Can a director be required to forfeit their salary and bonus for breach of fiduciary duty?

September 18, 2012

This article was originally written for and featured in Fresh Business Thinking.

The High Court has recently considered whether it is fair to order a senior employee to forfeit their salary or any bonuses for breach of fiduciary duty.  So far, the argument has not succeeded.  However, there is an increasing appetite amongst employers to rely on the argument.

This article looks at the recent cases on the matter, why the argument has failed so far, and circumstances in which it may succeed. 

Duty to disclose own wrongdoing

The cases of Brandeaux Advisers (UK) Limited v Chadwick (“Brandeaux”) and Bank of Ireland v Jaffery and Gill  (“BOI”) both relied on the argument that the defendant in each case owed a duty to disclose their own wrongdoing.  Had they disclosed their wrongdoing at the time, the claimant in each case argued that the defendant would have been dismissed.  The failure to disclose their own wrongdoing meant they continued to receive their salary and any bonus, and thus (they said) received a benefit for their breach of duty.

When does the duty to disclose one’s wrongdoing arise? In both Brandeaux and BOI, the court held that the defendant, who was not a director but a senior employee, owed fiduciary duties to their employer and as part of those fiduciary duties, owed a duty to disclose their own wrongdoing.  In BOI, the Judge recognised that the scope and extent of the duty could depend on the circumstances, but in cases of clear conflict of interest, it was held that such a conflict must be disclosed.   

However, in Customer Systems Plc v Ranson, the Court of Appeal held that there is no general duty on an employee (as opposed to a director) to disclose his own wrongdoing: it depends on what the employment contract says.  Care therefore must be taken when seeking to impose the duty on an employee.

Has the duty been breached?

Once a duty to disclose wrongdoing is established, the court must assess whether that duty has been breached. 

For the duty to arise, there needs to be an underlying wrongdoing, in other words, an underlying breach of duty.  The underlying breach of duty in BOI was that the defendant had placed himself in a conflict of interest  by arranging loans for clients via the bank from which he benefited.  In Brandeaux, the defendant breached her duty of confidentiality to her employer by transferring confidential information to her personal e-mail account. 

Has the employer suffered loss as a result of the breach?

The director’s (or employee’s) breach of duty must be found to have caused loss to the employer, for the employer to be compensated for the breach. 

In BOI, the court considered whether the bank was caused or induced to enter into any of the loans by the defendant’s breach of fiduciary duty. The court held the bank would not have proceeded with the transactions, had it known of the defendant’s interest in them. 

Is it just to demand forfeiture of salary?

In both Brandeaux and BOI, the court first considered whether the employer in each case would have dismissed the defendant, had the defendant disclosed his/her wrongdoing at the time. 

In Brandeaux, the Judge was satisfied that had the defendant reported what she had done, she would have been dismissed.

In BOI, the Judge was not convinced that the defendant would have been dismissed if the defendant’s wrongdoing had been disclosed initially.  However, the Judge accepted that, following further wrongdoing, which included falsifying certificates of compliance with the bank’s code of conduct, the defendant would have been dismissed. 

However, the Judge in both cases was not prepared to go a step further and order that the defendant forfeit his/her salary and bonus. 

The Judge in Brandeaux held that in the period between the act of wrongdoing and the point of actual dismissal, the defendant was working and earning her salary.  The Judge held that the employer had had the benefit of her work and took its value as the salary the employer had agreed to pay.  Therefore, the Judge considered there had been no loss to the company in paying the salary. 

In BOI, the Judge held that the defendant’s breaches should be looked at in the context of his employment as a whole – the defendant was found to be a diligent employee, who betrayed the bank’s trust only in respect of transactions involving a specific group of customers.  Therefore, an order for forfeiture of 5 years of salary and bonuses in addition to an order for compensation was held to be disproportionate: the employer would be sufficiently compensated by an order for account of profits or similar.

In what circumstances could an order for forfeiture of salary succeed?

It is clear the courts are currently reluctant to develop forfeiture of salary as a remedy.  Salary is earned for work done.  In the majority of cases, even when the director has breached his duties, he will have still carried out his day to day work for the benefit of the company.

Therefore, where the director has failed to do his job or has not been working, there may be a stronger argument for forfeiture of salary/bonuses as a consequence of breach of duty, for example:

  • Long periods of sick leave: where the director has committed a breach whilst on or immediately before going on sick leave, during which he would have been paid his salary but not worked.
  • Poor performance: where the director has performed poorly, or has added no value to the company’s business, but has nevertheless been paid his salary (care should be taken here as the employer will probably have to explain why the employee was left to perform poorly).  
  • The breach of duty is so serious that damages for the breach would not be an adequate remedy.

The courts seem keen to keep a clear distinction between the salary earned for work done and compensation for the breach of duty.  It is also important to remember that the courts cannot impose orders that punish the director rather than compensate the employer for loss suffered.   

But watch this space: if an employer can demonstrate the loss suffered as a result of the breach of duty includes the payment of salary by showing that the employee did not give value for the salary or where the breach far outweighs that value, the court may take a different approach.

 


Related pages:

Employment issues more

Litigation, Arbitration and Alternative Dispute Resolution more

icons Addthis Print Contact Register

Contact

tel: +44 (0) 20 7628 2000
10 Finsbury Square, London, EC2A 1AF
View map


For more information

 image

Evie Meleagros
Senior Associate
Direct dial: +44 (0)20 7614 2593
emeleagros@foxwilliams.com

Accreditations

  • Top Ranked Chambers UK 2014 - Leading Firm
  • Ranked in Chambers Europe 2013 - Leading Individual
  • Ranked in Chambers Global 2014 - Leading Firm
  • Legal 500 - Leading Firm
  • The Lawyer UK 200 - Listed Firm
  • The Law Society Excellence Awards 2012 - Shortlisted
  • Investors in People - Bronze