A fiduciary duty is the highest duty known to English law: the obligation owed by a person in a position of trust to act in the interests of the person or entity to whom the duty is owed, rather than in their own. Directors owe fiduciary duties to their companies, trustees owe them to their beneficiaries, partners owe them to each other and to the partnership, and senior employees in certain positions of trust may owe them to their employers.
Breach of fiduciary duty claims are among the most serious allegations in commercial law, and the legal consequences — personal liability to account for all profits made from the breach, liability to compensate for losses caused, and the potential for proprietary remedies that trace the profits through subsequent transactions — can be significantly more severe than ordinary damages claims. Investigating an alleged breach of fiduciary duty requires a combination of legal knowledge, financial forensic capability, and corporate intelligence that is specific to this category of claim.
The Legal Framework: Directors’ Duties
For company directors, fiduciary duties are codified in the Companies Act 2006. The relevant duties are:
Duty to Act Within Powers (s.171)
A director must act in accordance with the company’s constitution and only exercise powers for the purposes for which they are conferred. Exercise of a power for an improper purpose — issuing shares to dilute a shareholder’s vote rather than to raise capital, for example — is a breach of this duty even if the power itself exists.
Duty to Promote the Success of the Company (s.172)
A director must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. This is the duty most directly engaged by self-dealing, the diversion of corporate opportunities, and the prioritisation of the director’s own interests over those of the company.
Duty to Avoid Conflicts of Interest (s.175)
A director must avoid situations where they have, or can have, a direct or indirect interest that conflicts, or may conflict, with the interests of the company. This duty applies to the exploitation of property, information, or opportunity, and it applies regardless of whether the company could itself have exploited the property, information, or opportunity. It is the duty most directly engaged by the diversion of corporate opportunities and by undisclosed external interests.
Duty Not to Accept Benefits from Third Parties (s.176)
A director must not accept a benefit from a third party conferred by reason of their being a director, or by reason of any act or omission by the director as a director. This is the duty engaged by kickbacks, secret commissions, and any other personal benefit derived from the director’s position.
Duty to Declare Interest in Proposed Transactions (s.177)
A director must declare any interest in a proposed transaction or arrangement with the company, before the company enters into the transaction. Failure to declare an interest does not invalidate the transaction, but it is a breach of duty that may give the company the right to set aside the transaction and recover any profits.
Fiduciary Duties Beyond Directors
Fiduciary duties are not confined to company directors. Other relationships that give rise to fiduciary duties under English law include:
Partners: each partner owes fiduciary duties to their fellow partners and to the partnership, including the duty not to compete with the partnership, not to make a secret profit from partnership business, and not to divert partnership opportunities.
Trustees: trustees owe the full range of fiduciary duties to their beneficiaries, including the duty to act in the beneficiaries’ interests, the duty to avoid conflicts, and the duty not to profit from the trust relationship.
Senior employees: employees in certain senior positions, where the nature of their role and the trust placed in them creates a relationship analogous to a fiduciary relationship, may owe fiduciary duties in addition to the contractual and implied duties of their employment.
Agents: agents owe fiduciary duties to their principals, including the duty to account for any profit made from the agency relationship and the duty not to act for conflicting principals without consent.
Common Breach Scenarios
Self-Dealing in Corporate Transactions
A director who causes the company to enter a transaction with an entity in which they have a personal interest, without disclosing that interest and obtaining the necessary board or shareholder approval, has breached their duty to declare interest and may have breached the duty to avoid conflicts and the duty to promote the company’s success. The investigation establishes the personal interest, the lack of disclosure, and the commercial terms of the transaction, including whether those terms reflect the director’s personal interest rather than the company’s best interests.
Diversion of Corporate Opportunities
A director who becomes aware of a business opportunity — an acquisition target, a significant contract, an investment — in the course of their role and then pursues that opportunity through a personal vehicle or a company they have an interest in, rather than presenting it to the company, has diverted a corporate opportunity in breach of their fiduciary duty. The investigation establishes: how the director became aware of the opportunity (in their capacity as director, or through genuinely independent means); whether the company could have pursued the opportunity; the director’s personal conduct in pursuing it; and the profit they have made from it.
Secret Profits and Commissions
A director, agent, or other fiduciary who receives a payment, commission, or other benefit from a third party in connection with a transaction to which the principal is a party, without disclosing that payment and obtaining the principal’s consent, has made a secret profit in breach of their duty. The payment does not need to be a bribe in the colloquial sense; any undisclosed benefit derived from the fiduciary position constitutes a secret profit. The investigation establishes the payment, its source, and the mechanism by which it was concealed from the principal.
