Contact: Phillipa Hobbins; Clarkslegal LLP (Reading, England)
The Companies Act 2006 (“the 2006 Act”) codified the existing ‘common law’ rules and equitable principles relating to the responsibilities a company director has to the company and shareholders. These duties apply to executive, non-executive and shadow directors.
Continuing on from our last scenario in the article Shareholders’ Agreements, could Mr B be in breach of his Directors’ duties and what action could be taken? Mr B is a director (and shareholder) of XYZ Ltd.
XYZ Ltd has two other shareholders and directors, Mr D and Mr E. Mr D and Mr E are old friends with Mr B and brought him on board as a director to help drive XYZ Ltd forward. To begin with all goes well, however after 18 months Mr B stops putting in the effort and begins to not turn up to the office or meetings (including board meetings). Things deteriorate further and Mr D and Mr E discover, among other things, that he has set up his own company and is diverting very good business opportunities to his new company.
Action
Under the 2006 Act, as a director of XYZ Ltd, Mr B is under a duty to:
- Act within his powers, to act in accordance with XYZ Ltd’s constitution and only exercise his powers for their proper purpose
- Promote the success of XYZ Ltd (act in the way considered, in good faith, would be most likely to promote the success of XYZ Ltd for the benefit of the shareholders as a whole)
- Exercise independent judgment
- Aconflicts of interest
- Declare interests in proposed transactions or arrangements with XYZ Ltd
From the limited information given Mr B could be in breach of his Directors’ duties by setting up a competing company and directing clients away from XYZ Ltd.
By setting up a new company in direct competition with XYZ Ltd and directing clients away from XYZ Ltd, Mr B is in breach of promoting the success of XYZ Ltd. To fulfill your duty to promote the success of XYZ Ltd, the 2006 Act requires directors, in reaching their decisions, to have regard to six factors that demonstrate what the government has called ‘responsible business behavior’. The six factors are:
- The likely long-term consequences of any decision
- The interests of employees
- The need to foster business relationships with suppliers, customers and others
- The impact of XYZ Ltd’s operations on the community and the environment
- The desirability of maintaining a reputation for high standards of business conduct
- The need to act fairly between members
Mr B is also in breach of his duty to avoid conflict. A director must avoid a situation in which he or she: "has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of XYZ Ltd." This is very broad and covers both actual and potential conflicts and direct and indirect interests. It applies both to a conflict of interest and a conflict of duty, so it may catch Mr B as he has:
- An interest in a commercial opportunity that could also be exploited by XYZ Ltd
- Is using, for his own purpose, information belonging to XYZ Ltd
The consequences of a breach of the new duties are the same as for breach of the corresponding common law or fiduciary duties.
Action by XYZ Ltd
The duties are owed to XYZ Ltd and only XYZ Ltd will be able to enforce them, although in certain circumstances the shareholders could bring a derivative action on behalf of XYZ Ltd. A derivative claim is bought by a shareholder of XYZ Ltd seeking relief on behalf of XYZ Ltd. Such an action may be brought in respect of negligence, default, breach of duty or breach of trust by a director of XYZ Ltd.
The effect of this is that a derivative claim may be brought in respect of an alleged breach of any of the general duties of directors.
Dismissal
Whatever the circumstances shareholders always have the right to remove a director by resolution. That right is enshrined in statute and cannot be taken away by a company’s articles. However, the director’s employment rights will, be unaffected by the shareholder vote.
Please note: This is a limited examination of Directors’ duties and Mr B may well be in breach of other Directors duties.
