Breach of Director Duties – Know Your Responsibilities

13th March 2025 | Georgina Whitton, Chartered Legal Executive

What are the duties of a Director and what happens if they are breached?

Overview of Director Duties Under the Companies Act 2006

Company directors have several duties imposed on them under the Companies Act 2006 (the “Act”). Failure to carry out these duties can result in significant penalties, including personal liability for any losses suffered by the company, its shareholders, and its creditors.

The Act provides general duties that a director must follow. This article outlines these obligations and the consequences of breaching them.

Key Director Responsibilities

Acting Within Their Powers: Directors are granted discretion to manage the company but must operate within the powers given to them by the company’s constitution, primarily the Articles of Association. They must act in the company’s best interests and not for personal gain.

Promoting the Success of the Company: Directors must consider whether their actions will promote the company’s success and benefit shareholders and stakeholders. The Act outlines six key elements directors must consider, including employee interests, long-term business consequences, and relationships with suppliers and customers.

If a company’s solvency is uncertain, directors must prioritize the interests of creditors over shareholders. Directors drawing funds through dividends or loans must ensure the company remains financially stable, or they could face personal liability.

Exercising Independent Judgment: Directors must make decisions independently without undue influence from shareholders or external parties. They cannot delegate decision-making power unless they retain the ability to revoke it.

Avoiding Conflicts of Interest: Directors must avoid both direct and potential conflicts of interest. This includes using company information for personal gain. Exceptions exist if conflicts are properly disclosed and authorized under the Articles of Association.

Not Accepting Benefits from Third Parties: Directors cannot accept gifts or benefits from third parties if it relates to their position in the company. If there is any doubt about whether a gift creates a conflict of interest, directors should proceed with caution.

Declaring Interests in Company Transactions: Directors must disclose any personal interest in company transactions before they take place, such as having a stake in another business involved in the deal.

Consequences of Breaching Director Duties

Removal from Office: A director can be removed by a shareholder vote if more than 50% of shareholders support their removal. The removal can be temporary or permanent depending on the severity of the breach.

Restitution of Profits: If a director profits from breaching their duties, a court may order them to return these profits to the company.

Setting Aside Transactions: A court can void a transaction or contract entered into by a director in breach of their duties.

Injunctions and Legal Actions: Courts can issue injunctions to prevent a director from continuing a breach. Directors may also be ordered to return company property or pay damages if their actions cause financial loss. In severe cases, directors may face criminal fines.

Directors’ Responsibilities in Insolvency

Shift in Duty to Creditors: When a company is insolvent or at risk, directors must prioritize creditors’ interests over the company’s success. Failing to do so can lead to personal liability.

Wrongful Trading: A director may be personally liable if they knew or should have known that the company had no reasonable chance of avoiding insolvency but continued trading without taking steps to minimize losses to creditors.

Fraudulent Trading: If a director intentionally defrauds creditors, they may face personal liability and potential criminal charges.

Misfeasance: Misuse of company funds or wrongful exercise of authority can result in a court order requiring directors to repay or contribute funds to the company’s assets.

Can a Company Indemnify a Director?

A company may provide indemnity for directors in certain legal proceedings but is not obligated to do so. Indemnities do not cover:

• Unsuccessful criminal defense cases
• Fines imposed by regulatory bodies

Many companies take out insurance for directors, but policies often exclude fraud, dishonesty, and criminal acts. Directors should regularly review their insurance coverage to ensure adequate protection.

Seeking Legal Advice

Directors may inadvertently breach duties due to the complexity of the law. If in doubt, they should seek professional legal advice to ensure compliance with the Act and mitigate personal liability risks.

If you need legal advice or assistance, please contact our Litigation & Disputes Team. You can reach us at 01752 388883 or email us at info@brightllp.co.uk.