Breach of director duties: the claims defences and disputes they trigger

When concerns arise

In many director disputes, the first instinct is to determine who is at fault, often framed as an alleged breach of director duties. That exercise risks obscuring what really matters: how to contain personal liability and avoid a damaging escalation.

UK company law imposes duties on directors to the company itself, not to individual shareholders. Allegations often surface during fallouts or when the business enters distress, and reasonable directors can legitimately disagree about the best course of action.

Claims can still arise from those disagreements. This article is a decision-orientation guide; it does not constitute legal advice.

Claims you might face or bring

Derivative claims

A derivative claim is an action by a shareholder on behalf of the company, typically alleging negligence, default or breach of duty or trust. Examples include directors transferring company funds to personal accounts or failing to disclose conflicts. The remedies – damages, injunctions or unwinding transactions – benefit the company, not the individual shareholder.

Who brings it? Current members usually bring derivative claims, though claims may also be brought against former or shadow directors.

When? Claims commonly arise when shareholders feel excluded or suspect misappropriation, particularly in family businesses or quasi-partnerships. Minority shareholders may threaten derivative proceedings alongside unfair prejudice petitions.

Risks for directors: Derivative claims can result in substantial personal liability, legal costs and reputational damage. Permission of the court is needed at an early stage; factors include the shareholder’s good faith, whether the act could be ratified and whether a hypothetical independent director would pursue the claim. If permission is refused, the shareholder usually bears their own costs.

High-level defence: Demonstrate that decisions were properly authorised or ratified and that any mistakes fall within the range of reasonable business judgement. Evidence of independent advice and transparent disclosure helps. Early engagement may lead to an internal resolution before proceedings.

Unfair prejudice petitions

Shareholders (referred to in law as ‘members’) may bring a claim where a company’s affairs are conducted in a manner that is unfairly prejudicial to their interests. Both ‘unfairness’ and ‘prejudice’ must be proved. Typical allegations include misuse of company funds, share dilution, withholding dividends or breach of shareholders’ agreements under section 994 of the Companies Act 2006.

Who brings it? Only members (including those awaiting registration after a share transfer) may petition. Majority shareholders rarely succeed because alternative remedies exist.

When? Disputes frequently arise in quasi-partnership companies where personal relationships break down, in owner-managed SMEs and in investor-backed companies where majority investors use control rights aggressively.

Risks for directors. The court has wide discretion to order share buyouts, amendments to articles, or even wind up the company. Directors may incur adverse costs or be required to purchase minority shares at fair value. Because the petition is a dispute between members, the company may not indemnify directors.

Defence. Show that the conduct was commercially justifiable and not oppressive, that the petitioners acted fairly, or that a shareholders’ agreement provides an alternative remedy. Early negotiations can sometimes achieve a consensual share buyout.

Claims for breach of statutory duties and misfeasance

Beyond derivative and unfair prejudice claims, directors may face direct actions for breach of statutory duties or misfeasance. Misfeasance arises where directors misapply money or property, breach fiduciary duties or fail to exercise due care. Examples include misuse of assets, preferential payments to selected creditors and failure to keep proper records. Liquidators often bring misfeasance claims under section 212 of the Insolvency Act, seeking restitution or compensation.

Wrongful trading (s. 214 Insolvency Act): Wrongful trading creates personal liability where directors allow a company to continue trading when they knew (or ought to have known) that insolvency was unavoidable. Directors must then contribute to the company’s assets. Fraudulent trading involves deliberate deception and carries criminal as well as civil penalties.

Trading misfeasance: A 2024 High Court judgement in Wright v Chappell (BHS) introduced the concept of trading misfeasance – liability for continuing to trade when the company is insolvent or bordering on insolvency. The court upheld a £150 million award against former BHS directors, applying a ‘but for’ test of causation and holding that losses measured by the increase in net deficiency between breach and administration were recoverable. The case demonstrates that courts may impose far greater liability for trading misfeasance than for statutory wrongful trading.

Defences: Directors should evidence steps taken to minimise losses, such as seeking professional advice, exploring restructuring options and treating creditors equally. In misfeasance and wrongful trading claims, the burden often shifts to the director to demonstrate they took every reasonable step to reduce potential loss to creditors.

Claims linked to insolvency and regulatory enforcement

• Failure to file accounts: a criminal offence enforced by Companies House. Conviction may lead to fines and, after repeated offences, disqualification. Directors must show they took all reasonable steps to comply.
• Director disqualification: repeated misconduct, fraud, misfeasance or failure to file accounts can lead to bans of two to 15 years. In 2022/23, 2,270 directors were summoned for failing to file annual accounts or confirmation statements (reported in Companies House enforcement updates). Only around 40% were convicted, but the upward trend in prosecutions signals increased scrutiny.
• Economic Crime and Corporate Transparency Act 2023: Companies House is now an active gatekeeper. Between March 2024 and March 2025 it challenged 100,400 companies’ data, including addresses and ‘People with Significant Control’ and issued penalty notices for serious late filing. Under the Economic Crime and Corporate Transparency Act (ECCT), identity verification became mandatory for new and existing directors from November 2025.

