In England and Wales, every company director owes duties to their company.
What is a conflict?
These duties mostly relate to responsibility and management of the company, including the statutory duty under section 175 of the Companies Act 2006 (CA 2006). A director must avoid a situation where they have, or could have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. This duty is particularly pertinent to the exploitation of any property, information, or opportunity, regardless of whether the company could take advantage of it.
This type of conflict is referred to as a ‘situational conflict’, arising from the circumstances of the directorship. For example, where a director is a director of two companies who wish to enter into a service agreement together. Section 175 encompasses any potential or actual conflict between a director's personal interests or duties and their obligations to the company.
How do you deal with a situational conflict?
According to section 175(4), the duty is not infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest, or if the matter has been authorised by the board of directors. The relevant director must not be included in the quorum or voting arrangements, unless the company’s articles allow otherwise. Shareholders representing over 50% of votes at a general meeting are also able authorise a situational conflict.
Is a transactional conflict any different?
A ‘transactional’ conflict relates to a specific transaction or arrangement to which the company is party. This can occur whether the company proposes to enter a transaction or arrangement where the director may have conflicting interests (section 177 of the CA 2006), as well as where the transaction or arrangement has already been entered into (section 182 of the CA 2006).
Transactional conflicts require that a director declare the nature and extent of their interest to the other directors in respect of any proposed or existing transaction, which differs to the director duty of section 175 to avoid that situation where a conflict of interest arises.
Transactional conflicts are not prohibited, as situational conflicts are, and a director can fulfil their duty under section 177 or 182 by declaring their interest in accordance with the company’s constitution. The declaration must be made before the company enters into the transaction or agreement (section 177) or as soon as is reasonably practicable (section 182). The company may then proceed with the transaction or arrangement without risk of such being rendered null and void.
What should a director consider?
- Personal liability- Directors who breach their conflict of interest duties can be held personally liable; non-disclosure of a relevant interest in an existing transaction can result in criminal sanctions and penalties.
- Connected Persons- Conflict of interest rules may also apply to ‘connected persons’ of a director. Where a ‘connected person’, for example a spouse or sibling, has an interest that conflicts with the company’s, it can be considered as the director’s own conflict of interest. Therefore, it is essential that a director considers the interests of those close to them in relation to the interests of the company.
- Ex-directors- Where a director has resigned, they remain subject to the duty regarding the exploitation of any property, information or opportunity of which they became aware at time when they were director. Recent case law has shown a rise in cases of this nature, with the court taking a strict approach to holding ex-directors liable for exploiting information or opportunity of which they became aware at a time when they were a director of a company.
In conclusion, the duty to avoid conflicts of interest is a fundamental aspect of a director's responsibilities under the Companies Act 2006. Directors must be vigilant in identifying potential conflicts and ensuring that they are properly authorised or avoided to comply with their statutory duties and promote the success of the company. Companies should ensure that they have strict procedures in place to address directors’ duties and that their constitution assists the authorisation of such.
How can we help you?
Directors’ duties are crucial to the success of a company and for those directors who are responsible, compliance is key. It is often easy to overlook situations where the law deems a conflict of interest to exist and directors risk personal liability for failure to deal with any conflicts properly. If you believe that you or your company would benefit from further information or guidance on this topic, our Corporate team can help. We can advise on situations where a conflict of interests may arise, review director conduct in relation to any conflict and pursue action on behalf of the company.
