When you trust someone to sit on your board of directors, you expect them to act in the best interests of your company. Situations, however, can arise through which a director breaches their duty and fails to fulfil their obligations to you. A director breach of duty can put your company, its shareholders, its performance, and its reputation at serious risk. It can be distressing when it happens, too, so we’ve written this blog to calmly and unemotionally guide you through the legalities of managing a director who isn’t playing by the rules.
As with all our blogs, the content is for general information only and does not constitute formal legal advice. If you require tailored support, the Jamieson Law team are, of course, ideally placed to help. Addressing the issue of an unruly director begins with knowing what to look out for, understanding your rights and taking the required steps to protect your business.
Director Misconduct & UK Law
If you find yourself wondering how to address director misconduct in a private company, the answer likely lies in the Companies Act 2006. This legislation is the primary source of company law in the UK and, at the time, represented the most substantial overhaul of UK company legislation in over a century. It consolidated and replaced much of the Companies Act 1985 and related statutes, introducing clearer director fiduciary duties, improved shareholder rights, and streamlined administration.
The Act requires directors to always act in a company’s best interests and refrain from engaging in unfair or corrupt activities. Under the act, a director’s breach of duty can have serious consequences, both for the individual director and the company itself.
The Act specifies that board directors must follow a company’s Articles of Association and exercise powers as outlined within them. It is essential, therefore, that a company’s Articles of Association accurately define director responsibilities. Outdated or unclear Articles are clearly not helpful. They should be regularly reviewed and updated as your business evolves.
The Act makes it clear that directors must always act in a way they consider, in good faith, to promote the success of their company for the benefit of its members as a whole. Directors who work against a company’s best interests are explicitly breaking the law. Directors must also show independence. Following the wishes of others or allowing external pressures to dictate their decisions is prohibited by the Act. Directors are expected to demonstrate the general knowledge and skills reasonably expected of someone in their role. They are expected to demonstrate due care and diligence as they do so.
The Act stipulates that directors must avoid interests that conflict with their company. The Act also limits the benefits directors can realise from third parties based on their role and forces them to declare interests in all transactions and arrangements involving the company. Transparency and fairness are enshrined in law.
Any failure of director duty to shareholders or director misconduct, UK law says, can lead to personal liability, director disqualification, costly compensation claims, and broader corporate governance issues.
Warning Signs a Director May Be Acting In Bad Faith
Spotting misconduct by a director isn’t always straightforward. Often, it starts with subtle shifts in behaviour that can quickly escalate. Recognising these early warning signs can avert significant financial or reputational damage. We have described some behavioural red flags below that may indicate a director is acting in bad faith or otherwise failing to uphold their duties.
Withholding information
Directors are expected to operate transparently with their fellow board members by law. If a director regularly declines to share updates, avoids circulating reports, or dismisses reasonable requests for information, you may wish to question their intentions. An unwillingness to provide clarity on company decisions, finances or performance is a sign that something may be amiss.
Bypassing Processes
All board members have a duty to work collectively. Individuals making unilateral decisions, signing contracts without authorisation, or ignoring agreed internal policies may be breaching their duties. It pays to investigate such behaviour, as it is an indicator of poor governance, which can lead to significant problems as a company develops.
Favouring Personal Relationships
If a director starts recommending deals, suppliers or hires tied to their personal network without clear justification or proper declaration, this could indicate a director conflict of interest. Patterns such as awarding repeat contracts to particular companies or hiring without board discussion should raise questions.
Financial Concerns
Red flags often come to light through financial reporting. Unusual payments, disproportionate expense claims, and moving company funds without a clear rationale are all worthy of further investigation. An act doesn’t have to be explicitly illegal or fraudulent to be problematic. You just need to consider a move isn’t in the wider business’s interests to query it. If challenged, evasive responses are often a sign that the director may be failing in their duty.
Defensiveness & Hostility
Directors acting in bad faith often react poorly to scrutiny. They may become unusually defensive or attempt to shut down discussion should another board member ask for information or clarification. A director who tries to exclude others from key meetings or withholds important financial or operational data could be making decisions that serve their own interests rather than those of the company.
Prioritising Short-term Gains
It is always worth keeping an eye out for directors pushing through transactions that offer immediate benefits but expose a company to longer-term or greater risks. Selling company assets below their value, for example, or taking on debt that jeopardises stability may constitute a breach of duty.
