Breach of Director’s duties
Directors are responsible for the day to day management of a limited company and have specific duties and obligations, including to promote the company’s interests and success. A director found to have breached his/her duties may be liable for both in civil and criminal law.
What are a director’s duties?
The duties of directors are contained in sections 171 to 178 of the Companies Act 2006 and are as follows:
- Duty to act within his/her powers as prescribed by the company
- Duty to promote the success of the company
- Duty to exercise independent judgment whilst dealing in the affairs of the company
- Duty to exercise reasonable skill, care and diligence in the affairs of the company
- Duty to avoid conflicts of interest
- Duty not to accept benefits from third parties
- Duty to declare an interest in any transactions or arrangements of the company
Directors also have additional duties under the Act, including the duty to deal with and file company accounts, and an obligation to maintain proper records with Companies House.
What happens when a director breaches one of his duties?
Director’s duties are owed to the company and not to the shareholders or to other group companies. This means it is the company itself which must take action against a director if there has been a breach. There are however circumstances where an individual or group of shareholders may make a claim on behalf of the company against the director; this is known as a derivative claim.
There are a wide range of remedies available to a company on a successful claim against a director. These include the following:
- This requires that a director to stop breaching his duties or prevent him/her committing any further breach
- Restitution of profits. If the company has suffered any loss due to the breach, the director may be ordered to reimburse any profits made as compensation to the company
- Damages: The director may have to make a payment to the company where it has suffered loss as a result of the breach
- Return of property: The director may be ordered to return any company property acquired from his/her breach
- Disqualification: A director can be disqualified as a director
- Criminal sanctions: A direct may be fined or even imprisoned for serious breaches.
Are there any defences for Director’s found to have breached their duties?
The options available to directors that have breached their duties include the following:
- By resolution, the shareholders can ratify (essentially, forgive or condone) the conduct of the director
- There may be indemnity insurance in place for the company for the benefits of its directors
- The company may offer an indemnity to the director for the costs of successfully defending a claim
- The court has the power to grant relief to a director if it believes he/her acted honestly and reasonably and they ought to be excused.