A director's duties can be confusing at times. Some company
directors fail to properly grasp the distinction between the
company as a separate legal entity and their own personal and
financial matters. Instead, they have a tendency to view themselves
and the company as one and the same. In the case of a private
limited company, this could potentially lead to criminal
In an ideal world, all company directors would make decisions
and act purely in the best interests of the company. However, in
some cases the lines between the benefit for the company and the
director personally become blurred. The director's ability to
look at the merits of a particularly situation and act objectively
fail, and instead, they start to view the company as a simple
extension of themselves.
This bias in decision making, whether actual or potential, is an
extremely serious consideration for company directors.
Non-disclosure of a conflict of interest can lead to criminal
action, so it's essential you understand your duties in this
What is a conflict of interest?
A company director's duty to avoid conflicts of interest is
set out in section 175 and 177 of the Companies Act 2006. The
potential conflicts these laws cover include:
The duty to avoid situational
conflicts unless authorised;
The duty to avoid transactional
conflicts unless authorised.
When might situational and transactional conflicts of interest
The requirement to disclose a situational conflict of interest,
covered by section 175 of the Companies Act, is very broad.
Examples include a director becoming a director of a similar or
related company, or a child or spouse working for a direct
competitor. Alternatively, a company director could become a
trustee of the same company's pension scheme.
A transactional conflict of interest, as covered by section 177
of the Companies Act, occurs when a director has a personal
interest in any proposed or existing transaction the company has
entered, or intends to enter into. An example could be the sale of
personal property to the company, or a transaction between the
company and another company connected parties are involved
What does the law say?
Company directors are legally obliged to avoid conflicts of
interest wherever possible. If they identify a potential conflict,
they must follow specific rules to avoid recriminations further
down the line.
The liability for a conflict of interest lies with each director
personally and not with the company. Failure to comply with these
regulations is considered a serious breach of the director's duties, and could lead
to criminal action. For this reason, it's essential anyone
involved in the running of a limited company or limited liability
partnership regularly reviews their personal and business interests
to avoid conflicts wherever possible. If they identify a potential
conflict, they can protect themselves by seeking authorisation.
Authorising conflicts of interest
Where conflicts do arise, company directors need to be as open
as possible to disclosing the conflict. They should also take steps
to exclude themselves from discussions and decisions made on the
issue. In extreme cases, they should even consider standing down
from the board.
For companies formed after 1 October 2008, the power of
directors to pre-authorise conflicts of interest is implied, but
details can be included in the articles of association about the
processes that will be used. This can include information about how
conflicts will be declared, or who is entitled to vote on the
In most cases, a board meeting will need to be held so those
directors not involved in the conflict can determine whether a
conflict has arisen. They will also decide whether the director in
question is in breach of his or her duty to act in the best
interests of the company. Shareholders can also authorise a
potential or actual conflict through the use of an ordinary resolution.
How can we help?
If you are worried about a potential conflict of interest that
has yet to be authorised, you can call our director's helpline
on 08000 746 757 for the expert advice you need. Alternatively,
please email: firstname.lastname@example.org
or use our live support feature to discuss your circumstances
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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An assignment of rights under a contract is normally restricted to the benefit of the contract. Where a party wishes to transfer both the benefit and burden of the contract this generally needs to be done by way of a novation.
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