The term “fiduciary duty” sounds complicated, but the concept is actually quite simple.

A fiduciary duty is a duty of trust and loyalty. It arises when one person is entrusted to act on behalf of another and is expected to put the other person’s interests before their own.A simple everyday example is a trustee managing money for a beneficiary. The trustee cannot use that money for personal purposes because it does not belong to them. They must act in the beneficiary’s best interests.The same principle applies to company directors.Directors are trusted to manage the company’s affairs, assets and finances. Although they control the company’s money and assets, those assets do not belong to them personally. Directors must therefore make decisions that benefit the company rather than themselves.

Fiduciary Duties of Directors

What Does This Look Like in Practice?

 

Example 1

 

Putting Personal Interests Before the Company

A director owns a separate business and arranges for the company to purchase goods or services from that business at inflated prices.

By prioritising personal financial gain over the interests of the company, the director may be in breach of their fiduciary duties. In an insolvency scenario, a liquidator may investigate whether the transactions were conducted at arm’s length and whether the company suffered a loss as a result.

If a loss is established, the director could face a claim for misfeasance under section 212 of the Insolvency Act 1986.

 

Example 2

 

Using Company Money for Personal Expenses

A director uses company funds to pay for a family holiday and records it as a business expense.

The director is treating company money as their own. This is contrary to the duty to act in the company’s best interests and may give rise to recovery action if the company later enters insolvency.

 

Example 3

 

Repaying Friends and Family Before Other Creditors

A company is struggling financially and owes money to various creditors. Before liquidation, the director repays a loan owed to a family member but leaves trade suppliers unpaid.

This may be viewed as favouring one creditor over others and could be challenged by a liquidator as a preference.

 

 

How Does the Law Apply?

 

In the UK, these principles are reflected in the Companies Act 2006, which requires directors to:

  • Act within their powers.
  • Promote the success of the company.
  • Exercise independent judgment.
  • Exercise reasonable care, skill and diligence.
  • Avoid conflicts of interest.
  • Not accept benefits from third parties.
  • Declare interests in transactions and arrangements.

These duties are often straightforward when a company is profitable and trading successfully. However, they become particularly important when a company faces financial difficulties.

 

When a Company Becomes Insolvent

 

Many directors mistakenly believe their primary duty is always to shareholders. In reality, when a company is insolvent or approaching insolvency, directors must consider the interests of creditors.

 

For example, if a company owes HMRC £100,000, trade suppliers £50,000 and has little prospect of survival, directors should not continue taking excessive drawings or transferring assets to connected parties. Their decisions must be made with creditors’ interests in mind.

 

Understanding fiduciary duties is not just a legal requirement, it is fundamental to good corporate governance and protecting both the company and its stakeholders.