Redmans Solicitors

The fiduciary duties of directors (and when they can apply to employees)

by Direct2Lawyers on July 6, 2012

  • SumoMe

This post was submitted by Direct 2 Lawyers, a trading name of Redmans Solicitors, offering no win no fee unfair dismissal representation.

The case of Ranson v Customer Systems Plc [2012] EWCA Civ 841, handed down last week from the Court of Appeal, provides a useful reminder as to the various obligations that directors and employees are subject to. This post will mainly cover the duties that directors owe to their companies under common law and statute but will also touch at the end upon whether and in what circumstances employees can be subject to the same duties as directors. Please note that this is quite a brief overview of a complex area.

This post will therefore cover:

  1. The source of directors’ duties
  2. What the fiduciary duties of directors encompasses
  3. Who fiduciary duties are owed to
  4. How long the fiduciary duties bind directors
  5. The consequences for breach of fiduciary duty
  6. Whether the same duties can be applied to employees
  7. How employees can be subjected to these obligations

The source of directors’ duties

Until 1 October 2007, equitable principles were the source of fiduciary duties – the duties that directors owe to their company. On 1 October 2007 the Companies Act 2006 came into force. The Companies Act codified a number of the fiduciary duties and was intended to replace common law and equitable principles. However, the common law and equity are still to be used to interpret directors’ statutory duties.

What the fiduciary duties of directors encompasses

There are seven duties laid out within the Companies Act 2006:

  1. The duty to act within the directors’ powers (s.171)
  2. The duty to promote the success of the company (s.172)
  3. The duty to exercise independent judgment (s.173)
  4. The duty to exercise reasonable skill, care and diligence (s.174)
  5. The duty to avoid conflicts of interest (s.175)
  6. The duty not to accept benefits from third parties (s.176)
  7. The duty to declare an interest in proposed transactions (s.177)

Who are the duties owed to?

Fiduciary duties are owed to the company. However, in certain circumstances third parties can seek to bring an action against a director (see below).

How long do fiduciary duties continue to bind directors?

Most fiduciary duties cease to bind directors when they leave their position as director of the company. However, the duty to avoid conflict of interests and the duty not to accept benefits from third parties continues after the director has left their position.

What if the directors breach these duties?

Should a director breach the duties that they owe to the company the company has a right to take action against them. The remedies available to the company are the same as under normal common law or equitable principles – if, for example, a director has obtained a contract that should have been obtained by his company then he may be required to account for the profits of such. However, in certain circumstances shareholders may be able to bring an action against the director. This will not be elaborated further upon in this post.

Do these duties apply to employees?

The short answer is in general, no. Employees (even extremely senior employees) are not in a position of trust in the company and their rights and duties are not analogous to those of directors. Therefore, in the majority of circumstances employees are not bound by fiduciary duties. However, in certain circumstances they can be. This includes if the employee has agreed to be contractually bound by principles akin to the fiduciary duties or exceptional circumstances where the rights and duties of the employee are analogous to those of a director.

How, therefore, can employees be restrained from acting against the interests of their company?

An employee’s contract of employment (unless stated expressly otherwise) contains certain implied terms (such as the duty of fidelity) that restrains the employee from acting against the best interests of their employer whilst they are employed by them. However, these implied terms do not cover the (former) employee’s actions after he’s left the employment. This is why express post-termination restrictive covenants are necessary – if these are not contained within (or annexed to) the employee’s contract of employment then they are generally free to act as they wish after they have left employment. It is therefore wise to include terms that restrict the employee’s ability to engage with particular clients or customers, or compete within a certain geographical area, with the employer after they leave their employment. However, these terms must be reasonable and not too onerous.

Alternatively (as suggested above), if an employee is in a position analogous to that of a director then they may be deemed to be subject to the same fiduciary duties that a director is subject to. This, however, applies only in exceptional circumstances.

 

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