Directors’ Fiduciary Duties: Honesty And Maintaining Records
Company directors owe important fiduciary duties to the company and its shareholders. Those duties, set out by the Companies Act 2006 and associated legislation, range from acting in the company’s best interest to exercising reasonable skill, care and diligence.
Honesty and integrity are, of course, crucial to a director’s effective compliance with their fiduciary duties - which include the duty to act in the interests of creditors when the company becomes (or is at real risk of becoming) insolvent.
The crucial nature of these duties, and the financial and reputational implications where they are breached, have been reinforced in a recent High Court ruling where a director could not satisfy the court he had complied with his duties.
What happened?
Claimant company Omnimax (C) was a North American building products manufacturer producing aluminium products. Simon Cullen (D) was one of three defendants and the sole director and shareholder of the defendant company and another company (his wife was the other defendant).
D’s companies went into liquidation and the liquidator assigned any claims against D to company C. C brought a claim against D on grounds of false representation and breach of fiduciary duty. It secured a freezing order against the defendants - and has now obtained summary judgment against D.
D’s breaches
D’s conduct was serious - he used company assets to purchase a private property in breach of his and his companies’ fiduciary duties. He had made payments totalling £1.677m of company money to himself and another company (just over a year before going into liquidation) that had no valid explanation or purpose for the running of the businesses.
These included duties to act within his powers, to promote the companies’ success and to avoid conflicts of interest (ss171, 172 and 175 of the 2006 Act.
Despite the evidence, D denied making false representations and denied liability for deceit and breach of fiduciary duty – claiming he was entitled to the payments which related to his Director’s Loan Account (DLA). Whilst it was for D to prove the payment to him was a proper one, he was unable to do so because accounting records were missing.
His failures and breaches included:
· Using some of the cash transferred - more than £932,000 - to buy outright a private property with his wife
· Failed to keep proper accounting records explaining the payments
· He could not show that monies he received from the companies had been applied for proper purposes
· As for his conduct in the litigation, he had failed to clarify the balance of the DLA at the times the payments were made. In his defence, he could not rely on the absence of the very financial records he was responsible for maintaining (but hadn’t)
· He failed in breach of his duties to ensure that proper accounting records were kept
Key takeaway
The fiduciary duties owed by a company and its directors are vital to protect all parties, including creditors and shareholders.
Similarly, the necessity to keep and maintain comprehensive and accurate financial records is crucial. For instance, where a director is required to satisfy the court that a transaction was for a proper purpose, the records should be available to confirm or disprove a claim. The absence of records may indicate that a transaction was for the individual’s personal benefit and not for the company.
It's a reminder to consider reviewing your accounting policies and procedures to ensure records are accurate and in good order.
1Omnimax International LLC v Cullen [2024] EWHC 2367 (Ch)
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