Directors owe a range of legal duties to the company as set out in The Companies Act 2006.
Amongst other things, those duties are to:
- Act within their powers
- Promote the success of the company
- Exercise independent judgment
- Exercise reasonable care, skill and diligence
- Avoid conflicts of interest
- Not accept benefits from third parties
- Declare interests in proposed transactions
Where a director breaches these duties, loss may be caused to the company, which in turn may cause a loss to the shareholders themselves. So, the question is then “can a shareholder make a claim against a director for any losses suffered as a result of a breach?”
As a director's duties are generally owed to the company rather than to individual shareholders, and the losses arising from any misconduct will ordinarily cause a loss directly to the company, it is usually the company that would bring any claim against the director. So, in most cases, a shareholder cannot make a claim against a director.
To address this issue, the Companies Act 2006 allows shareholders to bring a derivative claim on behalf of the company. The shareholders can pursue the offending director where there has been negligence, breach of duty, breach of trust or some other default on the director’s part. Any damages recovered are owed to the company rather than the shareholder.
Derivative claims are complex and due to the conflict that can arise between the directors and shareholders pursuing those claims, the court’s permission is required to bring a derivative action. In deciding whether to grant permission for the claim to proceed, the court will consider a range of different factors, with a focus on whether the claim appears to be in the company’s best interests and whether, in all the circumstances, an independent director would pursue the claim in the interest of the company.
Owner-managed businesses and unfair prejudice
In owner-managed businesses, where there may be a small number of shareholders, an unfair prejudice petition may often be a more appropriate remedy provided that the offending director is also a shareholder and their actions and/or omissions are unfairly prejudicial to another member.
Unfair prejudice petitions derive from Sections 994 and 995 of the Companies Act 2006. Section 994 permits a member of a company to petition for relief where the affairs of the company are being, or have been, conducted in a manner that is unfairly prejudicial to the interests of members generally, or some of its members in their capacity acting as member of the company. Common examples include:
- Excluding a shareholder from management – we see this often in practice and this is a common sign of unfair prejudice
- Misappropriation of company funds – director shareholders may use company funds to fund non-company business
- Excessive director remuneration
- Diverting business opportunities – for example to a company which is linked to a shareholder
- Failure to provide information about the company's affairs
To learn more about unfair prejudice claims, who can bring them see our earlier blog here.
The court has wide-ranging powers, including ordering the purchase of a shareholder's shares, often providing a practical exit route from an otherwise deadlocked business relationship. You can read more about the remedies available in Unfair Prejudice claims in our blog “Unfair Prejudice Petitions: what remedies are available?"
I think I may have a claim against a director, what should I do now?
Before pursuing a claim, shareholders should consider obtaining early legal advice to assess the evidence available, the likely costs involved and the most appropriate remedy and course of action. Derivate claims and claims for unfair prejudice are complex, so early advice can help determine the most effective course of action.
Whilst a shareholder cannot usually sue a director directly for losses suffered by the company, there are a number of powerful mechanisms available for shareholders to hold directors accountable and protect themselves and the company from misconduct. If you are considering making a claim against a director our commercial litigation team may be able to assist you, contact us today on 0161 696 6170.
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