Disputes between the company and a third party such as a supplier are commonly damaging to the company and those that are involved with them. However, Disputes in the boardroom between directors or between individual shareholders can leave devastation and have a long-lasting impact upon the company as a whole if not dealt with correctly.
Generally, over recent years, we have seen a shift in the weight of duties and regulations attached to directors with more and more responsibility and emphasis being placed on individual responsibility. It is advisable to refresh yourself and the others on the board of what is involved in terms of directors’ duties. In brief terms, as a director, you should always be aware of your duties and, in particular, your fiduciary duties. Don’t forgot to review the company’s articles and the director’s employment contract. Failure to comply with these could see you removed as a director of the company.
The most common fiduciary duties (which can be found in the Companies Act 2006) are:
- To act in good faith in the best interest of the company
- To act for proper purposes
- Not to make secret profits
- To avoid conflicts of interest
Differences of opinion and debates between directors, even the ones that get heated, are bound to happen from time to time. The issue arises when it prevents the company being properly run or causes deadlock. This is different from a shareholder’s dispute that can arise when a shareholder holds a difference of opinion on the direction of the company. For the purpose of this blog we are simply considering the issues that arise in a dispute between directors. In all of this, it is important to remember that, in some instances, removal of a director is good governance of the company
So how does it go wrong? Surely a director cannot simply be removed from their position?
A dispute can arise for a number of reasons, for instance disagreements over the company, personality clashes, conflict of interest, and lack of performance are just a few. In some instances, a director may decide to pay themselves high salaries, or keeping money in the company (for a rainy day), which can lead to disputes with the shareholders, because shareholders feel it should be paid out as dividend. The point is you may feel you have not done anything wrong for example, keeping the money in the company, but unless the “grievance “is addressed early and resolved quickly, it can, and will likely, raise its head as a dispute which eventually will need to be dealt with. Understanding each party’s rights from those of the shareholders to directors is paramount in understanding how to deal with the issue/dispute and resolving the same very quickly.
Ensuring you have acted correctly.
Key questions to ask yourself a director:
- Decision making at board level. Who has to attend in order to make a decision? The majority on the board could force through any decision that is made at board level (provided they turn up to board meetings).
- Have you acted properly as a director? Examples where this might not be the case include where:
- you use company property for personal use
- you divert a contract from your company, without approval of the shareholders or of the independent directors on the board because it benefits you in another company.
- you lack the expertise for that specific role such as finance director and fail to maintain the information required for the performance of the business.
- you breach the company’s articles
What if the board hasn’t acted correctly?
It is important to understand that it is possible for either a fellow director, shareholder or non- executive director can apply to the court for permission to bring an action on behalf of the company a 'derivative' action. So as a director you can be open to anyone who has an interest in the company bringing an action.
Am I my fellow director’s guardian?
Well, sort of. In general terms, you are not liable for the actions of other directors if you didn't know about them and took no part in them. However, you should be aware that if you ought to have known or turned a blind eye, this is not enough to protect you.
Directors must keep themselves informed about the business, and participate in its management, which means they should not sit by and let other director’s act without being prepared to challenge them.
Likewise, resigning as a director is not enough to protect you: you might still face action against you if, for example, the company subsequently became insolvent.
As you can see, the life and role of a director can be complex. The way to ensure the company is run smoothly is to know and understand your responsibilities and deal with issues quickly by seeking legal advice. Remember that the company’s legal advisors may not be able to advise you as a director due to a conflict of interest.
If you want to know about directors’ duties, board disputes, or director disputes please contact: