Fiduciary Duties of Directors

Fiduciary Duties of Directors

Businessman hand writing Fiduciary duty with red marker on transparent wipe board, business concept.

Introduction to Fiduciary Duties

 

Fiduciary duties are the assumption by a director of duties, responsibilities and liabilities that arise by reason of the attributes of the office imposed by statutes and under the common law.

 

The functions of directors require them to:

  1. exercise their powers in accordance with the articles of association of the company; and
  2. have control of the property and assets of the company.

 

The general principles that govern the duties of directors have evolved over time. These principles generally deal with the issues of:

  1. the exercise by the directors of their powers as agents of the company; and
  2. the control of the property and assets belonging to the company as its trustees.

 

The decision of TYC Investment Pte Ltd v Tay v Yun Chwan Henry (2014), noted that directors are fiduciaries who ought to act in the best interests of the company. The High Court opined that shareholders of a company are typically not subject to fiduciary obligations, unlike directors.

Accordingly, it has been generally stated that a person who is subject to fiduciary duties must act in good faith and with reasonable care and diligence. Fiduciary duty is the highest duty of care that could be imposed by the law. The person who holds the duty must forego his personal interests in preference for the beneficiary’s in the event a conflict arises.

The Accounting and Corporate Regulatory Authority (ACRA) has outlined fiduciary duties that a director of a company is required to act in accordance with.

 

Every director must fulfil the following fiduciary duties:

 

Duty to act in good faith towards the principal.

  • This duty requires a director to behave honestly at all times towards the principal and consists of an obligation to disclose all information on possible conflicts of interest or sources of profit.

 

Duty to avoid any conflict of interest.

  • This duty comprises of an avoidance of any potential conflict of duty between the fiduciary and principal. This would mean that the fiduciary’s financial interests must not conflict with those of the principal. Further, the fiduciary cannot enter into other relationships which may hinder the fiduciary from being completely loyal to the principal.

 

Duty not to profit from his or her position

  • The fiduciary must not profit from his or her position as a fiduciary unless consent is provided by the principal.

 

How may a fiduciary duty arise?

Fiduciary duties arise out of certain types of relationships between the fiduciary and the principal. For example, if the fiduciary has been entrusted with the principal’s property and assets or authority to act on behalf of the principal for his or her benefit, a fiduciary duty is present. Importantly, the fiduciary is bound by these duties regardless of whether they were aware that the relationship would give rise to fiduciary duties. Fiduciary duties typically arise from relationships between directors and their companies and shareholders.

 

What happens when a fiduciary duty is breached?

If a fiduciary duty is breached, there is a possibility of the fiduciary facing a lawsuit from the principal. When filing a lawsuit against the fiduciary, the principal ought to prove that the fiduciary duty existed, that it was breached, and that this breach caused loss to the principal. The principal would typically claim damages for the breach in the form of money for loss profits, income or property.

 

The following remedies are also available for breach of fiduciary duty:

  1. Recission of a contract which involves a breach of fiduciary duty; or
  2. Equitable compensation payable by the fiduciary to the beneficiary; or
  3. An account of profits payable by the fiduciary to the beneficiary; or
  4. Transferring title of the property from the fiduciary to the beneficiary; or
  5. Injunctions to prevent the fiduciary from committing a breach.

 

Please note that this article does not constitute express or implied legal advice, whether in whole or in part. If you require legal advice, please contact me at walter@silvesterlegal.com.

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