Consequences of breach of duty

What action can your company take if one of the directors acts in breach of duty? Use our summary table to weigh up the options.

Company’s options

The action your company takes to address a director’s wrongdoing largely depends on the seriousness of the breach and the desired outcome. For example, if you have found out that one of your directors has used company funds for their personal expenses, the company is likely to want the money repaid. If a director is using confidential information for unauthorised purposes, the company may want to apply to court for an injunction to stop the director from doing it again and to require them to return their laptop, keys etc. and not access the premises again. In any such situation, the company is likely to want to remove the director from office.

Equally, there will be situations in which a director has breached their duties, but the company views the breach as merely technical or accidental. The company may choose to overlook the breach or stand by the director’s actions.

Our summary sets out the various options available for different breaches of duty. Bear in mind that often the most effective solution will be simply to remove the director from office and deal with the breach as a disciplinary matter, unless it is particularly serious or complicated, or it affects third parties. When deciding what to do, the remaining directors must act within their duties and take appropriate action in the interests of the company. If they are too quick to excuse their colleague’s breach at the company’s expense, they can be held liable themselves and the shareholders could apply to court for permission to take court action on the company’s behalf (known as a derivative claim).

Defences

If formal action is taken against a director, they can avoid or minimise their personal liability in a number of ways:

• defend the action
• apply for statutory relief from liability, which is only granted if the court accepts that the director acted honestly and reasonably and should be excused from liability
• obtain the company’s support by ratifying their actions; or
• in the case of breaches of fiduciary duty, raise any equitable bars that apply. These can block an equitable claim on the basis that it is unfair, e.g. because the company played a part in the wrongdoing.

External investigation

Action for breach of duty can also arise out of insolvency proceedings, when the liquidator or other office holder dealing with the case investigates the directors’ conduct and takes action where necessary. This can also lead to disqualification proceedings, legal claims under insolvency legislation, e.g. for misfeasance, or even criminal prosecution, e.g. where fraud is uncovered.