A director’s duties can be confusing at times. Some company directors fail to properly grasp the distinction between the company as a separate legal entity and their own personal and financial matters. Instead, they have a tendency to view themselves and the company as one and the same. In the case of a private limited company, especially in an insolvency situation, this could potentially lead to civil or even criminal liability.
A director’s ability to look at the merits of a particular situation and act objectively are often impacted by the pressures of financial problems in the business.
Breach of directors duties does quite commonly arise in the lead up to insolvency. It is during this crucial period that we can help. The earlier you get good advice if your business is failing, the less chance of you making things worse for the business or you. Please do get in contact for a confidential, free discussion.
What is a Conflict of Interest?
• The duty to avoid situational conflicts unless authorised;
• The duty to avoid transactional conflicts unless authorised.
When Might Situational and Transactional Conflicts of Interest Occur for Directors?
The requirement to disclose a situational conflict of interest, covered by section 175 of the Companies Act, is very broad. Examples include a director becoming a director of a similar or related company, or a child or spouse working for a direct competitor. Alternatively, a company director could become a trustee of the same company’s pension scheme.
A transactional conflict of interest, as covered by section 177 of the Companies Act, occurs when a director has a personal interest in any proposed or existing transaction the company has entered, or intends to enter into. An example could be the sale of personal property to the company, or a transaction between the company and another company connected parties are involved with.
What does the Law say?
Company directors are legally obliged to avoid conflicts of interest wherever possible. If they identify a potential conflict, they must follow specific rules to avoid recriminations further down the line.
Section 175, Companies Act 2006
As per Companies Act 2006, the liability for a conflict of interest lies with each director personally and not with the company. Failure to comply with these regulations is considered a serious breach of the director’s duties, and could lead to criminal action. For this reason, it’s essential anyone involved in the running of a limited company or limited liability partnership regularly reviews their personal and business interests to avoid conflicts wherever possible. If they identify a potential conflict, they can protect themselves by seeking authorisation.
Authorising Conflicts of Interest
Where conflicts do arise, company directors need to be as open as possible to disclosing the conflict. They should also take steps to exclude themselves from discussions and decisions made on the issue. In extreme cases, they should even consider standing down from the board.
For companies formed after 1 October 2008, the power of directors to pre-authorise conflicts of interest is implied, but details can be included in the articles of association about the processes that will be used. This can include information about how conflicts will be declared, or who is entitled to vote on the issue.
In most cases, a board meeting will need to be held so those directors not involved in the conflict can determine whether a conflict has arisen. They will also decide whether the director in question is in breach of his or her duty to act in the best interests of the company. Shareholders can also authorise a potential or actual conflict through the use of an ordinary resolution.
What Happens if a Director Breached his Duties?
It is usually the company itself who takes action against a director who has breached his duties.
Where shareholders or other members have suffered financial loss as a result of the directors actions they may choose to take action. This might result in the director:
- being removed from office
- having to restore company property
- setting aside transactions