Disputes between directors of a company are, unfortunately, not uncommon. When there are several parties involved in a company as directors and shareholders, it is, perhaps, not surprising that disputes may arise from time to time.
How to avoid pitfalls and resolve conflict when disputes between directors occur
Whilst directors’ disputes can occur for many reasons, and each set of circumstances will be unique, most disputes will commonly occur when the relationship between directors or shareholders has broken down and the parties have determined that they can no longer work collaboratively.
Disputes may arise in the following circumstances:
- there is a disagreement over the direction of the business involving the company’s management, business strategy, or ownership and control;
- directors fail to fulfil their duties;
- directors steal funds, intellectual property, or commit fraud;
- there is a conflict of interest; or
- there is a disparity between the remuneration of directors.
These disputes can dramatically impede business growth and threaten the company’s ability to trade, as the focus shifts to managing the dispute at hand rather than focusing on the growth of the business.
What duties are owed by directors to a company?
Directors owe a number of duties to a company under the Corporations Act 2001 (Cth). These include the following:
- Duty to act in good faith and in the best interest of the company;
- Duty to exercise care and diligence in discharging duties and making business decisions that a reasonable person would exercise if they were in the same position as the director;
- Duty not to improperly use position to gain advantage or obtain information for personal advantage;
- Duty to disclose a material personal interest; and
- Duty not to trade while insolvent.
How can directors’ disputes be best avoided?
There are different options for resolving director disputes as follows:
Normally, directors will own shares in the company in which they are a director. Having a shareholders agreement in place can serve as an effective means of setting out penalties for directors that engage in bad behaviour or damage the business. It can also provide an agreed roadmap for the exit of a shareholder and how their shares should be valued.
In the absence of a shareholders agreement, a company can be left in the position where an ex-director remains a shareholder in the company. This most likely means the director will have voting rights and can have an impact on the direction of the business. A well-drafted shareholders agreement can, for example, set out that a director must resign and sell their shares if they breach the document.
If a dispute between directors occurs, independent legal advice should be sought on the company’s position, whether a shareholders agreement is in place or not. This will allow parties to explore the company’s options and how to approach the problem.
Meeting with the Director
Depending on the advice, a meeting between directors in a neutral location may be a useful means of discussing what went wrong and what the desired outcome is for both parties. The discussion should be based on the legal advice both parties have received.
Resign or Sell Up
If directors have resolved that they can no longer work together, a director may consider resigning from the directorship.
In some cases, a dispute between directors orshareholders may be so acrimonious that the only viable option is to place the company into voluntary administration. This decision will depend on the financial health of the company and the attitudes of other shareholders.
If the matter is unable to be resolved through these options, then legal proceedings can be instituted if there aregrounds for doing so. The Court will have power to make orders regarding the resignation of directors, selling shares back to the company and issuing public apologies.
How Can Sharrock Pitman Legal Help?
If you require advice on confirming your position in a dispute and what options are available, as well as understanding the company’s legal position before commencing legal proceedings, we are happy to assist. As Accredited Commercial Litigation Specialists, we are well-equipped to provide expert legal advice relevant to your unique circumstances. Contact our litigation team on 1300 205 506 or by email at firstname.lastname@example.org.
The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.
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