Directors are required to put the interests of their Company and its shareholders first. They have a range of duties and responsibilities, which are meant to ensure that the Company’s best interests and its success are their overriding priority, as well to discourage any conduct intended to benefit directors or third parties personally to the detriment of the Company.
What are a director’s fiduciary duties?
The main source of directors’ responsibilities is the Companies Act 2006, as subsequently interpreted by the Courts. The principal duties include:
- To act within the powers given to them by the company’s constitution
- To promote the success of the company for the benefit of its shareholders as a whole
- To exercise independent judgment
- To exercise reasonable care, skill and diligence
- To avoid conflicts of interest
- Not to accept benefits personally from third parties
- To declare any interest they have in a proposed transaction or arrangement with the company
- To keep the company’s affairs confidential
- To disclose material information to the company or fellow directors
If the finances of a company deteriorate to the point where there is a genuine risk of insolvency, the directors’ responsibilities change. They must then put the interests of the creditors first, ahead of those of the Company and its shareholders.
Examples of a breach of fiduciary duties
Common breaches include:
- When a director enters into transactions with the company for personal gain such as by selling personal assets to it at an inflated price, this would be a clear breach of the duty of loyalty.
- Making decisions without proper research, due diligence or disregarding potential risks constitutes a breach of the duty of care. An example might be approving a high risk transaction without sufficient analysis or ignoring the significant the threat it could be to the company.
- Paying personal debts with company funds without proper approval breaches the duty of loyalty.
- Not disclosing material facts to shareholders or other board members, such as known risks, potential conflicts, or adverse financial conditions breaches the duty of disclosure.
- When a director acts beyond the authority granted to them under the company’s constitution, they breach their duty of obedience. This might be entering into contracts outside the company’s stated activities or decisions that bind the company improperly.
What can be done to remedy a breach of duties?
Remedies will vary according to the particular circumstances of a breach. They might include:
- Applying to court for an injunction to prevent an ongoing breach from continuing
- Removing the offender as a director
- Applying to the court to have any misappropriated company property or funds returned
- Setting aside an unauthorised or inappropriate transaction
- Obtaining compensation from the director personally for any financial losses or damages sustained
- Referring the matter to the police where there is a suspicion of fraud or theft
Who can take action?
In almost all cases, it will be the company that initiates proceedings against the director. In certain circumstances where the company declines to act, it may be possible for shareholders or other directors affected by the breach to issue what is known as a derivative claim in the company’s name to ensure that the offending director is held to account. To do this, they will need prior permission from the court.
A Liquidator or an Administrator can also initiate proceedings against directors, but these actions are more likely to be for specific offences under the Insolvency Act, such as Wrongful Trading or Fraudulent Trading.
What are the consequences for an errant director?
Legal liability
Shareholders or the company itself may sue for damages resulting from the breach. Directors can be held personally liable, meaning they may have to compensate the company or shareholders out of their own assets.
Removal from office
The company could remove the director from the board and terminate their employment. This may require shareholder approval, but alternatively a court order might be necessary.
Reimbursing gains
The court may impose fines or require the director to forfeit any profits gained through the breach.
Disqualification
In extreme cases, regulatory bodies such as the Insolvency Service may obtain a disqualification order, which bans them from acting as a director for any company for a period of up to fifteen years.
Reputational damage
Directors who are sanctioned for breaching fiduciary duties are very likely to suffer reputational harm, which can affect future career opportunities, as well as their standing within the community and the industry in which they operate. In some circumstances, they could be subject to the embarrassment of negative media comment and public opinion.
Advice for director’s and fiduciary duties
Breach of fiduciary duty is a highly complex area, which requires input from experienced professionals either to assist the company in deciding whether and how to proceed or else for the defence of the accused director. Getting that support must be a priority as soon as the breach is identified by the company or the director.
We have extensive experience assisting business owners and directors, and we will always work with you to find the best solution for you and your business.
One of our Partners would be more than happy to have a non-obligatory confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 0203 995 6380 and we will arrange for a call with one of our specialists.