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A guide to fiduciary duties owed by football club directors and remedies for breach of duty

A guide to fiduciary duties owed by football club directors and remedies for breach of duty – Nicholas Siddall writes for Law in Sport. This article was first produced for and published by LawinSport.com.

Whether a person is “fit and proper” to own and run a football club is a frequently debated question today. The press often reports on unsavoury behaviour and recent legal articles have explored the adequacy of the various owners’ and directors’ tests and how they might be improved.1

This article supplements the debate by examining the additional fiduciary duties owed in law and equity by directors of incorporated football clubs, and the associated rights and remedies available to clubs should such duties be breached.

 

What is a Fiduciary?

To begin, one needs to understand the curious question of what a fiduciary actually is? The answer to that conundrum is not settled but the English model, based upon equitable principles, is perhaps best explained by the words of Millet LJ (as he then was) in Mothew:2

A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.

In relation to football, most professional clubs today are incorporated (either on a Limited or PLC basis) because of the advantages it provides as regards ability to raise capital,3 preferential tax options and the limitation of liability.

Incorporation also involves recognition that the company is a separate legal entity from the owner(s) (shareholders), with its own rights and assets. However, club owners today (i.e. principal shareholders) are normally also directors of the company, and company directors have long been recognised as fiduciaries who owe such duties to the club.4

 

What are Fiduciary Duties?

Once an owner/director is shown to be in a fiduciary relationship with the club what does that mean? What are the consequences of that status? What are the special duties that fiduciaries owe compared to, for example, employees? Millet LJ in Mothew stated:

The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal.5

Those classic fiduciary duties are traditionally summarised as:

  1. The “no profit” rule;
  2. The “no conflict” rule; and
  3. The “undivided loyalty” rule.

 

Fiduciary Duties under the Companies Act 2006

Company Directors have long been recognised as fiduciaries and this has led to the statutory codification of a director’s duties in ss170-7 Companies Act 2006 (“CA”).6 It is not possible to contract out of these duties (s232 CA) as they are imposed as a matter of law.

The key duties for the purposes of this article (which replicate the traditional rules set out above) are:

  • S171:duty to act within powers;
  • S172:duty to promote the success of the company;
  • S175duty to avoid conflicts of interest;
  • S176duty not to accept benefits from third parties; and
  • S177duty to declare an interest in a proposed transaction.

The essence of the duties is that the powers of the company are to be exercised by the director in good faith and for the benefit of the company as a whole.

Thus the hypothetical wrongdoing owner would act in breach of those duties if they allowed their own interest to conflict with the duty to the company or if they were to derive an unauthorised benefit from their actions.

What might be examples of a Breach of a Fiduciary Position?

The rules are clear, but their strictness makes complying with them onerous. The owner may consider the club their own to do with as they choose. Such an approach would be unwise.

The effect of the above is that the following (hypothetical examples) are likely to be breaches of duty unless disclosed to the club and its permission openly obtained –generally through a resolution of the Board of Directors-save that s176 CA provides that the club cannot authorise a breach of the third party benefits prohibition:

  1. The gift of the gold watch to the owner by a contractor if a commercial deal were concluded with the club;
  2. The payment of a consultancy fee to the owner by a sporting goods company which might be seen as a conflict when kit sponsorship deals are negotiated;
  3. The payment of a sum to encourage the owner to procure to the sale of a player by the club to another club;
  4. Purchasing land which shall appreciate in value as a result of its proximity to a proposed commercial development of the club;
  5. The agreement for the club to pay a transfer fee at a sum above the “market level” as a result of connection with an agent;
  6. Holding a significant financial stake or directorship in another club in the same League.

The above are obvious examples of breach. However it should be recognised that a fiduciary obligation is strict and does not require fraud or bad faith. Indeed a breach can be made out without any loss being suffered and without any consciousness of wrongdoing at all.

Thus a wide range of activity can breach the duties set out above. However, in cases of innocent breach, s1157 CA allows an excuse where it is considered by the court appropriate on the basis that the owner has acted honestly and reasonably.

 

What is the Position as Regards the Proceeds of Breach?

In law (addressing the examples above) the gold watch is the owner’s to wear, the consultancy fee/payment is his to retain. However in equity the position is very different as explained in Gwembe Valley:7

…An undisclosed profit which a director so derives from the execution of his fiduciary duties belongs in equity to the company. It is no answer to the application of the rule that the profit is of a kind which the company itself could not have obtained, or that no loss is caused to the company by the gain of the director. It is a principle resting upon the impossibility of allowing the conflict of duty and interest which is involved in the pursuit of private advantage in the course of dealing in a fiduciary capacity with the affairs of the company. If, when it is his duty to safeguard and further the interests of the company, he uses the occasion as a means of profit to himself, he raises an opposition between the duty he has undertaken and his own self interest, beyond which it is neither wise nor practicable for the law to look for a criterion of liability. The consequences of such a conflict are not discoverable. Both justice and policy are against their investigation.

