Directors are in control of substantial assets belonging to another, the company they manage. Although a majority of shareholders may dismiss them at will1 great damage could be done to the company’s interests, including misappropriation of its property, in the time it takes to bring about their removal. While some fetter on indiscretion is provided by there being a board exercising powers, and undertaking surveillance, collectively, many companies now have a sole director who is also the only shareholder, over whom no obvious control exists. Indeed, one of the hardest lessons for the small company proprietor to learn (usually from his professional advisers) is that the company’s assets are not his assets, and that he cannot extract them for his own benefit as he pleases2. Almost as hard to grasp, judging by the recent plethora of cases, is the notion that exploitation by a director (whether or not he is the proprietor) of a corporate opportunity for his own purposes is just as much a misapplication of property as if funds had been taken from the till.

Faced with this catalogue of mischief the law has needed to evolve rules which compel directors to act in a way which puts the company’s interests before theirs. Since corporate law is a Johnny-come-lately into our jurisprudence, principles have needed to be borrowed or adapted from other areas of law. The chief of these is the law of agency, as mercantile transactions in which an agent is empowered to create binding relations between his principal and a third party are of ancient origin and have at their root the agent’s obligations of obedience (or loyalty), care and skill, personal performance and good faith. But agency itself shares a further set of principles, based around the law of trusts. As was argued as early as 179516:
“The office of a common agent has already been described in this case, and it is needless to enter into refinements or niceties as to the nature of trusts or the specific name of trusts. There is no magic in the term: he is a trustee (in technical style) who is vested with property in trust for others: but every man has a trust to whom a business is committed by another, or the charge and care of any concern is confided or delegated.”

And so for company directors such obligations are termed “fiduciary”, because they derive from trusteeship; and in early law the duties of directors and trustees were considered the same.

However, a company director is not a trustee in a strict sense, and the suggestion that he might be is an historical quirk. In the nineteenth century most companies other than chartered or statutory corporations were not distinct legal entities as we now recognise them, but operated under deeds of settlement with property and powers actually vested in trustees. The managers or directors of the companies equated with the trustees, and were treated as custodians, and it was not until the adoption of the limited liability company with separate boards that the roles became distinct. A vestige of the old form is seen in the modern unit trust where the underlying property is vested in the trustees (who owe obligations as such to unit holders) but the funds are controlled by managers, who exercise much greater discretion but are still to be regarded as “fiduciaries”.

It is perhaps no co-incidence that the rules of company law have been worked out in the Courts of Chancery which administered rules of equity as opposed to common law, and enforced trusts, and there has been a natural tendency for judges of those courts to emphasise the equitable aspects of a company director’s position. This influence also accounts for the fact that the fiduciary obligations of directors, which entail strict personal accountability, are generally of a higher standard than those formulated at common law, such as care and skill.

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