Consequences of Breach of Directors’ Duties
While there are many matters a director must focus upon, one of the most important concern is the financial statements of the company. The Companies Act has myriad of compliance requirements for accounts, record keeping, disclosures, and filing of annual returns for which a director is responsible, with criminal sanctions in any event of breach of duty.
The new law also implements a stricter standard and more responsibilities for directors, this includes heavy fines and longer terms of imprisonment for violations.
Sanctions for Any Breach of Their Duties
Directors are subject to a variety of sanctions for any breach of their duties. These include:
1. Personal liability
The limited liability afforded by a limited liability company only applies to its shareholders rather than its directors. The directors may be personally liable if they fail to meet their responsibilities, such as:
A breach of the director’s general duties owed to the company, including to account to the company for profits made from transactions where a conflict of interest was present or did not declare an interest as required
Failing to comply with specific duties such as making unlawful distributions
Any false or misleading reporting in which the company suffers a loss
Being under insolvency law such as for any fraudulent or wrongful trading
Unable to pay debts
In case of any disqualification proceedings, a contribution order is made against the director
2. Criminal offences and fines
Breaching of the company law may be regarded as a criminal offence and subject to fines.
Statutory provisions in legislations are present for criminal offences as well the sanctions that may apply to companies upon conviction. The types of sanctions that may be imposed on the company as follows:
3. Cease and desist orders
During the investigative phase of any criminal proceedings, courts may choose to make orders requiring companies to disclose their records or make a freezing order over the company’s assets such as bank accounts.
4. Disqualifications or undertakings in lieu
The court may disqualify an individual from being a director of a company. Undertakings not to act as a director may be accepted in lieu.
A persistent breach of company law such as not making requisite filings, fraudulent trading, and where the company has become insolvent where the director is unfit to be handling the management of a company are considered possible grounds for disqualification.
Forms of Relief for breach of General Duties
If the director is found to breach any of the general duties owed to the company, there are some possible forms of relief that can be performed:
Breach may be ratified by resolution of the company’s shareholders
Grant relief if the director acted reasonably and honestly
Arranged insurance for the benefits of its directors
Offer assistance to the director by indemnifying him or her against costs incurred in successfully defending a claim for breach of duties owed to the company