Directors duties are owed primarily to the company and not shareholders.
Legal Advice on directors duties
We advise company directors unclear about their duties or where there are allegations of breach. We also advise shareholders and/or directors who believe a director is in breach of their duties and are considering action to remove the director. Where claims or disputes arise, our lawyers are experienced in advising any of the parties involved.
Legal duties of directors come from statutory sources, principally the Companies Acts but also other statutory duties such as Health & Safety. It's also very common for directors duties to be set out in a shareholder agreement, the company's articles of association and/or a director service agreement.
Director duties in shareholder agreement, company articles or director service agreement
The duties set out in the Companies Act (see below) are guiding principles. To avoid disputes over whether directors have breached duties, companies will often set out more clearly what is acceptable or unacceptable conduct from directors.As well as setting out clearly what will amount to breaches of duty, clear restrictions on powers and authority are a key protection. There are 3 main ways to do this :-
- by amending the company's articles
- where the directors are also shareholders, in a shareholders agreement
- in a directors service contract
A clear benefit of a shareholder agreement, where directors are also shareholders or where directors are made a party to the agreement is that the shareholders will be able to enforce any breach of duty by a director as a breach of contract.
Directors duties under the Companies Act
The Companies Act 2006 outlines the main statutory duties, which are summarised here. We are often contacted by shareholders, typically minority shareholders, who report that the directors are acting in a wholly inappropriate way only benefiting themselves and/or majority shareholders. It is often a surprise to shareholders when we advise that under statutory Company law and common law, almost all of the director duties are owed to the company not shareholders, which makes taking legal action against the directors difficult.
The main option available in this situation is to consider a derivative claim, which is a claim brought by the company against the directors and usually instigated by the shareholders. The process is complex and risky.
Shareholders should ensure that they are protected by enhancing the company's standard form articles and/or with a comprehensive shareholder agreement so that they have more options to take action against directors, such as to remove directors, reducing directors powers or enhancing the duties of the directors.
How can directors protect themselves?
Company directors should not only ensure that they comply with the general principles set out in the Companies Act. Risks for directors can arise where they become aware that a co-director is acting unlawfully and/or illegally. Risks also arise where a company is in financial difficulties, where personal liability for directors is possible if the company trades on when insolvent.
Some of the ways we assist directors who are concerned about their legal duties include :-
- ensuring that your role, duties, rights and responsibilities are very clear.
- what to do if you have legal concerns about activity of the company and how to resign, if necessary, whilst protecting your employment law and/or other rights.
- consider obtaining appropriate legal indemnities against liability from the company.
- ensuring you are properly and adequately covered under appropriate Directors & Officers Insurance.
For more information on how we can assist, please get in touch.