On the Concept of “Fiduciary Duty” under Taiwanese Law before the Amendment of the Company Law in 2001

A Real Case

X, a director of T Company listed on the TSE (Taiwan Stock Exchange) during the period from 1991 to1999, was charged by the Prosecution in 2004 with the offence of breach of trust and embezzlement. The Prosecutor accused X of having violated the director’s duty to the listed company and thus causing huge loss to T Company’s property and members’ interests. At the same time, T Company filed a lawsuit to claim back millions of dollars allegedly embezzled by X when he served as the director. During the proceedings, X lodged a counterplea against T Company’s claim, arguing that the concept of “fiduciary duty” was inserted firstly into Art. 23(1) of the Company Law in 2001. Because the concept of “fiduciary duty” did not exist under Taiwanese Law during the period when X was the director, X should not owe any “fiduciary duty” to T Company and should not be liable for T Company’s allegedly damage.

Introduction

Before the amendment in 2001, Art. 23 of the Company Law provided that “if the responsible person of a company has, in the course of conducting the business operations, violated any provision of the laws and/or regulations and thus caused damage to any other person, he/she shall be liable, jointly and severally, for the damage to such other person” (公司負責人對於公司業務之執行，如有違反法令致他人受有損害時，對他人應與公司負連帶賠償之責). However, in Nov. 2001, the Draft of the Company Law was passed by the Legislative Yuan, and a new subsection was added into Art. 23, which provided that “the responsible person of a company shall have the loyalty and shall exercise the due care of a good administrator in conducting the business operation of the company; and if he/she has acted contrary to this provision, shall be liable for the damages to be sustained by the company therefrom” (公司負責人應忠實執行業務並盡善良管理人之注意義務，如有違反致公司受有損害者，負損害賠償責任). Consequently, it was in 2001 that the term “fiduciary duty” was introduced into the new Art. 23(1) of the Company Law.

Nevertheless, the fact that the term “fiduciary duty” was introduced into Company Law in 2001 does not mean that there were no similar provisions or content of this concept in Taiwanese Law before 2001. In order to clarify this issue, it would be necessary to compare the concept of “fiduciary duty” in Common Law system, and the related provisions in Taiwanese Law in the 1990s respectively.

Comparing the Concept of “Fiduciary Duty” in Common Law System and Taiwanese Law

In the Common Law system, the concept of “fiduciary duty” has been considered as the most important one in governing the legal relationship between the company and its director. In the U.S.A., the Supreme Court of Delaware has held in its leading decision in Smith v. Van Gorkom that fiduciary duty has only two sub-categories -- duty of care and duty of loyalty;[1] in England, nevertheless, it has been generally accepted that directors should owe a further fiduciary duty -- duty of good faith.

(1) Duty of Care

Under duty of care, for instance, a director “ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take are those which would be known or ascertained, or reached or taken, by a reasonably diligent person having both (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that the director has” (The Insolvency Act, 1986). It should be noticed that this provision has put emphasis on a director’s “duty of skill” and “duty of diligence”, the two which are very similar to those imposed by Art. 535 of the Civil Code of Taiwan.[2] Subsequently, leading scholars are of the opinion that Art. 535 of the Civil Code could be analogous to the concept of duty of care in the Common Law system.[3]

 

(2) Duty of Loyalty and Good Faith

In 2000, the Company Law Review Steering Group of England has made a list of a director’s obligations under duty of loyalty and that of good faith: (1) to obey the constitution and decisions of the company which bind the director; (2) to promote what he calculates in good faith to be likely to promote success for members’ benefit; and (3) to take account of the factors which he believes in good faith to be relevant for that purpose.[4] Although the content of duty of loyalty and good faith in the Common Law system is quite complex and extensive, a number of these duties, for instance, still could be found in Taiwanese Law before 2001:

A. Art. 223 of the Company Law prohibits the director from acting as the representative of the company when transacting a sales with or conducting any legal act with the company on his/her own account.

B. Art. 209 of the Company Law requires a director who does anything for himself/herself that is within the scope of the company's business to explain to the meeting of members the essential contents of such an act and secure its approval.

C. According to Art. 541 of the Civil Code, the director is obliged to deliver to the company the moneys and profits which he/she received, or transfer the rights which he/she acquires when acting on behalf of the company.

In short, all of these provisions could be considered as part of directors’ obligations under duty of loyalty and that of good faith.

The Scholars’ Opinions and the Courts’ Decisions

Given that duty of care is an important portion of the concept of fiduciary duty, and that Art. 535 of the Civil Code has imposed on the director the duty of acting with the care of a good administrator, it is obvious that all directors had owed certain fiduciary duties before 2001. Both Professor Tseng and Professor Wang conclude that the amendment of Art. 23 of the Company Law 2001 pointed out the introduction of duty of loyalty (including duty of good faith), rather than duty of care.[5] Professor Liu Len-Yu also noted that, from the perspective of the nature of fiduciary, the director should owe fiduciary duties to the company, even without a clear statement in pre-2001 corporate law system of Taiwan.[6] Professor Tseng further argued that the amendment in 2001 was to “strengthen” the existed but insufficient directors’ duties under Taiwanese law.[7] In other words, certain fiduciary duties have already existed before 2001. The amended Art. 23 of the Company Law 2001 was not to create a whole new concept for directors’ duties, but to re-assert some existed duties on the one hand (particularly the duty of care), and also to impose some new fiduciary duties upon directors on the other hand (particularly the duty of loyalty).

In addition, courts have held the same view. The Taiwan High Court has stated that “if the director has, in the course of conducting the business operations, received the remuneration, he/she shall do so with the care of a good administrator. Even without the same provision in the company’s Articles of Association or in the resolutions at a members' meeting, Art. 535 of the Civil Code has imposed this duty on the director, which indicates the director’s fiduciary duty”.[8] In other words, although the provisions in the Civil Code before 2001 were not completely the same as the standards of fiduciary duty under the Common Law system, these provisions had been applicable enough for the courts to impose on the director the duty of acting with the care of a good administrator (duty of care) in real cases.

Conclusion

In the case between T Company and X, certain provisions in the law in connection with fiduciary duty were governing the relationship when X was the director of T Company.[9] In particular, according to Art. 535 of the Civil Code, H had to exercise the due care of a good administrator in conducting the business operation of T Company. Since it is suggested that Art. 535 is analogous to the concept of duty of care, this Article could be a switch by which judicial courts are able to apply the standards of fiduciary duty in the Common Law system to the relationship between T Company and X, and even to other cases occurring in the 1990s.

In conclusion, despite the fact that the term “fiduciary duty” was not employed in the Company Law until 2001, a number of provisions before 2001 had already had similar content, and had imposed certain fiduciary duties upon X (especially duty of care). Consequently, X was still a fiduciary of T Company during the period between 1991 and  1999, and he should had owed certain fiduciary duties to T Company.

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