PastPaperHero | The fiduciary relationship and its obligations - Identifying fiduciaries (trustees, agents, company directors)

Learning Outcomes

This article explains the nature of a fiduciary relationship and outlines the fundamental duties owed by fiduciaries. It focuses on identifying trustees, agents, and company directors as key examples of fiduciaries and details their specific obligations. Upon completion, you should be able to identify fiduciary relationships in practice scenarios and apply the relevant duties, particularly those concerning trustees, agents, and directors under the Companies Act 2006, to SQE1 assessment questions. You should also be able to distinguish fiduciary obligations (loyalty, no-conflict, no-profit) from non-fiduciary duties (such as the duty of care), recognise fact patterns that give rise to fiduciary responsibilities, and understand the principal remedies for breach, including accounting for profits and constructive trust claims.

SQE1 Syllabus

For SQE1, you are required to understand the core principles of fiduciary duties and be able to identify when such relationships arise, particularly in the contexts of trusts, agency, and company law, and to apply your knowledge of the duties owed by fiduciaries to specific factual scenarios, distinguishing the general duties from the particular obligations of trustees, agents, and company directors, with a focus on the following syllabus points:

The characteristics defining a fiduciary relationship.
The principal duties owed by fiduciaries: loyalty, avoiding conflicts of interest, and not profiting from the position.
How to identify trustees, agents, and company directors as fiduciaries.
The specific duties of trustees towards beneficiaries and the trust.
The duties of agents towards their principals.
The general duties of company directors as codified in the Companies Act 2006.
How authorisation and fully informed consent can modify fiduciary restrictions (e.g., trustee self-dealing, director conflicts under s.175 CA 2006).
Typical remedies for breach of fiduciary duty (account of profits, constructive trust, rescission, equitable compensation) and how they apply in trusts, agency, and company contexts.
The distinction between fiduciary loyalty obligations and duties of care and skill, and how both can operate together in problem scenarios.
The position of company directors when a company is in financial difficulty (creditor interests under s.172 CA 2006 and relevant case law).
When fiduciary duties arise in multi-principal situations and how conflicts are managed (disclosure and consent).

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

Which of the following best describes the core duty fundamental to all fiduciary obligations?
1. The duty to exercise reasonable care and skill.
2. The duty to account for all transactions.
3. The duty of undivided loyalty.
4. The duty to maintain confidentiality.
An agent, acting for a principal selling a property, discovers valuable minerals under the land but does not disclose this to the principal, instead arranging for a friend to buy the property cheaply. Which fiduciary duty has the agent primarily breached?
1. Duty to act within authority.
2. Duty to account.
3. Duty of loyalty (including the duty not to profit and avoid conflicts).
4. Duty of confidentiality.
Under the Companies Act 2006, to whom do company directors primarily owe their statutory duties?
1. The shareholders individually.
2. The company itself.
3. The company's creditors.
4. The employees of the company.

Introduction

Certain relationships in law demand a higher level of trust and confidence than others. Where one party (the fiduciary) undertakes to act for or on behalf of another (the principal or beneficiary) in circumstances giving rise to a relationship of trust and reliance, the law imposes strict duties on the fiduciary. These duties, known as fiduciary duties, are designed to ensure the fiduciary acts solely in the interests of the person to whom the duties are owed. The concept permeates various areas of law, notably trusts, agency, and company law, and understanding it is fundamental for legal practice.

Key Term: Fiduciary Relationship
A relationship where one party (the fiduciary) is bound to act in the best interests of another party (the principal or beneficiary), placing that party's interests above their own.

The essence of the fiduciary relationship is loyalty. From this central obligation flow other specific duties designed to protect the principal or beneficiary from potential abuse of the fiduciary's position. Not all duties owed in these relationships are fiduciary in nature; the duty of care and skill, for example, is an important obligation but is analytically distinct from loyalty. Courts emphasise that the “distinguishing obligation” of a fiduciary is the duty of loyalty, requiring the fiduciary to act exclusively in the interests of the principal in respect of the matters entrusted to them. The fiduciary duty is strict, prophylactic, and often applies irrespective of good faith or whether the principal in fact suffered financial loss.

Core Fiduciary Obligations

Although the specific context shapes the precise application of duties, several fundamental obligations are common to all fiduciary relationships.

