Director Disputes FAQs

Please note that the questions and answers on this page are for general information only and must not be used as a substitute for legal advice. You should always take legal advice which is tailored to your specific circumstances.

What should I do if my personal interest(s) conflict with the interest(s) of the company?

As a director you need to be aware that you must declare any potential conflict of interest and ensure you have recorded having done so. Section 175 of the Companies Act 2006 places a clear duty on directors to avoid a situation where he/she has or can have a direct or indirect interest that conflicts, or may conflict, with the interest of the company. Advice on whether a situation may amount to a potential conflict should be sought as soon as possible.

 

How can the company continue to do business if the board of directors is deadlocked?

Deadlock often occurs in smaller companies, particularly those with only two directors (who may also be the only shareholders) who cannot agree upon how the company should be run, or if it should continue to do business at all. It is important to consider the company’s Articles of Association or whether a Shareholders Agreement is in place which addresses deadlock. If not, there are a range of potential solutions available depending on the particular circumstances. It is crucial to seek advice to minimise the impact deadlock on the board may have on the business of the company. It will be important to determine whether the relationships between board members have completely broken down and exits are contemplated, or whether there is scope for the board to work together to find a solution, such as by the appointment of a non-executive director or mediator to make necessary decisions on how the company should proceed.  

 

What happens when directors disagree on a decision?

If the majority of the board makes a decision which a director disagrees with then that director may need to seek advice on how to ensure swift resolution. Objections should be properly minuted and legal advice sought. If disagreements are serious, this may lead to a director calling a general meeting of the company or considering resignation and in both cases advice should be sought.

 

As a director, what can I do if a decision I disagree with has been taken at a meeting I didn't attend?

In general, company law does not entitle directors to notice of any board meetings (unless a board meeting is to discuss a person’s dismissal as a director). However, it is common for a company's Articles of Association to require that directors be given specific notice of the proposed date, time, and place of any board meetings and, sometimes, notice of the agenda items. It is important to note that notice of a board meeting need not, unless the Articles otherwise provide, specify the nature of the business to be transacted; even where you are entitled to notice of the meeting and its agenda, additional decisions could be taken under 'any other business'.

If your company’s Articles provide that directors must be given notice of board meetings and you were not given (appropriate) notice, then any decision taken at that meeting will be invalid. You should advise the rest of the board of this fact and suggest that a properly constituted board meeting be held. If they refuse, you could apply to the court for the decision to be declared invalid.

If the directors who made the decision were not in breach of the Articles, and did not act improperly in breach of their statutory duties, then the board decision will stand. This being the case, your only option would be to raise the issue, and make sure it is discussed and minuted at a subsequent board meeting.

 

How can the board of directors remove a director?

Generally, the power to remove a director from office belongs to the company’s shareholders, so the board cannot remove a director. Sections 168 and 169 of the Companies Act 2006 set out the statutory procedure by which shareholders can remove a director by passing an ordinary resolution (i.e. a resolution passed by more than 50% of the voting shareholders) at a general meeting of the company.

If the director is also an employee of the company, the board will need to ensure that the removal respects the relevant director’s employment rights, in particular his/her notice period under the employment contract or as specified by law, and his/her right not to be unfairly dismissed. If these rights are not respected, the director in question may be entitled to claim damages from the company.

 

How should the board of directors react to activist shareholders?

‘Activist shareholders’ are shareholders who use their shareholder rights proactively to put pressure on the board of directors to take certain actions. The power and influence of such activist shareholders will primarily depend upon the size of their shareholding, but it can be augmented by support from other shareholders and/or additional rights granted under a Shareholders’ Agreement or contained in the company’s Articles of Association.

Where possible directors and shareholders should attempt to resolve their differences through dialogue or some form of alternative dispute resolution process in the first instance. If a resolution cannot be found you should seek legal advice at an early stage to help you navigate your options.

 

My company is a ‘quasi-partnership’ and I am in dispute with my fellow shareholder-director, what should I do?

A ‘quasi partnership’ is a limited company established in the way that all limited companies are but has features which make it similar to a partnership:

  • a special relationship of good faith and mutual confidence between the shareholders,
  • an expectation that all or some of the shareholders will participate in the management of the business, and
  • restrictions on shareholders transferring their shares to outside parties.

