Directors' responsibilities & fiduciary duties
- John Deane
- Updated: Tue, 7th Mar 2017
In many cases the directors’ responsibilities and fiduciary duties are far from clear. But the liabilities can be potentially devastating. We interpret the risk and tell you how to minimise exposure. We act for both directors and companies.
Our directors’ responsibilities and fiduciary duties expertise includes:
- Who owes a duty;
- Directors’ fiduciary duties;
- Implications of a breach;
- Conflicting roles of director and shareholder;
- Shadow director responsibility and fiduciary duties;
- Responsibility and fiduciary duties for non-executive directors; and
- Directors’ responsibilities and fiduciary duties – recent cases successfully resolved.
The roles and obligations of directors are in the spotlight. We specialise in finding solutions to resolve legal problems within private companies involving directors and shareholders. Our experience covers start ups, businesses with investors, and family companies.
Who owes a duty?
You may not realise that the responsibilities and fiduciary duties of directors is not confined to a company’s statutory directors registered at Companies House.
The primary test as to whether an individual can be held to account as a director is whether the person has a direct influence and control over the direction of the business and the people within it. The focus of the court will be on what the individual does, not what they are called.
A critical question will be whether the individual is discharging functions that are usually discharged by a director.
The implications on either being a statutory director or upon being regarded as a director by the court include:
- Personal liability; and
- Financial responsibility.
We see issues arise around shadow directors, de facto directors and non-executive directors carrying risks they are unaware of.
Directors are personally liable for any failure to comply with their director’s responsibilities and fiduciary duties. If you are a director, you will be expected (by a court and or the shareholders) to know what your responsibilities and fiduciary duties are.
Financial obligations of directors
If a company runs into financial difficulties, then the directors (including in some cases shadow directors, de facto directors and non-executive directors) can be held personally financially responsible. Insolvency legislation allows the creditors of a company that has been wound up to request a court to compel a director to account personally.
Directors’ fiduciary duties
A fiduciary relationship is a relationship of trust. This places a duty on directors to act within the best interests of the company, in good faith, and honestly. The duties can arise under contract, the articles and any shareholders’ agreement. The duties also arise under statute as the Companies Act 2006 sets out extensive fiduciary duties as we explain.
Director duties under the Companies Act 2006
There are seven general directors’ duties set out in the Companies Act, which are:
- A duty to act in accordance with the powers set out in the company’s articles;
- A duty to promote the success of the company for the benefit of its members;
- A duty to exercise independent judgment;
- A duty to exercise reasonable care, skill and diligence;
- A duty to avoid conflicts of interest;
- A duty not to accept benefits from third parties; and
- A duty to declare to the company’s other directors any interest a director has in a proposed transaction or arrangement with the company.
Alongside the statutory duties there is what is known as the ‘code of conduct’ for directors. In a nutshell, directors have to consider the broader impact of any decision.
Implications of a breach
There are a variety of routes to consider where there is a breach of a director’s duties. The best one will depend upon the circumstances and can include:
- Removal from office; or
- An injunction to force or stop an act; or
- If the company will not act then the shareholders can act.
A director that is also an employee
You may find that the director’s service agreement deals with removal from employment as a director and the statutory office of director. However, often there is no written agreement.
No director’s service agreement
You need to consider removal from employment and removal from the office of director. In law the functions are mutually exclusive. An employee director is both an employee with the title of “director”, and a statutory director registered at Companies House.
Removal from employment
You can terminate the employment of the director. Without a written agreement you may face an argument around the appropriate notice period and claims of unfair dismissal.
Removal from office as director
Dismissing the director (as an employee) does not automatically mean that the director is no longer a statutory director. This is because there is no contractual power to remove the director from his position as officer of the company. But, the director can be removed from office if you can secure an ordinary resolution.
The ordinary resolution requirement
The shareholders can remove a director from office under the Companies Act by a majority vote, i.e. over 50% of the shareholders agree, providing:
- The vote is given at a general meeting and not through writing.
- At least 28 days’ notice of the general meeting is given to the shareholders of the company and the director subject.
- The director is given the opportunity to make representations at the general meeting before the company’s shareholders.
