DIRECTOR DISPUTES

The Companies Act 2006 imposes several general duties upon the directors of a company. These duties are imposed on any person occupying the position of director by whatever name called, including de facto directors and shadow directors, and may still be owed to the company following a director’s resignation or termination. The duties are owed to the company and its shareholders. Any breach of these duties my lead to the company bringing a legal claim against the director for financial compensation or injunctive relief.

Every company director owes certain fiduciary and statutory duties to the company and its shareholders. These include:

• Duty to not make a secret profit.
• Duty to act in good faith.
• Duty to avoid a conflict of interest.
• Duty to act in the company’s best interests.
• Duty to promote the success of the company.
• Duty to exercise reasonable care, skill and diligence.
• Duty to declare an interest in a proposed transaction or arrangements.

When any of the above are breached the director can be held personally liable for any loss suffered to the company.

Directors owe duties to the company, not the shareholders. This means that it is for the company, not the shareholders, to act should the directors breach their duties and responsibilities to the company.

Shareholders however can bring a ‘derivative’ action or claim on the company’s behalf. Shareholders may bring a derivative action in respect of an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company. Potential grounds for a derivative claim include:

• A director fails to exercise independent judgment in board meetings due to influence exerted by one or more shareholders.
• A director fails to disclose their full interest in an arrangement or contract with a third party.
• A director receives an undisclosed commission payment from a third party in exchange for voting or acting in a particular way.
• Company disputes between directors/shareholders.

Depending on the breach in question, the court may order the director to pay damages or account for profits, set aside a transaction or restore company property held by the director. A breach of duty may also be grounds for the termination of an executive director’s service contract, or for disqualification as a director under the Company Directors Disqualification Act 1986.

Derivative actions are rarely brought by shareholders because, even if the claim is successful, the shareholders do not benefit directly (relief ordered by the court will be awarded to the company). Further, if the claim is unsuccessful, there is a risk the shareholders will be ordered to pay the director’s costs of the litigation (which may or may not have been funded by the company). These types of director disputes are not common but may be rolled out as part of a strategy to enforce your rights.

In an insolvent company the directors’ duties shift from promoting the shareholders interest to acting in the interests of the creditors with a view to minimizing losses. As soon as a director becomes aware that a company is approaching financial difficulty, they should take steps to protect the interests of the creditors. Failure to act appropriately can lead to possible personal liability for directors. Claims include:

• Fraudulently trading. Directors of a company must not allow the company to incur debts when there is no good reason to think that funds will be available to repay the amount owed when it becomes due or shortly afterwards. If they incur debts knowing that those debts are unlikely to be repaid the directors could be liable for fraudulent trading.
• Wrongful trading. Directors of a company must take every step reasonably possible to minimize creditors’ losses when the company is or may be insolvent. Failure to do so may result in a claim for wrongful trading.
• Director disqualification. When a director or former director of an insolvent company is found to have engaged in conduct which makes them unfit to be concerned in the management of a company then they may be disqualified as acting as a director in the future.

It is of paramount importance to protect the interests of the business when dealing with director disputes. These sorts of disputes can be extremely time consuming and expensive to resolve if not dealt with early. At Birch Law our expert commercial dispute solicitors have considerable experience advising directors, shareholders, and businesses when it comes to a director dispute. Our proactive and commercial approach will help mitigate any disruption to your business. Our experienced solicitors will discuss your options at the outset. We are great advocates of alternative dispute resolution as a means of early settlement but if more formal court proceedings are required we will take decisive and robust action with the aim of achieving the best possible outcome for you. For a free no obligation discussion please contact us on 0161 669 4621 or by email at sbirchall@birchlaw.co.uk.