We all know that a company director, as a fiduciary to the company, owes a fiduciary duty to the company during his tenure as the company director. However, does the director owe the same duty post-resignation?
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We all know that a company director, as a fiduciary to the company, owes a fiduciary duty to the company during his tenure as the company director. However, does the director owe the same duty post-resignation? In this article, we will briefly discuss what it mean when we say “fiduciary duty” and whether a former director still owes such a duty post-resignation.
Fiduciary 101 – A quick guide
- What is a “fiduciary duty”?
Fiduciary duty is a term used to describe the relationship between two parties in which one party places complete confidence in another in regard to a particular transaction/ one’s general affairs/ business. This duty is not necessarily formally or legally established as in a declaration of trust but can be one of moral or personal responsibility, due to the one whose affairs the other party (also called a ‘fiduciary’) is handling.
- Who is a fiduciary?
A fiduciary is therefore a person (or a business like a bank or stock brokerage) who has the power and obligation to act for another (often called the beneficiary) under circumstances that require total trust, good faith, and honesty. The most common is a trustee of a trust, but fiduciaries can include business advisers, attorneys, guardians, administrators of estates, real estate agents, bankers, stockbrokers, title companies, or anyone who undertakes to assist someone who places complete confidence and trust in that person or company (and in our case, a director of the company).
- The law in regard to fiduciary/ fiduciary duties
Sections 213 and 214 of the Companies Act lays down the fiduciary duties that a director owes to the company and how can that duty be achieved by the director. In regards to the law states that a director shall at all times exercise his powers in accordance with the Act for a proper purpose and in good faith, with reasonable care, skill, and diligence in the best interest of the company. A director is said to meet those standards if he:
- Makes the business judgment for a proper purpose and in good faith;
- Does not have a material personal interest in the subject matter of the business judgment;
- Is informed about the subject matter of the business judgment to the extent the director reasonably believes to be appropriate under the circumstances; and
- Reasonably believes that the business judgment is in the best interest of the company.
However, take another glance at it and you will realize there is nothing mentioned above financial duty that a director owes to a company post-resignation. So the question still remains- does a company director owes a fiduciary duty towards his/ her company post-resignation?
The general rule
In AG v Blake (Jonathan Cape Ltd third party), the court noted that an employee owed a duty of loyalty to his employer by virtue of the fiduciary relationship of trust and confidence between them, and a duty to maintain the confidentiality of information imparted to him in confidence. However, those duties lasted only as long as the relationship lasted and the information remained confidential. Thus, a former employee owed no duty of loyalty to his former employer.
Is the end of our story? Not quite, as we will point out below.
The exception
English law has noted that the door to the issue above should not be closed, especially in cases where there is a necessity to do so. In Canadian Aero Service, the court noted that:
“…The general standards of loyalty, good faith, and avoidance of conflict of duty and self-interest to which the conduct of a director or senior officer must conform, must be tested in each case by many factors which it would be reckless to attempt to enumerate exhaustively. Among them is the factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness and the director’s or managerial officer’s relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or, indeed, even private, the factor of time in the continuation of fiduciary duty where the alleged breach occurs after termination of the relationship with the company, and the circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge.”
Why is there an exception to the general rule? Why can’t both parties mind their own business?
Simply put, this is to prevent the former directors from abusing/ exploiting their former position as a director of the company to obtain businesses at the expense of their former company and also to prevent the former directors from abusing/ exploiting their former company’s property at the expense of their former company without any regards to fiduciary obligations they owed to the former company in relation to that property.
As mentioned above, while the general rule applies to a director the moment he leaves the company (i.e. he owes no fiduciary duty towards his former company), this does not mean that the director can abuse the general rule. A balance must be struck between moving on and ensuring that his ex-employer is not harmed by what the director does post-resignation. If the scale is tilted to one end, the former director must just land himself in hot soup.
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