Fiduciary duties and modern slavery
03 Dec 2019 8:05 am
Fiduciary duties and modern slavery: Can a director incur liabilities under section 54 of the UK Modern Slavery Act?
Guest Author: Colleen Theron, Director Ardea International.
There is a global trend towards strengthening accountability in institutions to ensure that senior managers should be held liable for corruption and bribery. For example, in 2015 the Financial Conduct Authority announced a fine of £33,800 for the former finance Global Compliance officer Stephen Bell of Network Financial Group. He was also banned from performing a compliance oversight function.
Shareholders are also increasingly using their influence to encourage ethical behavior of companies. In Brazil, the state oil company paid $2.95 billion to settle a class action suit brought by investors in the U.S. This sum was in addition to fines to settle bribery allegations.
The Yates Memorandum, released in 2015 by the U.S. Department of Justice, addressed individual accountability for corporate wrongdoing, noting, “One of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetuated the wrongdoing.”
Whilst the UK Bribery Act allows for individuals or companies that are linked to the UK to be prosecuted for corruption regardless where the crime took place there is no similar legislation within the UK relating to modern slavery offences.
Notwithstanding the fact that there is no explicit criminal liability for director’s in the event of failing to comply with the requirements of Section 54 of the UK Modern Slavery Act, directors continue to be bound by their fiduciary duties. With the growth in mandatory legislation covering disclosure of how companies are addressing modern slavery issues in their supply chains, directors across the globe should understand their fiduciary duties.
Whilst some people are aware of what a contract is and may have heard about a duty of care, fewer are familiar with the concept of the fiduciary obligation and the rights and duties that flow from it.
What does the UK Modern Slavery Act require?
Section 54 of the Modern Slavery Act (the so-called ‘Transparency in Supply Chains’ or TISC clause) applies to commercial organizations (incorporated in the UK) that:
- Supplies goods or services,
- Has a turnover (or a group turnover) of £36 million
- Carries on business or part of a business in the UK
The organization has to publish an annual slavery and human trafficking statement, setting out the steps it has taken during that fiscal year to ensure slavery is not taking place:
- Anywhere in its supply chains
- In any part of its business
Section 54 (6) requires that the statement has to be approved by the board of directors (or equivalent managing body) and be signed by a director (or equivalent). If it is a partnership, the anti-slavery statement must be approved by the partners or members.
The duties that are imposed on commercial organisations are enforceable by the Secretary of State bringing civil proceedings in the High Court for an injunction or in Scotland for specific performance. Failure to comply with the injunction can lead to unlimited civil penalties and of course further reputational damage.
The increased reporting requirements will put into focus the measures that boards are putting into place to ensure ethical processes are implemented.
What liability can a director incur under the Modern Slavery Act (MSA)?
The TISC provisions do not create criminal liability for directors for failing to publish a statement or to sign it. This is contrary to the position in the Companies Act 2006 (CA2006), where a director can be held personally liable for failure to carry out his/ her duty to publish a strategic report for the company.
A director can, however, be found guilty of the crime of human trafficking under the MSA if they have personally trafficked people and are subsequently successfully prosecuted.
Directors should keep in mind that they are not exempt from their overall duties under the CA 2006 or any other legislation that holds directors personally liable (for example, the Health and Safety Act 1974).
Whilst a director is not able to incur criminal liability under the MSA TISC provisions, there is an argument that they could, however, incur liability for a breach of fiduciary duty.
What is a fiduciary duty?
In addition to statutory duties, directors also have fiduciary duties. A fiduciary relationship is a relationship of trust. This relationship places a duty on company directors to act within the best interests of the company, in good faith and ethically. In a recent Scottish Appeal Case of Dryburgh v Scott’s Media Tax [2-14] the Court described the duty as one to ‘act in good faith in the interests of (the principal) to act for a proper purpose, and not to allow … personal interests to conflict with those of [the principal]’.
There is no legal standard of care higher than a fiduciary duty. And given the current trust crisis, directors owe a fiduciary duty whether or not this is set out in a contract.
When are directors considered to have breached their fiduciary duties?
There are a number of examples of where directors are considered to have breached their fiduciary duties. Amongst these are:
- A failure to make a business judgment in good faith
- Where there are reasonable grounds to believe that the business judgment is not in the best interests of their company
- Intentionally failing to exercise their duties in good faith
- Acting dishonestly or deceitfully, not acting in the best interests of the company and placing their own interests above others
Can directors be found liable for breach of fiduciary duties under the TISC provisions in relation to MSA statements?
In the context of the TISC requirement that an MSA statement should be published and that it should set out the steps (albeit voluntarily) of the actions being taken to address modern slavery in the organisation and its supply chains, there are arguably some scenarios where directors could find themselves liable for breach of their fiduciary duties. Allegations may include:
- Failure to act with reasonable care, skill and due diligence when signing off the transparency the statement (where, for example, they have failed to get enough relevant information to understand the risks)
- Not getting the approval of the board for the statement
- Not ensuring the statement complies with the requirements of the law
- Failing to exercise due care and diligence when determining what steps the company is taking or should be taking to tackle slavery in the organization and their supply chains
- Failing to act in good faith in the company’s interests as a whole (for example, not providing the resource needed to identify the risk of slavery in supply chains, or dismissing any risk in the first place)
- Failing to ensure that any public disclosure is not underpinned by robust or perhaps even true records of company due diligence procedures.
- Acting dishonestly or deceitfully by withholding information from the board about identified slavery in supply chains
- Acting dishonestly because the company is benefitting from the profits made by the use of slaves and forced labour in their supply chains
- Failing to promote the success of the company if middle management are found guilty of abuses which result in damage to the company
What are the consequences of breach of fiduciary duty?
For a claim to prevail for breach of fiduciary duty there are three key elements that must be proved.
- Prove that a fiduciary relationship existed at the time of the dispute
- Understand the scope of that relationship and the fiduciary duties
- Identify duties that were breached within the scope of the relationship.
Shareholders have a right to recover damages where a board member breaches their fiduciary duties. The consequences can be very severe, and it is not uncommon for a director to be pursued personally.
The consequences of breach may include:
- Damages or compensation where the company/shareholders have suffered loss
- Punitive damages
- Restoration of the company’s property
- An account by the director of the profits he or she has made in breach of the fiduciary duty
The Modern Slavery Act has significantly increased the focus on the steps organisations are taking to prevent modern slavery. It now makes modern slavery a board issue.
As consumers, NGO’s, regulators, and civil society are growing more aware of corporate human rights violations and modern slavery in supply chains, directors are advised to understand the extent of their statutory and fiduciary duties.