The Remedies of Fiduciary Duties
After a year of COVID-19 spreading across the globe, we are now facing the most challenging business climate we have seen in decades.
At the helm of most publicly held companies sit the corporate directors who are both obligated and incentivized to act responsibly. Owing a fiduciary duty to their companies, directors need to stay level-headed and act rationally, especially during tough times.
What does it mean to breach your fiduciary duties?
As a director, you can breach your fiduciary duties if you fail to act responsibly or behave in any way that goes against the best interests of your company.
Whether it benefits the director or another entity, if a director uses their knowledge and position to divert business or potential business away from the company, they are in breach of their duties.
Boards typically use financial remedies to restore the value lost from any counterproductive directors. If you’re a board member or a director in breach, knowing how these remedies work is a good starting point.
Possible remedies after a breach of fiduciary duties
1. Accounting of Profits
Accounting of profits is an equitable remedy where the director has to repay their (former) employer with any profits made by diverting revenues away from their company.
Companies must first prove the extent of lost sales resulting from their employee or director’s misconduct. The infringer then has the burden to substantiate their profits by showing their accounting records.
This profit figure is often difficult to calculate, so a reasonable approximation is often used to determine the company’s losses. This uncertainty makes accounting for profits a strong incentive for responsible behaviour.
2. Interim and Permanent Injunctive Relief
Interim and Permanent Injunctive Relief is an equitable remedy, meaning that the court has discretion to grant it depending on the circumstance of each case. It essentially restrains the wrongful party from continuing whichever act led to a breach.
Injunctive relief is sometimes used to preserve the status quo until trial; injunctions restrain former directors and senior management personnel from directly or indirectly acquiring operating licences or soliciting their former employer’s customers.
Companies can request an interim injunction with or without notice to the opposing party. If the injunction is granted, it usually lasts for a brief, specific period of time. Permanent injunctions are granted after the imposition of interim injunctions. This process takes much longer, so many individuals impose interim injunctions first to quickly get some form of remedy in place.
3. A Constructive Trust
The courts impose constructive trusts to benefit parties that have been wrongfully deprived of their rights due to a person wrongfully obtaining or holding a legal property. Constructive trusts are passive arrangements where one individual must hold the property on behalf of one or more beneficiaries. Most often the defendant still owns the wrongfully obtained property when the court imposes a constructive trust.
When a constructive trust gets imposed, the courts mandate the injured party to open a trust account, then have the fiduciary convey the property title to the defendant, or make the fiduciary repay an equivalent monetary amount into the trust.
If you’re a director considering a constructive trust in Canada, you should know that it’s a difficult remedy to establish since courts tend to prefer other remedies.
4. Equitable Compensation
Where no unauthorized profit has been made, compensation serves to restore the value of trust property. Note that equitable compensation does not compensate the former employer for loss, but rather restores the trust fund.
An equitable compensation is not an alternative to an account, but an account may be used in the process of assessing equitable compensation.
5. Disgorgement Remedies
If a fiduciary profits from illegal or wrongful acts, disgorgement remedies force them to give up any profits made as a result of negative conduct. Disgorgement is intended to prevent unjust enrichment by directors but is not meant to be a punishment. What makes this remedy unique is that it focuses on the actual gains rather than the losses incurred by the director’s company.
Since the defendant has to provide a great deal of evidence for evaluation, disgorgement is not a simple remedy, but the process happens quickly if all the necessary information is in place. To calculate disgorgement payments, a distinction is made between legally and illegally obtained profits. The most common techniques for bringing about disgorgement’s come from principles developed by the Courts of Equity, but there are many more techniques available.
Utilizing the remedies
If you have an employee who has abused their fiduciary duties, or if you’re a director in breach, having a clear understanding of your situation can guide you towards the most efficient outcome. Fiduciary remedies will play a crucial role if you ever try to recover property from a former employee or need to re-compensate a former employer.
6. Other Remedies
If a director breaches a provision of the Business Corporations Act (AB) and the Act does not provide a remedy, that director is subject to either a maximum fine of $1000, a prison term no longer than 1 month, or both.
If a corporation breaches a provision, it is subject to a maximum fine of $1000.
In today’s dubious business climate, directors need to steer their companies towards success and never go against their fiduciary duties. By understanding the implications of a breach and knowing the optimal remedies, directors can avoid a difficult situation.
If you’re a director in breach of fiduciary duties, we recommend consulting a lawyer.