Special rules apply to quasi partnerships within the scope of unfair prejudice petitions and shareholder remedies generally. It is therefore critical to establish whether you are a member of a quasi-partnership or not. Different rules also apply to the valuation of a party's shareholding in a quasi-partnership.

As a result, if a dispute between shareholders goes to court, the court may consider that the company operates like a partnership, and will more readily accept that its shareholders have rights and obligations which might not be set out in the company’s Articles of Association and/or any Shareholders’ Agreement.

Quasi-partnership disputes are often complex and given the nature of the relationship between the parties, can become heated and bitter. Where possible, quasi-partners should try to settle their differences through dialogue or some form of alternative dispute resolution process before initiating legal proceedings. If you cannot resolve your differences through dialogue, you should seek legal advice at the earliest opportunity.

 

I am a director of a company facing insolvency. What should I do?

Insolvency is a serious situation and directors can be held accountable for actions/inactions that took place a number of years before the company’s decline. If your business is currently struggling financially, or has already become insolvent, there are a number of implications for the directors.

As a company director you have certain duties and responsibilities in law. When a company appears to be approaching insolvency these include to place creditors’ interests before those of the company as a whole. Be open with creditors and attempt to gain their trust.

There is a thin line between the company experiencing on-going financial difficulties and being in an insolvent situation. Take professional advice from an Insolvency practitioner (IP) who will be able to guide you and help you avoid accusations of trading while insolvent.

Hold frequent board meetings to review the changing situation and monitor the company’s financial position. Keep a written note of all discussions, recording how and why decisions were made and the steps being taken to control the situation. Keep detailed and accurate financial records so that you can monitor the company’s financial position and, if necessary, to provide to the IP.

Do not incur further credit as this will worsen the position of the company’s creditors as a whole and could be viewed as acting in an improper manner. The value of the company’s assets must be protected, so make sure they are insured and secure. Directors who try to sell/dispose of/move company assets can face allegations of misconduct during an investigation by an IP.

As part of their duties IPs have a responsibility to investigate the behaviour of directors in the period preceding liquidation. They will be looking for evidence that the moment the directors recognised that the company was/was likely to be insolvent they placed the interests of creditors first and foremost.

 

I am a director of a company in liquidation. What duties do I owe to the company now?

When a company becomes insolvent, the directors of that company have a duty to place creditors’ interests before those of the company as a whole.

On a liquidation, the appointed insolvency practitioner takes over and all the powers of the directors cease (unless the creditors/liquidation committee sanction their continuance). You are no longer in control of the company. You have a duty to cooperate fully with the liquidator during the process. The liquidator will conduct an investigation as to why the business has failed and you have a duty to provide the liquidator with any books/records needed for the investigation and to attend an interview with and answer the questions of the liquidator. See our client case study relating to Section 236 interviews and document requests here.

 

What should I do if I think a fellow director is acting fraudulently/stealing from the company?

You need to act swiftly. Seek advice from a solicitor who is experienced in fraud and company matters. Steps that your solicitor will advise you on are likely to include:

  • Consider reporting the theft to the police and to the company’s insurers;
  • Consider your own duties as a director in this situation;
  • Consider how best to protect the company;
  • Consider forming a sub-committee of the board to deal with the situation;
  • Consider starting an investigation to see if you can find any evidence to support your suspicions;
  • Suspend any document destruction policies;
  • Check the company’s fraud and IT policies to check what you can legitimately do with regard to, for example, reviewing any of your co-director’s personal emails found on the company’s server;
  • If your co-director has stolen from the company’s bank account(s), contact the bank(s) and take steps to change the bank mandate(s)/cancel cards and cheque books;
  • Alert suppliers/customers not to deal with your co-director;
  • Arrange for a full image of your co-director’s email account/computer to be taken so that even if they delete any emails/documents you will hold a full image.

 

Does the board of directors have to act in accordance with a shareholder’s agreement if it conflicts with the company’s Articles of Association?

