1 December 2010 by

Directors' fiduciary duties

"You have to lead people gently to what they already know is right." - Philip Crosby

Currently, a director's fiduciary duties are derived from a company's memorandum and articles of association and the common law. The common law fiduciary duties of a director, such as the duty to act in good faith and in the best interest of the company, have been developed by the courts. In order to hold an executive director accountable for a breach of duty and dismiss the executive director as a result, an employer is obliged to prove wrongfulness or fault, the loss or potential loss suffered and a casual connection between the director's act or omission and the breach. To assist an employer in discharging these obligations, an executive director's contract of employment makes specific provision for the director's obligation to act in good faith and not do anything or engage in any activity which is harmful to the company. In line with these contractual obligations, disciplinary action taken against an executive director for breach of fiduciary duties can be based on a breach of contractual obligations, in addition to an implied duty imposed on the office of director.

Similarly, the conduct of other employees who exert general executive authority over the company or who are responsible for the management of a company's legal or financial affairs is regulated by contractual provisions or with reference to implied duties of the employee.

The Act also introduces a new source of duties. It includes a partial codification of the common law fiduciary duties of directors and extends this to the wider definition of director. The Act places a positive obligation on directors to exercise their powers and perform their functions in good faith, for a proper purpose and in the best interest of the company. In addition, there is a codification of a director's duty to carry out his or her functions with the degree of skill and diligence that may reasonably be expected of a person carrying out the same functions in relation to the company and having the general knowledge, skill and experience of that director.

The express inclusion of these duties in the Act will provide a basis for taking disciplinary action against employees who directly or indirectly exercise, or significantly influence the exercise of, control over the general management and administration of a company and who fail to comply with these duties. Disciplinary action taken against an executive employee for a breach of his or her fiduciary duties can now be founded not only on the contractual provisions of his or her contract of employment and/or a seemingly vague proposition of fiduciary duties, but also the express statutory provisions.

Gillian Lumb, Director and Pranisha Maharaj, Associate

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