The breaches directors are most often accused of

Allegations of breach rarely appear in abstract terms. In practice, they tend to fall into a small number of recognisable patterns:

• Acting outside authority or for an improper purpose: Directors must act within their powers and for proper purposes. Allegations often arise where decisions appear to benefit one group of shareholders over another, or where powers are used tactically during disputes rather than for genuine commercial reasons.
• Failing to promote the success of the company: Directors are required to act in good faith to promote the success of the company for the benefit of its members. Disputes often arise where decisions prioritise short-term advantage, personal position or one stakeholder group at the expense of the company as a whole.
• Conflicts of interest and misuse of position: Conflicts are a frequent source of allegations. This includes failure to disclose competing interests, using company information for personal gain, or diverting opportunities. Even perceived conflicts can become central to a claim.
• Lack of care, oversight or independent judgement: Directors are expected to exercise reasonable care, skill and diligence and to apply independent judgement. Claims often arise from inaction, failure to challenge decisions, or reliance on others without proper scrutiny.

Breaches need not be deliberate. Negligence, poor oversight or ill-timed decisions can still amount to a breach. Consequences may include civil liability (repayment of profits, compensation or unwinding transactions), director disqualification for two to 15 years and personal exposure if the company becomes insolvent.

Recent enforcement demonstrates the stakes. In the 2024/25 financial year, the Insolvency Service statistics show that it secured 1,037 director disqualifications, with an average ban of 8.3 years.

Whistleblowing vs breach – why ‘doing the right thing’ can still create risk

Directors sometimes discover misconduct and feel compelled to disclose it. The Public Interest Disclosure Act 1998 (PIDA) protects workers who make a protected disclosure about criminal offences, legal breaches or other serious failures. However, directors owe duties of confidentiality and loyalty to the company. The tension arises because:

• Disclosing confidential information externally without proper channels may itself breach duties or contractual obligations. A disclosure must relate to the public interest and be made to an appropriate person or body in order to be protected.
• After a disclosure, relationships often sour, and others may recharacterise allegations as breaches of fiduciary duty, misuse of information or conflict of interest. The timing, method and audience of the disclosure are crucial.
• Whistleblowing protection does not eliminate the risk of removal from office or civil claims. It may provide a defence against unfair dismissal or detriment, but not against claims brought by the company.

Directors contemplating disclosure should seek specialist advice. Internal channels, independent non-executive directors or regulators can provide safer routes. Early legal advice can help frame disclosures to maximise PIDA protection while minimising breach risk.

Many disputes involving directors overlap with a shareholder dispute when the director is also a shareholder or employee. In these cases, income structure, exit restrictions and tribunal limits often shape how the dispute unfolds in practice.

How company size affects disputes and claims

While directors’ statutory duties are the same across all companies, the way disputes arise and are pursued varies significantly depending on corporate structure, governance and control.

Owner-managed SMEs: In owner-managed SMEs, informality and overlapping roles are common. Poor documentation, blurred authority and unmanaged conflicts increase the risk of alleged breaches, particularly during relationship breakdowns rather than clear misconduct.

VC-backed and investor-controlled companies: Venture-backed companies tend to have formal documentation but sharper power imbalances. Investor control rights, reserved matters and dilution mechanics often frame disputes, with claims driven by contractual leverage as much as statutory duty.

Large corporates: Larger organisations usually operate within established governance, audit and insurance frameworks. These can reduce personal exposure but increase scrutiny, with alleged breaches more likely to be escalated internally or to regulators rather than resolved informally.

Steps you can take right now

Whether a respondent or applicant, there are practical steps you can take to reduce risk:

• Secure advice early: Early legal advice is not an admission of guilt; it removes uncertainty and allows informed decisions. Also, speak to an accountant to get their perspective.
• Get decisions and communications on record: If you have been excluded, ask for clear, official confirmation of what decisions have been taken and what has been communicated about you, including board minutes, resolutions and any internal or external announcements. If you are involved in decisions affecting another director, ensure that communications are accurate, properly authorised and consistent with the company’s governance processes.
• Preserve evidence: Implement a ‘hold’ on document deletion; retain emails, board packs and messages. Do not edit or destroy documents.
• Disclose conflicts and withdraw: Make full declarations and step back from relevant decisions.
• Engage constructively: Seek particulars of allegations and provide measured responses through your legal team. Avoid emotional or casual communication.
• Document your judgement: Record the factors considered, advice received and why the decision was in the company’s interests.
• Notify insurers: Promptly inform Directors and Officers (D&O) insurers and follow policy conditions.

Silence or concealment often leads to harsher outcomes. Companies House prosecutions show that early engagement and evidence of ‘all reasonable steps’ are crucial to avoiding conviction. In insolvency, officeholders scrutinise historic transactions for misfeasance and preferences. When in doubt, take professional advice rather than improvising.

Early specialist advice is usually essential where

In reality, there are usually more options than it seems at the outset. Claims can be defended or resolved; shareholders can negotiate exits; misfeasance claims can be mitigated.

• Allegations of breach, misfeasance or conflict of interest surface.
• The company is approaching insolvency or has entered administration.
• Shareholders threaten derivative or unfair prejudice proceedings.
• You contemplate disclosing wrongdoing under whistleblowing legislation.
• You are considering resignation or are removed from the board.

Many director disputes settle before catastrophic outcomes. Honest, prompt engagement with advisers often leads to negotiated share purchases, agreed resignations or internal improvements rather than litigation.

Understanding your duties, status and options is the first step to regaining control.

Visit our director disputes service page to see how we can help if you need it.

Riah Sattar