'A director stands in a fiduciary relationship with his company'. Discuss

Question: 'A director stands in a fiduciary relationship with his company'. Discuss [BJS 1980]

Find the question and answer of Company Law only on Legal Bites. ['A director stands in a fiduciary relationship with his company'. Discuss]

Answer

A director of a company stands in a fiduciary relationship with the company, which means that they have a legal duty to act in the best interests of the company and to exercise their powers for a proper purpose. This duty is derived from common law and is imposed on directors as a matter of trust and confidence.

Some of the key principles of the fiduciary duty of directors include:

Loyalty: Directors must act in the best interests of the company and not for their own personal benefit. They must avoid conflicts of interest and disclose any potential conflicts to the company.

Care and Diligence: Directors must exercise the care and diligence that a reasonable person would exercise in the same circumstances.

Good Faith: Directors must act in good faith and not use their position for improper purposes.

Case laws that illustrate the principle of fiduciary duty of directors include:

In the case of Howard Smith Ltd v. Ampol Petroleum Ltd., [1974] AC 821, the House of Lords held that directors owe a fiduciary duty to the company to act in its best interests and not to act in their own interests.

In the case of Regal (Hastings) Ltd v. Gulliver, [1967] 2 AC 134, the House of Lords held that a director must not use his position to make a secret profit, and any profit made by a director in such circumstances must be held on trust for the company.

In the case of Johnson v. Gore Wood & Co., [2002] 2 AC 1, the House of Lords held that the fiduciary duty of a director includes a duty to exercise reasonable care, skill and diligence in the management of the company.

In the case, Dale and Carrington v. Prathapan & Ors, [(2005 )1SCC 212], litigation centred around the control and management of a company in which the parties were shareholders. Additional equity shares were issued in favour of the Managing Director which rendered the respondent from a majority shareholder to a minority shareholder. The court then had to decide whether such an act was a bonafide act in the interests of the company.

Directors of a company are in a fiduciary relationship with the company and are expected to act in the best interests of the company and exercise their powers for a proper purpose. They are expected to act with loyalty, care, diligence, and good faith towards the company. Breaches of these duties can lead to civil and criminal liability for directors.

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