What Happens If There Is A Breach Of A Director’s Duty?

It’s no secret that directors hold a position of power over a company’s operations. Because of this, they are subject to certain duties and obligations that help to promote good governance and ensure they act in the company’s best interests. 

If you are a director of a company, or thinking about becoming one, you’ll need to know and understand what these duties are so you can make sure you act in accordance with them. Breaching your duties as a director can have some very serious consequences for you in both your professional and personal capacity.

Who Is A Director?

Working out if you are a director is based on the definition found in section 250 of the Companies Act 2006. This includes directors, de facto directors and shadow directors.

• Director: Someone who has been validly appointed as a director or an alternate director
  
• De facto director: Someone who carries out the same roles that a director would, even though they have not been validly appointed as one
  
• Shadow director: Someone whose instructions and / or wishes are followed by validly appointed directors of the company, even though they themselves have not been validly appointed as one

The Act itself says that a director can be any person occupying the position of director, by ‘whatever name called’. So, the issue of whether you are a director or not is a flexible one and will bind you to directors’ duties.

At the end of the day, if you are exercising the same powers and discharging the same functions that a director would, you will need to accept the responsibilities and obligations that come with being a director. 

What Are The Director’s Duties?

The Companies Act 2006 sets out several main duties that a director must carry out.

• Follow the Company Constitution
• Promote the success of the company
• Make independent judgements
• Exercise reasonable care, skill and diligence
• Avoid conflicts of interest
• Do not accept third party benefits
• Disclose any personal benefits you may receive from a transaction

It’s crucial that directors understand the nature of these duties in more detail.

Has There Been A Breach Of A Director’s Duty?

Working out if there has been a breach of a director’s duty depends on the specific situation and should be considered on a case-by-case basis.

Ask yourself whether the actions you or another company director have taken are authorised by:

• the company constitution
• the company’s members in a general meeting
• the company’s board of directors

If proper authorisation has been given, it will be unlikely that a breach of a director’s duty has taken place. 

Example The members of Company XYZ passed a resolution allowing Tom, a director of Company XYZ to take out a loan on behalf of the company. If Tom takes out a loan in accordance with the resolution, it is unlikely that he will have breached his director’s duties.

What Happens If There Has Been A Breach Of A Director’s Duties?

Breaching your director’s duties can have very serious consequences and often varies according to what duty has been breached and what has subsequently happened because of the breach. 

These can include:

• Account of profits
• Restoration of property
• Injunction
• Rescission of the relevant contract
• Damages

Litigation for a breach of such duties can be quite complex, so it’s worth seeking help from a legal professional who can assess the specific circumstances of your situation and provide appropriate solutions.

Shareholders and other members of the company can take legal action against a director if they suspect a breach of duties. For serious cases, the breach could amount to a criminal offence, where imprisonment becomes an option for the director in breach.

In addition, directors can sue other directors of the same company. So, it’s important that you ensure you are not in breach of these duties to avoid legal consequences.

Criminal Conviction

In extreme cases, if you have seriously breached your duty to act in good faith or the duties not to improperly use information or the position of director, you could face criminal charges and even imprisonment. Breaches resulting in criminal conviction often involve an element of dishonesty or recklessness, including a director making false or misleading disclosures or engaging in dishonest conduct. 

Disqualification

The courts, The Insolvency Service, Companies House and the Competition and Markets Authority (CMA) have the power to disqualify you from managing companies for long periods of time if you have breached your directors duties.

This usually occurs where they find that your conduct as director has been ‘unfit‘.

Commercial Ramifications

Though not a legal consequence, it’s also important to be aware of the implications breaching a director’s duty has for the company itself. 

As you know, a company’s reputation is often one of its most valuable assets. If a company director breaches their duty, it will likely tarnish that reputation and the company will often be subjected to much greater scrutiny from the public – meaning actual and potential investors and regulators alike.

I Think There Has Been A Breach. What Should I Do?

One of the best things to do if you think there has been a breach of a director’s duty is to obtain independent financial and legal advice as soon as you become aware of it. It is essential to do this as soon as possible so you can minimise the consequences of the breach efficiently, as well as mitigate your own personal liability.

Moving forward, it will be important that you implement strong policies and processes to ensure compliance with the law, the company constitution, and other operational shareholder agreements.

Speak With A Lawyer

Understanding your responsibilities and obligations as a director of a company can be overwhelming, as there are many areas of the company you will need to be across. If you would like more information or help with getting on top of your legal obligations as a director, get in touch!

We have a team of friendly expert lawyers who are ready to help. For a free, no obligations chat, email [email protected] or call 08081347754.

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