Duty to Avoid Conflicts of Interest as a Company Director in the UK

As a company director in the UK, you need to watch out for instances of conflict of interest. For example, perhaps you sit on the board of another company, or you may be selling something to the company. In that case, you want to ensure you are not violating any of your corporate duties. This article will explain how conflicts of interest arise, how to avoid them, and how to disclose them where appropriate.

Duty to Avoid Conflicts of Interest

One of your duties as a company director is to avoid conflicts of interest that clash with the interests of the company. You must also avoid circumstances that have the potential to conflict with the interests of your company.

Importantly, the duty to avoid a conflict of interest is separate from the duty to disclose a personal interest in a company transaction. However, in practice, these may arise in the same set of circumstances.

Examples of conflicts of interest include:

• where you sit on the board of more than one company and the companies are in competition with one another. For example, you are the director for two separate car wash companies in the same town; or
• your company submits a bid for a service contract and is unsuccessful. However, you are interested in securing the contract in your personal capacity.

If it is obvious that there is no actual risk of a conflict of interest, this duty will not apply.

An Example

Suppose you sit on the board for two companies, PrivCarWash Ltd and LoCo Wash Limited. Likewise, PrivCarWash only washes privately owned cars, and LoCo Wash only washes the local authority’s fleet of vehicles. In this instance, you would probably not be in breach.

Similarly, consider if instead of failing to win the contract, your company is approached and turns it down. If you then offer to do the job in your personal capacity, provided your company knew of all the circumstances of the offer before turning it down, there will not be a conflict of interest.

Board Authorisation of Conflicts of Interest

Separately, you will not be in breach of this duty if you have gained the board of directors’ authorisation. This exception is the case, regardless of the conflict of interest. This means different things depending on when your company was formed.

• If your company was formed after 1 October 2008, subject to your company’s articles of association, a quorum of directors may approve the conflict unless the articles of association specifically exclude this power.
• If formed before 1 October 2008, the authorisation of the other directors may be given only if the articles of association do not prevent it. Likewise, the shareholders need to have passed an ordinary resolution after 1 October 2008 permitting this power of authorising conflicts of interest.

In practice, if you are the only director, you can authorise the conflict of interest yourself if your company was formed after October 2008. If you are one of two directors, the other director can authorise it.

Company’s Articles of Association

In some cases, the company’s articles of association may require the approval of the shareholders. For example, you can gain approval either through an ordinary or special resolution. If this is the case, you must follow the appropriate formalities.

This duty will continue even after you stop being a director if you use any information or property you obtained during your position as a director for your own gain.

Duty to Disclose an Interest in a Proposed Transaction

You should be aware that there is a separate duty to disclose an interest in any proposed “transaction or arrangement” with the company. You must make this declaration before the company enters into the transaction.

It can also extend to situations where you may benefit indirectly from the transaction. For example, if your company is entering into a contract with your sister’s machine-repair company.

If you have a personal interest in a proposed transaction or think you might, the best thing to do is disclose the interest to the rest of the directors. This means explaining:

• the nature and extent of the interest — e.g. “My sister owns part of the repair company, but I will not receive any other personal benefit”; and
• if it is a direct or indirect interest — for your sister’s company, if you are not an owner, it would be an indirect interest; if you happened to be part owner in her company, it would be a direct interest.

Exceptions

You will not have to make any declaration of a proposed interest:

• when it relates to your service contract as a director; or
• if you are the only director.

Key Takeaways

When it comes to conflicts of interest, you need to consider two separate duties: 

• the duty to avoid conflicts of interest and;
• the duty to declare any personal interest in a company transaction. 

In many circumstances, both duties may be engaged. From a practical perspective, you should always be forthcoming with the other company directors, especially if you think there may be a conflict of interest or some other personal interest. Additionally, always refer to the company’s articles of association to ensure you do not need the approval of shareholders.

If you need help with your corporate governance, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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