson Weir is a team of highly qualified chartered accountants and insolvency practitioners. We can provide directors with the guidance and support needed to navigate fiduciary responsibility.
With our expertise in business recovery, insolvency and turnaround, we can help directors fulfil their fiduciary obligations. Please get in touch for a no-obligation chat today.
