Orr Litchfield

Solicitors and Business Lawyers

Directors' Disputes

1. Directors’ statutory, common law and contractual obligations

Disagreements among company directors and between shareholders and company directors are not unusual. They can arise for a variety of commercial reasons, such as, differences of opinion as to financial, legal, operational or sales issues or strategies. However, if they are not resolved in a practical, efficient and effective way, they can be highly damaging for a company.

Directors have numerous statutory, common law and (usually) contractual obligations. Companies should enter into and maintain Service Agreements with their executive and non-executive directors setting out, amongst other matters, their roles, rights and responsibilities. Directors will be required to comply with and procure that the Company complies with the Memorandum and Articles of Association of the Company. Importantly, the Companies Act 2006 sets out 7 general duties of directors to the Company:

(i) Duty to act within powers;

(ii) Duty to promote the success of the company;

(iii) Duty to exercise independent judgment;

(iv) Duty to exercise reasonable care, skill and diligence;

(v) Duty to avoid conflicts of interest;

(vi) Duty not to accept benefits from third parties; and

(vii) Duty to declare interest in proposed transaction or arrangement with the company.

You can read more information about Directors and Directors’ Duties from our Corporate Law section.

Most companies will come across board issues and disputes at some point. When they arise, it is usually important to be able to manage and resolve the relevant issues as efficiently and effectively as possible in order to minimise disruption, save time and costs and avoid causing any damage to the reputation of the business. Where circumstances permit, the pro-active management of such issues and disputes may enable the parties to maintain or even strengthen their business relationship for the overall benefit of the Company.

2. Advising and assisting you on directors’ disputes

Whether you are a claimant or a defendant in relation to a directors’ dispute, we are able to provide efficient and effective legal advice and support in relation to your dispute using our legal knowledge, experience and commercially focussed approach to resolve the dispute in a way that is right for you.

3. Resolving directors’ disputes

There are several key stages in assessing and resolving contractual issues and disputes with directors. These include:

(a) Step 1 - Identifying the relevant statutory, common law and contractual rights and obligations of the directors.

At the outset, it is vital to identify the relevant statutory, common law and contractual obligations of the directors whose actions are in question. This is not always a simple task.

Each director should have a written Service Agreement with the Company. However, such agreements may not have been prepared or maintained adequately or may have been supplemented over time by other contractual arrangements.

We can advise as to the relevant statutory, common law and contractual obligations of the directors.

(b) Step 2 - Determining whether directors have breached their obligations and what remedies may be available

Once the relevant statutory, common law and contractual obligations of the directors whose actions are in question have been identified, it is necessary to determine whether a breach has occurred and, if so, what remedies may be available.

Where a breach is of a contractual nature, the contractual terms may include provisions relating to the rectification of contractual failures, the resolution of contractual disputes and the grounds on which parties may terminate the contract. The nature and extent of any breach of contract is often important. Where one party has failed to comply with its obligations under a contract, that failure may be considered to be relatively minor and, even if it gives rise to a claim for damages, it may not enable the complaining party to terminate the contract. However, where there is a serious breach of contract, English common law may give the affected contracting party the right to terminate the contract (whether or not there is any contractual right to terminate).

Where a director is found to be in breach of his or her obligations, the Company may be able to seek remedies such as an injunction, the restitution of profits, the return of property, the rescission of a contract and/or damages against a recalcitrant director.

We can advise as to whether a breach has occurred and, if so, what remedies may be available and consequently help determine whether it is likely to be in your interest or the interests of your business to pursue the breach.

(c) Step 3 - Seeking an early resolution for directors’ disputes

Normally, it is in the interests of the parties to identify and resolve any issues and disputes relating to directors efficiently and effectively so that they can continue to progress the arrangements in an acceptable manner.

The Articles of Association or other documents may include provisions relating to the resolution of certain issues and disputes relating to directors. Where this is not the case, it is often sensible to try to take steps to resolve any issues or disputes. By way of example, the parties may agree to try to achieve resolution through direct discussions or some form of alternative dispute resolution.

(d) Step 4 - Letter before action

Where it has not been possible to resolve any issue or dispute, it may be that it is necessary to formally notify the other party (or parties) that legal action will be taken unless the relevant issue or dispute is resolved satisfactorily. This notification is usually sent in the form of a ‘letter before action’. It will, amongst other matters, set out the complaining party’s legal position, the outcome the complaining party wishes to achieve and the steps it proposes to take if a suitable agreement is not concluded.

We can prepare appropriate and effective letters before action and advise you on subsequent communications with a view to helping resolve any issues and disputes relating to directors.

(e) Step 5 - Alternatives to litigation for directors disputes

It has become more and more common for parties which are in dispute to use alternative methods of resolving disputes prior to issuing legal proceedings or during the litigation process (typically at an early stage). The 4 main alternative methods of resolving disputes (commonly called ‘Alternative Dispute Resolution’ or ‘ADR’) in the UK other than court proceedings are negotiation, mediation, arbitration and conciliation.

Whilst ADR is not suitable for every dispute, courts often expect disputing parties to take steps to resolve disputes prior to commencing legal proceedings or at an early stage of the litigation process. An unreasonable refusal to do so may result in the court imposing sanctions (typically in the form of costs penalties) on the relevant party.

We can advise on the relevant form of ADR and assist you in relation to the ADR process with a view to helping resolve any directors’ disputes.

(f) Step 6 - Court proceedings for directors’ disputes

If it has not been possible to resolve a dispute, it may be that the only way forward is to commence formal legal proceedings. Where that is the case, we can help prepare your claim and provide clear advice on legal, procedural and tactical issues in order to assist you through the litigation process efficiently and effectively.

Contact us

If you would like more information about disputes with directors or would like to discuss a potential or existing dispute, please email us at enquiries@orrlitchfield.com, complete an Enquiry Form or call us.