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 arises.

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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