Diverting Business

In director and shareholder disputes, “diverting business” refers to the act where a director or a group of directors diverts potential or existing business away from the company to another entity, typically for personal gain.

This could mean redirecting customers, using company resources for personal benefit, or setting up competing ventures. Such conduct can undermine company profits and shareholder value, and is often in contravention of the directors’ obligations to act in the best interests of the company.

Yes, diverting business can certainly be considered a breach of fiduciary duty. Directors owe their company a duty of loyalty and must act in its best interests, as stipulated under the Companies Act 2006. By diverting business, directors may be prioritising their interests over those of the company, thus breaching the duty they owe. Proving this breach is central to legal challenges in such disputes.

Shareholders can keep an eye out for signs that business may have been unlawfully diverted. These may include:

• Unexplained declines in company revenue or profits
• Directors starting a new, similar venture or having interests in a competing business
• Changes in customer or supplier relationships without clear business rationale
• Shareholders should scrutinise financial statements, board meeting minutes, and other company records for evidence of such activities.

If you think that a director is diverting business, please do not hesitate to contact us urgently. You can call us on 0207 459 4037 or complete our online booking form for a Free Consultation today.

If shareholders suspect business diversion, they have several legal actions at their disposal:

• Raising the issue with the board of directors or at a shareholder meeting
• Demanding an independent investigation into the alleged activities
• If satisfaction is not obtained through internal mechanisms, shareholders may consider legal proceedings, including derivative actions on behalf of the company.

Our expert lawyers are experienced in navigating disputes concerning the diversion of business, please get in touch with us today for a Free Consultation.

If business diversion is proven in court, shareholders may obtain several remedies:

• Injunctions to stop the diversion and prevent future breaches
• Orders for directors to account for profits made from the diverted business
• Damages to compensate the company for any loss suffered
• In some cases, the court may order the rescission of contracts entered into by the directors in breach of their duties.

For detailed advice and to explore the full spectrum of legal options available, shareholders are encouraged to seek legal counsel. Our specialist dispute resolution team provides expert guidance and representation in such disputes. To begin addressing concerns of business diversion, please book a Free Consultation with our expert dispute resolution lawyers by calling 0207 459 4037 or using our online booking form.

Directors can defend against allegations of diverting business by demonstrating that their actions were in line with the company’s best interests or that they had informed consent from the company. This could include showing:

• Proper authorisation was obtained from the board or shareholders for their actions
• No conflict of interest existed, or if it did, it was fully disclosed and managed according to company procedures
• They genuinely believed, with reasonable grounds, that the venture would benefit the company.

It is essential for directors to maintain transparent records and clear communications to substantiate these defences.

Directors are encouraged to seek advice from our experienced lawyers for guidance and representation in such disputes.

Yes, there are time limitations for bringing claims related to business diversion. Under the Limitation Act 1980, claims for breach of trust or duty must generally be brought within 6 years from the date on which the cause of action accrued. However, where a director has concealed a breach, the limitation period may not start until the claimant has discovered the breach or could have discovered it with reasonable diligence.

It is nevertheless important to act swiftly if business is being diverted as it could significantly damage the business and cash flow if action is not taken quickly. Our lawyers are here to help; do not hesitate to call us on 0207 459 4037 for a Free Consultation today.

Yes, business diversion claims can indeed be brought concurrently with other director/shareholder disputes. These could include claims for breach of contract, breach of statutory duty, or other forms of equitable relief. We will need to consider consolidating these claims into a single claim if they are related, streamlining the legal process and potentially saving on costs and time.

Company auditors play a critical role in uncovering business diversion. Their objective scrutiny of the company’s financial statements can reveal discrepancies that suggest diversions, such as unexplained decreases in revenue or unusual transactions.

Auditors have a duty to report to the company any significant findings that may point to fraud or error, including potential cases of business diversion. It is their vigilance that can often bring to light the initial signs that such a breach of duty has occurred.

If you are facing issues related to business diversion or have concerns about directorial conduct, our legal team can offer comprehensive support and guidance. To delve into the specifics of your situation and explore the avenues available to you, book a Free Consultation with our expert dispute resolution lawyers. Contact us on 0207 459 4037 or use our booking form to arrange a discussion.

Business diversion can significantly impact the financial health and valuation of a company. When business opportunities are diverted, the company may experience:

• Loss of Revenue: Diverted opportunities can lead to a direct loss of sales and profits, diminishing the company’s financial performance
• Damaged Reputation: The discovery of business diversion can erode trust with shareholders, customers, and suppliers, potentially affecting future business
• Decreased Valuation: The combined effect of reduced profits and damaged reputation can lead to a lower company valuation, impacting investment appeal and market position.

Alternative Dispute Resolution (ADR) methods such as mediation and arbitration can be highly effective in resolving disputes related to business diversion. ADR can:

• Facilitate a Settlement: ADR offers a confidential setting where parties can reach a mutually satisfactory resolution without the adversarial nature of court proceedings
• Save Time and Costs: Resolving disputes through ADR is often faster and more cost-effective than litigation
• Preserve Relationships: ADR can help maintain business relationships by fostering a more collaborative approach to dispute resolution.

Our lawyers are strong advocates for mediation, which can often lead to favourable settlements. Several of our lawyers are trained mediators and expert negotiators who are registered members of the Chartered Institute of Arbitrators (CIArb) and the International Mediation Institute. Our expertise in mediation gives our lawyers a significant and unique advantage when navigating settlement discussions on your behalf.

Directors found guilty of diverting business may face criminal consequences if their actions involve elements of fraud, theft, or deception. Under UK law, such conduct could lead to:

• Prosecution: Directors may be prosecuted under the Fraud Act 2006 or the Theft Act 1968.
• Penalties: Convictions can result in fines, disqualification from directorship, and even imprisonment.

Yes, a director can be removed from their position for engaging in business diversion. Shareholders can:

• Vote to Remove: A majority shareholder vote can remove a director in accordance with the company’s articles of association and the Companies Act 2006.
• Apply to Court: In certain circumstances, shareholders may apply to the court for an order to remove a director for breach of duty.

If you wish to remove a director from your company, please do not hesitate to contact our expert lawyers today for a Free Consultation on 0207 459 4037.

Shareholders can take proactive steps to prevent business diversion:

• Implement Oversight Mechanisms: Regular audits and the establishment of internal controls can monitor directorial actions.
• Set Clear Policies: Company policies should clearly outline prohibited conduct and the process for handling conflicts of interest.
• Review Director Agreements: Employment contracts and director agreements can include clauses that specifically prohibit the diversion of business.

For detailed guidance on these issues and to safeguard your company against business diversion, consider seeking legal advice. Our lawyers offer comprehensive legal support to navigate the complexities of director and shareholder disputes.

To discuss protective measures and enforcement actions, book a Free Consultation with our expert lawyers by calling 0207 459 4037 or using our booking form.