Eleanor Finch
A fiduciary relationship is one which involves a level of trust and legal and ethical grounds to act in the best interest of another. A breach of fiduciary duty occurs when a fiduciary fails to act in the principal's best interest or promote their self-interest above that of the beneficiary. This can include profiting at the principal's expense, favouring third parties, exposing discriminatory information, failing to disclose vital information, or acting in a manner that is contrary to the interests of those they represent. For example, a company director cannot authorise the sale of company-owned property to another business of which they are also a director. If a fiduciary breaches their duties, they may face serious consequences, including legal liability, removal from office, financial penalties, disqualification, and reputational damage.
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What You'll Learn
Conflict of interest
A fiduciary relationship is one that involves a level of trust. One person owes certain duties to another, which attract legal consequences if breached. Fiduciary duties include duty of care, loyalty, good faith, confidentiality, prudence, and disclosure.
A breach of fiduciary duty occurs when a conflict of interest arises between the interests of the fiduciary and the client's interests. A conflict of interest can occur when a director enters into transactions with the company for personal gain. For example, selling personal assets to the company at inflated prices, or using company funds or resources for personal purposes.
In the UK, a breach of fiduciary duty as a director occurs when a company director fails to fulfil their obligations to the company and its shareholders. These obligations, or fiduciary duties, are legally binding and require the director to act in the company’s best interests.
Under the Companies Act 2006, directors must act in the company’s best interests, avoid conflicts, and uphold governance standards. Company directors have strict legal obligations to act in the best interests of their company. These fiduciary duties, set out in the Companies Act 2006, govern how directors must manage company affairs, avoid conflicts of interest, and prioritise the company's success over personal gain.
A breach can lead to significant legal and financial consequences, including personal liability, director disqualification, and, in some cases, criminal penalties.
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Self-dealing
A fiduciary duty is a legal obligation owed by corporate officers, directors, and partners to the company and its shareholders. Several fiduciary duties are imposed on these individuals, including the duties of loyalty, care, and good faith. A breach of fiduciary duty occurs when a director's actions fall short of these duties.
A fiduciary must always put the interests of the principal first and cannot benefit from the relationship without the principal's consent. A breach of fiduciary duty through self-dealing can occur in several ways, including:
- Using company funds to buy an asset from themselves, often at an inflated price.
- Selling an asset to themselves at a lower price than its cost.
- Receiving a kickback for a transaction involving company or trust assets.
- Paying themselves an unreasonably high fee.
- Loaning themselves money from company or trust funds.
- Failing to provide proper disclosures before entering a transaction with a connected company.
If a breach of fiduciary duty is found, the fiduciary may be held liable for damages, including both compensatory and punitive damages.
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Negligence and recklessness
A breach of fiduciary duty occurs when a director's actions fall short of their duties. Negligence and recklessness are key factors in this. Directors have a duty of care, meaning they must make informed decisions, conduct proper oversight, and stay informed about the company's activities. They must perform their roles with the care, diligence, and skill that a reasonably prudent person would exercise in similar circumstances.
Making decisions without proper research or due diligence, or disregarding potential risks, constitutes a breach of this duty of care. For example, approving risky transactions without sufficient analysis or ignoring significant business risks. This can lead to serious consequences, including legal liability, with shareholders or the company itself able to sue the director for damages. Directors can be held personally liable and may have to compensate the company or shareholders from their own assets.
However, it is important to note that negligence and a breach of fiduciary duty are distinct. Negligence is the failure to use the level of care and caution that an ordinary person would use in similar circumstances. While the elements are similar to a fiduciary breach, negligence can exist outside of a fiduciary obligation. For example, a motorist has no fiduciary relationship with other drivers, but they do have a legal obligation to others to exercise reasonable care while driving. In contrast, a financial advisor has a fiduciary duty to always act in the best interest of a client. If the advisor does not research an investment opportunity, they may have been negligent, but they have not necessarily breached their fiduciary duty.
To ensure the best chance of success in a legal claim, it is crucial to understand the distinctions between negligence and a breach of fiduciary duty and to base the claim on the appropriate cause of action.
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Misuse of company assets
A breach of fiduciary duty in the UK occurs when a company director fails to fulfil their obligations to the company and its shareholders. These obligations, or fiduciary duties, are legally binding and require the director to act in the company's best interests.
One such fiduciary duty is to avoid the misuse of company assets. Directors must not use company funds or resources for personal purposes, even minor ones, as this violates the duty of loyalty and could be deemed misappropriation. For example, selling personal assets to the company at inflated prices would be a breach of fiduciary duty.
If a director has acquired property or assets through a breach of fiduciary duty, a court may impose a constructive trust, transferring ownership of the property back to the beneficiary. The court may also order the director to compensate the company, return the misused assets, or surrender any profits gained from their breach.
It is important to note that consent is crucial. Failing to obtain full and informed approval before making decisions that affect company assets can lead to legal consequences. However, if the principal gives informed consent, this can be a valid defence.
Directors who breach their fiduciary duties may face serious consequences, including legal liability, removal from office, financial penalties, disqualification, and reputational damage.
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Failure to disclose information
A fiduciary relationship is one which involves a level of trust, with one person owing certain duties to another, attracting legal consequences if breached. Fiduciary duties include the duty of care, loyalty, good faith, confidentiality, prudence, and disclosure.
A breach of fiduciary duty occurs when a fiduciary fails to act responsibly in the best interests of a client. This can include failing to disclose vital information, acting in a manner that is contrary to the interests of those they represent, or when a conflict of interest is not appropriately managed.
A breach can also occur when a fiduciary fails to provide important information to a client, leading to misunderstandings, misinterpretations, or misguided advice. This can happen when an advisor tries to upsell clients on unsafe assets or mislead them about conflicts of interest.
To prevent breaches, companies can establish practices that help directors understand and comply with their fiduciary duties, such as board training and development, clear conflict of interest policies, due diligence and oversight, transparency with shareholders, and legal counsel and advice.
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Frequently asked questions
A fiduciary relationship involves a level of trust and legal and ethical responsibility, where one person owes certain duties to another. Fiduciary relationships can arise between directors and their companies, trustees and beneficiaries, and professionals and their clients.
A breach of fiduciary duty occurs when a fiduciary fails to act in the principal's best interest or promotes self-interest above that of the beneficiary. This can include profiting at the principal's expense, favouring third parties, exposing discriminatory information, failing to disclose vital information, or acting in a manner that is contrary to the interests of those they represent.
If a fiduciary breaches their duties, they may face serious consequences, including legal liability, removal from office, financial penalties, disqualification, and reputational damage. Shareholders or the company itself may sue the fiduciary for damages resulting from the breach, and the fiduciary may be held personally liable, requiring them to compensate the company or shareholders from their own assets.
Yes, there are several defences that may be applicable in the event of a breach of fiduciary duty claim. These include the business judgment rule, ratification by shareholders, reliance on expert advice, and demonstrating that the fiduciary acted in good faith and in the best interests of the principal.
A breach of fiduciary duty can occur in various forms. For example, a company director may engage in self-dealing by selling personal assets to the company at inflated prices or approving risky transactions without sufficient analysis. A breach can also involve negligence, recklessness, misuse of company assets, or failure to disclose material information to shareholders or board members.
