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Companies Act 2006: Important Changes for the Statutory Duties of Company Directors

From 1 October 2008 a Director will have a Statutory Duty under Section 175 of the Companies Act 2006 to avoid a situation in which he has or can have a conflict of interest or a possible conflict of interest with that of the Company.

Formerly, where a material conflict arose, the Director concerned would take steps to mitigate the conflict by, for example, absenting himself from Board discussions and, in extreme cases, standing down from the Board.  Under Section 175 however, a Director must not let the situation arise in the first place, unless the Board has given prior authorisation. This change in the law will require Companies to operate more formal procedures regarding the conflicts of interest. However, if a potential conflict has been authorised, the change should not result in the relevant Director behaving in a different way than he would at the moment when a real conflict arises.

Section 175(1) of the 2006 Act states that a Director of a Company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the Company.  Such a situation could arise where a Director of a Company is a competitor of that Company, or even where a Director of a Company is a major share holder of that Company;  similarly, if a Director of a Company is a potential customer or supplier to the Company.

There could even be a conflict where a Director of a Company owns property adjacent to the Company’s property, the value of which being affected by the activities of the Company.  If a Director of a Company is in an advisory relationship, such as a Solicitor or an Accountant Director of the Company or of a competitor, there could be a potential conflict situation. 

A  more obvious example would be where a Director is in a situation where he can make a profit as a result of his Directorship, whether or not he discloses it to the Company, or where he can take an opportunity offered but declined by the Company.

Provided a conflict situation has been authorised by the Directors, it will not require approvals by share holders. However, in the case of Public Companies, the authorisation can only be given where the constitution includes provision enabling the Directors to authorise the matter and the matter is proposed to and authorised by them in accordance with the constitution.  There are some important points to note about authorisation.  First, the authorisation by the Board cannot be retrospective, and secondly, the authorisation will apply to the conflict situation, but not other breaches of duty.  For example, even if a Director’s conflict has been authorised, that will not absolve him from his duty to act in a way that he considers it most likely to promote the success of the Company under Section 172. 

However, under Section 180(4(b)) where a Company’s Articles contain provisions for dealing with conflicts of interest, the general duties are not infringed by anything done (or omitted to be done) by the Directors or any of them, when following these provisions.

Actions to be Taken

Any provision in the Articles enabling the Directors to authorise the matter, giving rise to the actual or potential conflict, must include the power for the Board to authorise conflict.  In addition, a Company may want to set out in its Articles how any matter is proposed to the Board, and how it is to be authorised by them.
 
Companies will need to consult their advisors on the timing of changes to their Articles to reflect Section 175 and, if deemed necessary, Section 180(4(b)), and the timing of the Board Meeting to authorise conflicts.

The Board will want to consider the situation of each of the Company’s Directors to determine if there are actual or potential conflicts of interest that need to be proved in accordance with Section 175(4) to avoid the Director being in breach of Section 175.  It should be stressed that each situation should be considered separately on its particular facts.  It is not practical to prescribe what conflicts should be authorised or to what extent.  Each Director’s situation needs to be considered by the Board, and the Board must consider whether to approve any conflict situations taking account of their general duties under the 2006 Act.

The Board also needs to consider what should happen if a real conflict arises, post authorisation, if the Director has clearly conflicting interest. 
The options are :-

a. Exclude the Director from the relevant information on database;
b. Exclude the Director from the Board (suspension); or
c. Require the Director to resign.
        
Pearson Hinchliffe Commercial Law advise companies and directors on all matters realting The Companies Act 2006. Click here to contact a specialst commercial lawyer.

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