Duty of Loyalty

The most important duty is that of loyalty. The fiduciary must act honestly, in good faith, and solely in the best interests of the principal or beneficiary. Personal interests must not influence the fiduciary's conduct in relation to the matter at hand. Courts treat loyalty as the core commitment supporting all other fiduciary rules. It requires full candour and faithfulness, including the obligation to disclose relevant information and avoid acting for rival interests without the principal’s fully informed consent.

Practical implications include:

Not diverting property, information, or opportunities that belong to or are entrusted by the principal.
Not favouring one beneficiary over another where impartiality is required.
Avoiding “double employment” (e.g., an agent acting for buyer and seller) unless both principals consent after full disclosure.

No-Conflict Duty

Fiduciaries must avoid situations where their personal interest conflicts, or might possibly conflict, with their duty to the principal or beneficiary. This 'no-conflict' rule is applied rigorously to prevent the fiduciary's judgment being compromised. This duty includes two aspects:

Conflict between the fiduciary's duty and their personal interest.
Conflict between the fiduciary's duties to two different principals (where applicable).

Both “actual” and “potential” conflicts are caught. The rule is prophylactic: liability can arise even if the fiduciary acts honestly or the principal appears not to have suffered loss. The strictness reflects the policy that fiduciaries must not be tempted to put themselves first when exercising discretion or control on another’s behalf.

Authorisation can sometimes be obtained prospectively:

Trustees may act despite conflicts if authorised by the trust instrument, court order, or by fully informed consent from all adult and absolutely entitled beneficiaries.
Agents may act for both sides in a transaction if each principal consents in advance to the agent’s dual role and any benefits arising.
Company directors may be authorised by the board (if the constitution permits) or by shareholders’ ratification, subject to statutory rules limiting participation by interested members in public companies.

No-Profit Duty

A fiduciary must not exploit their position to make an unauthorised personal profit. Any benefit or gain obtained through the fiduciary position, using the principal's property, information, or opportunities, must be accounted for to the principal, unless the profit has been properly authorised (e.g., through informed consent). The rule applies regardless of whether the principal could or would have made the profit themselves.

Classic applications include:

Trustees renewing leases or taking opportunities connected to trust property for themselves without authority (the rule from Keech v Sandford).
Agents accepting secret commissions or bribes linked to their agency.
Directors appropriating corporate opportunities or accepting benefits from third parties in connection with their office (codified in Companies Act 2006, including duties under ss.175–176).

A breach typically results in the fiduciary having to account for the profit and, in many cases, a proprietary remedy: the profit or asset may be treated as held on constructive trust for the principal, enabling tracing into substitutes or proceeds.

Worked Example 1.1

Scenario: Sarah is a trustee of a family trust that owns several properties. She learns that a property adjacent to one owned by the trust is for sale at a low price due to a forced sale. Recognising its potential value if combined with the trust's property, Sarah purchases the adjacent property in her own name without informing the beneficiaries.

Question: Has Sarah breached her core fiduciary duties?

Answer:
Yes. Sarah has breached her duty of loyalty by prioritising her personal gain over the potential benefit to the trust. She has breached the no-conflict rule by putting her personal interest in acquiring the property ahead of her duty to consider the opportunity for the trust. She has also breached the no-profit rule by exploiting information and opportunity gained through her position as trustee for personal profit without authorisation.

Identifying Specific Fiduciaries

While the specific circumstances of a relationship can give rise to fiduciary duties, certain roles are inherently fiduciary. Key examples for SQE1 include trustees, agents, and company directors.

Trustees

Trusteeship is a classic fiduciary role. Trustees hold legal ownership of trust assets but are strictly bound to manage them for the benefit of the beneficiaries according to the terms of the trust.

Key Term: Trust
An equitable obligation binding a person (the trustee) to deal with property over which they have control (the trust property) for the benefit of persons (the beneficiaries or cestuis que trust) of whom they may themselves be one, and any one of whom may enforce the obligation.

Key Term: Trustee
The legal owner of trust property who is obliged to administer it for the benefit of the beneficiaries in accordance with the trust terms and fiduciary duties.

