The Companies Act has codified the duties directors owe to a company, one of which is to avoid situations where the director has or can have a direct or indirect interest which conflicts or may conflict with the company's interest. Directors are obliged to declare their interest in any transactions or arrangements with the company and failure to comply with these duties can cost directors dearly. The Courts have recently ordered a director guilty of a serious conflict of interest to repay over £2m to the Company.

In this case the two parties were equal owners of Palmier plc and were directors of the business which imported womens' clothing. Director A also owned another company which acted as agent for Palmier organising and paying for shipping of goods to Palmier and being paid a commission for its services (the "Agent"). Palmier found itself in financial difficulties and following negotiations with a large creditor agreed to use funds it expected to received as the result of a VAT rebate amounting to approximately £1.6m to pay the sums due. On the day the VAT rebate arrived in Palmier's account it was immediately transferred to another account and the company then went into liquidation. Director B brought an action under Section 212 of the Insolvency Act 1986 against Director A on the grounds that he had misapplied company money and breached his duties to the company.

It was argued that Director A had breached his duties to Palmier by causing the VAT rebate to be transferred from the company's account to the Agent's account and it was also argued that Director A had secretly paid excessive commissions to the Agent for his own benefit.

The court ruled against Director A finding that he had been guilty of a conflict of interest and had acted dishonestly. The Judge declared that Director A was well aware that his duties as a director of Palmier and of the Agent placed him in a conflicting position and that he had fixed commission rates for the Agent which had not been properly declared to Palmier resulting it suffering significant losses. In addition, it was found that he had instructed the transfer of the rebate payment to the Agent and that the transfer was not made for purposes connected with Palmier's business. In essence he was attempting to "milk" Palmier to look after his other business interests and concealing from Palmier his true relationship with the Agent and the profits the Agent had been making.

On that basis Director A was ordered to have the Agent repay £927,000 in relation to overpayment of commission and to ensure that the sum of £1.6m the VAT rebate was also restored.

This case should emphasise to directors the need to make sure they are open and transparent in all of their dealings with their Company and that any potential conflicts have been properly notified to the board and approved prior to any action being taken.

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.