Breach of Directors Duties: An Overview of Derivative Claims

Many people when setting up a company, do not realise that they are under certain obligations as to how to behave and act in relation to the management of private limited company. Furthermore, if a director has been found to be acting against the shareholders and/or the company, under certain circumstances it will be possible to 'pierce the corporate veil' and bring those directors' personally to account for their actions.

What are directors duties? The Companies Act 2006 imposes a number of general duties upon the directors of a company. These duties are imposed on any person occupying the position of director by whatever name called, including de facto directors and shadow directors, and may still be owed to the company following a directors resignation or termination.

The duties are owed by the director to the company. Resultantly, any breach of duties may lead to the company bringing legal action against one of its own directors.

What duties do directors owe? There are several duties contained within Chapter 2 of the Companies Act 2006. The ones which are encountered the most during the course of litigation are:

Acting in the company's best interests;

1. The duty to promote the success of the company;

2. The duty to exercise reasonable care, skill and diligence; and

3. The duty to declare an interest in a proposed transaction or arrangements.

4. When any of the above are breached, the director can be held personally liable for any loss suffered to the company, which is when a derivative action should be presented.

It is essential to note that directors are accountable to the shareholders of a company.

Derivative Action A derivative action (also known as a derivative claim), is typically presented by the shareholders of a company on the company's behalf. A derivative claim may only be brought where the company suffers loss as a result of a director's:

• Negligence;

• Default;

• Breach of duty; and/or

• Breach of trust.

There are, however, procedural obstacles in bringing a derivative claim. Under s 263 of the Companies Act 2006, the court must refuse permission to bring a derivative claim if it is satisfied that either:

1. A person acting in accordance with the general duty to promote the success of the company would not seek to continue the claim; or

2. The act or omission giving rise to the derivative action has been authorised or ratified by the company.

If a shareholder can overcome these hurdles then they can pursue a derivative action on behalf of the company and a wide range of remedies will be available

Remedies of a derivative action. The remedies available to a company under a derivative claim are the same as those which are attainable in an ordinary civil action, including:

1. An injunction preventing prospective or further breaches;

2. Setting aside a particular transaction;

3. An order for restitution or requiring the director to account for any profits they have made;

4. Restoration of company property held by the director; and

5. Damages for any losses the company has sustained.

The breach of duty may also lead to a person being disqualified as a director under the Company Directors Disqualification Act 1986 and/or result in imprisonment

If a duty is breached, will a director always be personally liable? A director who has breached one of the duties owed to the company may be able to get relief from liability in limited circumstances, including ratification or relief from the court.

Shareholders of a company can ratify the conduct of a director that amounts to negligence, default, breach of duty or breach of trust if 50% of the members vote in favour of it. This has the effect of rectifying the misconduct of a director so that there are no grounds for bringing a derivative claim in the future.

Alternatively, a director may apply to the court for an application for relief, if they anticipate that a claim will be made against them for a breach of duty. The court may relieve the director from liability where it is satisfied that the director involved acted honestly, reasonably and having regard to all the circumstances of the case, they ought fairly to be excused.

It is not always easy to identify whether a director has breached one of the duties under the Companies Act 2006, and it is not a straightforward to bring or defend a derivative action brought on behalf of the company.

Derivative claim A derivative claim is legal action brought in relation to a company director for a breach of duty, usually by shareholders. It may be brought if the director is believed to be negligent or has breached duty or trust.