As an officer of a Company, a director must endeavour to recognise and avoid instances when their own interest may conflict with the interests of the Company.
While avoiding conflicts had historically been a director's duty covered by Common Law, formal legislation was added to the UK Companies Act on 1 October 2008.
Section 175 of the Companies Act 2006 states that a director has a duty to avoid any “situation in which he has, or can have, a direct or indirect interest that conflict, or possibly may conflict, with the interests of the company”. An example of an indirect interest would be if the Company you act on behalf of is considering buying land which is owned by a relative.
The Companies Act makes specific reference to the importance of acknowledging conflicts specific to property, information or opportunity, for example meeting a potential new client through your role as director of ABC Limited, but forming a business relationship through another company you act for.
Declaring interest in a Proposed Transaction
In order for a director to not infringe on their duty to the company, they must declare their interest(s) and have same authorised by the remaining directors. The declaration must be made in advance of the Company entering into the transaction or agreement. A declaration can be made in person, at a directors meeting, or in writing. Hard copies of the declaration should be sent to all directors, however if all the recipients agree, electronic copies of the originals will suffice.
Once the declaration has been sent, it must be discussed as part of the next board meeting and should therefore be noted in the minutes of the next meeting.
When giving notice, the director should state how they believe they may be conflicted, stating both the nature and extent of their interest.
A declaration is not required when:
- Director is unaware of the interest or the transaction
- The event cannot reasonably be regarded as likely to give rise to a conflict of interest
- All other directors are already aware of the conflict
Best practice for a director is to err on the side of caution, as a failure to disclose a conflict of interest is a criminal offence.
Even if you feel the possibility of a conflict is small, or if you are confident all directors are aware of the possible conflict, it is still advisable to make a declaration and allow your fellow directors to decide if the situation is reasonable and if the conflict should be authorised.
Companies with a Sole Director
If you are the sole director of a Company and you foresee a conflict, it is required that you prepare a written declaration, that it is considered at the next board meeting and that it is placed on the Company’s minute book.
It should be noted that when acting on behalf of the Company, a sole director must act in the Company’s best interest and if criminal proceedings arise at a later date they will be asked to rationalise and explain your decision.
Third Party Benefits
Section 176 of the Companies act states that a “director must not accept a benefit from a third party conferred” by reason of:
- a) His being a director, or
- b) His doing (or not doing) anything as a director
As receiving a benefit from a third party could be considered a bribe, it is not possible for fellow directors to authorise this and instead authorisation would be sought from the members. It is also possible for Companies to amend their articles to state that when a director accepts benefits under a specified value, they will not be in breach of their duty to the company. A reason for inserting this clause would be to ensure corporate hospitality would not be construed as an excessive benefit, for example accepting an invitation to attend a sporting event.
A director must act in the best interest of the Company at all times, however conflicts of interest may be impossible to avoid. The Companies Act clearly sets out how a director should act to comply with the law and avoid criminal offences.
As part of a follow up blog, we will discuss how fellow directors can authorise a conflict of interest and how the declaration and subsequent discussions should be entered in the board meeting minutes.