The Weight of the Crown: Directors’ fiduciary duties and consequences of breach

Heavy is the head that wears the crown. In the world of corporate governance, being a director is more than just a title or a seat at the boardroom table. It is a position of profound trust. This trust is reinforced by a set of fiduciary duties, designed to ensure those at the helm act with integrity, loyalty, and care.

But what exactly are these duties, and what happens when the crown slips?

Directors’ fiduciary duties

Fiduciary duties are the legal obligations of a director (including de facto and non-executive directors) to act in the best interests of the company, rather than leverage their position for self-serving purposes. At its core, a fiduciary duty imposes a duty of single-minded loyalty to the company. There are 7 duties in total:

1. Duty to act within powers (as set out in the company’s Articles of Association)
2. Duty to promote the success of the company (for the benefit of its members as a whole)
3. Duty to exercise independent judgment
4. Duty to exercise reasonable care, skill and diligence
5. Duty to avoid conflicts of interest
6. Duty not to accept benefits from third parties
7. Duty to declare interest in proposed transaction or arrangement

These duties typically last for as long as you are a director – from the date you are appointed to the date you cease to be one.

Consequences of breaching these fiduciary duties

A breach of fiduciary duty isn’t just a corporate faux pas. Regardless of whether this breach was intentional or not, it can have serious legal and financial consequences.

The company can take legal action against the director. While this is usually done by the company itself, it can also be the shareholders on behalf of the company through a derivative claim, or creditors if the company becomes insolvent.

The courts have a wide discretion in deciding how to rectify the situation, depending on the severity and impact of the breach. An injunction may be ordered to prevent ongoing or imminent breaches. A director may be required to compensate the company for any losses. Even where the company has not suffered any financial loss, if the director has made personal gain, an account of profits may be ordered which allows the company to recover the full amount the director gained through their breach of fiduciary duty.

Further consequences could include disqualification and personal bankruptcy.

Final comments

While a director’s fiduciary duties may appear easy to understand on paper, they are judged in the real world; one that is fast-paced and highly-pressured. Tension at the top can often trigger allegations of breach, but not every accusation constitutes real misconduct.

Most breaches of fiduciary duty never reach a courtroom and are resolved long before a judge is involved. The sooner that legal advice is obtained, the more likely that de-escalation will be possible, and the better the chances of initiating constructive discussions. Positions have not yet had the opportunity to harden, and words have not been exchanged that cannot be taken back.

In most cases, resolutions are found through alternative dispute resolution or shareholder ratification.

If you are a company, or a director, and you are concerned about a possible breach of fiduciary duty, please contact Hughes Paddison’s Litigation Team at ras@hughes-paddison.co.uk or on 01242 574 244.