Claims against directors

Directors carry the risk of personal claims, arising in many different ways such as from  creditors, shareholders and increasingly the Insolvency Service.  We advise and represent directors at investigations, in civil claims, at creditors meetings and before the Insolvency Service.  We are as familiar in bringing claims as we are in defending claims.

We quickly assess and advise on whether a director is acting outside of his or her powers or is in breach of fiduciary duties and are skilled in advising directors who believe there is a campaign to oust them.

Please do call us to discuss your position.  We do provide initial scopes and fee estimates.

Common types of claims against company directors

There are a wide range of potential disputes which directors need to be aware of. Liability can arise from claims including :-

• Claims based on negligence such as negligent misrepresentation
• Insolvency related claims (see below)
• Claims made by shareholders against directors such as unfair prejudice
• Breaches of fiduciary duty
• Claims which may involve criminal as well as civil liability, such as fraud, misappropriation of company assets, bribery or misfeasance.
• Claims made by the Insolvency Service such as director disqualification.
• Claims arising from company loans to a director from the company or for repayment of overpaid dividends.
• Claims where the director may be personally liable if they have given personal guarantees for the company’s borrowing or where directors have allowed the company to trade when insolvent.

Breach of directors powers

Generally speaking under most company’s articles of association the directors are given day to day control and management of the company. This can be limited and in smaller companies where the directors are typically also the main shareholders, powers may be limited in a shareholder agreement.

The specific powers a director has vary from company to company often as established by the Company’s articles of association or director service contract. In some situations directors act beyond their powers or outside of agreed powers. Situations can include :-

• Loans being made to directors;
• Issuing new shares in the company;
• Company directors awarding themselves fixed term contracts of over 2 years or excessive remuneration;

Consequently, if a director has acted outside of his or her powers, legal action can be taken. If you need advice in this area, please do give us a call. We can also advise on practical ways to limit directors powers to provide clarity and to reduce the likelihood of having to make a claim as a shareholder in the future.

Claims for breach of director duties

Every company director owes fiduciary duties to the company and it’s shareholders. These include not making a secret profit, acting in good faith, avoiding a conflict of interest and others. For more on fiduciary duties see here.

Claims against the directors on insolvency

Where a company is insolvent, the directors duties shifts from acting in the interests of the shareholders to acting in the interests of the creditors, with a view to minimising losses. However, it is not clear when exactly this duty shifts across to the creditors during ‘the twilight zone’ before insolvency. The shift does not depend on a snapshot of the company’s financial position but rather the directors rational expectations of what the future may hold.

As soon as a director becomes aware that a company is approaching financial difficulty they should take steps. This applies collectively as a board and on an individual level.

Failure to act appropriapately on company insolvency can lead to risks of claims being made by the Insolvency Practitioner appointed and possible personal liability for directors including liability for :-

• Fraudulent trading – arises when directors of a company allows it to incur debt when they know there is no good reason for thinking that funds will be available to repay the amount owed when it becomes due or shortly afterwards. This is a criminal offence which can strike if the director ought to have known about fraudulent trading.
• Wrongful trading – where a director ought to have known that there was no reasonable prospect that the company would avoid going insolvent and thereafter the director failed to take every step he ought to have taken, with a view to minimising creditors losses. Unlike fraudulent trading, it is not necessary to show intent.  Directors may be liable to contribute to the company’s assets. This also applies to shadow directors and sometimes non-executive directors.
• Director disqualification – If a director or former director of an insolvent company is found to have engaged in conduct which makes him unfit to be concerned in the management of a company, the court can order that he be disqualified from being a director for between two and fifteen years.

We can help if you are a company director worried about or facing any type of legal claim against you or you want advice on suing a director personally or you have reasons to believe a director is breach of fiduciary duties. Get in touch.