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This is particularly the case where the dominant director is also the majority shareholder and runs the business as if it were his or her own personal property. The recent case of Dickinson v NAL Realisations (Staffordshire) Ltd underlined that directors cannot simply sit back and allow one dominant director to run the company, but must take an active role in the management of the company. The case also serves as a reminder of the importance of directors ensuring that they have proper authority to enter into transactions, and that they take into account the interests of all shareholders in carrying out directorial duties.
The case concerned a company which had three directors, one of which (“D”) was also the majority shareholder (the other shares being held by D’s own small self-administered pension scheme). D ran the company himself, and the other two directors effectively abandoned management of the company to him. Due to some potentially costly litigation against the company, D undertook a series of transactions on behalf of the company, with the purpose of taking the company’s assets out of the reach of the claimants in the litigation, and into D’s personal possession.
The court found that some of the transactions were void as D had undertaken them without reference to the other directors and consequently did not have the proper authority of the board to enter into them. D could not rely on the Re Duomatic principle (which is that where all shareholders consent to a matter which a general meeting of the company could effect, that consent is binding) to give validity to his actions because the pension-scheme shareholder had not been aware of or consented to the relevant transactions. D had also acted in breach of his duties by diminishing the assets of the company and enriching himself in the process.
The court found that the other directors had also breached their duties by entirely abrogating their responsibilities to D. They were found to be irretrievably in breach of duty, however they avoided any liability to the company on the basis that the losses suffered by the company were caused by the actions of D, and not the other directors’ inaction. Although directors in these circumstances may not be liable for the company’s losses, avoiding the stigma and costs that attach to being involved in litigation of this kind should be sufficient incentive to ensure that directors remain active in the management of companies, not to mention the potential for proceedings under the Company Directors Disqualification Act 1986. There is also the potential for personal liability of the directors in certain circumstances where the company becomes insolvent, such as where a director allows a company to trade where there is no reasonable prospect of avoiding entering into insolvent liquidation or administration.
How can I avoid this situation?
Being aware of the up-to-date financial and trading situation should be seen as a prerequisite by any director who wants to comply with his or her duties. In order to stay active in the management of the company, directors have the right to access certain financial information of the company under the Companies Act 2006. If this information is not made readily available, then a first step could be to require that it is provided. This information will also be crucial in determining whether insolvency is likely to occur.
If the dominant director makes it difficult to remain sufficiently aware or involved in management, then the other directors may have to look to other strategies to remain involved. These could range from taking an action in the name of the company against the dominant director (where he or she has breached directorial duties) or, where the other directors are shareholders, suing for unfair prejudice. Where the other directors have no share in the ownership of the company, then the simplest way of limiting their exposure may be to resign; however, where they have an interest in the company they will want to remain involved in the management so this approach is unlikely to be suitable.
It is essential that all directors take their directors’ duties seriously and maintain an active role in the management of the company. If directors feel that they are not sufficiently involved in the management of the business, we recommend they seek legal advice as to how to obtain involvement and/or limit their personal exposure. If they suspect there is a prospect of insolvency of the business, it is also recommended that they take advice from an insolvency practitioner in order to minimise the risk of having to contribute if the company becomes insolvent.
If you have any questions about directors’ duties, please contact our Corporate Commercial team by telephoning 0161 941 4000 or e-mailing firstname.lastname@example.org.