Key duties specific to trustees include:

Duty to comply with trust terms: Trustees must administer the trust according to the provisions set out in the trust instrument (e.g., will or trust deed).
Duty of care: They must exercise reasonable care and skill in all aspects of trust administration (s.1 Trustee Act 2000). Professional trustees will be held to the standard reasonably expected of a person acting in the course of a profession. The duty of care is not a fiduciary duty, but it sits alongside fiduciary obligations and often arises in the same settings.
Duty to invest prudently: Under the Trustee Act 2000, trustees have a general power of investment (s.3) but must apply the “standard investment criteria” (s.4): suitability of investments and the need for diversification. They should keep investments under review and, where appropriate, take proper advice (s.5) unless it is unreasonable to do so.
Duty to act impartially: They must balance the interests of different beneficiaries (e.g., life tenants and remaindermen) fairly, avoiding any favouritism unless the trust instrument allows preferences.
Duty not to profit / Self-dealing rule: Trustees cannot purchase trust property (self-dealing) or sell their own property to the trust without authorisation (court order, trust instrument, or fully informed consent of all adult beneficiaries). This is a strict application of the no-conflict and no-profit rules (Keech v Sandford). Where a trustee seeks to buy a beneficiary’s equitable interest (the “fair-dealing” rule), the transaction is not automatically void but is scrutinised; it must be demonstrably fair with full disclosure and independent advice.
Duty not to delegate without authority: Trustees generally must act personally. The Trustee Act 2000 permits certain delegations (ss.11–15) but requires appropriate oversight and adherence to statutory and trust-instrument conditions.
Duty to account and keep records: Trustees must keep and provide accurate accounts of trust property, income, and transactions, and be ready to justify decisions.
Duty to avoid unauthorised remuneration: Trustees are not entitled to payment for acting as trustee unless authorised by the trust instrument or statute (e.g., s.29 Trustee Act 2000). This reflects the principle that trustees should not profit from their office.

Practical issues:

Trustees must consider whether opportunities encountered in their role should be pursued for the trust. Taking a related opportunity personally will likely breach the no-conflict/no-profit rules and expose the trustee to an account of profits or a constructive trust over the asset acquired.
Replacement, retirement, and removal of trustees are governed by the Trustee Act 1925 (appointment under s.36; retirement under s.39; court appointment under s.41 where necessary). Removal can occur for breach of trust or where conflicts impair administration.

Remedies for breach by trustees:

Personal remedies: Account of profits; equitable compensation for loss caused by breach.
Proprietary remedies: Constructive trust over gains acquired via the breach, permitting tracing into substituted assets or proceeds.
Ancillary orders: Injunctions, removal of trustee, and orders requiring disclosure of information.

Allowances may sometimes be granted for skill and effort where the trustee acted in good faith and increased the value of trust property, but this is exceptional and depends on the circumstances and judicial discretion.

Agents

An agent is authorised to act on behalf of a principal, often creating or affecting legal relations between the principal and third parties. This relationship inherently involves trust and confidence, making it fiduciary.

Key Term: Agent
A person who acts on behalf of another (the principal) with authority, express or implied, to create legal relations between the principal and third parties.

Key duties specific to agents include:

Duty to obey instructions: Agents must follow the lawful instructions of their principal.
Duty to act within authority: Agents must not exceed the actual or apparent authority granted by the principal. Acting outside authority may leave the agent personally liable and breach their duty to the principal.
Duty of care and skill: Agents must exercise reasonable care and skill in performing their functions, applying the standard appropriate to any particular knowledge or skill they have.
Duty not to delegate: Generally, an agent must perform their duties personally unless authorised to delegate.
Duty to account: Agents must keep accurate accounts of all transactions and money received or paid on the principal's behalf and must promptly pay over monies due.
Core fiduciary duties: Agents must act loyally, avoid conflicts of interest, and not make secret profits. Typical breaches include accepting undisclosed commissions or acting for competing principals without consent.

The law takes a strict approach to agents who take secret profits. Benefits received by an agent in connection with the agency (e.g., commissions from a counterparty) are generally held on constructive trust for the principal unless consent has been obtained after full disclosure of the nature and amount of the benefit. The principal can claim the profit even if the agent acted honestly and the principal did not suffer loss.

