Breach Of Directors' Duties

The Companies Act 2006 provides for a series of duties directors owe to the company.

If a director breaches these duties, it may be possible for shareholders to bring a claim by contacting one of our shareholder disputes solicitors.

For example, a director has a duty to act in the best interests of the company and promote its success. The consequences of breaching directors’ duties can be both criminal and civil, therefore it is crucial that directors understand not only their statutory duties under the Companies Act but also their powers and responsibilities under the Articles of Association.

Before explaining what directors’ duties are and the consequences of a breach, it is important to note that these duties are owed to the company and therefore, only the company can enforce them. However, shareholders and fellow directors can bring a claim on behalf of the company. Furthermore, if the company becomes insolvent, creditors can pursue a claim, for example, in cases where a director is alleged to have continued to promote the interests of shareholders rather than the interests of its creditors after they knew or ought to have known the company is insolvent or bordering on insolvency.

What are the directors’ duties?

The general duties of a company director are found in sections 171-177 of the Companies Act. They are:

A company director must act per the company’s constitution and only exercise their powers for the purposes for which they are given (section 171).
A company director must act in good faith and promote the success of the company for the benefit of its members (section 172 (1)).
A company director must exercise independent judgment. They may take on board the advice or opinion of others, the ultimate decision must be theirs (section 173).
A company director must exercise reasonable care, skill, and due diligence when undertaking their duties (section 174).
A company director must not place themselves in a position where there is a conflict, or possible conflict, between the duties they owe the company and either their personal interests or other duties owed to a third party (section 175).
A company director must not accept any benefits which are conferred on them due to their position as a company director (section 176).
If a company director has an interest in a proposed transaction or arrangement with the company this must be declared to any fellow directors (section 177).

Examples of breach of directors’ duties cases

In 2019, ClientEarth sued, as a minority shareholder, Polish energy company Enea alleging that the company’s strategy to build a 1GW coal-fired power station in northeast Poland as part of a joint venture with another Polish energy firm, Energa posed an indefensible risk to investors in the face of rising prices for carbon and growing demand for renewables. Moving forward with the project would constitute a breach of the board of directors’ fiduciary duties of due diligence and acting in the best interests of the company and its shareholders.
In Fairford Water Ski Club v Cohoon [2021] EWCA Civ 143 the director of a company that owned a lake and surrounding land was ordered to repay £350,000 after failing to declare his interest in a water skiing school that operated on the lake at a particular directors’ meeting.

Breach of directors duties penalties

What can be imposed?

There are several sanctions the court can make if a director is found to have breached their duties, including:

Damages – if the director has been negligent in performing their duties they may be required to pay damages to the company.
Injunctions – an injunction order can be made to prevent a director from conducting a breach or continuing to breach their duty.
Restoration of property and/or profits – the court can order a director to return property and/or repay any profits gained through the breach.
Reversing of a contract – if a director signs an agreement that goes against the company’s intentions it can be rescinded.

Can the company ‘forgive’ a director for a breach of duty?

Yes, section 239 regulates the company’s right to ratify (forgive) conduct by a director amounting to negligence, default, breach of duty, or breach of trust in relation to the company. The ratification decision must be made by resolution of the members and neither the director nor anyone connected with them can be part of the resolution.

Most importantly, a breach of duty that results in a decision that threatens the solvency of the company or causes a loss to its creditors cannot be ratified.

In cases of negligence, default, breach of duty, or breach of trust claims, the court can relieve a director of liability in whole or in part if:

They acted honestly and reasonably, and
Having regard to all the circumstances of the case, the court believes it is reasonable to excuse the director.

Concluding comments on breaching directors duties

Civil litigation in cases involving directors’ duties is a highly complex area of law and requires the involvement of commercial disputes solicitors.

Take for example the Enea case mentioned above which concerned shareholders bringing a claim against the board for, in broad terms, failing to consider environmental and climate change matters in their decision making.
These types of directors’ duties claims are guaranteed to rise as the science around the impact of company actions on climate change becomes clearer.

This, and other types of directors’ duties claims, such as conflicts of interests or negligence, can involve cross-border and joint venture elements, adding to the complexity of the matter.

If you are facing a regulatory or criminal investigation or prosecution, seek experienced legal advice immediately.

To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: The points in this article reflect the law in place at the time of writing, 19 January 2024. This article does not constitute legal advice. For further information, please contact our London office.