Directors Disputes and Breach of Fiduciary Duty

Help is at hand for Company Directors.

Disputes can arise between directors while running a business. Here at Backhouse, we can advise the Company and its remaining directors when a dispute arises with a lone director, or conversely, we can advise you if you are the lone director in that situation.

In either scenario, the offending conduct may amount to a breach of the fiduciary duty owed by the director to the company.

Put simply, it is a duty of good faith toward the company and its directors.

Directors and Shareholders in a Limited Company have the protection of trading with limited liability, whereby they can enter into arrangements on the company’s behalf without being exposed to any personal liability. In return for this protection, a director is subject to a number of duties which ensure they act properly toward the company and their fellow directors, i.e. acting in good faith and with the appropriate level of care and skill when carrying out their role as director.

These common law duties have also been incorporated in the Companies Act 2006, which provides, amongst others, that a director must:

• Act within their powers and as conferred by the Articles of Association;
• Promote the company’s success
• Exercise independent judgement
• Exercise reasonable care, skill and diligence
• Account for unauthorised profits

It can be seen that the sort of conduct that may give rise to a dispute between directors or that will affect the efficient running of the Company will likely be a breach of the directors’ fiduciary duties. Instances might include:

• Promoting their own interests above that of the company when contracting with a third party
• Selling personal assets to the company at above market value
• Misuse of company funds. Where this is for personal gain, this could be deemed misappropriation
• Failure to disclose material information to the board of directors and shareholders
• Entering into unauthorised contracts that nonetheless bind the company.

• Seeking an injunction to prevent an ongoing breach from continuing
• Securing approval from the shareholders to remove the offending director from their role
• Applying to the court to have any misappropriated company property restored
• Applying to the court to have any unauthorised or inappropriate transactions set aside
• Seeking compensation from the director personally for any financial losses or damages sustained
• Referring the matter to the police where there is a suspicion of fraud or theft.

It should be noted that whilst prosecution of a director for dishonesty offences such as Fraud by Abuse of Position does not of itself recover misappropriated funds to the Company, it is possible on the defendants conviction of the offence, for the victim (the company) of the Fraud, to invite the Court to make a Compensation Order in favour of the company in the amount of the diverted funds.

In an insolvency situation, it may be possible for an administrator or liquidator to take action and use any money or property that is recovered to boost the funds available for distribution among the company’s creditors. Such action might be taken where the offending director is suspected of wrongful or fraudulent trading or of misfeasance. Misfeasance relates to misapplication or misappropriation of company funds or other company property, e.g where a director prioritises paying themselves over the companies creditors, conceals assets or whilst the company struggles to repay creditors, conceals assets or prefers one creditor to another.

A liquidator or administrator can also seek a Director’s Disqualification Order as referred to above.

For expert legal advice on these issues, please contact our Head of Litigation Francis Fenegan who will be happy assist you.

Tel:          01245 893400
Email:     info@backhouse-solicitors.co.uk
Visit:       17 Duke Street, Chelmsford, CM1 1JU
Or send us a message through the Contact Us page on this website.