Insight

Director duties – no longer applicable once you are no longer a director?

Our Corporate department has received an influx in instructions for company incorporations in recent months, which is a positive marker for the post COVID-19 economic recovery.

Our commercial lawyers deal with company incorporations for all types of company, for example: companies limited by share, companies limited by guarantee and right to manage companies amongst many others.

When incorporating a new company, each prospective director should be aware of their statutory duties. Given the wide-ranging powers that directors hold over a company, these duties play a very important role and should be fully understood by all directors.

The purpose of these legal duties is to protect the shareholders of the company by ensuring that directors can be held accountable for the way they manage the company.

Don’t assume directors duties end when you are no longer a director

It is a common misconception that directors duties end when the director is no longer a director. We regularly advise director clients on the ongoing legal duties they may still have, post termination of their directorship.

Duty to avoid conflicts of interest

The duty to avoid conflicts of interest and the scope of duty owed by former directors was considered in the recent High Court case of  Burnell v Trans-Tag Ltd [2021] EWHC 1457 (Ch), in which the court clarified the extent to which a directors’ duties continue after they resign from office and whether a claim for breach of the duty to avoid conflict of interest situations, (set out in section 175 of the CA 2006), may be founded solely on the activities of directors after they have ceased to hold office.

The general rule is that a director is no longer subject to the duty in section 175 when he or she ceases to hold office. However, the duty “continues” after a person ceases to be a director in certain circumstances (specifically, as regards the exploitation of any property, information or opportunity of which the person became aware when in office) which, imposes a duty of a continuing nature and implies claims may be made after the cessation of office.

De facto directors

The court found that that the activities of a de facto director of a company after he had ceased to hold office had put him in a position in which his personal interests conflicted with the interests of the company as regards the exploitation of property (the company’s rights under a particular licence agreement) of which he had been aware as a director.

What does this case mean for directors?

Whilst entering into a lucrative deal on cessation of a directorship is not strictly a breach of duty, where a company director (whilst still in office) identifies a lucrative opportunity which the company itself can exploit but instead resigns and exploits that opportunity personally, this will strongly point towards a breach of directors duties.

Lawyers for advice on director duties

Advising directors on legal issues, duties and risks is a core part of our work and expertise. If you need advice, whether as a departing director or the company where a director has left, voluntarily resigning or otherwise, we can help. Please do call or email us.

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