You should review the company’s articles or shareholders’ agreement. This is because either or both of those documents may have extended the scope of the Companies Act provision beyond the 51% shareholder approval threshold. Often we see removal as a shareholder “veto right” meaning all shareholders have to vote in favour.
Removal of the director from employment or office does not mean that the director is forced to transfer any shareholding. You can only force the transfer of shares if you have compulsory transfer rights under the articles and or shareholders’ agreement.
Conflicting roles of director and shareholder
A director, who is also a shareholder, can be in conflict. It is recognised that these two positions are separate. A shareholder director is required to ensure that his interests in the company as a shareholder do not overlap with the duties (as a director) owed under the Companies Act 2006. In practice the dual positions can easily be blurred giving rise to a breach of the director’s responsibilities and fiduciary duties.
If you are a shareholder director you should be prepared for shareholder scrutiny. It is recommended that the board of directors keeps a record of company decision making. Board minutes are often relied upon to defend decision making.
Shadow director responsibility and fiduciary duties
Some individuals exercise control over the business, without formally being appointed as directors. But, these individuals have the same responsibilities and fiduciary duties as statutory directors. They are known as shadow directors or de facto directors.
Shadow director risks
If a shareholder claims against a shadow director, then any directors and officers’ insurance is unlikely to cover the shadow director. Not only does this impact on the shadow director, but also the company and all other directors.
By not registering the shadow director at Companies House, it is arguable that the statutory directors have breached their own directors’ responsibilities and fiduciary duties.
If you are a shadow director the best advice is to make sure you have a service agreement protecting you from liability. Also, arrange for cover under the company’s officers’ and directors insurance.
Responsibility and fiduciary duties for non-executive directors
Increasing numbers of non-executive directors (NEDs) are being appointed by companies. They are recommended for large companies for corporate oversight and an independent view; they assist smaller, growing companies by providing board-level strategic advice without the cost of a full time director.
Duties of non-executive directors
However, there is often confusion over the role of NEDs and in particular the duties they owe to the company.
How do these differ from the duties owed by the executive directors? The simple answer is: not at all. The duties owed by a director to the company are the same for all directors and the law does not distinguish between NEDS and other directors.
The role of NEDs
Even though not working full-time in the business, a NED is under the same duty to avoid conflicts of interest, and disclose interests in any transactions, as statutory directors.
A NED taking up an appointment needs to consider carefully his or her other interests and whether there is any likely scope for conflict. Board meeting minutes should be carefully drafted to address these issues.
The liability of non-executive directors
The NED must also consider the possible risks of being a director without full involvement in the company. The NED will be potentially liable for issues such as wrongful trading if the company is insolvent and must keep himself sufficiently informed to manage any potential risks.
Letter of appointment for NEDs
The company would always be well advised to issue a letter of appointment for NEDs. The letter of appointment can:
- clarifying such matters as the term of the appointment;
- the statutory and other requirements on the NED and the obligation to comply with all laws, rules, the articles of the company etc.;
- the fees to be paid; and
- address confidentiality, intellectual property rights, any restrictive covenants and other matters.
It pays to have a letter of appointment in the event of a conflict or dispute.
Directors’ responsibilities and fiduciary duties – recent cases successfully resolved
Our recent instructions include:
- Assisting a liquidator to successfully claim for an electronics company’s restoration to Companies House to permit a full investigation into the directors’ management of the company’s affairs prior to insolvency.
- Obtaining an interim injunction on behalf of a pharmaceuticals company where a director intended to market a new product through another company in which he had a direct conflict.
- Revising NED agreements for a hedge fund to align with new confidential information introduced to the NEDs appointed to the board.
- Applying to the court for the disqualification of a director found to have breached his fiduciary duties to a firm of accountants by misleading investors and overstating the firm’s financial position.
Directors are in the spotlight and are expected to be aware of their duties. Please do get in touch if we can be of assistance.
My main focus is on resolving shareholder disputes & commercial disputes. Many clients are private companies, their directors and shareholders. I achieve effective commercial results for my clients, whether through negotiation, mediation or litigation. Why not call or email me now, to arrange an informal discussion....