Misusing Information
Sharing company data without due care and attention is generally considered a breach of directors’ duties. Data protection laws further protect the personal data of customers and colleagues, but sharing any kind of sensitive information without consent may be a sign that a director is prioritising a personal agenda ahead of their duty to protect your company’s interests.
Inconsistency
Any inconsistencies in reporting to the board require careful consideration. Even if there is no clear, blatant deception, the inability to present a coherent justification for decisions may be an indication that all is not as it seems, and a director might not be performing as you would wish them to.
Being alert to these behavioural signs is essential. While not every instance necessarily indicates deliberate misconduct, repeated or escalating patterns should prompt an internal review at the very least. Spotting problems early means the board can address concerns before they escalate.
If you’ve noticed any of these warning signs, it’s prudent to seek professional legal advice to protect both the company and the interests of its shareholders. The Jamieson Law team can help you evaluate the situation and chart the right course forward.
Next Steps for Shareholders
Boards and shareholders can, of course, feel unsettled by a director’s breach of duty. It’s a natural response to feel a range of emotions, almost all of them negative. It’s vital, however, to understand how to deal with director misconduct in a private company coolly and calmly. It’s essential to handle concerns clearly with minimal delay, too. Questioning things that appear at odds with the company’s best interests is the board’s right and responsibility, and so there should be no hesitation in discussing the matter internally.
Internal discussions normally involve adding an agenda for a board meeting, ensuring the issue is adequately documented. In many cases, problems arise due to poor communication rather than intentional actions. This means that issues can be, and often are, resolved through open and frank dialogue between the parties involved.
However, if informal discussions fail to allay concerns, the board may decide to initiate a structured investigation. It is wise at this stage to consult the company’s Articles of Association and Shareholder Agreements, which ought to specify how disputes are to be handled. Any investigation that follows may involve external auditors or legal advisers to assist. It pays to be thorough.
Throughout this process, maintaining clear and accurate records is crucial. Detailed board minutes and formal correspondence will protect the company and ensure that, if matters escalate, there is a documented history of attempts to address the concerns in a timely and appropriate manner. This also demonstrates that directors are meeting their duties by taking potential breaches or a director conflict of interest seriously.
Removal of a Company Director
Despite the best of intentions, not every situation can be resolved. In extreme cases, where trust has completely broken down, shareholders and the board may need to remove a director.
Under the Companies Act 2006, shareholders can usually pass a resolution to remove a director at a general meeting. However, this is not always as simple as calling a vote. Specific formalities apply, such as providing special notice of the resolution and notifying the director of their right to reply.
Additionally, it’s essential to consider the director’s contractual rights. Many directors also hold employment contracts or service agreements that provide for notice periods or severance terms. Dismissing a director without observing these could lead to claims for wrongful dismissal or breach of contract.
Due to the complexity and risks involved, including the possibility of unfair dismissal claims or allegations of oppressive conduct, it is strongly recommended that you seek specialist legal advice before deciding to remove a director. A qualified HR & Employment solicitor can guide you through the statutory process, help navigate any provisions in shareholder agreements that might affect the decision, and prepare the necessary formal notices and resolutions.
Removal of a company director is rarely a decision taken lightly. But when a director acts in bad faith or breaches their fiduciary duties, it may be essential to protect the company’s long-term interests, its shareholders, and its reputation in the marketplace.
What Should I Do If I Suspect A Director Breaches Their Duties?
What happens if a director breaches their duties? The answer will vary depending on your business, but a breach will almost certainly disrupt day-to-day operations, erode investor and employee confidence, and harm key relationships with customers and suppliers. In the most serious cases, it can expose the company to litigation. One fact is clear. Should there be a breach of trust or director fiduciary duties, the potential consequences for your business go beyond immediate losses.
If you spot the warning signs that a director may be acting in bad faith, it is critical not to dismiss them. Failure to act means risking your company’s future. By understanding what constitutes a director’s breach of duty, staying alert to behavioural red flags, and knowing your legal options, you place yourself in the strongest possible position to protect both your company’s financial health and its long-term strategic goals.You have plenty of legal options if a company director acts in bad faith, but navigating them can be complex and time-consuming. At Jamieson Law, we support businesses through the process one step at a time. If you have concerns, don’t wait until problems spiral. Together, we can help ensure your company’s leadership remains fully aligned with your best interests.