Authorisation and consent:

Dual agency (acting for both buyer and seller) is permissible only with both parties’ fully informed consent. Without consent, the agent is exposed to an account of profits and the transaction may be rescinded by the principal if third-party rights have not intervened.

Conflicts can persist post-termination in relation to confidential information. An agent must not misuse confidential information obtained in the course of the agency to the detriment of the principal, and may be restrained by injunction or required to account for profits made from misuse.

Worked Example 1.2

Scenario: David appoints Eleanor as his agent to sell his collection of antique stamps. Eleanor knows David wants at least £10,000. Eleanor finds a buyer, Fiona, willing to pay £12,000. Fiona also offers Eleanor a £500 'bonus' if the sale goes through at £11,000. Eleanor presents only the £11,000 offer to David, recommending he accept it, which he does. Eleanor receives the £500 bonus from Fiona.

Question: What breaches of duty has Eleanor committed?

Answer:
Eleanor has breached her core fiduciary duties: loyalty (by not securing the best price of £12,000 for David), no-conflict (her interest in the bonus conflicted with David's interest in the price), and no-profit (making a secret £500 profit). She also breached her specific agent's duty to act in David's best interests and possibly the duty to account fully.

Worked Example 1.3

Scenario: A property agent, Malik, negotiates a sale of a client’s commercial unit. The buyer’s representative offers Malik a 2% “facilitation fee” if he ensures exchange within a week. Malik accepts the fee without telling his principal and accelerates exchange, foregoing a higher bid received the next day.

Question: What remedies are available to the principal?

Answer:
Malik has breached the no-profit and no-conflict duties. The facilitation fee is a secret commission held on constructive trust for the principal. The principal can demand an account of the commission and may seek rescission of the sale if third-party rights have not intervened. If loss was caused by accepting the lower bid, the principal may also claim equitable compensation for that loss.

Company Directors

Directors are entrusted with the management of a company's business. They occupy a fiduciary position in relation to the company itself. Their primary duties are now largely codified in the Companies Act 2006.

Key Term: Company Director
A person appointed to direct and manage the business of a company.

The general duties of directors under the Companies Act 2006 (ss.171-177) incorporate the traditional fiduciary principles:

Duty to act within powers (s.171): Act in accordance with the company’s constitution and only exercise powers for the purposes for which they are conferred. Using a power for an improper purpose (e.g., issuing shares to dilute a particular shareholder’s voting power) may breach this duty.
Duty to advance the success of the company (s.172): Act in good faith to advance the company's success for the benefit of its members as a whole, considering various stakeholder factors (employees, environment, business relationships, etc.). This reflects the core duty of loyalty to the company. Where a company is insolvent or approaching insolvency, directors must have regard to the interests of creditors; recent Supreme Court authority confirms that this “creditor duty” arises when directors know or ought to know that insolvency is probable, and creditors’ interests become overriding once insolvency is inevitable.
Duty to exercise independent judgment (s.173): Directors must use their own judgment and not fetter their discretion, save where lawful arrangements (e.g., joint ventures or shareholder agreements) appropriately constrain their decision-making.
Duty to exercise reasonable care, skill and diligence (s.174): Combines objective and subjective tests: the standard that would be exercised by a reasonably diligent person with (a) the general knowledge, skill, and experience that may reasonably be expected of a person carrying out the functions of a director, and (b) the actual knowledge, skill, and experience of the director.
Duty to avoid conflicts of interest (s.175): Directors must avoid situations where their interests conflict or may conflict with the company's interests, especially regarding company property, information, or opportunities. This includes corporate opportunities: directors must not exploit opportunities discovered through their position unless authorised. Authorisation for conflicts may be possible under the company's constitution or by the board (if permitted). This duty applies to “situational conflicts” (positions or relationships) rather than transactions.
Duty not to accept benefits from third parties (s.176): Prevents secret profits or bribes conferred by reason of being a director or doing (or not doing) anything as a director. Benefits may be authorised only in limited circumstances and rarely where they risk compromising loyalty.
Duty to declare interest in proposed or existing transactions or arrangements (s.177 & s.182): Requires transparency regarding personal interests in company dealings. These provisions address “transactional conflicts”. Failure to declare can itself be a breach irrespective of the substantive fairness of the transaction.

