What the courts can do to remedy a director’s breach of duties

A question I am often asked when advising a company about how to deal with a rogue director is what can the courts do to help.

The first thing to appreciate is that directors owe duties to the company itself and it is usually only the company that can take court action rather than its shareholders or a fellow director. This can lead to problems in companies where there are only two directors as the rogue director is unlikely to agree that action should be taken against himself! Having said this, sometimes the courts will authorise proceedings to be taken in this situation by the company or by a minority shareholder who is being unfairly prejudiced.

The courts have a wide range of powers and which ones they use depend on the particular circumstances of the case. They can roughly be divided into three groups: powers to aid investigation, preserve assets or to remedy the wrong done.

Investigatory Powers – Obtaining Documents

The court has the power to compel someone to disclose documents that will be important in a case. ‘Documents’ do not just mean paper documents but also electronic documents and these include all electronic data such as emails as well as soft copies of other documents.

A particular fear when it comes to rogue directors is that these documents will be destroyed or simply disappear if they are given notice to disclose them. In these situations, if the case is strong enough, the courts can make a Search Order. In this situation, no notice is given to the rogue director and effectively their computers can be seized in an attempt to obtain the computer data before they are given a chance to destroy them.

Maintaining Assets

If there is evidence that assets wrongly taken from the company may ‘disappear’ (whether physical assets or money), the court can order that the assets be frozen to prevent this. Usually, this comes down to freezing bank accounts.

If assets have been diverted to third parties, the courts will sometimes make orders against those third parties to preserve the company’s assets.

Remedies

The courts have a wide range of powers to attempt to remedy the director’s wrong-doing.

If the company can show it has suffered loss and damage by the director’s actions (if he has removed money from the company, for example) the court can order ‘damages’, i.e. that any loss and damage is repaid.

Where a rogue director has benefited from his wrongdoing, for example by diverting contracts and/or customers from the company and has made a profit from them, then the courts can order that he gives full details of the profits he has made and order that these profits be repaid to the company. This is called ‘an account of profits’. The courts can also make these orders against third parties including other companies where contracts have been wrongfully diverted to other parties.

The courts can also make orders to stop any further wrongdoing. These usually take the form of ‘injunctions’, i.e. an order that someone must stop doing something. If, for example, a director has diverted contracts from the company, the court can order that he must stop this. If he does not, he can be sentenced to prison.

The Choice

It is up to the company to suggest to the court what combination of powers it should use in any particular case. This decision will differ from case to case and will be based on the strength of the evidence available as well as making a decision as to what combination of remedies will best achieve the desired outcome.

It is important to obtain legal advice as soon as possible after you discover wrongdoing by a director. Sometimes this is important to preserve assets as, the longer things go on, the harder it sometimes is to trace missing assets. Also, the courts will refuse to exercise some powers if there has been undue delay in making a court application.

Therefore, if you think you have a rogue director in your company, first gather together all the evidence you have of any wrongdoing and then take legal advice. Sometimes, confronting the rogue director early on will be a good idea but not when this gives him sufficient time to destroy evidence. In those situations, obtaining legal advice first could be vital.

Gary Cousins
Business Solicitor

For free advice on this topic please call us on 0845 003 5639.