Prospective Breach of the Director's Duties and Remedies

CRITICAL LEGAL ADVICE
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April 22, 2023
* A breach or prospective breach of the director's duties and remedies
In the scenario presented, there are several instances where the directors' duties may have been breached, or there is a potential for a breach. The Companies Act 2006 lays down various directors' duties, including s.172 (duty to promote the success of the company), s.174 (duty to exercise reasonable care, skill, and diligence), and s.175 (duty to avoid conflicts of interest).
First, Jane disclosed her potential conflict of interest under s.175 of the Companies Act 2006 concerning the property acquisition from her husband's company, Bingley Estates Ltd. The board has authorized the matter, which indicates that Jane has not breached her duty under s.175. However, it is essential to ensure that the transaction is in the company's best interest and that Jane does not use her position to benefit her husband's company unduly. The UK Court of Appeals illustrated this in the case of Bhullar v Bhullar, where the court held that the directors have a duty to disclose their interest in a transaction involving the company.
Secondly, Lydia's romantic involvement with George Wickham, the owner of Wickham Enterprises, could lead to a breach of s.175. As stated earlier, s.175 provides that directors have a duty to maintain neutrality and prevent a conflict of interest, which sometimes translates to keeping transactions at 'arm's length.' Thus, if Lydia had shared confidential company information with George to help him secure the linen hire contract, she would have breached her duty to avoid conflicts of interest. As held by the House of Lords, in the case of Regal (Hastings) Ltd v Gulliver, it was established that directors must not use their position to gain personal advantage, and any breach of this duty may give rise to a claim for the company.
Going back to this case, it was shown that the company might seek remedies such as an injunction to prevent further breaches, damages for any loss suffered, or the recovery of any profit made by Lydia due to the breach. This breach and remedy for compensation may be supported by the case of Island Export Finance Ltd v Umunna, where it was demonstrated that directors could be held liable for any loss suffered by the company due to their breach of duty.
Now that we have discussed the various breaches and prospective breaches by the directors, the following section will provide some of the actions to mitigate such risks.
Mitigation of Risks
To mitigate the risks and potential breaches of directors' duties, the company can take remedial steps such as:
1 Reviewing Property Acquisition
Reviewing the property acquisition to ensure that it is in the company's best interest and does not unduly benefit Bingley Estates Ltd. As mentioned earlier, the law provides that the directors should ensure the company's best interests in making decisions. Similarly, the case of Eclairs Group Ltd v JKX Oil & Gas PLC highlighted the importance of directors acting in good faith and in the company's best interest.
2 Conducting an Internal Investigation
Additionally, conducting an internal investigation to determine if Lydia shared any confidential information with George Wickham to help him secure the linen hire contract. In doing so, the company can take guidance from the case of CMS Dolphin Ltd v Simonet, where the court emphasized the importance of confidentiality in directors' duties.
3 Establishing Clear Guidelines
Finally, after reviewing the property acquisition and conducting an internal investigation, the board of directors should establish clear guidelines to mitigate future risks. Establish clear guidelines and policies to prevent future conflicts of interest and breaches of directors' duties. The UK Corporate Governance Code, published by the Financial Reporting Council, provides guidance on best practices for corporate governance and can be a helpful resource for the company.
By taking these remedial steps, the company can mitigate the risks of potential breaches of directors' duties and ensure compliance with the relevant provisions of the Companies Act 2006 and UK case law.
* Removing Lydia as a director
In the situation presented, the Bennett family may be considering the removal of Lydia as a director due to her potential breach of the director's duties and her romantic involvement with George Wickham, which may have influenced the company's decision to award the linen hire contract to Wickham Enterprises. To remove Lydia as a director, it is essential to follow the provisions set out in the Companies Act 2006 and any specific requirements in the company's articles of association. This compliance is essential to reduce legal risks and protect the company.
As mentioned before, under the Companies Act 2006, “a company may by ordinary resolution at a meeting remove a director before the expiration of his period of office, notwithstanding anything in any agreement between it and him” (s.168). This means more than 50% of the shareholders who vote on the resolution must support the removal. To initiate the process, a notice of the resolution to remove Lydia as a director must be sent to her at least 28 days before the general meeting where the resol...