Dispute Resolution: breach of duties by a Director

What are the duties of a Director?

As outlined by Companies House a director must;

• Act within their powers under the company’s constitution.
• Promote the success of the company.
• Exercise independent judgment.
• Exercise reasonable care, skill and diligence.
• Avoid conflicts of interest. 

What happens if a Director is in breach of duty?

These duties are owed to the company and only the company can enforce them (although it may be possible for a shareholder to take legal action on behalf of the company. Breach of duty by a director who is also a shareholder may also give rise to a claim between shareholders). 

If a director falls short of these standards (or threatens to fall short), the Court can act to remedy or prevent a breach of duty. The Court can make an award of damages, requiring the director to account for profits made or, in extreme cases, prevent a director from acting in breach of duty by issuing an injunction. 

Case Example: Conflict of Interest – The Edwardian Hotel Group

In a recent decision concerning the well-known, family owned, Edwardian Hotel Group ([2018]EWHC 1715), the Court considered whether one of the directors should have disclosed his interest in a proposed transaction on the basis that the transaction was one from which the company could also have potentially benefitted. The allegation was that the director had a conflict between his own interests and those of the company, and that he should have declared his interest to the Board before going ahead with the transaction in his own name.

The Court found that the director did have a conflict of interest and that disclosure should have been made where the conflict was “sensible”, meaning “real, objectively assessed and not merely theoretical”. The Court also observed that it was not up to the conflicted director to decide that the company would not be interested in the transaction or opportunity, and then take it for themselves.

Dealt with properly, the director should have declared the matter to the Board for discussion. If the company was not interested in the transaction, it would have been open to the Board to authorise the director to proceed. This would have avoided later difficulties.

Labrums Dispute Resolution Approach

Disputes between companies, their directors and shareholders can be particularly fraught, causing friends and family to fall out in ways they could never have imagined when they started a company in a blaze of optimism and enthusiasm. 

If you are thinking of setting up a company with friends or family, speak to us now about the steps that can be taken to avoid these types of all too common disputes in the future. If you are a director or shareholder of a company and have concerns that a company is not being run appropriately, please call us for an initial discussion about the options available to you. We are experienced at advising directors and shareholders on their rights and duties at all stages of the lifecycle of a company.

Please contact Michael Labrum or Clare Jones on 01727 858807.