The Companies Act 2006 (“the 2006 Act”) codified many of the existing ‘common law’ and fiduciary duties of company directors. These duties apply to executive, non-executive and shadow directors. Below is an example of how these duties under the 2006 Act apply.
Mr B is a director (and shareholder) of XYZ Ltd. XYZ Ltd has two other shareholders and directors, Mr D and Mr E. Mr D and Mr E are old friends with Mr B and appointed him as a director. To begin with all goes well, but, after 18 months, Mr B stops putting in any effort and begins to fail to attend the office or meetings (including board meetings). Things deteriorate further and Mr D and Mr E discover, among other things, that Mr B has set up his own company and is diverting business opportunities that could be very appropriate for XYZ Ltd. to his new company.
Under the 2006 Act, as a director of XYZ Ltd, Mr B has a number of general duties:
From the limited information given above, Mr B could well be in breach of several of these general duties by setting up a competing company and directing clients away from XYZ Ltd.
By doing these things, Mr B is almost certainly failing to promote the success of XYZ Ltd. Six factors underpin this duty and a director is required to have regard to all of these:
Mr B is also in breach of his duty to avoid a conflict of interest. A director must avoid a situation in which he or she: "has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the company’s interests." This is very broad and covers both actual and potential conflicts and direct and indirect interests. It applies both to a conflict of interest and a conflict of duty, so it may catch Mr B as he:
The consequences of a breach of the 2006 Act duties are the same as for breach of the corresponding common law or fiduciary duties.
Action by XYZ Ltd
The duties are owed to XYZ Ltd and only XYZ Ltd will be able to enforce them, although in certain circumstances shareholders can bring a “derivative action” on behalf of a company. Such an action may be brought in respect of negligence, default, breach of duty or breach of trust by a director of a company. This means that a derivative action may be brought in respect of alleged breach of any of the 2006 Act general duties of directors.
Whatever the circumstances, shareholders always have the right to remove a director by shareholder resolution. That right is enshrined in statute and cannot be taken away by a company’s articles. However, the director’s employment rights will, be unaffected by the shareholder vote – so he or she may still have a claim for wrongful and/or unfair dismissal.