Breaching fiduciary duty and its consequences

Breaching fiduciary duty is a major act of foul play in the world of corporate governance. Here’s a guide to explain it further. 

If you hold a position of power in a business, you will be bound by fiduciary duty, which means acting in the best interests of the business and its stakeholders, such as shareholders, creditors, and customers. As a board member or a company director, you must tread carefully, as breaching fiduciary duty can have serious consequences and impact your ability to operate in this capacity.  

The fiduciary and statutory duties of a company director are intertwined, so it’s essential to play by the rulebook to remain compliant and fulfil your legal obligations as a company director. Chris Bristow, a corporate insolvency and business restructuring adviser at Real Business Rescue runs through the legal consequences of breaching fiduciary duties as a limited company director.

Company directors must act in good faith and fulfil a duty of care to stakeholders in all that they do. Each decision must be carefully considered and executed to promote the company’s success.  

While statutory duties consist of fulfilling reporting and accounting obligations and ensuring smooth operations, fiduciary duties ensure that company directors act responsibly and prioritise the well-being of the business. The fundamental pillars include fulfilling a duty of care, loyalty, and disclosure.

A breach of fiduciary duty can occur in many ways, from disregarding the company’s best interest and failing to disclose a conflict of interest to acting dishonestly. If a breach occurs, strict protocol must be followed to protect the company and its stakeholders. 

A company constitution establishes the protocol that must be followed in such events, including procedures for dealing with fiduciary breaches. This will vary based on the severity of the offence, such as an in-house investigation to substantiate claims or a formal investigation involving external parties, such as a regulator, to investigate severe offences.

Shareholder intervention – Board directors or company shareholders will intervene to investigate and reprimand the director if they are found guilty of breaching fiduciary duties. This will involve examining and seeking a remedy to initiate damage control and protect the business and stakeholders against risk. 

Removal of director – The director may be removed from their post following a shareholder vote during the investigation. If proven guilty of breaching fiduciary duties, the director could be dismissed.  

Legal action – Shareholders may choose to pursue the errant director legally, should they wish to seek damages for loss or damage, or require an interim injunction.  This may be set aside if a transaction is in question due to a conflict of interest. 

Regulatory action – If there is regulatory oversight, strict policies will guide such matters. Companies operating in a regulated industry, such as financial services, must comply with high procedural standards, as the consequences following a breach of duty could prove fatal. 

A company director breaching fiduciary duties can have their commercial abilities seriously restricted. If the matter is pursued legally, the consequences can be severe, alongside irreparable reputational damage that could hinder your ability to operate a business in the future.