INSIGHT: Disloyal Director Pays Price for Serving Her Own Agenda

Directors are under a duty to act in good faith and to do all that they reasonably can to promote the success of the companies they serve. Breaching those obligations can be costly, as one businesswoman found out after the High Court ruled that she had favoured her own interests and been disloyal to shareholders.

The woman was a director of two companies which encountered financial difficulties almost from the outset. Fundraising targets were missed by a large margin; a substantial loss was made in the first year of trading and it swiftly became apparent that the companies were running out of cash. As relationships within the business frayed, the woman resigned. However, following a board meeting, she was suspended during her notice period.

Shareholders who had invested in the companies argued that she had breached her duties under Section 172 of the Companies Act 2006. Far from taking steps which were likely to further the success of the business, she was alleged to have taken a number of actions with the deliberate intention of harming it.

The Court rejected arguments that the woman's questioning the solvency of one of the companies and establishing competing businesses in her own name were acts of disloyalty. However, some of the steps she took did have the effect of harming the companies' interests. She had, amongst other things, ignored instructions not to communicate with clients after her suspension. She had continued to act as she pleased, in pursuit of her own agenda and to the companies' detriment.

The harm caused to the companies by her breaches of duty was limited. However, she was, amongst other things, ordered to pay damages equivalent to one month's salary. Further sums were awarded to the companies in respect of a lost grant opportunity and management time taken up in dealing with the consequences of her breaches. The total sum that she will have to pay has yet to be assessed.

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