Directors - Are your actions promoting the success of the company?

Recent legal cases have highlighted the importance of a director’s duty to act in good faith and to promote the success of the company. Under Part 11 of the Companies Act 2006 (“Act”) a statutory derivative claim can be brought if a directors’ actual or proposed act or omission is negligent, in breach of duty or in breach of trust.

It was thought that the implementation of the Act would bring in a flood of new derivative claims. However this has not been the case, as permission of the court is required to commence the claim and then to continue it. Proving your claim is not straightforward. The applicant must demonstrate that in bringing the claim they are acting in good faith to promote the success of the company. They must also show that the act or omission the subject of the claim is not one that would have been otherwise authorised by the company.

The case of Kiani v Cooper and others [2010] EWHC 577 (Ch) is the first reported case in England where the claimant satisfied all the requirements of the Act to secure permission to both commence and continue their statutory derivative claim. In this case one director had a substantial case against the other director for wrongly claiming money as a creditor of the company without prior agreement.

Further cases have provided judicial guidance on the criteria for commencing an action. In the case of Langley Ward Ltd v Trevor and another [2011] All ER 78 a director commenced a derivative claim, however because the company was on the verge of insolvency the Court held that the derivative action was not in the best interests of the company and that any issues relating to the dispute would be best dealt with by the liquidator. In Re Onslow Ditchling Ltd [2011] EWHC 257 (Ch) the duty of directors to act in good faith when trading in financial difficulty was highlighted. In this case the directors continued trading while it was clear that the company was insolvent. They were found guilty of breach of duty and misfeasance as well as wrongful trading under the Insolvency Act 1986.  

These three cases highlight that where a genuine claim of breach of duty is made the Courts are willing to grant permission to commence and continue a statutory derivative claim. Directors need to ensure that they fully understand the duties and requirements placed on them by the Companies Act 2006, thus avoiding the possibility of any genuine or futile claims arising from the breakdown of a business relationship.

Whether you need advice on directors’ duties, are facing a claim in your capacity as a director or are a company looking to bring a derivative action, Birkett Long have specialist lawyers that can advise and assist you.  For advice on the Companies Act contact David Cammack - [email protected], for advice on derivative actions contact Kevin Sullivan - [email protected].