Material Breach of Fiduciary Duty - Some notes

Material Breach of Fiduciary Duties

A registered auditor only has to report a “reportable irregularity” if the unlawful act which would be a breach of the director’s fiduciary duty is material. Section 1 of the APA defines a reportable irregularity as any unlawful act or omission committed by any person responsible for the management of an entity, represents a material breach of any fiduciary duty. The IRBA Guide states that the registered auditor does not have an obligation to report inconsequential or trivial breaches of director’s fiduciary duties. The registered auditor has an obligation only to report those breaches that are considered to represent a material breach of director’s fiduciary duties thus suggesting that that there are certain breaches of a director’s fiduciary duties that are more severe than others.

Is it not logical to presume that the obligation of the registered auditor should simply have to assess whether the director has breached their fiduciary duties, as by its very nature a breach of a statutory duty is material? In other words could be said that every breach by a director of their fiduciary duties is material and there is no one breach that is more severe than any other breach? 

In making such an assessment the registered auditor would have to have regard to the facts and circumstances of each matter in order to determine the significance and import of the relevant breach. 

The recent case of Msimang NO and Another v Katuliiba and Others provides insight as to what may be considered a material breach of fiduciary duties. The court confirmed that breaches by directors of company law amount to breaches of their fiduciary duties. In this case, the court declared directors of a company as delinquent directors under s 162 of the Companies Act 2008 for a failure to comply with their duties in respect of convening annual general meetings of the company and the preparation and auditing of annual financial statements. The court must make an order declaring a person to be a delinquent director if the person grossly abused the position of director; intentionally, or by gross negligence, inflicted harm upon the company or a subsidiary of the company, and acted in a manner that amounted to gross negligence, willful misconduct or breach of trust in relation to the performance of the director’s functions within, and duties to, the company. 

It is also notable from the above that a breach of fiduciary duties does not require proof of negligence, even if the directors were unaware of the relevant legal provisions they would still be held to have breached their fiduciary duties. As Blackman puts it, with reference to several cases, "the director's fiduciary duties are inflexible in the sense that, the liability they impose is not based on fault or blameworthiness, the courts insist upon the thorough performance of fiduciary obligations by directors”.

Directors often fail to comply with the provisions of the Companies Act. For example not acquiring a special resolution for any financial assistance provided by the company or failing to appoint the requisite number directors on to the audit committee. The issue that forms the core of the issue under discussion is whether as a result of the directors allowing the company to contravene a provision of the Companies Act a material breach of a fiduciary duty has taken place. An unlawful act may only occur if the directors are considered to have breached their fiduciary duties and the unlawful act only becomes reportable if the unlawful act is considered a material breach of the directors fiduciary duties.