Overview of Fiduciary Duties in Corporate Law
The employees owe certain fiduciary duties of loyal and goodwill towards their organization. However, these fiduciary duties are contractual in natures which have been imposed by the application of law. The contractual relationship existing between the parties has been questioned on various grounds from time to time. Further investigation in this matter has been made by the courts for the purpose of establishing the fact that whether the fiduciary duties are consensual in nature that are restricted to the scope of express and implied terms of contract between the parties. The formation of a company requires the form of a valid contract. In this regard, during the formation of a company, certain fiduciary duties arises which forms a part of contractual obligations. It is worthwhile to mention here that, in order to develop a fiduciary relation, there must be a fiduciary agreement. In such cases, the Courts are authorized to investigate in depth regarding the existing contractual gaps by agreeing to the terms of the contract and the negotiations during the incorporation of an organization. It is noteworthy to mention here that, the duty of fiduciary is often associated with ulterior motive, conflict of interests and making unauthorized profits. In most of the cases, the nature of these fiduciary duties is such that it has been defined as a standard terms of agreement that has been formulated for the purpose of carrying on contractual undertakings. The employees must comply with the fiduciary duties assigned to them during the formation of a company in a valid fiduciary agreement in good faith. From the very beginning, the fiduciary duties arising out of contractual obligations comply with the degrees of trust and confidence. Such a condition can be only observed when both the parties depend upon the contractual obligations of one another. It is worth mentioning that, the concept of fiduciary duties and contractual obligations are different from each other having a distinct purpose.
The case of Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64, is a landmark case where the scope of fiduciary duties under the purview of implied terms of contract has been explained. However, in this case, the Court clearly rejected the contractual obligations arising out of the fiduciary duties. In this regard, the Court was of the opinion that, the contractual obligations provides an important structure for the purpose of establishing a fiduciary relationship. The incorporation of a company requires a lot of documentation and other legal formalities. The incorporation of a company also involves fiduciary duties and the employees are required to comply with these fiduciary duties in good faith and with honesty. The purpose is to act according to the best interests of the organization. It is worthwhile to refer here that, the employees must discharge their duties for the best interests of the company while enhancing corporate funds. However, the procurement of such corporate funds shall not be obtained against the interests of the company. Similarly, in the case of Oliver Hume South East Queensland Pty Ltd v Investa Residential Group Pty Ltd [2017] FCAFC 141 [33], it was decided by a majority of judges of the Federal Court that, an employee owes fiduciary duties to his employer and the individual working under his employer.
Examples of Fiduciary Duties in Corporate Law
It is known to all that, the directors and shareholders of a company owes certain fiduciary duties to each other. However, these fiduciary duties has been examined and applied by the Australian State laws from time to time. Since time immemorial, there were two existing fiduciary duties. These can be emphasized as duty of care and to act in good faith. The directors and the other employees of a company must act in good faith and in accordance to the company’s interests. The directors should considerably avoid any conflict of interests arising during the tenure of their employment. The incorporation of a organization is associated with valid documentation in association with the signing of a fiduciary agreement. The violation of fiduciary duties on the part of the employees must be examined prior to the formation of a fiduciary agreement for the purpose of ensuring loyalty and good will. In case of any violation of fiduciary duties takes place on the part of the employees, the burden of proof lies upon them. In this regard, such employee is required to prove that the fiduciary duties were violated while exercising his duties in due care and diligence and in good faith. The ulterior motive must be for the best interests of the company and not for his own personal gain. Lastly, it can be mentioned that, the fiduciary duties must be carried on efficient on detailed assumptions on the part of the corporation board.
The ultimate motive of every partnership business is to gain common profit in association with each other. Each of the partners owes fiduciary duties to each other. In accordance to the provisions of Section 16 of the Partnership Act 1963, the existing partners of a corporation are jointly liable for the activities carried on for the purpose of expanding business venture. In accordance to the provisions of Section 17 of the Partnership Act 1963, if a partner of a firm is involved in improper use of trust property then, the partner shall be held liable. The nature of fiduciary duties entrusted to each of the partners shall be analyzed in regard to the partnership business in which they are involved. The relation of the partners is based on the foundation of trust and honesty. The partners are required to act in accordance to high standards of care imposed by the provisions of Partnership Act 1963. The partners should not take undue advantage of their position while discharging their fiduciary duties.
Fiduciary Duties in Partnership Law
In accordance to the provisions of the Partnership Act 1963, the fiduciary duties are associated with acting in good faith, due diligence and for the best interests of the organization in which the individuals are acting as partners. In cases, if the relationship of partnership ceases to exist; the partners shall not have any fiduciary duties with each other however such fiduciary duties shall continue towards the organization. It is noteworthy to state here that, the fiduciary duties on the part of the partners shall continue even if the firm dissolves and winds up.
The fiduciary duties of the partners revolve around the interests of the company and are supposed to act in accordance to the benefits of the firm. The partners should not engage in any conflict of interests while discharging duties in lieu of personal and professional interests. In cases involving conflict of interests, the reason of such conflict needs to be disclosed to the other existing partners so that they may be aware about the conduct involved in such conflict. However, the fiduciary duty of loyalty is automatically dissolved as soon as the partners leave the firm. During the period of their employment while acting as a partner of the firm, there may be opportunities from which they may gain secret profit for their own benefit. In this regard, it is worth noting that, partners discharging their fiduciary duties should avoid making secret profit for their personal gain from the company’s business transactions. The partners are authorized to disclose relevant information regarding activities associated with secret profit making. Therefore, it can be rightly stated that, partner can only make secret profit for the benefit of the company and not for his own personal gain. The breach of partner’s fiduciary duties can lead to serious penalties and consequences.
