A breach of fiduciary duty can have a number of legal and financial consequences, which in turn can result in significant repercussions and penalties. If you believe a breach of fiduciary duty has occurred or are unsure what your legal obligations are as a fiduciary, read on.
You can also contact the employment lawyers at Owen Hodge if you have any questions.
What are fiduciary duties?
A fiduciary duty is a legal obligation for one party to act in the best interests of another (such as a company). In a fiduciary relationship, the person who is legally and ethically bound by this duty is known as the fiduciary.
As well as the above, the fiduciary has a responsibility to put the interests of the other party ahead of their own, and must preserve good faith and trust.
Types of fiduciary duties of directors & officers
The directors, officers and other employees of a company have a common law duty to:
1. Act bona fide in the interests of the company in which they are working
Directors and officers should act in good faith in the company’s interests as a whole.
2. Act for proper purposes only
Directors and officers should not misuse their powers for improper purposes, such as gaining personal advantage or defeating voting powers of the existing shareholders by forming a new majority.
3. Exercise due care and diligence
Directors are required to guide, monitor and use diligent care and make well informed and independent decisions while managing the affairs of the company.
4. Avoid conflicts of interest and retain discretion
Directors should not place themselves in such situations or become a part of transactions where they are not able to make a decision which is in the best interest of the company. Since the directors owe a relationship of faith and trust to the company, they are presumed to put the company’s interest ahead of their own interest.
5. Refrain from disclosing confidential information and abusing corporate opportunities
On account of their fiduciary relationship, directors are under an obligation not to disclose confidential information or abuse corporate opportunities. They should not disclose any information that might be detrimental to the company’s interest.
The employment lawyers at Owen Hodge Lawyers can provide more information if you have any questions.
Learn more: executive employment agreements
Does a CEO have a fiduciary duty?
Yes, a CEO has the same legal fiduciary duties as officers and directors. The fiduciary duties are legal concepts that form the basis of a CEO’s legal relationship with the company owners.
What does a breach of fiduciary duty mean?
A breach of fiduciary duty is when a fiduciary (such as a director or officer) does not comply with their fiduciary duties (as outlined above).
Types of breaches of fiduciary duty
The directors and other officers of a company are considered to have breached their fiduciary duties when they:
- Fail to make a business judgment in good faith or in the best interests of the company.
- Have placed a material personal interest in the subject matter of the business judgment ahead of the company’s interest.
- Engage in conduct that is detrimental to the interest of the company with the intention and purpose of obtaining a benefit for and/or from someone.
- Deceitfully and intentionally fail to exercise their powers and discharge their duties in good faith either in the best interest of the company or for a proper purpose.
- Dishonestly and intentionally commit an offence by using their position so as to gain an advantage for themselves or someone else, either directly or indirectly, thereby causing harm to the company.
- Obtain information with intentional dishonesty and use the information to the detriment of the company to gain an advantage, directly or indirectly, either for themselves or for someone else.
- Fail to prevent the company from trading in a dishonest manner while being insolvent.
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How do you prove breach of fiduciary duty?
In order to claim remedies for breach of fiduciary duty, a complainant needs to establish four things:
- There was an existence of a duty between the complainant and the fiduciary.
- The fiduciary owed a duty of trust and faith to the complainant.
- There has been a breach of duty by the fiduciary.
- The complainant has suffered loss and damage owing to such breach of fiduciary duty.
What is the penalty for breach of fiduciary duty?
In the case that a breach of fiduciary duty is proved, the courts may order the following:
- “Pecuniary penalty” of up to $200,000 if a declaration of contravention has been made by any person when the contravention is serious and materially prejudices the company and its ability to pay to its creditors or members.
- Compensation for damage for contravening a civil penalty provision under Section 1317 E of the Corporation Act 2001 in relation to a company or a scheme.
- Disqualification from managing corporations.
How to make an application for a breach of fiduciary duty
An application for declaration of contravention of a civil penalty provision can be made by the Power of Australian Securities and Investment Commission (ASIC) to the appropriate court. Upon the declaration being made, ASIC can seek a pecuniary penalty order or a disqualification order to disqualify director(s) from managing the affairs of the company owing to breach of general, statutory or constitutional duties.
Talk to Owen Hodge Lawyers
Fiduciary relationship case law can be complicated, so it is highly recommended that you seek the legal advice of an experienced employment lawyer sooner than later.
And if you have any questions about your fiduciary responsibilities, the rights of executives or how to prove there has been a breach of fiduciary relationship, contact Owen Hodge on 1800 770 780 to schedule an initial consultation.