We've all seen it: a director quietly funnels company contracts to their own side business, or recklessly racks up debts while ignoring insolvency warnings. These aren't just bad practices, they're breaches of fiduciary duty, and under Irish law, they can trigger personal liability, lawsuits, and even disqualification.
Under the Companies Act 2014, directors must act in the company's best interests, not their own. Yet time and again, we see conflicts of interest, self-dealing, or gross negligence that put companies (and shareholders) at risk. If you suspect misconduct, here's what you need to know and how to act.
What Are Directors' Duties?
Directors owe a range of duties to a company. These come from statute (primarily the Companies Act 2014) and common law.
Under the Act, key statutory duties include:
- To act honestly and responsibly in relation to the company's affairs.
- To exercise reasonable care, skill and diligence (that of a
reasonable person with the knowledge and experience that might
reasonably be expected of a person in that position).
To avoid conflicts of interest, unless properly authorised. - Not to use company property, information or opportunities for their own benefit without consent.
Sections 228 to 231 of the Companies Act 2014 outline these and other duties. These statutory obligations reflect corresponding common law rules developed by the courts over time.
Fiduciary Duties and Conflicts of Interest
A fiduciary duty is about loyalty. Directors must always act in good faith, in the best interests of the company as a whole, not just on their own behalf or or on behalf of other stakeholders they might favour.
Conflicts of interest can arise more easily than some may realise. For instance:
- A director involved in a proposed transaction where they have a personal interest.
- A director passing on company information to benefit a person connected to them.
- Using company assets for personal gain.
When a conflict does arise, the director concerned must take reasonable steps to declare it and avoid acting in their director's role where their impartiality could be compromised.
Breaches and their Consequences
Director breaches can have serious consequences. The company may suffer financial loss, and the director may face personal liability for compensation or restitution. In serious cases, the court can make a disqualification order, preventing the individual from acting as a director for a set period.
Breaches might also expose directors to claims of unfair prejudice, especially where their actions harm minority shareholders or benefit themselves at the company's expense.
The Corporate Enforcement Authority (CEA) plays a key role in investigating and enforcing compliance. Where breaches come to light, the CEA may seek sanctions through the courts, including interim injunctions to prevent further harm.
Remedies Available
Companies that have been harmed by errant directors can seek various remedies, including:
- Compensation for losses suffered.
- Restitution of company assets wrongly used.
- Injunctions to stop ongoing breaches.
- Applications to disqualify or restrict the director personally.
Courts may also grant equitable relief where appropriate. For directors, this means sometimes the stakes are high if they fail to act fairly and in line with their duties.
Shareholder Action and Dispute Resolution
When a director breaches their duties, shareholders may step in. Under Section 212 of the Companies Act 2014, a shareholder can bring an unfair prejudice or oppression claim if they believe the director's conduct has harmed their interests unfairly.
Disputes don't always have to end up in court. Many shareholder agreements or constitutions include alternative dispute resolution (ADR) mechanisms like mediation or arbitration. These can offer faster, less confrontational paths to resolution, often protecting the company's reputation along the way.
Disclosure of Interests and the Need for Transparency
Directors are legally required to disclose personal interests in transactions involving the company. This includes the interests of persons connected to them, such as family members or companies they control.
Transparency is vital for maintaining trust between directors, shareholders, and other stakeholders. Proper declaration of interests helps avoid the appearance of self-dealing and supports sound governance.
Relief from Liability and Steps Directors Can Take
Not every breach leads to automatic liability. Courts in Ireland have discretion to grant relief in certain cases under Section 233 of the Companies Act 2014. If a director can show that they acted honestly and reasonably, and that in all the circumstances it's fair to excuse them, the court may relieve them from some or all liability.
This isn't a free pass. Directors must be able to demonstrate that they took reasonable steps, sought advice where needed, and acted in good faith. If a director realises they've made a misstep, prompt action to rectify the situation can make a difference.
The Importance of Good Governance
Sound governance practices are the backbone of compliance. The board as a whole shares responsibility for ensuring that directors' duties are understood and followed. This includes setting clear policies on conflicts of interest, ensuring accurate records of decisions, and fostering a culture where directors feel able to declare potential issues early.
When governance is weak, the risks multiply, not just for individual directors, but for the company's reputation, stability, and legal standing.
Case Examples and Practical Tips
Consider the case of a director who approved a company contract that quietly benefited a relative's business. The lack of disclosure came to light when the contract terms damaged the company financially. The court found the director personally liable and issued a restriction order.
Or the situation where a director failed to exercise independent judgement and simply followed the instructions of a majority shareholder. When that shareholder's actions harmed the company's position, the director was unable to argue that they'd met the standard of care, skill, and diligence expected of them.
So, how can directors stay on the right side of the law?
- Always declare conflicts of interest as soon as they arise.
- Seek independent legal or financial advice when in doubt.
- Keep clear records of decisions and the reasoning behind them.
- Exercise independent judgement, don't simply rubber-stamp decisions.
- Review governance policies regularly, and update them as needed.
Directors' duties are practical obligations that go to the heart of a company's integrity. Breaching those duties can lead to serious personal and corporate consequences. But with careful attention, openness, and a commitment to good governance, directors can navigate these responsibilities and help their companies thrive.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
