Under Sections 171–177 of the Companies Act 2006, directors are subject to statutory duties requiring them to act in the best interests of the company and exercise their powers appropriately. However, poor performance alone does not necessarily amount to a breach of these duties. A director may make poor commercial decisions or adopt unsuccessful strategies that result in financial losses without breaching their statutory obligations, as this may simply reflect inadequate management decisions, commercial misjudgment or a lack of experience. Conversely, actions that appear routine or harmless at first glance may, depending on the circumstances, amount to a serious breach of directors’ duties under the Act.
Poor performance: what is not prohibited by the law
Poor performance can encompass a wide range of conduct, such as ineffective leadership, failure to identify competitive and commercial threats, flaws and oversights in strategies and company plans and poor management of finances. As detrimental as these deficiencies may be, the key to distinguishing them from breaches of directors’ duties is whether they performed with good faith for the success of the company.
In company law, the courts are generally reluctant to interfere with genuine commercial decisions made by directors acting honestly and in good faith. Directors are afforded a degree of discretion in managing the affairs of the company and are not expected to guarantee successful outcomes from every decision. Therefore, even where a decision ultimately proves detrimental to the company’s performance or development, poor results alone will not usually amount to a breach of duty if the decision was made in good faith, without improper personal interests, and with a genuine belief that it would further the success of the company.
Threshold of breach
Breaches of directors’ duties are more likely to arise where conduct falls within the specific areas identified in the Act, including exercising powers for an improper purpose, failing to act in the company’s best interests, neglecting to exercise independent judgment or reasonable care, or, most commonly, failing to manage conflicts of interest and disclose relevant interests in company transactions.
Where a breach occurs for the first time, a degree of leniency may often be appropriate, particularly where the conduct was unintentional or capable of being remedied. In such circumstances, directors may be given guidance, reminders or formal warnings to acknowledge the issue and take steps to prevent similar breaches occurring in the future. However, acts such as repeated failure to comply with company regulations, arbitrary decision-making that do not align with the company’s position, and diversion of opportunities all have a high chance of being recognised as a breach of director’s statutory duties.
How to distinguish poor performance from a breach of director’s duties
Evidence that only points to financial loss or strategic shortfalls are insufficient in demonstrating an actionable breach; rather, referring to the Companies Act 2006, the conduct in question must be examined carefully and compared against the specific duties as detailed in the Act.
Where a director’s breach of duty has been established, a derivative action under Part 11 of the Companies Act 2006 may be brought on behalf of the company to seek an appropriate remedy for the benefit of the company as a whole.
If you are seeking legal advice regarding a director’s poor performance or breach of their duties, please contact Nath Solicitors on 0203 983 8278 or get in touch with the firm online to discuss your case.