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Understanding director conflicts of interest and company law

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Written by: Jonathan Munnery

What are conflicts of interests and how can these affect your company?

The Companies Act, 2006, states that directors must avoid conflicts of interest and always promote the success of their company, but it can sometimes be difficult to separate business from personal interests.

Failing to do so carries heavy penalties for directors, however, and if you foresee a conflict of interest arising or know one already exists, it’s vital that you declare it to avoid serious repercussions.

It’s possible to demonstrate your awareness of a conflict of interest and act with integrity until the issue can be resolved, or you obtain authorisation from the board to carry on. But what types of conflict of interest typically arise for company directors, and how should they be handled?

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Situational and transactional conflicts of interest

When identifying whether you might have a conflict of interest you need to factor in your family and extended family’s actions and personal situations, as they are also covered by the laws.

There are two potential types of conflict of interest – situational and transactional. So how might these appear in practice? Here are some examples:

Situational conflicts of interest could include:

  • You or a member of your family being director of a competitor business
  • Becoming a Trustee of your company’s pension scheme

Transactional conflicts of interest might include:

  • Selling a property to the company, in which you have a personal interest
  • You or a member of your family becoming a supplier or customer of your own company

Disclosing and dealing with conflicts of interest

Your company’s Articles of Association lay down various aspects of how the company must be run, and may also detail what to do in the event of a conflict of interest. Other directors typically meet to discuss and vote on whether a conflict exists, and determine whether the director has breached any of their statutory duties.

Directors also have the right to authorise the matter but the director in question, and any other directors who are conflicted, aren’t allowed to participate in the discussions, voting, or authorisation process.

Additionally, it’s possible for shareholders to authorise a conflict by passing an ordinary resolution, so declaring a conflict doesn’t necessarily mean you’ll have to step down as a director or face sanctions.

Proper records should be kept of the disclosure of your potential conflict of interest, the board meeting, and the result of any voting, making sure the reasons why the conflict has been authorised are noted.

What are direct and indirect conflicts of interest?

Transactional and situational conflicts of interest can be either direct or indirect. If they’re direct it means that only the director is involved, but indirect conflicts of interest involve the director’s family or ‘connected persons.’

Additionally, these conflicts may be ‘actual,’ i.e. they’re already in existence, or ‘potential,’ and may materialise in the future or under certain conditions. Conflicts of interest are clearly a complex issue, so what are the potential ramifications for directors who fail to disclose the situation or transaction in question?

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Consequences of failing to disclose a conflict of interest

Deliberately failing to disclose a conflict of interest, whatever its type, is a serious breach of director duties and could result in criminal prosecution. Directors must take responsibility for their own legal compliance in this respect, and cannot pass responsibility to the company.

So how can you identify whether a conflict of interest might arise in the future, or already exists? Here are a few areas to consider:

  • Whether involvement with another company might affect your ability to use independent judgement in a business decision or situation
  • If you’re involved in another company in any capacity, do they compete in the same market or do the two company’s products or services overlap in any way?
  • Is a family member involved with a company that supplies or is a customer of your company?

If you’re concerned about an actual or potential conflict of interest, our experts at Real Business Rescue can help. We’ll establish whether a conflict exists, and provide guidance on how to proceed. Please call one of the team to arrange a free same-day meeting – we work from an extensive network of offices around the UK.

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