Directors’ duty to avoid conflicts of interests
Duty to avoid conflicts
One of the more high-profile changes introduced by the
Companies Act 2006 was the new duty of directors under section 175
to avoid conflicts of interest - a director must avoid a situation
where he has, or can have, a direct or indirect interest that
conflicts, or possibly may conflict with the company's interests.
This requirement is very broad and could apply, for example, if a
director becomes a director of another company or a trustee of his
company's pension scheme.
Directors can authorise conflicts
The Act allows directors to authorise conflicts and
potential conflicts. Such authorisation must be given by
independent directors who form a quorum. For private companies
incorporated on or after 1 October 2008, articles of association
must not contain any provision preventing such authorisation. A
transitional provision was introduced for private companies
incorporated before 1 October 2008 which required a shareholder
resolution to be passed allowing such authorisation.
However, this transitional provision did not fall away when
the Act became fully in force on 1 October 2009 - so, if a private
company formed before October 2008 wants its directors to be able
to authorise conflicts it will first need to pass an ordinary
resolution of the shareholders to allow this. A failure to do this
could, in theory, leave conflicted directors open to liability for
breach of this duty. The consequences of a breach can include the
director being required to pay damages or compensation where the
company has suffered a loss or a requirement for the director to
account for profits made or received by the director.
Authorisation by shareholders
We have come across situations where directors have been
unable to authorise conflicts because the company could not achieve
a quorum of independent directors because all the directors were
conflicted. In such a situation, it will be necessary for the
shareholders to authorise the conflicts.
Articles of association
The Act allows articles of association to contain other
provisions for dealing with directors' conflicts of interest and we
have found it useful, to include, for example, provisions relating
to confidential information, attendance at board meetings and
availability of board papers to protect a director being in breach
of duty if a conflict or potential conflict of interest
Posted on: 17/09/2010
This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.
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