The Companies Act 2006 introduced a number of duties to which all company directors must comply. Director’s conflict of interest refers to a situation in which a director’s personal interests or the interests of other persons to whom the director is connected to owes duties are, or may be, at odds with the duties owed by the director to the company. These duties include:
- the duty to avoid conflicts of interest
- the duty not to accept benefits from third parties
- the duty to declare interest in a proposed transaction or arrangement (transactional conflicts) and
- the duty to declare interest in an existing transaction or arrangement.
Further to these statutory requirements, a company’s Articles of Association as well as setting out aspects of how the company must be run also detail what to do in the event of a conflict of interest.
Shareholders are usually empowered to authorise a conflict by passing an ordinary resolution. Pursuant to the Companies Act 2006 , a company’s articles may provide that such authorisation may be given by the non-conflicted directors, however this is only effective if the conflicted director(s) is/are excluded from the voting and quorum requirements in relation to authorisation.
What happens if a breach of these duties occurs?
Deliberately failing to disclose a conflict of interest, is a serious breach of director duties and could result in criminal prosecution. Directors must take responsibility for their own legal compliance in this respect and cannot pass responsibility to the company or other directors. A breach of the duties may also give rise to civil remedies. Depending upon the circumstances of the breach, this could include compensation, damages, an account of profits, restoration of property or rescission of a contract.
The strictness of the courts approach in the cases of Bhullar v Bhullar and Regal (Hastings) Ltd v Gulliver reinforces the fact that these duties are meant to act as a deterrent. In both cases, the failure to disclose a potential personal conflict of interest resulted in serious repercussions for the directors involved. Therefore, disclosing a conflict of interest properly and as soon as it arises will ensure that they have put the interests of the company before their own personal interest, with the resultant effect leading to a a ratification of the transaction as opposed to a breach of their duty.
What steps should directors take in order to comply with their duties?
Directors should ensure that they keep themselves informed of the business of the board so as to be able to identify potential situations of conflicts and obtain the necessary authorisations by making the necessary declarations in advance. This is particularly important for non-executive directors who are not likely to be involved in day-to-day management.
Where the board and shareholders propose to authorise a conflicted transaction consideration should be given as to the scope of the approval. It is important to remember that, when considering whether to authorise conflicts, the overarching consideration for all should be “does the entering into the transaction promote the success of the company?”
For further information on director conflicts or advice regarding your company and potential conflicts, contact Michelle.Lamberth@Herrington-Carmichael.com or call 0118 989 9706.
This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to your own particular matter before action is taken.
