Fiduciary duties

In broad legal terms, fiduciary duty is an obligation on one party to act in the best interest and good faith of another party. Fiduciary duties are foundation behind the idea of good faith and confidence. Fiduciary relationship can only exist when one person trusts the other and the other fully accepts the duties and obligations that come with that trust. The duties in fiduciary relationship include loyalty and reasonable care for the assets in the entrusted person’s custody. It is not enough to think highly and with respect of another individual or generally trust in their good character, to form a fiduciary relationship. Although, there is no case law clearly defining boundaries of fiduciary relationships and particular circumstances in which such relationships arise, it is commonly understood that that relationships between lawyers and clients, brokers and principals, trustees and beneficiaries, administrators or executors of estate and beneficiaries of the estate are fiduciary relationships.

Directors’ Fiduciary Duties

As a director you are effectively an agent of the company that you are representing. You are therefore placed in a position of trust.  The idea behind it is simple:  the directors should act within their powers and in the best interest of the members of the company. The most common breaches of directors’ fiduciary duties involve directors who act in their own best interest by i.e. diverting business opportunities away from the company, using the company’s premises and assets to own benefit or accepting bribes. Directors who honestly believe that they have acted in the best interest of the company and can prove that they have exercised sufficient level of care will not usually be held in breach of their fiduciary duties. This specifically however does not apply to directors who fail to disclose their personal interest in proposed or existing transactions.

Fiduciary Duties of Trustees

Trustees owe fiduciary duties to the beneficiaries of a trust. These include duty of loyalty, integrity good faith and honesty. Trustees should never allow their own personal interest to prevail over the interest of beneficiaries. Trustees should avoid any potential conflicts of interest and account for any profits made by them in their capacity as trustees. It is not advisable for trustees to purchase the trust property and in some cases such transactions are automatically void.

To avoid breaches of fiduciary duties, the trustees should act in accordance with the trust document. In the absence of such or in the case of discretionary trusts, the trustees should act in a way that will offer the best monetary returns with the least amount of risk involved, to the beneficiaries.

Remedies

A breach of fiduciary duty may give rise to a civil action. Some of the remedies that may be available include:

  • Damages – if the beneficiaries can demonstrate consequential loss resulting from the breach of fiduciary duty they may be entitled to damages.
  • Injunction – it is an equitable remedy available to court’s in certain circumstances, in particular in matters concerned with breaches of confidence.
  • Void transactions – it may be possible to make some transactions void. For example a transaction in which the personal representative leases or mortgages the estate property may be set aside by the beneficiaries. They may also seek restitution.
  • Account of profits – this is particularly relevant to company law. A director who diverts business opportunities away from the company or profits by not disclosing his or her personal interest in proposed or existing business arrangements, may be forced to account for profits made from such dishonest activity.
  • Disciplinary proceedings – in the case of professionals such as solicitors there may be disciplinary actions associated with breaches of fiduciary duties.
  • Criminal punishment – if the breach of fiduciary duty is criminal in nature (i.e. fraud) it may result in criminal sanctions being imposed.

If you are a director and need advice on any aspects of fiduciary duties or a shareholder or other beneficiary of a trust and feel that a director or trustee are in breach of their fiduciary duty we can help. Get in touch with me for further advice.

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