Civil Fraud – breach of fiduciary duty and breach of trust

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What is a fiduciary relationship?

A fiduciary relationship can arise in circumstances where one party acts for, or on behalf of, another party and owes that party loyalty and fidelity as a result of its position. Generally, an imbalance of power exists between the two parties, perhaps because the acting party has knowledge or expertise which the represented party relies on. 

A typical example might be the relationship between a director and a company. The director acts on behalf of the company; the company relies on and is influenced by the opinion of the director; and in return for that trust, the director owes the company fiduciary duties. The director is required to exercise their judgement and act in the best interest of the company, putting all personal causes and motives aside. 

What are fiduciary duties?

A director is subject to a number of duties which ensure they act properly. At the most basic level, there is an expectation that a director will act in good faith and in the best interests of the company, and with a level of care and skill expected of someone in that position. Many of a director’s fiduciary duties have been codified under the Companies Act 2006. Among other duties, a director must:

  • Act within their powers for the purposes they were conferred;
  • Promote the company’s success;
  • Exercise independent judgement;
  • Exercise reasonable care, skill and diligence;
  • Account for unauthorised profits;
  • Avoid situations which might give rise to a conflict of interest. 

Breach of fiduciary duties 

A recent example concerning breach of fiduciary duties can be seen in the case of Davies v Ford (2021). The Claimant incorporated a business (Company A) for the primary purpose of taking over a recycling plant. He appointed two directors, both of whom had previous experience in the industry. Once appointed, the new directors set up a rival company (Company B), with one becoming a majority shareholder. Together, the two directors diverted business away from Company A to Company B. The actions of the directors was hugely detrimental to Company A, which reached the point of insolvency and was subsequently struck off the Register of Companies. At a Court hearing, the Judge decided that both directors had breached their fiduciary duties to promote the success of Company A and to avoid conflicts of interest. The Claimant was awarded equitable compensation in accordance with the value of Company B at the time of Company A’s collapse.

Remedies available to the company against a director who breach their fiduciary duties

Where a breach of duty occurs, it will be open to the company to take different forms of action depending on the circumstances. This may include:

  • seeking an injunction to prevent an ongoing breach from continuing;
  • securing approval from the shareholders to remove the offending director from their post;
  • applying to the court to have any misappropriated company property restored;
  • applying to the court to have an unauthorised or inappropriate transaction set aside;
  • seeking compensation from the director personally for any financial losses or damages sustained; and
  • referring the matter to the police where there is a suspicion of fraud or theft.

In certain circumstances where the company declines to act, it may be possible for affected shareholders to issue a derivative claim in the company’s name to ensure that the offending director is held to account. However, they will need prior permission from the court to do this.

In an insolvency situation, it may be possible for an administrator or liquidator to take action and use any money or property that is recovered in order to boost the funds available for distribution among the company’s creditors. Such action might be taken where the offending director is suspected of wrongful or fraudulent trading or of misfeasance in office.  A liquidator or administrator can also push for the offending director to be made subject to a director’s disqualification order.

Personal liability of directors to third parties

One of the foundational principles of company law is that of separate legal personality, that the company is recognised as a legal person capable of entering legal relationships in its own name. As a result, claims for wrongs committed by a company ought to be brought against the company and not its shareholders, directors or other officers.

It is also well-established that a director's duties are owed to the company, and that therefore where a director has breached those duties it is the company which has a claim against the director. Where a director's breach of duty has resulted in the company causing loss to a third party, then the chain of liability is from the company to the third party, and from the director to the company – as a starting point, there would be no direct liability from the director to the third party.

Notwithstanding this general position, there are numerous circumstances where liability for a company's actions can extend beyond the company – most obviously, where the director has given a personal guarantee, or who has been involved in fraudulent or other dishonest action on the part of the company. An example of this is where a director has made a fraudulent misrepresentation intending for another person to rely upon it, and that person does rely upon it and suffers a loss as a result, then the corporate structure will not protect that director from personal liability. 

Breach of Trust 

Similar to a breach of fiduciary duty, a ‘breach of trust’ refers to the breach of a duty imposed on a trustee by a trust instrument. It can be distinguished from a breach of fiduciary duty, which can be committed not only by the trustees, but by anyone acting for the benefit of the trust (i.e. a solicitor and client relationship). 

A breach of trust may result in civil and/or criminal liability. The trustee’s civil liability is the loss that their act or omission has caused to the trust. The trustee’s criminal liability is most commonly that of theft, in the sense that the trustee dishonestly misappropriates property belonging to another (being the beneficiary who benefits from the trust) with the intention of permanently depriving them of it. 

Breach of trust can represent an important route of claim for a claimant beneficiary in many cases of alleged fraud (for example, for the purposes of establishing liability against an alleged fraudster who is a trustee). If there has been a breach of trust, a claimant beneficiary may consider proceedings either to restore the trust fund or obtain compensation on the basis that the trustee has exceeded their authority or failed to exercise the required duty of care. If more than one trustee is involved, they will be liable to the beneficiary on a joint and several basis. This means that the claimant beneficiary can choose to take action against any one of the jointly liable parties and recover fully from them.

For expert legal advice on civil fraud, including breaches of fiduciary duty and breach of trust, please contact Cara White who will be able to assist.

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