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  • Claims against a Director for Breach of Duties

    Claims against a Director for Breach of Duties

    If a director breaches these duties, it may be possible for shareholders to bring a claim. Contact one of our solicitors.

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    What are the directors’ duties?

    The general duties of a company director are found in sections 171-177 of the Companies Act. They are:

    • A company director must act per the company’s constitution and only exercise their powers for the purposes for which they are given (section 171).
    • A company director must act in good faith and promote the success of the company for the benefit of its members (section 172 (1)).
    • A company director must exercise independent judgment. They may take on board the advice or opinion of others, the ultimate decision must be theirs (section 173).
    • A company director must exercise reasonable care, skill, and due diligence when undertaking their duties (section 174).
    • A company director must not place themselves in a position where there is a conflict, or possible conflict, between the duties they owe the company and either their personal interests or other duties owed to a third party (section 175).
    • A company director must not accept any benefits which are conferred on them due to their position as a company director (section 176).
    • If a company director has an interest in a proposed transaction or arrangement with the company this must be declared to any fellow directors (section 177).

    Examples of breach of directors’ duties cases

    • In 2019, ClientEarth sued, as a minority shareholder, Polish energy company Enea alleging that the company’s strategy to build a 1GW coal-fired power station in northeast Poland as part of a joint venture with another Polish energy firm, Energa posed an indefensible risk to investors in the face of rising prices for carbon and growing demand for renewables. Moving forward with the project would constitute a breach of the board of directors’ fiduciary duties of due diligence and acting in the best interests of the company and its shareholders.
    • In Fairford Water Ski Club v Cohoon [2021] EWCA Civ 143 the director of a company that owned a lake and surrounding land was ordered to repay £350,000 after failing to declare his interest in a water skiing school that operated on the lake at a particular directors’ meeting.

    Breach of directors duties penalties

    What can be imposed?

    There are several sanctions the court can make if a director is found to have breached their duties, including:

    • Damages – if the director has been negligent in performing their duties they may be required to pay damages to the company.
    • Injunctions – an injunction order can be made to prevent a director from conducting a breach or continuing to breach their duty.
    • Restoration of property and/or profits – the court can order a director to return property and/or repay any profits gained through the breach.
    • Reversing of a contract – if a director signs an agreement that goes against the company’s intentions it can be rescinded.

    Can the company ‘forgive’ a director for a breach of duty?

    Yes, section 239 regulates the company’s right to ratify (forgive) conduct by a director amounting to negligence, default, breach of duty, or breach of trust in relation to the company. The ratification decision must be made by resolution of the members and neither the director nor anyone connected with them can be part of the resolution.

    Most importantly, a breach of duty that results in a decision that threatens the solvency of the company or causes a loss to its creditors cannot be ratified.

    In cases of negligence, default, breach of duty, or breach of trust claims, the court can relieve a director of liability in whole or in part if:

    • They acted honestly and reasonably, and
    • Having regard to all the circumstances of the case, the court believes it is reasonable to excuse the director.

    Concluding comments on breaching directors duties

    Civil litigation in cases involving directors’ duties is a highly complex area of law and requires the involvement of commercial disputes solicitors.

    Take for example the Enea case mentioned above which concerned shareholders bringing a claim against the board for, in broad terms, failing to consider environmental and climate change matters in their decision making.
    These types of directors’ duties claims are guaranteed to rise as the science around the impact of company actions on climate change becomes clearer.

    This, and other types of directors’ duties claims, such as conflicts of interests or negligence, can involve cross-border and joint venture elements, adding to the complexity of the matter.

    If you are facing a regulatory or criminal investigation or prosecution, seek experienced legal advice immediately.

    To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

    Note: The points in this article reflect the law in place at the time of writing, 19 January 2024. This article does not constitute legal advice. For further information, please contact our London office.

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  • Practical Implications of the Supreme Court’s Decision in BTI v Sequana SA

    Practical Implications of the Supreme Court’s Decision in BTI v Sequana SA

    The Supreme Court has handed down its long-awaited judgment, which as Lord Reed noted, considered issues that go to the heart of our understanding of company law and are of considerable practical importance to the management of companies.

    Background to the Appeal

    In May 2009, the directors of a company called AWA caused it to distribute a dividend of €135 million to its only shareholder, Sequana SA (“Sequana”) extinguishing almost the whole of a larger debt Sequana owed to AWA. The dividend complied with the statutory scheme regulating the payment of dividends and with the common law rules. At the time the dividend was paid, AWA was solvent, however, it had a long-term contingent liability of an uncertain amount, which gave rise to a real risk, albeit not a probability, that AWA would become insolvent at an uncertain date in the future.

    This risk materialised ten years later, and AWA went into insolvent administration. The appellant, AWA’s assignee BTI 2014 LLC (“BTI”) sought to recover the dividend amount from AWA’s directors. BTI argued that the payment of the divided was in breach of their fiduciary duties because the directors had not considered or acted in the interests of AWA’s creditors. Both the High Court and Court of Appeal rejected the creditor duty claim. In the judgment of the Court of Appeal, it was held that the creditor duty did not arise until a company was actually insolvent, on the brink of insolvency, or probably headed for insolvency. BTI appealed to the Supreme Court.

    The Supreme Court’s Decision

    The judgment of the Supreme Court unanimously dismissing the appeal consists of four separate judgments, which consider at length the existence, content and engagement of the so-called “creditor duty”. Although the reasoning in each of the judgments vary, we have detailed below what can be considered as the key takeaways:

    • A creditor duty is owed by the directors of a company. The Supreme Court held that the creditor duty should be affirmed due to its existence being preserved by section 172(3) of the Companies Act (imposing a director’s duty to, in certain circumstances, consider or act in the interests of company creditors) and a long line of UK case law.
    • The interests of creditors are the interest of the company’s creditors as a whole. Once the creditor duty is engaged, directors should consider the interests of creditors whilst balancing them against the interests of shareholders where they conflict. However, where an insolvent liquidation or administration is inevitable, the creditors’ interests become paramount as the shareholders cease to retain any valuable interest in the company.
    • As to when the creditor duty will be triggered, the majority held that the creditor duty is engaged when the directors know, or ought to know, that the company is insolvent or bordering on insolvency, or that an insolvent liquidation is probable.
    • The creditor duty can apply to a decision by directors to pay a dividend which is otherwise lawful.

    The Practical Implications

    The Supreme Court has provided clarification that the creditor duty exists, however, the exact point at which this duty will be triggered is not as clear. Although the Supreme Court has held that the creditor duty is not triggered by a mere risk of insolvency which is neither probable or imminent, the exact point at which a real risk of insolvency becomes a probable one is unclear.

    The Supreme Court appears to have preferred a ‘sliding-scale’, with the priority given to the creditors’ interests increasing as the company’s financial difficulties become more serious until the point at which insolvency is inevitable meaning that the creditors’ interests become paramount. Whilst it is true that many companies who experience financial difficulties slowly slide into insolvency, this nuanced approach is difficult to apply in practice.

    Directors are therefore encouraged to take a cautious approach to the duties they owe to creditors particularly when considering the point at which the creditor duty is triggered.