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Civil Consequences Of Breach Of General Duties Of A Director

The Companies Act, 2015 (the “Act”) in Section 142-147 has outlined the various duties of directors as below;

1. Duty to act within powers and in accordance with the company constitution.

2. Duty to promote the success of the company.

3. Duty to exercise independent judgement.

4. Duty to exercise reasonable care, skill and diligence.

5. Duty to avoid conflict of interest and conflict of duties.

6. Duty to reject benefits/gifts from third parties.

Further, the Act provides that where a director breaches any of the duties listed above, then civil consequences for the breach should arise. The consequences of breach are the same in common law and in equity.

However, the duty to exercise reasonable care, skill and diligence is the only exception in terms of how it is enforced because it is a common law duty.  The rest of the general duties of a director are equity-based duties which would be enforced as any other fiduciary duty of the directors to the company.

Consequences for breach of equity-based director duties have been established in the law of equity and on equitable principles. The remedies are as below;

1.     Removal of the director from office; the shareholders must vote and decide whether to remove the director temporarily or permanently depending on the seriousness of the breach.

2.    Return of company property; property which has been taken by a director must be returned upon breach of any duties of the director.

3.    Restitution of profits; a court of law can order that where the company has suffered a loss because a director breached any duty, such a director should pay the company from his personal profits.

4.    Injunctive reliefs; a court can issue an injunction to prevent further breaches of duties by a director to prevent further losses.

5.    Setting aside of a transaction; a court may order that a transaction entered on behalf of the company by a director who is not acting within his powers and duties be set aside.