Continuing our look at directors’ duties, in this third newsletter on UK directors we look at managing conflicts.

What does the law say?

Under the Companies Act 2006 (CA), a director has a general duty to avoid any conflict between their own interests and duties and those of the company (s.175 CA). The scope of this duty covers conflicts of interest and duty, as well as the duty not to misuse company property or information.

Directors must avoid situations in which they have, or could have, a direct or indirect interest or duty that conflicts, or may conflict, with the interests of the company. You will note from this language that the duty covers potential as well as actual conflicts.

What are common examples?
The most obvious examples are where a director has an interest in a contract with the company. For example, the director wishes to sell or rent property to the company. Or the company enters into a contract with a family member of the director.

A conflict may arise where a director pursues separately a business opportunity that the company was interested in. The courts have enforced the duty in such circumstances even when the company has chosen not to pursue the opportunity.

Directors who are on the board of more than one group company can find themselves in a conflict situation and need to be careful to separate the interests of different companies and put the interests of one company over those of another.

How do you manage such conflicts?

A director can usually manage a conflict situation by undertaking a combination of the following actions:

• Obtaining permission from the board or company to act despite a conflict
• Declaring his or her interest
• Not participating in decision making regarding the relevant matter
• Acting on the advice of the other directors or a professional adviser
• Accounting to the company for any profit the director makes
• In extreme cases, resigning

The board (excluding the conflicted director) can authorise the director to act despite a conflict.

If the board cannot or will not authorise the director to act, the company can nonetheless consent in certain circumstances. Such permission can be set out in the company’s articles of association or by way of shareholder resolution.

What if the conflict doesn’t harm the company?

The courts take a strict line on conflicts. A number of genuine defences have been put before the courts but still been rejected, including:

• the company suffered no loss or even benefited from the contract which was the subject of the conflict
• the contract was fair and reasonable
• the director acted honestly.

Are there any ways to manage the liability after a conflict has occurred?

Clearly, managing the conflict in advance is preferable. However, there may be circumstances when managing the conflict after the event may be possible. A common example would be where the director, in good faith, was unaware of the conflict. The company may, by shareholder resolution, ratify the breach of duty caused by the conflict. Directors may also benefit from directors and officers (D&O) insurance.

Conflicts can and should be managed. A company should have a clear conflict of interest process set out in the articles and directors need to be alive to both potential and actual conflicts.

If you need any assistance in understanding directors’ duties and managing conflicts, please do get in touch.

Keith McAlister

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Registered in England & Wales | Registered office is 60 Moorgate, London, EC2R 6EJ
3CS Corporate Solicitors Ltd is registered under the number 08198795
3CS Corporate Solicitors Ltd is a Solicitors Practice, authorised and regulated by the Solicitors Regulation Authority with number 597935


Registered in England & Wales | Registered office is 60 Moorgate, London, EC2R 6EJ
3CS Corporate Solicitors Ltd is registered under the number 08198795
3CS Corporate Solicitors Ltd is a Solicitors Practice, authorised and regulated by the Solicitors Regulation Authority with number 597935