Fiduciary Duties of Directors

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Fiduciary Duties of Directors

There must be a relationship of trust and confidence between shareholders and directors. The fiduciary duties of directors expresses that relationship in law; primarily through the Companies Act 2006 and common law.

Having modernised and consolidated all pre-existing company legislation (taking 9 years & being the largest statute in UK law), the Companies Act 2006 makes it clear that directors fiduciary duties are owed to the company alone and that directors duties can be enforced by shareholders.

Inherently, in successfully applying the fiduciary duties of directors to all company initiatives, in particular the principle to ‘promote the company’s success’, directors may be able to alleviate many business risks.

The key fiduciary duties of directors as from the statutory statement of director’s duties:

Act within their powers
Duty to act within the powers as granted by the Company’s constitution and to only exercise the powers for the purpose they were conferred (CA 2006, s171).

Promote the company’s success (alters in insolvency - call 0121 201 1720 for advice)
Directors have a duty to promote the success of the company for the benefit of its members (CA 2006, s172). Applies to all actions of directors. In making decisions, directors must have considered long term consequences, taking into account: 

  • interests of employees
  • impact of operations on the community and its environment
  • need to foster business relationships with suppliers, customers and others
  • the demand to act fairly between members
  • a need to uphold a reputation for high standards of business and conduct

Exercise independent judgment (CA 2006, s173)
Directors need to exercise their powers independently, considering all members equally.

Exercise reasonable care, skill and diligence
As would be expected by a reasonably diligent person with:

  • general knowledge, skill and experience that could be reasonably expected from a person doing the director’s functions; and
  • director’s actual general knowledge, skill and experience (CA 2006, s174).

Avoid conflicts of interest
Directors have a duty to avoid situations in which they have, or could have, a direct or indirect interest that conflicts, or could conflict, with the interests of the company (CA 2006, s175).

Not accept benefits from third parties
Directors have a statutory duty not to accept a benefit from a third party which is given because of their director role or because of anything they have done in their position as a director (CA 2006, s176).

Declare interests in transactions or arrangements
Directors have a duty to divulge any direct or indirect interest they have in a proposed transaction or arrangement with the company (CA 2006, s177). In addition, directors have a duty under CA 2006, s182 to state any interest held, direct or indirect, in an existing transaction or arrangement.

Consequences of directors breaching fiduciary duties
Possible actions include: an interim injunction, shareholding proceedings, recovery of financial loss, setting aside of a transaction, removal as a director.

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