Fiduciary Duties of Company Directors

A director’s fiduciary duty is an obligation to use the position of trust for the company’s benefit rather than for personal advantage. Section 166 of the Companies Act, 2013 requires directors to act in good faith, exercise independent judgment and reasonable care, and avoid conflicts of interest and undue gains.

Good faith and the interests to be protected

Section 166(2) requires a director to act in good faith to promote the company’s objects for the benefit of its members as a whole. It also requires action in the best interests of the company, its employees, shareholders and the community, and for the protection of the environment.

• The reference to members as a whole means that the statutory duty is not simply to advance the interests of a particular shareholder or promoter.
• The provision recognises interests beyond shareholders, while retaining the company’s objects and interests as central considerations.

Care, independent judgment and conflicts of interest

The section combines a duty of loyalty with standards governing how directors make decisions.

• Section 166(3) requires directors to exercise their duties with due and reasonable care, skill and diligence, and to exercise independent judgment.
• Section 166(4) prohibits involvement in a situation where a director has a direct or indirect interest that conflicts, or possibly may conflict, with the company’s interests.
• Section 166(5) prohibits achieving or attempting to achieve any undue gain or advantage for the director, or for the director’s relatives, partners or associates.

Other obligations and consequences

These duties operate alongside requirements concerning the company’s internal rules and the personal nature of a director’s office.

• Section 166(1) requires a director to act in accordance with the company’s articles, subject to the Act’s provisions.
• Under Section 166(5), a director found guilty of making an undue gain must pay the company an amount equal to that gain.
• Section 166(6) prohibits a director from assigning the office to another person and makes any such assignment void.