Breach of Director Duties: Acting With Improper Purpose
Being a Director, you are expected to work within the authority given to you and avoid a breach of director duties. Your duties are either expressly or implied by the bylaws and Articles of Association. Directors need to use this authority in the best interests of the company. Any action outside of this purpose is deemed to be acting for an “improper purpose” or in “breach of director duties”. Directors are elected to their positions to move the company agenda forward. Your main objective is to propel the organisation to reach its goals and vision.
FIVE actions that are Deemed a Breach of Director Duties:
Using your authority as Director to issue shares fraudulently to reallocate voting power
Attempt by one of the Directors to increase his or her voting power
A director using his or her position to “gift” company property
A director entering into a contract to take advantage of a business opportunity that personally benefits him or her
Consenting to a contract that is outside the main activities of the organisation
Anyone can challenge if they believe a Director has acted with improper purpose. The court of law uses a number of elements to determine if a director or directors breached their duty.
What is the Power Granted to the Director?
The court examines the purpose for which power was granted to the director and if that authority was granted in the first place. If the director is working beyond his power, the case is taken as acting for an improper purpose. If the director had been granted the power, then, the court determines the purpose for using the power. Actions must be done in the best interests of the company. If the action is not in the best interests of the company, then the directors are said to have breached their duty.
Is the Purpose Lawful?
The purpose of exercising the power must be lawful. For example, if Directors are issuing shares to dilute the voting powers of the shareholders, then the purpose is not lawful. Moreover, it looks at what the Director would have done was it not for the improper purpose. The shareholders have the power to ratify an act by its directors that is otherwise improper and make it valid. However, if the director or directors were leading an insolvent company to prejudice the creditors, their actions cannot be ratified.
What Should I Do Next?
Contact us if you would like further legal advice on your Duties as a Director. Our lawyers at You Legal will be happy to assist you in whatever way we can.
* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.