Directors’ duty to avoid conflicts of interests
Duty to avoid conflicts
One of the more high-profile changes introduced by theCompanies Act 2006 was the new duty of directors under section 175to avoid conflicts of interest - a director must avoid a situationwhere he has, or can have, a direct or indirect interest thatconflicts, or possibly may conflict with the company's interests.This requirement is very broad and could apply, for example, if adirector becomes a director of another company or a trustee of hiscompany's pension scheme.
Directors can authorise conflicts
The Act allows directors to authorise conflicts andpotential conflicts. Such authorisation must be given byindependent directors who form a quorum. For private companiesincorporated on or after 1 October 2008, articles of associationmust not contain any provision preventing such authorisation. Atransitional provision was introduced for private companiesincorporated before 1 October 2008 which required a shareholderresolution to be passed allowing such authorisation.
However, this transitional provision did not fall away whenthe Act became fully in force on 1 October 2009 - so, if a privatecompany formed before October 2008 wants its directors to be ableto authorise conflicts it will first need to pass an ordinaryresolution of the shareholders to allow this. A failure to do thiscould, in theory, leave conflicted directors open to liability forbreach of this duty. The consequences of a breach can include thedirector being required to pay damages or compensation where thecompany has suffered a loss or a requirement for the director toaccount for profits made or received by the director.
Authorisation by shareholders
We have come across situations where directors have beenunable to authorise conflicts because the company could not achievea quorum of independent directors because all the directors wereconflicted. In such a situation, it will be necessary for theshareholders to authorise the conflicts.
Articles of association
The Act allows articles of association to contain otherprovisions for dealing with directors' conflicts of interest and wehave found it useful, to include, for example, provisions relatingto confidential information, attendance at board meetings andavailability of board papers to protect a director being in breachof duty if a conflict or potential conflict of interestarises.
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.