Understanding a company director’s fiduciary duties and consequences of failing these duties
Your fiduciary duties as a director reflect a relationship of trust and loyalty between yourself, the company, its members, and stakeholders. The expectation is that you will act in good faith, and in the best interests of the company.
These duties overlap and inter-connect with your common law duties - operating with skill and care as a director - and also the statutory duties as laid down in the Companies Act, 2006.
A new concept named ‘Enlightened Shareholder Value’ was introduced to clarify the wide-ranging duties of a director. This helps to ensure that employees and other stakeholders receive consideration during a director’s decision-making process, as well as the company and its members.
Duty to act within your powers
These are the powers as specified in the company’s Articles of Association, and they should only be exercised for the purposes intended, i.e. for the good of the company rather than the director concerned.
Duty to promote the success of the company for the benefit of its members as a whole
- When making decisions as a director, you must consider:
- The potential long-term consequences for the company
- The interests of your employees
- Maintaining your company’s good business reputation
- The need to promote good relationships with suppliers and customers
- The company’s impact on the environment and local community
- The need to act fairly between members, for example, treating those with few shares in the same manner as institutions with a large shareholding.
Duty to exercise independent judgement
You must consider all members when exercising judgement, rather than an individual or a particular group of shareholders.
Duty to exercise reasonable care, skill, and diligence
This applies to both executive and non-executive directors. Anyone with specific training and skills would be expected to apply them to their role as director, for example.
Duty to avoid conflicts of interest
This includes actual and potential ‘situational’ and ‘transactional’ conflicts, as well as direct and indirect interests. If a conflict is disclosed, the company’s constitution may allow the board of directors to approve it as long as it is sanctioned in the proper manner.
Duty not to accept benefits from third parties
It can be difficult to gauge the difference between accepting a ‘benefit’ and simply trying to engender good relationships with a supplier/customer. Some companies have a written policy to clarify such situations.
Duty to declare an interest in proposed transactions or arrangements
Your interest must be declared before the company enters into the transaction or arrangement. The company’s Articles of Association may set out the procedures and requirements for doing so, and how the board should deal with the matter.
What are the consequences of failing in these duties?
If loss or damage has been suffered by a shareholder, creditor, or the company, they can take action against you personally, but it is often the case that the company as an entity pursues directors who have failed in their fiduciary duty.
Removal as director
The director may be removed from office if more than 50% of shareholders vote in favour, but the director must be allowed to offer their own representations during the meeting. The company’s constitution determines how this process is carried out, but removal may be temporary pending further investigation, or on a permanent basis.
This would be issued by the court with the intention of halting any ongoing actions in breach of director duties. It serves to reduce the potential for further financial loss, and prevent irreversible damage to the company. It could be that the director in question is attempting to harm the reputation of the business and bring down its value down, for example.
In limited situations, shareholders can take litigation action on their own behalf if they fear other directors might support an errant director, but this is known to be a complex process.
Recovery of financial losses
If a financial loss has been incurred by the company, the director can be pursued through the courts. There may be severe financial repercussions, including the loss of their home and potential personal bankruptcy.
Setting aside a transaction
Under the rules on transactional conflicts of interest, an affected transaction could be set aside or company property restored.
If you need professional guidance on your fiduciary duties as a director, or are unsure whether a conflict of interest has occurred, Begbies Traynor can help. We are the largest professional services consultancy, and operate from offices nationwide.