Additional statutory points relevant to directors as fiduciaries:

s.170: Confirms that general duties are to be interpreted in the same way as common law and equitable principles.
s.178: Provides that the consequences of breach are the same as would apply in equity or common law.
s.180–s.182: Set out how member authorisation and declaration of interests interact with the general duties.
s.239: Ratification by members of conduct by directors (in public companies, votes of interested members are disregarded for ratification resolutions).
s.1157: The court may relieve a director from liability for negligence, default, breach of duty, or breach of trust if they acted honestly and reasonably and ought fairly to be excused.
s.232–s.234: Prohibit certain indemnities but allow directors’ and officers’ insurance.

Directors may also face derivative claims brought by members on the company’s behalf under Part 11 CA 2006, where the company itself has a cause of action arising from breach of duty. Such claims are subject to a court permission stage and are governed by specific statutory criteria.

Practical implications:

Directors should obtain authorisation for potential conflicts in advance and keep thorough records of disclosures and approvals.
Corporate opportunities discovered through a director’s role are presumed to belong to the company; unauthorised appropriation triggers an account of profits.
Benefits offered by third parties “because of” the office should be refused or disclosed and authorised as appropriate.

Worked Example 1.4

Scenario: Nina, a director of Alpha Ltd, learns during board discussions that a landlord is willing to grant a long lease over premises ideal for Alpha’s planned expansion. Nina arranges for a separate company she controls to secure the lease, believing Alpha lacks funds to proceed.

Question: Has Nina breached her fiduciary duties under the Companies Act 2006?

Answer:
Likely yes. Nina has appropriated a corporate opportunity discovered in her role as director, engaging s.175 (avoid conflicts of interest). Even if she believed Alpha could not proceed, the opportunity belonged to Alpha unless duly authorised. Nina must account for any profit or advantage gained and the lease may be treated as held on constructive trust for Alpha, subject to practicalities. She may also have breached s.172 if her actions were not in good faith to advance the success of the company.

Exam Warning

Remember that directors owe their duties primarily to the company, not directly to individual shareholders or creditors (though creditor interests become more relevant if the company is nearing insolvency). Distinguishing the entity to whom the duty is owed is essential in problem questions. Where insolvency is probable, creditors’ interests must be considered under s.172 and relevant case law; once insolvency is inevitable, creditors’ interests become overriding. Authorisation and ratification operate differently for situational conflicts (s.175) and transactional conflicts (s.177/s.182), and public companies face stricter ratification rules on interested voting.

Key Point Checklist

This article has covered the following key knowledge points:

A fiduciary relationship is based on trust and confidence, requiring the fiduciary to act loyally in the best interests of the principal or beneficiary.
Core fiduciary duties include loyalty, the no-conflict rule, and the no-profit rule.
Trusteeship is a classic fiduciary role, with specific duties including compliance with the trust terms and the self-dealing rule.
Agents act on behalf of principals and owe fiduciary duties including acting within authority and avoiding secret profits.
Company directors owe statutory duties to the company under the Companies Act 2006, which incorporate traditional fiduciary principles like avoiding conflicts of interest (s.175) and advancing the company's success (s.172).
Breaches of fiduciary duty can lead to personal liability (e.g., accounting for profits) and proprietary remedies (e.g., a constructive trust over property obtained through the breach).
Fully informed consent and proper authorisation can permit actions that would otherwise breach fiduciary restrictions (e.g., dual agency, director conflicts), but disclosure must be full and candid.
Trustees must invest prudently under Trustee Act 2000, applying suitability and diversification criteria and taking appropriate advice; this sits alongside fiduciary obligations.
Secret commissions received by agents (and analogous benefits for directors) are generally held on constructive trust for the principal or company and are recoverable irrespective of loss.
Directors’ duties include situational conflicts (s.175) and transactional conflicts (s.177/s.182), and member ratification is subject to statutory limits (s.239).
Remedies for breach include account of profits, constructive trust, rescission where possible, equitable compensation, and in the company context, derivative claims.
Courts may grant allowances for skill and effort in limited circumstances, but good faith does not prevent liability for unauthorised profits.

Key Terms and Concepts

Fiduciary Relationship
Trust
Trustee
Agent
Company Director

The fiduciary relationship and its obligations - Identifying...