Company Director Disputes

The general duties are codified in sections 171 to 177 of the Companies Act 2006: to act within powers, to promote the success of the company, to exercise independent judgment, to exercise reasonable care, skill and diligence, to avoid conflicts of interest, not to accept benefits from third parties, and to declare interests in proposed transactions. The duties are owed to the company itself, and on insolvency the interests of creditors come to the fore. Breach exposes a director to personal claims for compensation and to account for profits.

Under section 168 of the Companies Act 2006, shareholders may remove a director by ordinary resolution following special notice, whatever the articles or any agreement say. In practice the position is more complicated: the articles may contain weighted voting rights that allow the director to defeat the resolution, removal may breach a shareholders agreement or service agreement giving rise to claims, and removing a director who is also a shareholder can found an unfair prejudice petition. Removal should be planned, not improvised.

A director is personally liable to compensate the company for loss caused by breach of duty and to account for profits made from a conflict. After insolvency, a liquidator can pursue claims for wrongful trading, misfeasance and transactions at undervalue or preferences, and the Insolvency Service can seek disqualification. Directors are not liable for honest commercial misjudgement: the standard is that of a reasonably diligent person with the knowledge, skill and experience both objectively expected of the role and actually possessed.

Not while in office. The duty to avoid conflicts of interest prevents a director from diverting the company’s business, opportunities, staff or confidential information to a competing venture, and the duty continues after departure in respect of opportunities learned of while a director. A director who has competed can be required to account for the profits made and to compensate the company. Well drafted service agreements add restrictive covenants that extend the protection after exit.

Start with the documents: articles and shareholders agreements often contain casting votes, deadlock resolution or buyout provisions. Where they do not, mediation is frequently effective, and the structural solutions include one side buying the other out. As a last resort, a shareholder may petition for unfair prejudice or to wind the company up on just and equitable grounds, for which deadlock in a two person company is a recognised basis. The credible threat of those remedies is usually what unlocks the negotiation.

You have two overlapping sets of rights. As a director you may have claims arising from your service agreement and the manner of your removal. As a shareholder, exclusion from management in a company built on mutual trust is the classic foundation for an unfair prejudice petition, with a buyout of your shares at fair value the usual outcome. The strongest strategies deal with the board seat, the employment and the shares together rather than fighting three separate battles.

The standard limitation period for breach of duty claims is six years (under the Limitation Act 1980), but it does not run where a director has fraudulently concealed the breach, and no period applies to claims to recover company property in the hands of a dishonest fiduciary. Insolvency claims have their own time limits running from the onset of the insolvency process. It is critical to seek legal advice promptly, because evidence and remedies both degrade with delay.