Directors' Duties: What happens when it goes wrong?

Posted on: 09/01/2024

Category: For your business

This is the second part of the three-part series on Directors Duties and examines what action can be taken against a director who is in breach of his duties or otherwise may be liable due to his position as a director.

The directors seven duties codified under the Companies Act 2006, are owed to the company and generally it is the company that will take action to enforce breaches by directors. There are also situations where shareholders or liquidators may bring a claim against a director on behalf of the company.

The company can take action against a director for an actual or threatened breach and the decision is usually made by a majority vote of the Board of Directors.

Remedies awarded to the company for most breaches include:

• Compensation
• An account of any profits made by the director where the profits were generated from the breach of duty.
• Return of company property.
• Rescission (undoing) of a contract.
• Injunction against the director to prevent the breach.

In addition, if the director has failed in their duty of care skill and diligence common damages maybe awarded to put right any loss suffered by the company as a result of the directors' negligence.

There are however other potential consequences where directors can be pursued for wrongdoing and not just breaching one of the seven duties:

• There may be grounds for termination of the Directors service contract.
• Possible disqualification as a director. Continuing to act as a director post disqualification can lead to further personal liability, fines or imprisonment.
• Further compensation if the directors breach has caused an unfair prejudice claim by shareholders.
• Criminal offence punishable with a fine for failing to declare an interest in an existing transaction.
• If a company runs into financial difficulties, then they may be liable under the Insolvency Act 1986 for wrongful trading or fraudulent trading. Wrongful trading applies if before the company becomes insolvent the director knows or ought to have known that there was no reasonable prospect that the company would avoid insolvency the director may be found guilty and be asked to contribute to the company’s assets. Fraudulent trading applies if the company continued in business with the intention to defraud creditors. A rare action and usually involves an element of criminal activity.

Further areas that might give rise to personal liability and in some cases fines or imprisonment include:

• If a director exceeds his actual authority in entering into a contract. The company will still be bound but the director will be liable for any loss the company has suffered.
• For fraudulent act.
• Failing to maintain company records – minutes of meetings and Companies House filings.
• Health and Safety breaches
• Bribery offences under The Bribery Act 2010, which is loosely drafted and applies to overseas offences.
• Breaches under environmental legislation
• Running cartels, which are a criminal offence under The Enterprise Act 2002.

As can be seen accepting the position of a director can bring with it a vast array of potential personal liabilities although some are very rare.