 

Remedies and the Need to Prove Loss

Damages are available as a remedy for any actionable unlawful act. The problem is that damages look to compensate loss whereas an owner may gain in circumstances where the club itself suffers no loss. Clear issues arise in cases of secret profits or diversion of opportunities where the proof of loss is a significant difficulty. The distinction is perhaps best demonstrated by discussing two of the examples above.

In example (v): enhanced price paid for a player; there the club would be able to show loss without too much difficulty. If a player’s realistic market value is £25 million (i.e. they have played 15 minutes for England in an international friendly) but the owner procures a purchase by the club at £27.5 million then the actions of the owner have caused an overspend (and thus loss) of £2.5 million. Loss is demonstrated and is readily quantifiable presenting no difficulty in a claim for damages.

That example is to be contrasted with example (iv). The club has no plans to exploit the land next to its development. The club does not own the land. Thus the owner has gained by his knowledge of the commercial plans of the club but the club itself has sustained no loss. It is in those circumstances that equitable remedies which are available against a fiduciary and which do not require proof of loss become key.

 

What are the equitable remedies available against a Fiduciary?

The additional remedies that can be claimed by a club against a fiduciary are:

  1. An account of what they have done with the club’s assets;
  2. An account of profits obtained as a result of any breach of duty;
  3. Restoration of Property (including recission –i.e. cancellation- of any contract wrongfully concluded-);
  4. Equitable compensation for loss;
  5. The imposition of a constructive trust over unauthorised profits made as result of any unconscionable conduct;
  6. Equitable tracing of property into the hands of third parties whom are knowing recipients or dishonest assistants of a breach of duty.

The scope of the available remedies are potentially wide-reaching. For example if the hypothetical owner were to make a defined profit and then invested the same securing a huge additional profit then the club would in principle be entitled to assert a claim to the value of the additional profit as the making of the same flows from the breach of fiduciary duty.

 

Remedies and the Issue of Control

Often the hypothetical wrongdoing owner would exercise effective control of the club through his votes on, or appointments to, the board. Thus the club’s ability to enforce its legal and equitable remedies is in effect stymied.

However in circumstances where the owner ceased to be permitted to carry out an effective role in the governance of club then the possibility of a claim and substantial remedies is open to it. The same position would apply if the club were sold and a new board put in place as regards wrongful acts which were not too historic.

In reality however wrongdoing is often hidden. Further once discovered it is often perpetrated by those who control the ability of the company to take action to recover the fruits of any wrongdoing. This is why such actions are rare. The supporters who are rarely shareholders (and if they are have insufficient votes to compel action in such a regard) are often powerless to bring to book those whom might abuse their beloved clubs.

 

Conclusion

It is perhaps a common misconception that the owner of a club may do with it as they wish. The author would suggest that the moment the club is incorporated and takes on a legal status of its own that such a view is incorrect and that the club’s assets/opportunities ought to be viewed as being its, and its alone.

Thus in circumstances such as those, in addition to regulatory action against a hypothetical wrongdoing owner, more direct remedies may lie to the club to secure recovery of the loss suffered by or the benefits of any such wrongdoing.


References

  1. See for example: Anne-Marie Sheperd, ‘An analysis of how English football can reinforce the criteria of who is a “Fit And Proper Person” to run or own a club’, LawInSport.com, 26 Nov 2015, last viewed 6 Jan 2016, http://www.lawinsport.com/articles/item/an-analysis-of-how-english-football-can-reinforce-the-criteria-of-who-is-a-fit-and-proper-person-to-run-or-own-a-club ; and Rochard Barham, ‘Is football’s owners’ & directors’ test fit for purpose?’ LawInSport.com, 21 Jan 2015, last viewed 6 Jan 2016, http://www.lawinsport.com/articles/item/is-football-s-owners-directors-test-fit-for-purpose
  2. Bristol and West BS-v-Mothew [1998] Ch 1, available to view at: http://www.bailii.org/ew/cases/EWCA/Civ/1996/533.html (last checked 16 December 2015)
  3. See, http://www.lawinsport.com/articles/item/should-fans-play-a-greater-role-in-the-ownership-of-english-welsh-football-clubs
  4. It should be noted that owners are not fiduciaries in their capacity as shareholders.
  5. See footnote 2, above
  6. Companies Act 2006, available to view at: http://www.legislation.gov.uk/ukpga/2006/46/contents (last accessed 6 Jan 2016)
  7. Gwembe Valley-v-Koshy (no 3) [2004] 1 BCLC 131, (see para 44), available to view at http://www.bailii.org/ew/cases/EWCA/Civ/2003/1048.html (last checked 16 December 2015)

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