The Articles of Association is a formal constitutional document which, along with the Memorandum of Association, sets out the terms upon which the company will operate, and the respective rights and obligations of the company, its shareholders and directors. By contrast, the shareholders’ agreement is a private contract between shareholders setting out how they will conduct themselves as shareholders of the company and, crucially, the protection of shareholders. As such, unless the company itself is a party to the shareholders’ agreement, it is not necessarily bound by its contents.

Nevertheless, in circumstances where the provisions of a shareholders’ agreement conflict with those contained in the Articles of Association, then the shareholders’ agreement will often prevail. The courts often treat an agreement between the company’s shareholders as overriding its Articles, without the need for any further formality.

A common way to address the issue of conflict would be to include within the shareholders' agreement a provision stating that, as between the parties to it, in the event of a conflict between the two documents the provisions of the shareholders' agreement will prevail over the Articles of Association. This will usually be coupled with an obligation on the parties to exercise their powers to procure that the articles are amended to remove the conflict.

 

Who instructs the solicitor: the company or me?

The board of a company will need to instruct the solicitors if the company is the firm’s client, for example where the company is bringing a claim against a director for breach of duty.

If you are bringing or defending a claim as a director (and/or shareholder), then you will need to instruct the firm personally. Further, unless the Articles of Association or shareholders agreement provide otherwise, the director may not be entitled to use company funds to pay for his/her legal costs although the director should check to see if any directors and officers insurance policy taken out by the company might provide cover for their legal costs.

 

What fiduciary duties do directors have?

The duties of a director are owed to the company of which he/she is a director. Some of those duties apply even when the person ceases to be a director. A director’s fiduciary duties are codified in the Companies Act 2006 . A director must:

  • act within the powers conferred on you
  • promote the success of the company
  • exercise independent judgment
  • exercise reasonable skill, care and diligence
  • avoid conflicts of interest
  • not accept benefits from third parties
  • declare interests in transactions/arrangements with the company.

 

What are the consequences for a director in breach of their fiduciary duties?

The duties of a director are owed to the company of which he/she is a director. If a director breaches any of those duties it is the company which can take action against a director. The decision to start proceedings would be made by the board or, in an insolvency situation, a liquidator. In certain circumstances, an individual shareholder, or group of shareholders, can bring a claim on behalf of the company against a director for breach of duty (known as a derivative action).

The remedy sought depends on the breach but can include damages for loss of profit suffered by the company and recovery of profits earned by the director when acting in breach of duty.

 

As a director, what should I do if I feel that the board is acting improperly?

The most appropriate course will depend on the circumstances. If the error or omission is relatively minor, the most commercially sensible thing to do is to give the board and/or relevant director an opportunity to rectify the problem.

However, for more serious matters you should object to what is being done, ensure that there is written evidence of your objections and take legal advice on what should be done to protect you and the company.

 

Am I personally liable for improper or fraudulent conduct by my fellow directors?

You are not generally liable for the actions of other directors if you didn't know about them and took no part in their improper or fraudulent conduct. However, knowing but turning a blind eye is not enough to protect you.

Directors have statutory duties to keep themselves informed about what is going on in the business and to participate in its management. This means that they should not sit by and let other directors act without being prepared to challenge them, no matter how dominant those other directors are.

Likewise, resigning as a director is not enough to protect you as some directors' duties continue after resignation and if, for example, the company subsequently becomes insolvent, you might face action for your acts/omissions when you were a director.

 

Is the company liable for the fraudulent acts of a rogue director?

The law is complex around this subject and it will depend on the facts of each case. Knowledge can be imputed to the company in some circumstances where a member of the board is a directing mind and/or has a sufficient degree of control of the company affairs. Specialist legal advice should be obtained whenever there are allegations of fraud.

 

What should I do if I believe a fellow director is paying bribes to win business?

There are four offences under the Bribery Act 2010: (1) bribing another person, (2) receiving a bribe, (3) bribing a foreign public official and (4) failure by a commercial organisation to prevent bribery. A director who consents to or is involved in the commission by a company of offences (1)-(3) could be found personally liable for the offence.

If you suspect that other directors might be paying bribes to win business, you should take specialist legal advice as soon as possible.

Further information about how our Criminal Litigation team may be able to assist with matters relating to bribery and corruption is available here.

 

Skip to content Home About Us Insights Services Contact Accessibility