COMPANY LAW - 03.02.2020

Do you have a conflict of interest?

Why distinguish between interests?

Ideally, a director’s interests would always be perfectly aligned with their company’s. However, conflicts of interest are common, particularly in small companies where the line between the individuals and the company is easily blurred and there is less independent oversight. Since a company is a separate legal entity and reliant on its directors to act in its best interests, directors are subject to various legal duties to ensure that they do not abuse their position (see The next step ). One such duty is to avoid conflicts of interest.

What is a conflict?

This duty encompasses any situation in which a director’s interests might clash with the company’s. This includes everyday situations, such as employing a relative or appointing them as a director, providing goods or services to friends/family on “mates’ rates”, or helping someone else out with their business.

Tip. Don’t fall into the trap of assuming that a conflict is irrelevant if the company is not disadvantaged. Contracts can be overturned and directors held personally liable even if the company did not suffer or the director intended no harm to their company.

Flexibility in the rules

Applied strictly, this duty would make it impossible for many smaller companies to operate. Company law therefore strikes a balance by requiring directors to disclose their interests fully to their companies. The company can then decide whether the director can participate in the relevant decisions.

Tip.  Directors must disclose any interest, whether it creates a conflict or not.

Procedure

A disclosure must be made (at a board meeting or in writing to the board) regarding any interests in proposed and existing transactions and arrangements. It can take the form of a general notice, e.g. that a director would have an interest in any dealings between their company and their brother’s business, or a specific notice regarding a particular transaction. In either case, the director can then act in relation to the interest if there is no conflict, or the shareholders can pass a resolution allowing them to act (even if there is a conflict).

Tip. Check your company’s articles in case they differ from the standard procedure. See The next step for a conflict flow chart.

Failure outcome

A failure to disclose can lead to personal liability (on top of liability for any related breach of the duty to avoid conflicts).

Tip. Always err on the side of caution and make a disclosure even if you’re not sure it’s relevant.

Keep organised

A register of directors’ interests is not obligatory but helps to keep track of conflicts. If kept up to date and in a searchable format, e.g. an Excel spreadsheet, it can easily be checked prior to significant decisions, like a major purchase or new business relationship.

For a directors’ duties summary and conflict of interest flow chart, visit http://tipsandadvice-business.co.uk/download (CD 21.09.02).