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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:
- 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)
- If the situation cannot reasonably be regarded as likely to
give rise to a conflict of interest
- If, or to the extent that, the other directors are already
aware of it
- 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.
Copyright 2006 - 2010
Taylors Solicitors
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Directors’ Duties