Directors: Disputes & Duties

Directors Disputes In Cornwall.

Disputes between directors or disputes between the directors and shareholders give rise to a mix of legal rights and remedies arising from the different positions the director may have i.e in addition to being a director, he may also be a shareholder and an employee.

An overall strategy should be put into place to deal with all three as quickly as possible.

Removing a director from the board is not difficult providing the correct process has been undertaken and there is a requisite majority of shareholders who agree that the delinquent director should be removed.

Many directors will not simply resign if they are also shareholders and feel that if they cannot continue to be on the board their interests as shareholders may be prejudiced.

To force a director from the board it is necessary to call a shareholders meeting. It is the decision of the members not the board whether someone continues to serve as a director.

Notice of the meeting must be given to all members and the director who it is desired to remove from the board. The notice must clearly state that it is proposed to pass a resolution to remove the director in question.

Any shareholder or group of shareholders with greater than 10% of the issued share capital can usually require the company to call a meeting and 21 days’ notice of the meeting is required.

For most the resolution can only be passed if it is carried by members having more than 50% of the issued share capital in the company.

If the director has been removed from the board, but he may still be an employee and may still hold shares in the company.

As an employee the director has all the employment rights and protection that any other employee would have. As a senior person he may also have enhanced rights embedded in his service contract. He cannot be sacked as an employee without the company facing potentially substantial claims for wrongful and unfair dismissal.

If the director has done something that would entitle the company to dismiss the director, the company’s disciplinary procedure must be followed.

Suspension on full pay pending investigation.

Disciplinary hearing

Sanction. This may include dismissal.

Appeal.

Getting the process wrong will be costly to the company in terms of claims for unfair dismissal or wrongful dismissal, but may also give the director ground to launch a claim as an unfairly prejudiced shareholder under section 994 of the Companies Act 2006.

Though he may have been removed from the board and had his contract of employment brought to an end, the director will still have his shares so the director will have separate rights and causes of action simply for being a shareholder.

Unless there is provision in a service contract or shareholders agreement dealing with what should happen to someone’s shares when he or she leaves the company, it is not possible to force the shares to be relinquished.

Shareholders agreement or service contract may have a bad leavers provision that could entitle the company to cancel the shares.

In the absence of any contractual provision, getting the leaving director’s shares back will be a question of doing a deal.

Directors Duties

Since the Companies Act 2006 the duties that the directors owe to a company, its creditors and its shareholders are set out in sections 171 – 177 of the Companies Act 2006.

Directors duties include:

  • To act within the constitution and powers of the company
  • To promote the success of the company
  • To execute judgment, skill care and diligence
  • To avoid conflicts of interest
  • Not to accept benefits from third parties at the expense of or to the detriment of the company
  • A duty to declare an interest in a transaction or arrangement.

The interests of creditors and shareholders are paramount and every decision that the Board makes must be made with the interests of the creditors and shareholders in mind.

One of the key duties is the requirement to constantly review the financial viability of the company.

Breaches of these duties may lead to a director having a personal liability to the company which may be pursued through a derivative action, or may provide grounds for a claim of unfair prejudice by shareholders under section 994 of the Companies Act 2006.

It will be implied (if not expressly provided for) into a director’s service contract or contract of employment that he will comply with his statutory duties as a director.

Not to do so could result in a disciplinary process against the offending director giving rise to the termination of his employment with his company and steps may be taken by the shareholders to remove the offending director from the Board.

If the company becoming insolvent, the Liquidator must consider whether the actions of the board of directors contributed to the failure of the company and whether to pursue the directors personally for wrongful trading for an order for disqualification under the Directors Disqualification Act 1986 a major consideration is whether the board had regard to their duties as directors.

If you need to discuss these or like issues then please call on 01872 302342 or email inof@lawincornwall.co.uk and we will call you.