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New Directors’ Duties

» Posted on: 3 November 2008
» Posted by: Rebecca Glancy
» Service area: Business Support & Restructuring

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On 1 October 2008, the following provisions of the Companies Act 2006 in relation to directors’ duties came into force:

  • the duty to avoid conflicts of interest (section 175)
  • the duty not to accept benefits from third parties (section 176)
  • the duty to declare interests in proposed transactions or arrangements (section 177)

Duty to Avoid Conflicts of Interest
The Act provides that a director must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or may possibly conflict, with the interests of the company. This duty applies in particular to the exploitation of any property, information or opportunity, whether or not the company could take advantage of this.

A director will not infringe this duty if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest or if the matter has been authorised by the directors. The Articles of Association of a public company must contain a specific provision enabling director authorisation.

All public companies should therefore be looking to amend their Articles in this way. In respect of a private company, director authorisation is permitted provided there is nothing in the Articles to invalidate such authorisation. However, for any companies incorporated before 1 October 2008, a resolution will need to be passed to that effect. In both cases, authorisation can only be given by independent directors.

Therefore any director with a conflict or potential conflict will not be counted as part of the quorum of the meeting and his vote, if any, will also not be counted.

Directors authorising a conflict should consider each situation on its own merits and also consider whether any limitations should be attached to their authority and its duration. There is a further safeguard in section 180(4) of the Companies Act 2006 in that providing directors comply with the procedures set out in the company’s Articles, they will not be in breach of their duties.

Duty not to Accept Benefits from Third Parties
A person may not accept a benefit from a third party conferred by reason of his being a director or his doing (or not doing) anything as a director. However, the duty is not infringed if acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

Duty to Declare an Interest in a Proposed Transaction or Arrangement
A director must declare the nature and extent of his interest, whether direct or indirect, in a proposed transaction or arrangement with the company, before the company enters into that transaction or arrangement.

A declaration can be made at a meeting of the directors. It can also be made by notice in writing sent to all other directors by hard copy or, if agreed, electronic format. A director can also give general notice if he has an interest in a specified body corporate or firm or if he is connected with a specified person.

Such notice must state the nature and extent of the director’s interest in the body corporate or firm or the nature of his connection with the specified person and will further state that the director is to be regarded as interested in any transaction or arrangement that may, after the date of that notice, be made with that body corporate or firm, or specified person. Notice must be given at a meeting of directors or be brought up and read at the next meeting of directors after it is given. Further declarations must be made if previous declarations become inaccurate or incomplete.

It is not necessary to declare an interest in the following situations:

  1. If the director is not aware of the transaction or arrangement in question (a director is treated as being aware of anything which he ought reasonably to have been aware)
  2. If the situation cannot reasonably be regarded as likely to give rise to a conflict of interest
  3. If, or to the extent that, the other directors are already aware of it
  4. If, or to the extent that, it concerns the terms of the directors service contract that have been or are to be considered buy a meeting of the directors or by a committee of directors

Directors must also declare their interests in existing transactions or arrangements as soon as reasonably practicable under s182 of the Act. This is not a duty and the consequences of breach attract criminal liability.

Effects of Breach
The Act preserves the common law and equitable remedies available in the case of a breach of the duties set out above. A breach of the duty to declare an interest in an existing transaction or arrangement is a criminal offence punishable by a fine.

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