Essay on fiduciaries, fiduciary obligations and remedies
Equity deals with justice and the present common and statutory laws may not result in justice; this has especially been the case in respect to the fiduciary duties of directors in respect to shareholders. Equity has been forced to use fiduciary duty as an accordion term lately in this area.
This discussion will illustrate how this is essential part of equity because without flexibility justice cannot be done. As the basic maxim illustrates Equity will not suffer a wrong without a remedy. However another important maxim, which is Equity acts in personam because ‘the personal nature of the jurisdiction is illustrated by the fact that failure to comply with an order is a contempt of court punishable by imprisonment’.
Fiduciary Duty in Company Law A Case Study:
The general duty that the director holds is to the company, which has been established through the law of equity, which will be further discussed in the next section. In relation to contracts that personally benefit the director under contract law the company can make it avoidable as it is in breach of the basic duty that the director holds, which is implied in the present Company Acts. Yet after an extensive three year review it has been revealed that the individual shareholder’s interests may not be sufficiently protected by protecting the company’s interest and declaring any interest in a contract to the board. This duty held to the shareholder has been a question of concern in the new CA 2004; whereby the protection of director’s liability has been slackened and the powers of investigation into possible wrongdoing, negligence of acts and/or omission of acts will be strengthened. However the main deficiency that the legislation has not dealt with is that the director still owes only a direct fiduciary duty to the company as a whole and not to individual shareholders. This seems to limit the amount of liability the director holds because if the director held a duty to each beneficiary, i.e. shareholder, then they would be liable for legal action from individual shareholders.
The law of equity has used the accordion effect to expand the fiduciary duty in respect to directors due to a deficiency in the present common and statutory law. As the following consideration of the cases will show there is no specific duty owed, except in certain circumstances where equity expands this duty in the interests of justice, but will contract it if there is no specific injustice going to occur.
The present law does not create a fiduciary duty between individual shareholders and a director, rather this is implied because the director owes a fiduciary duty to the company as a whole, which is strictly adhered to in Regal (Hastings) Ltd v Gulliver. This creates a limitation in the extent that the law of equity can protect the individual shareholder’s interest, because it means that the company must bring a claim and ordinarily the shareholder cannot bring a claim because no duty is held to the individual shareholder. This can cause problems in the case that all the directors enjoy a personal interest in the transaction and therefore leading to a situation where there is no one in the company prepared to take action against the directors. This has lead the law to make exceptions, but these exceptions are not for the interest of the shareholders but for creditors and employees. Hence creating a situation where there are individual fiduciary duties held but as of yet not held to individual shareholders.
Therefore as long as the director believes he is acting in the best interest as the company, not individual shareholders and then he can use and dispose of company property as he wishes. In addition in personally interested transactions, as long as the company is notified and the board agrees, that are in the best interests of the company and for proper purposes, i.e. not fraudulent, negligent or reckless, are seen as perfectly valid. If the director is to make profit from valid personal dealings this then must be fully disclosed, otherwise he would be in breach of his fiduciary duty to the company; even if the company could not have made profit without this dealing. However in the recent case of Crown Dilmun and Dilmun Investments v Nicholas Sutton and Fulham River Projects the court held that the director, whom held a direct personal interest in the contested deal, required the additional written permission of the deal from individual shareholders in the business deal as there were serious consequences and conflicts in the case and ignorance is no excuse:
The fact that Mr Sutton believes all of this is possible is a good demonstration of his minimal understanding of his duties and responsibilities and possibilities of conflict which he never understood at all. The recent Dilmun Case indicates that there is a movement to protect individual shareholders; this seems to be the direction that new legislation and proposed reforms seem to be indicating also. The main point is that without individual shareholders there would not be a company, therefore their interests should be equally protected as individual employees and creditors. Hopefully the Dilmun Case will indicate a movement towards protecting individual shareholders interests, as well as creating a direct fiduciary duty between directors and shareholders at a statutory level.
Company law will be reformed to encourage greater levels of investment and enterprise.
One of the key areas that is proposed in reference to company law is changing the role of the shareholder in companies. A key part that this bill will deal with is the director’s duties where the whitepaper proposes that director’s duties which are now present in equity be put into a stutory frame work:
The statutory statement of duties will replace existing common law and equitable rules. The duties owed to the company, and as now only the company will enforce them. (In certain circumstances, the shareholders may be able to bring a derivative action, albeit essentially for the company’s benefit).
Conclusion:
Therefore the accordion effect of equity is definitely present and highly important because it incorporates flexibility into the justice system. Usually if it is highly important it follows with statutory change and the basic tool of equity is the creation of a trust, where every trustee owes a fiduciary duty to the beneficiaries. However flexibility has to remain in the interests of justice, as the recent Dilmun Case indicates.
Tags: company law, equity, fiduciaries, justice, shareholders, statutory laws
