As a company director, you’re tasked with a critical responsibility: always acting in the best interests of your business. But what happens when your personal interests clash with those of the company?
Failing to properly manage conflicts of interest can have serious consequences, both for you personally and for your company’s financial health. In some cases, it can even lead to criminal charges. That’s why it’s crucial to understand what constitutes a conflict, how to identify potential issues, and what steps to take when conflicts arise.
A conflict of interest arises when a director’s personal interests interfere with their ability to promote the success of the company. Two primary categories are recognised by the Companies Act 2006:
Situational conflicts: Arising from a director’s position or circumstances
Transactional conflicts: Related to specific dealings or arrangements
Common scenarios include directorship of competing entities, personal use of company assets, or familial connections to major suppliers. These provisions extend to ‘connected persons’ as defined in the Act, including spouses and certain family members.
Legal Obligations: Avoiding and Disclosing Conflicts Under the Companies Act
In the UK, it’s the Companies Act 2006 that forms the legal cornerstone of directors’ obligations regarding conflicts of interest[1]Trusted Source – GOV.UK – Companies Act 2006, Section 175. Key provisions include:
The duty to avoid situations where interests can conflict (s175)
The obligation to declare interests in proposed transactions or arrangements (s177)
The prohibition on accepting benefits from third parties (s176)
These duties are not merely procedural; they underpin the basic fiduciary relationship between a director and the company.
Breach of these obligations can result in personal liability, disqualification, and in severe cases, criminal sanctions. Since such breaches often surface during insolvency proceedings, they can also lead to claims against directors for wrongful trading or misfeasance.
Resigning as a director doesn’t necessarily end your responsibilities either: these duties continue to apply, particularly concerning the exploitation of any property, information, or opportunity of which the director became aware while in office.
Re Allied Business and Financial Consultants Ltd [2009]
The courts take a strict approach to these duties, as demonstrated in the case of Re Allied Business and Financial Consultants Ltd [2009] (also known as O’Donnell v Shanahan). Here, two directors were found to have breached their fiduciary duties by personally profiting from a property transaction that could have been pursued by their company[2]Trusted Source – Wikipedia – O’Donnell v Shanahan.
The Court of Appeal emphasised that the ‘no-profit’ and ‘no-conflict’ rules apply strictly to directors, regardless of whether the company could have taken up the opportunity itself.
This judgment underscores the importance of disclosure and obtaining proper authorisation before pursuing any opportunity encountered in your capacity as a director. It also highlights that the courts will not entertain arguments about the company’s ability or likelihood to pursue an opportunity – the mere possibility is enough to trigger your duty to disclose.
Identifying and Managing Potential Conflicts
As a director, you’re responsible for spotting and addressing potential conflicts of interest. Common scenarios that might raise red flags include:
Holding directorships in competing companies
Personal investments in suppliers or customers
Family members working for or contracting with your company
Using corporate opportunities for personal gain
To manage these risks, we recommend keeping an up-to-date register of interests and ensuring your company has transparent disclosure procedures in place. If you’re ever in doubt, don’t hesitate to seek independent legal advice.
When you identify a potential conflict, you’ll need to disclose it to the board immediately. Be clear about the nature and extent of your interest. In many cases, you’ll need to step back from related decision-making to ensure you’re complying with your statutory duties.
For private companies, the board may be able to authorise conflicts, depending on your articles of association. Public companies will need specific provisions in their articles to allow this. Either way, make sure the authorisation process is properly documented and reviewed regularly.
What are the Consequences of Non-Compliance?
Failing to manage conflicts of interest properly isn’t just bad practice – it can have serious repercussions. As a director, you need to be aware of the potential consequences.
If you breach your duties regarding conflicts, you could face:
Personal liability for any losses the company suffers
Disqualification from acting as a director
The requirement to account for any profits made from the conflict
In severe cases, criminal charges
Moreover, transactions tainted by undisclosed conflicts may be voidable at the company’s instance. This can lead to significant financial and reputational damage for your business.
In an insolvency situation, these issues come under even closer scrutiny. Liquidators and administrators have powers to investigate directors’ conduct and may bring claims for breach of duty. This can result in personal liability for company debts – a risk you certainly want to avoid.
How Can We Help?
If you are worried about a potential conflict of interest that has yet to be authorised, you can call our director’s helpline on 0800 074 6757 for the expert advice you need. Alternatively, please email: info@companydebt.com or use our live support feature to discuss your circumstances confidentially.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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