What are the fiduciary duties of a limited company director?

Requirements for directors of solvent and insolvent companies

The legal separation of a company from its directors through the corporate structure also imposes various fiduciary duties on directors. These obligations are in place to protect all stakeholders associated with the business, including shareholders, employees, customers, and the general public.

Fiduciary duties apply to all directors, including shadow and de-facto directors who may not be registered with Companies House. Directors, irrespective of their roles, including non-executive directors, must adhere to the legislation regarding fiduciary duty.

Instances of deliberate misuse of the power and authority vested in the role of director have occurred in the past. What are your fiduciary duties, and what are the potential consequences if these duties are not fulfilled?

What are a company director’s fiduciary duties?

Duty to act in the best interests of the company

This duty involves prioritising the overall success of the company, taking into account factors such as:

• The reputation of your company
• The impact of your decisions on employees
• The long-term consequences for the company
• Treating shareholders equally, regardless of their shareholding

I. Duty to act within your powers

The powers vested in directors are outlined in the company’s Articles of Association, with the fundamental principle being that these powers should be exercised for the benefit of the company rather than individuals. Additionally, your directorial powers may be delineated in resolutions and other constitutional agreements adopted by the company.

II. Duty to avoid conflicts of interest

A conflict of interest can arise in a ‘transactional’ context when you possess a personal interest in an ongoing transaction or agreement, or in an arrangement the company is about to enter into. ‘Situational’ conflicts of interest may also occur, such as when you hold a directorship in a competing business. Additionally, there is a duty to refrain from accepting third-party benefits.

III. Duty to exercise independent judgement

You must make decisions considering all company members, without being unduly influenced by specific individuals or groups of shareholders, for instance.

IV. Duty to exercise reasonable skill, care, and diligence

You are obligated to act with the skill, care, and diligence that can reasonably be expected based on your training and past experience. For instance, a company accountant would be expected to apply specific skills and financial knowledge.

Director duties in insolvency

Your responsibilities as a company director alter when the business faces insolvency due to a lack of funds. In such circumstances, you are legally obligated to prioritise the interests of your creditors. Failing to comply with this duty constitutes a serious breach and may expose you to personal liability and disqualification.

What are the potential repercussions if you violate your fiduciary duties as a director of a financially sound company?

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Ramifications of failing in your fiduciary duties

If you have violated your fiduciary duties as a director, there are several potential outcomes:

I. Removal from office:

If a sufficient number of shareholders vote in favour, you may be removed from office pending an investigation. The company’s constitution dictates the procedure for this action.

II. Interim injunction:

If a director is intentionally causing harm to the company, such as damaging its reputation, a court application can be made for an interim injunction to halt the harmful behaviour.

III. Compensation:

The company or an individual who has suffered financial loss due to a breach of fiduciary duty may pursue legal action against you. This puts your assets, including your home, at risk if you are ultimately declared bankrupt.

IV. Reversal of transactions:

The company, another director, or a shareholder, could seek court intervention to set aside or restore a transaction if it is revealed that a conflict of interest existed at the time of the transaction, for example.

The foundation of director fiduciary duty lies in trust and confidence among the directors, their company, and its stakeholders. Understanding your duties as a director is crucial, as failure to fulfil them exposes you to serious sanctions and penalties.

For further information, please contact our expert team and arrange a free, same-day consultation. Vanguard Insolvency operates an extensive network of offices around the country and can promptly provide the unbiased guidance you need.