Remedies where there is a breach of directors' duties
This article is based on UK law as at 1st April 2007, unless
otherwise stated.
If a director breaches any of his or her duties, what
are the consequences? (For more information see our OUT-LAW guide
on The Code of Directors' Duties)
Claims by the company
The company itself can bring a claim against the erring director
if it can show that it has suffered some loss. If the director has
made some personal profit, they can be required to surrender the
gain to the company.
A contract or other arrangement entered into by the director in
breach of a duty will be void, though it may be open to the company
to ratify the agreement if it wishes to do so.
The company may also seek:
- an injunction to stop the director from carrying out or
continuing with the breach;
- damages by way of compensation where the director has been
negligent;
- restoration of the company’s property;
- the rescinding of a contract in which the director had an
undisclosed interest.
Claims by a company are often retrospective, brought by members
of the existing board against their predecessors. (It is, after
all, unlikely that a board will choose to sue itself; turkeys don’t
vote for Christmas.)
When Equitable Life’s problems with guaranteed income policies
were fully revealed, the newly installed directors voted to pursue
the former directors for the losses the company had suffered. It
was only after several years of crippling litigation, which pushed
several of the defendants towards bankruptcy, that the company
agreed to withdraw its claims.
When a company is sold, the new owners may appoint fresh
directors and, if things go wrong, they may cast around for past
breaches and the opportunity to hold the old directors to
account.
Shareholder claims
Shareholders have no right to claim against a director for any
loss they believe they may have suffered as a result of breach of
duty. A director owes their duties direct to the company and only
the company can complain of any breach. However much their shares
may have dropped in price, shareholders cannot recover that loss of
value from the directors they hold responsible.
But because few companies will bring a claim against one of
their own directors, the law has over the years developed a
mechanism for shareholders to seek redress. Shareholders can ask
the court to be allowed to bring a claim against a director in the
name of the company. The claim is initiated and run by
shareholders, but it is brought in the company’s name and to
recover the company’s loss.
Like directors’ duties, this is an area of law built up by the
courts over the past 150 years or so in an ad hoc way, with little
clarity for today’s company director. So again the government has
taken the opportunity of the 2006 Companies Act to revise and
codify the law.
Claims by a liquidator or administrator
Following an insolvency, a liquidator or administrator will be
under a duty to consider a claim where a breach of duty is
discovered.
Dismissal
Whatever the circumstances, regardless of who is in the right
and whether or not there has been a breach of duty, the
shareholders have the ability in the Companies Act to remove a
director by ordinary resolution. The articles might make it easier
for the shareholders to sack a director, but they cannot make it
more difficult or remove this statutory right.
The company will still have to pay out for any notice period
agreed under the director’s service contract.
Ratification
Even where a director’s breach of duty is clear, the
shareholders can ratify the breach by ordinary resolution (that is,
a simple majority vote). If the errant director is also a
shareholder, they cannot vote in their own favour; neither can
their family or others connected with them.
But connected parties can vote if all shareholders support the
director – unanimity will cure the mischief.
Excusing liability
A director in breach of a duty may also be relieved of any
liability if they can convince the court that they acted honestly
and reasonably in all the circumstances. This might happen where a
director acted in good faith on the advice of a lawyer or other
professional, but where the advice proved to be wrong.
Directors need not wait for proceedings against them before
seeking the court’s protection. They can bring their own action for
a court order to exempt them from liability.