The partners are required to carry on the fiduciary duties in such a way as it would have been carried out by any reasonable person of prudent nature. The appropriate information relating to partnership contracts and contributions should efficiently communicated by the partners to each other for the purpose of avoiding conflict of interests. In case of sale of partnership venture, such disclosure is usually proved to be beneficial for the firm and its partners. In cases of breach of fiduciary duties on the part of one of the partner of the firm, the burden of proof lies upon the partner as he is liable to prove that, such an activity has not been carried out by him in order to involve in unfair advantages and gaining personal profits. In order to prove that such a partner acted in good faith, there must be full disclosure of the underlying facts involved with the activity; in such process, a presumption must be made in regard to fraud and undue influence. From the very beginning, the fiduciary duties on the part of the partners are governed by the provisions of both common law and statutory laws. The nature of such fiduciary duties is such that it can be altered by agreement with the applications of the provisions of the State laws. Under the provisions of statutory laws, the requirements of these fiduciary duties have not been changed so far. However, partners are at the authority to modify the fiduciary duties by complying with the existing laws.
Violation of Fiduciary Duties in Partnership Law
It is worthwhile to refer here that, the significance of fiduciary duties entrusted to the directors of a corporation should not be underestimated or understated by any reason. The fiduciary status hold by the directors should reflect their position of trust and confidence. The fiduciary duties of the directors are governed by the relevant provisions of the Corporations Act 2001 (Cth). Directors are said to have certain fiduciary duties towards the company. Fiduciary duties are the foundation of an important legal relationship between the director and the company. These relationships are based upon the foundation of trust and loyalty which cannot be compromised under any circumstances. The position of the directors must not be placed in a position where they are not able to take any decisions in accordance to the benefits of the company.
The fiduciary duties owed by the directors to a company can be emphasized as- the duty to not to act for improper purpose, the duty to take due care and diligence, the duty to act according to the best interests of the company, to retain any discretion, avoiding any conflict of interests and the duty of not disclosing any confidential information. It is worth mentioning that, the concept of insider trading can be cited as a common example in regard to the fiduciary duty of not to misuse any confidential information obtained by the director as a result of the position hold by them. It is noteworthy to mention here that, the fiduciary duty of due care and diligence is not diminished with the delegation of responsibilities. Therefore, it is important on the part of the directors to question the relevant source from which the information has been obtained in order to ensure its accuracy.
According to the provisions of Section 184 of the Corporations Act 2001(Cth), it is a criminal offence on the part of a director, if he engages in an offence which is associated with intentional dishonesty. According the provisions of Section 191 of the Corporations Act 2001(Cth), the directors must establish duties for the purpose of disclosing material personal interests. The provisions of Section 285 to the Section 318 of the Corporations Act 2001(Cth) are associated with the imposition of obligations related to financial reporting. There provisions are related to the duties of the directors in exercise of powers with due care and diligence. According to the provisions of Section 588G of the Corporations Act 2001(Cth), it is important for the directors to not to involve in any trade relations with an insolvent company. A company can be considered to be insolvent if it is unable to pay the bills as any reasonable person of ordinary prudence would have. The breach of the provisions of Section 588G of the Corporations Act 2001(Cth), can held the director of being personally liable for the debts incurred during the period of insolvency.
The concept of fiduciary duties on the part of the directors under the Corporation Act 2001 (Cth) can be explained with the help of relevant case laws. In the case of ASIC v Healey & Ors [2011] FCA, it was observed that the directors has not acted in good faith and due diligence while discharging his fiduciary duties. In this case, the Court imposed penalty on one of the directors and the other directors were charged with imprisonment. Similarly, in the case of Fodare Pty Ltd v Shearn [2011] NSWSC, the sole director of the company has contravened the duty and has not acted in good faith for the purpose of the company. In the case of Cassegrain v Gerard Cassegrain & Co Pty Ltd [2015] HCA 2 (4 February 2015), the director has breached his duty and has made improper use of his position. In the case of ASIC v Vizard [2005] FCA 1037; (2005) 145 FCR 57, it was observed that Vizard being the director of Telstra has used the confidential information of the company for the purpose of gaining personal benefit. Therefore, he was disqualified from practicing as a director. In the case of Diakyne Pty Limited v Ralph – [2009] FCA 721, I was observed that, although the director acted honestly, he was involved in conflict of interests. In this case, the director has breached the duties that has outlined in the provisions of the Corporations Act 2001(Cth).
References:
ASIC v Healey & Ors [2011] FCA.
ASIC v Vizard [2005] FCA 1037; (2005) 145 FCR 57.
Cassegrain v Gerard Cassegrain & Co Pty Ltd [2015] HCA 2 (4 February 2015).
Diakyne Pty Limited v Ralph – [2009] FCA 721.
Diakyne Pty Limited v Ralph [2009] FCA 721; 72 ACSR 450.
Fodare Pty Ltd v Shearn [2011] NSWSC.
Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64.
Oliver Hume South East Queensland Pty Ltd v Investa Residential Group Pty Ltd [2017] FCAFC 141 [33].
Acts:
The Corporations Act 2001(Cth).
Partnership Act 1963.
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