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LondonlawyerJ
LondonlawyerJ, Advocate
Category: Law
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Experience:  Solicitor with over 15 years experience.
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If one wishes to bring an action against the Directors of a

Resolved Question:

If one wishes to bring an action against the Directors of a company limited by guarantee, must one sue them jointly or can one bring an action severally?
Submitted: 3 years ago.
Category: Law
Expert:  LondonlawyerJ replied 3 years ago.

LondonlawyerJ :

Hello I am a lawyer with over 15 years experience. I will try to help you with this. Can you just tell me in very general terms what the case is about and what is the value of the claim?

Customer:

Two Directors (one long standing) are in my opinion failing to run the company's affairs for the benefit of the members. The Managing Agent appears to be acting as the Company Secretary, and seems to be in cahoots with the two mentioned. A third Director, elected at the AGM last year is stymied from action as he is outvoted. There are 11 members, but one holds 3 votes, and will always vote with the 2 directors, another is apathetic so we can't muster a majority.

Customer:

The company is owns the freehold of a block of flats, all the dwelling holders have one vote , but one couple own 3 flats, and their daughter is one of the two Directors who are inert.

Customer:

Have I missed something?

LondonlawyerJ :

Thankyou for that. I will answer you later this morning I have a meeting at 09.00 and will answer you after that. I hope that is OK.

Customer:

Sorry, I thought I'd just paid and you'd ended the conversation.

LondonlawyerJ :

No, I like most of the experts on this part of the site am a lawyer in private practice and work on this site around my other commitments.

LondonlawyerJ :

Under the Companies Act 2006 directors have certain duties. These duties apply to companies limited by guarantee as well as by shares.


S171 to act within their powers - to abide by the terms of the company's memorandum and articles of association and decisions made by the shareholders;


S172 to promote the success of the company - directors must continue to act in a way that benefits the shareholders as a whole, but there is now an additional list of non-exhaustive factors to which the directors must have regard. This was one of the most controversial aspects of the new legislation at the drafting stage. These factors are:



  1. the long term consequences of decisions

  2. the interests of employees

  3. the need to foster the company's business relationships with suppliers, customers and others

  4. the impact on the community and the environment

  5. the desire to maintain a reputation for high standards of business conduct

  6. the need to act fairly as between members


S173 to exercise independent judgment - directors must not fetter their discretion to act, other than pursuant to an agreement entered into by the company or in a way authorised by the company's articles


S174 to exercise reasonable care, skill and diligence - this must be exercised to the standard expected ofsomeone with the general knowledge, skill and experience reasonably expected of a person carrying out the functions of the director (the objective test) and alsothe actual knowledge, skill and experience of that particular director (the subjective test)


S175 to avoid conflicts of interest - methods for authorising such conflicts by either board or shareholder approval are also to be introduced


S176 not to accept benefits from third parties


S177 to declare an interest in a proposed transaction with the company - there are to be carve outs for matters that are not likely to give rise to a conflict of interest, or of which the directors are already aware. There will be an additional statutory obligations to declare interests in relation to existing transactions.


 


These general duties are owed by a director of a company to the company;


therefore, only the company can enforce these general duties. There are three


main ways in which a company limited by guarantee can take legal action against a director for


breach of duty - (a) if the board of directors decides to commence proceedings;


(b) if the liquidator or administrator following the commencement of a formal


insolvency procedure decides to commence proceedings; and (c) through an action brought by one or more members to enforce a right which is vested not in himself, but in the company.


If the directors are in breach of their duties then you, perhaps with other members can bring an action against them, not the company as a whole.


I hope this answers your question but please feel free to ask follow up questions.

Customer:

Thank you for your reply. I have been reading up on the 2006 companies act, The company was formed in 1993.

Customer:

sorry pressed return by mistake.......the problem is that only one of the 3 directors is proactive, and I need to know if action can be taken or perhaps just threatened against either one or two of the 3, or whether I'd have to include them all; the 3rd (proactive) is obviously trying to get the thing running efficiently. The company secretary recently needed reminding by me (via the Directors) that he had failed to submit a company AR01.....and lo and behold one of the 2 inert Directors became quite defensive about the whole thing maintaining that the Company secretary has worked hard for the company, and that so has she, for 14 years!.

Customer:

sorry, done it again.......

Customer:

I just would not want to threaten action against all the Directors if one can't be specific about exactly who is failing in their duty of care .Many thanks for your clarification so far. CL

Customer:

Additionally, I have reservations about the Company secretary being the Managing Agent, as I feel that there must be a conflict of interest...the CS seems to call all the meetings and seems to be the one that the inert directors are directed by rather than the person to whom instructions are given. There was a contract for redecoration of the outside of the building (£25k) and the job was done fairly shoddily, the Managing agent seemed to be instrumental in securing the tenders for the job and now, nearly a year after it was completed has failed to get the contractor to return to put anything right....there was a 2.5% retention on the contract, and it would appear that although undertaken with good intentions the Directors failed to protect the interests of the members. The inert Directors seem to have no desire to pursue any redress, and the Comp Sec is prevaricating either in his role as sec or because he is the Managing agent.and knows that the Directors will not push him to sort it out. Thanks again for your time on this. CL

Expert:  LondonlawyerJ replied 3 years ago.
You would only need to threaten action against those who are breaching their duties, if it is clear who has what duties otherwise against all of them. It might be tactically sound to go against all of them especially if you have an OK relationship with the decent director. He might even welcome the threat as a way to whip them into performing their role properly
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