When a director does not carry out duties
What happens if a director does not carry out his/her general duties properly?
The general duties are owed by a director to the company. Therefore, only the company is entitled to enforce them and take action against a director if he/she has breached the general duties.
If a director breaches any of these general duties, the company can take legal action against the director, such as seeking an injunction (to stop the director from carrying out or continuing the breach), issuing a claim for damages (where the director has been negligent), seeking an order for restoration of the company’s property (where the director has disposed of property) or seeking an order that the director must account for profits (where the director has profited at the company’s expense). Any contract entered into by the director as a result of a breach will be rescinded.
A person who has breached the general duties may be disqualified from acting as a director if, as a result of the breach, they are shown to be “unfit to be concerned in the management of the company” (s.8, Company Directors Disqualification Act 1986 [“CDDA 1986”]), irrespective of whether the company is insolvent while he/she was, or subsequently became, a director of the company.
In addition to the action which the Company may take, the shareholders of a company may pass an ordinary resolution (= a simple majority vote) to remove a director who has breached their duties.
Where one or more shareholders of the company believe that they have been prejudiced by a director who has breached s.172 Companies Act 2006 (“CA 2006”), the shareholder(s) in their own name may bring an action for unfair prejudice against the company.
Are there any other points I need to be aware of in terms of the general duties?
If you are a director, or you intend to become one, you should also note the following points:
- The general duties apply to a shadow director (and to a former director) as well as to a current director of a company;
- The general duties must be understood as adding to, not replacing, anything which by law prohibits or imposes a requirement on a director;
- The general duties must not be considered in isolation. More than one duty may apply to a director at any one time, in which case, each applicable duty must be complied with;
- If the Articles of Association of your company (“Articles”) contain specific provisions for dealing with conflicts of interest, anything done (or not done) by you as a director to comply with the provisions in the Articles will not count as infringing the general duties.
Our Corporate and Commercial Team advise company directors on how to ensure that they carry out their duties properly, as well as companies who wish to bring a claim against a director and directors who face allegations of a breach of their duties made against them by a company.
We also have extensive experience of advising clients on other company-related issues:
- company law and director compliance
corporate governance and compliance documentation
- acquisitions, disposals and mergers
- management buy-outs and buy-ins
- shareholder arrangements
- share and asset sales and purchases
- financial services and insolvency
1 A “shadow director”, in relation to a company, is a person in accordance with whose directions or instructions the directors of the company are accustomed to act (s.251, CA 2006)
We pride ourselves in providing pragmatic, effective and client-focused commercial legal advice. Please contact us for a free no-obligation initial consultation to discuss your requirements, please do not hesitate to contact Heald Solicitors LLP on 01908 662 277 to arrange an appointment.
By Brian d’Arcy