Breach of the Duty to Avoid Conflicts in a Trust
A trustee who invests trust assets in a business in which they have a personal financial interest, or who uses information obtained in their capacity as trustee for personal financial benefit, has breached their duty to avoid conflicts. Trust breach investigations frequently involve complex tracing exercises: establishing where the trust assets went, what returns were generated, and where those returns are now.
The Investigation Process
Establishing the Relationship and the Duty
The starting point is establishing that the relevant fiduciary duty existed and what its specific content was in the circumstances of the case. For directors, this involves reviewing the company’s constitution, the director’s appointment terms, any board resolutions authorising or restricting specific activities, and any existing disclosure of interests. For trustees, it involves reviewing the trust deed and the specific trustee powers. For other fiduciaries, it involves establishing the nature and terms of the relationship.
Financial Forensic Investigation
Systematic analysis of the financial transactions that are alleged to constitute the breach: the specific payments made, the transactions entered into, the investments made with trust assets, or the profits diverted from the principal. The financial forensic investigation establishes the specific amounts involved, the mechanism of the breach, and the timing, which is relevant both to the limitation question and to the measure of any liability.
Corporate Intelligence Investigation
For breaches involving undisclosed interests, connected party transactions, or diverted corporate opportunities, corporate intelligence investigation establishes the director’s external business interests, their corporate associations, and the connections between those interests and the specific transactions under investigation. A Companies House search of all entities connected to the director, combined with open source intelligence and specialist database investigation, builds the picture of the undisclosed interests that the legal case requires.
Tracing the Profits
Where the breach has produced profits that have been moved through subsequent transactions, a tracing exercise may be necessary to establish where those profits are now and what form they take. Tracing is a legal remedy as well as an investigative exercise: the company or principal whose property was used to generate the profits may be entitled to a proprietary claim over those profits and their traceable proceeds, which survives the insolvency of the defendant and takes priority over their general creditors. Bond Rees conducts tracing investigations that meet the evidentiary standard required for proprietary claims.
The Available Remedies
The remedies for breach of fiduciary duty are more extensive than those available for ordinary breach of contract or negligence:
Account of profits: the defendant is required to account for all profits made from the breach of duty, regardless of whether those profits caused any loss to the claimant. This is the primary remedy where the defendant has profited from the breach, and it is available regardless of whether the transaction was at market value.
Equitable compensation: compensation for losses caused by the breach. Where the breach has caused the company or principal a financial loss, equitable compensation addresses that loss.
Constructive trust: where the defendant has received property as a result of the breach, the court can impose a constructive trust over that property, giving the claimant a proprietary interest in it that survives the defendant’s insolvency.
Rescission: the unwinding of a transaction entered into as a result of a breach of fiduciary duty, restoring the parties to their pre-transaction position.
Injunction: prevention of continuing or future breach, including a freezing injunction to preserve assets pending the resolution of the claim.
Frequently Asked Questions
How is breach of fiduciary duty different from fraud?
Breach of fiduciary duty does not require dishonesty, although many cases involve conduct that is also fraudulent. A director can breach their fiduciary duty through a genuine but undisclosed conflict of interest, even if their intention was not to defraud the company. The legal consequences of breach of fiduciary duty — particularly the account of profits remedy — apply regardless of the defendant’s subjective honesty. Fraud, in the legal sense, requires proof of dishonesty, but the remedies for fraud and for breach of fiduciary duty frequently overlap in cases where the fiduciary has acted dishonestly.
What is the limitation period for fiduciary duty claims?
The limitation period for breach of fiduciary duty is six years from the date of the breach under the Limitation Act 1980, although the court has discretion to disapply the limitation period in cases of fraud or concealment. Where a breach of fiduciary duty has been actively concealed by the defendant, the limitation period runs from the date on which the claimant discovered, or with reasonable diligence could have discovered, the breach. This deliberate concealment exception is significant in the context of secret profits and undisclosed conflicts, which are by their nature designed to prevent the claimant from knowing about the breach.
What if the company approved the transaction?
A transaction that was properly disclosed and approved by the company, either through a board resolution or a shareholder resolution, does not give rise to liability for breach of the duty to avoid conflicts or the duty to declare interests. However, the adequacy of the disclosure — whether the director disclosed all material facts relating to their interest, not just the bare existence of it — is frequently a contested question. An investigation that establishes what was actually disclosed, compared with what should have been disclosed, is often determinative of whether a properly informed approval was given.
Investigating a suspected breach of fiduciary duty? Contact Bond Rees for expert investigation and litigation support.
