Analysis for Directors' Breach of Duties

Question 1

Structure for question/issue relating to directors’ breach of duties

Answer 1

1. What has the director done - what is the action/transaction which gives rise to a breach.
2. What duties precisely has the director breached (e.g., breach of duty to act within powers…)
3. What options does the company have?
   - Ratify the breach: how appropriate/appealing is this for the client?
   - Bring proceedings against the director in breach
4. What are the remedies for directors’ breach of duty?
   - Company is claimant
   - Remedies include: setting aside the transaction, restoration, restitution, injunction and damages
   - Personal consequences against the director

Question 2

Personal consequences for a director who has breached their duties

Answer 2

• Breach of duty may be grounds to immediately terminate a directors’ service contract. Check the provisions of the contract
• Basis for disqualification

Question 3

How to remove a director following breach of duties?

Answer 3

1. Removal of director takes place by ordinary resolution of shareholders
   - Passed at GM - special notice of 28 days
   - Apply to client’s facts: show of hands / poll vote to pass resolution
   - Director is entitled to vote in capacity as shareholder at the GM
2. Is there a shareholders’ agreement in place?
   - Is there an agreement whereby directors can only be removed by agreement of all shareholders?
   - Breach of shareholders’ agreement. This means director has a claim for breach of contract against the shareholders if there was an ordinary resolution passed to remove the director
   - The resolution is valid, but shareholders are in breach of the agreement/contract
   - Advise on risk/difficulties of removing a director in breach of the shareholders’ agreement - as this gives rise to a claim against the shareholders

Question 4

Can a shareholder be required to transfer their shares?

Answer 4

If there are no forced transfer provisions in the Articles or the shareholders agreement, then a shareholder cannot be compelled to transfer their shares

However, it is likely that if a company brings proceedings against a director for their breach, they will want to sell their shares

Question 5

Situation where director is in breach / but company wants to remove director contrary to the shareholders’ agreement

Answer 5

This gives rise to two competing claims
- Company can issue proceedings against the director
- Director can bring proceedings for breach of contract against the shareholders

This gives rise to negotiation
- Try to agree with director for them to resign as director and transfer shares
- If director agrees, the company can agree not to bring proceedings against the director. This also means the shareholders do not act in breach of the shareholders’ agreement

Question 6

Advise a client on these negotiation options

Answer 6

• Can write a letter to set out legal position to commence negotiations
• Remind client that it is their decision as to which course of action to take