Fiduciary duty of directors

Madoff Securities International Ltd (in liquidation) v Raven and others [2013] EWHC 3147 (Comm), [2013] All ER (D) 216 (Oct); NLJ 1 November

It was settled law that a director owed a fiduciary duty to a company to act in what he considered to be the interests of the company. The test was a subjective one. The directors of a company were in a similar position in respect of the company’s property as trustees. The predominant interests to which the directors of a solvent company had to have regard were the interests of the shareholders as a whole, present and future. A trustee who knowingly permitted a co-trustee to commit a breach of trust was also in breach of trust. Where a director failed to address his mind to the question of whether a transaction was in the interests of a company, he was not thereby, and without more, liable for the consequences of the transaction. The court would ask whether an honest and intelligent man in the position of a director of the company concerned could, in the whole of the existing circumstances, have reasonably believed that the transaction was for the benefit of the company. The standard of care required of a director was to be determined, not only subjectively, by reference to his particular knowledge, skill and experience, but also on general objective criteria. A director owed a fiduciary duty to exercise the powers conferred on him by the constitution for the purposes for which they were conferred. The court would apply a four-stage test, which involved identifying: (i) the power whose exercise was in question; (ii) the proper purpose for which such power was conferred; (iii) the substantial purpose for which the power had been exercised; and (iv) whether that purpose had been proper. A power might be exercised for an improper purpose notwithstanding that the directors bona fide believed it was being exercised in the company’s best interest. Liability was fault-based: a director’s liability in relation to misapplication of a company’s property by exercising a power otherwise than that for which it was conferred could not arise unless he knew that it was an improper purpose or of the facts which made the purpose improper. A director had a duty to exercise reasonable care, skill and diligence. A limited company, not in liquidation, might not return assets to its shareholders except by way of a reduction of capital approved by the court. A company should not make a distribution except out of the profits available for that purpose. A transaction which offended that principle was to be treated as ultra vires.