Director’s Duties – Obligations, Breaches and Legal Remedies

DIRECTORS’ DUTIES – Obligations, Breaches and Legal Remedies

Rix & Kay Solicitors LLP offer expert advice to directors on their obligations under both contract and law as well as their fiduciary duties (essentially, loyalty) owed to a limited company. We can advise you how to identify and potentially rectify such a breach of those duties and the legal options available to you either as a director at fault, or on behalf of the Company, who suspects foul play by one of its directors.

As a director of a company, you are governed by the General Duties of Directors as set out in Chapter 2 Part 10 of the Companies Act 2006. These duties are wide ranging and put a considerable onus on a director to act and behave in a particular way, failure of which can result in serious consequences for the director and the company.

It is often the case that fellow directors’, or the shareholders of the company, will be the first to bring any breach of these duties to the attention of the offending director or the board, which can bring about a legal dispute and the need for a director or the company to seek urgent legal advice.

Duties and obligations

Here we set out seven duties that all company directors’ need to comply with:

1. Duty to act within powers. A director must comply with the powers conferred upon him/her in accordance with the constitution of the company. These are set out in the company’s Articles of Association and you will be in breach of this duty should you abuse these powers, or act in a way which is within its scope but done for an improper reason.
2. Duty to promote the success of the company. A director will use his/her good faith judgment to benefit the company and generate a ‘long-term increase in value’.
3. Duty to exercise independent judgment. In general a director must exercise their powers independently, without subordinating their discretion or powers to others.
4. Duty to exercise reasonable care, skill and diligence. This duty’s benchmark is that of a reasonably diligent person with the general knowledge, skill and experience that could reasonably be expected from a person carrying out the director’s functions. Also, directors with specific professional training or skills (such as a lawyer or accountant) are held to a higher standard in related issues than less qualified colleagues.
5. Duty to avoid conflicts of interest. A director must not place themselves in a position where there is a conflict between the duties to the company and their personal interests or duties they owe to 3^rd parties.
6. Duty not to accept benefits from third parties. Directors must not accept any benefit from 3^rd Parties specifically due to their status as a director.
7. Duty to declare an interest in a proposed transaction or arrangement. Directors must declare the nature and extent, direct or indirect, in a proposed transaction or arrangement with the company.

Breaches

If a director of a company breaches any of the above fiduciary duties, they could face civil action and, in some cases, criminal sanction. It is essential that you seek advice and representation from specialist Commercial Litigation Solicitors to protect yourself and the company throughout any legal proceedings and to secure the most favourable outcome. Breach of directors’ duties and resulting legal action can have significant consequences for the director, company, shareholders and creditors.

Legal Remedies

If a director breaches their fiduciary duties towards their company, the company can take legal action against the director. This action is usually instigated by the company seeking restitution for financial loss or damage.

Depending on the type of director misconduct, the company has a variety of legal options available to it. The company could ask the director to account to them for any profits, pay compensation, return company property or rescind contracts the director has entered into. It may also be possible to negotiate a favourable settlement outside of litigation but this can only be achieved by seeking urgent legal advise in order to assess the options which are available.

Contact our Dispute Resolution lawyers in Brighton & Hove, West Kent (Hadlow), and East Sussex (Uckfield)

If you are a director of a company or if you have any questions regarding the above issues, please contact our Dispute Resolution Team