Directors of companies hold positions of trust and responsibility, and their actions are governed by legal duties designed to protect the company, its shareholders, and other stakeholders. Breaching these duties can lead to significant legal and financial consequences.
Below are answers to some common questions relating to breaches of directors' duties.
What Are the Primary Duties of a Director?
The primary duties of a director are set out in the Companies Act 2006 ("CA 2006"). These include both common law and equitable duties, and, while not exhaustive, they include the following:
- To act within their powers.
- To promote the success of the company for the benefit of its members/shareholders as a whole.
- To exercise independent judgment.
- To exercise reasonable care, skill, and diligence.
- To avoid conflicts of interest.
- Not to accept benefits from third parties.
- To declare any interest they have in a proposed transaction or arrangement with the company.
In certain circumstances, a director may also owe what is referred to as a "creditor duty", requiring them to consider or act in the interests of the company's creditors in addition to their general duties.
What Constitutes a Breach of Directors' Duties?
A breach occurs when a director fails to fulfil the obligations outlined above. Common examples include:
- Acting negligently or recklessly in managing the company's affairs.
- Engaging in self-dealing or conflicts of interest without proper disclosure.
- Using company information for personal gain.
- Failing to act in the best interests of the company, such as prioritising personal benefit over the company's welfare.
- Allowing the company to incur debts when it is insolvent.
What Are the Consequences of Breaching Directors' Duties?
The consequences of breaching directors' duties vary depending on the nature and severity of the breach. Potential outcomes include:
- Personal liability requiring financial compensation.
- An account of profits made by the director.
- Removal from the position of director.
- An order to restore company property.
- Rescission or setting aside of a transaction.
- Legal proceedings initiated against the director personally.
- Injunctive and/or declaratory relief.
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.
