What is the position if a director has a conflict of interest?
Quite apart from the following provisions of the Act and Table A articles, a director must always act in what s/he honestly believes to be the best interests of the company. This rule applies to the directors deciding on a transaction in which one of their colleagues has an interest, as well as to the director with the interest. If in doubt, the best course is to have any transaction in which a conflict of interest arises approved by the members, full disclosure having been made.
The following statutory provisions supplement the general common law position:
Director to disclose any interest
CA 1985, sec317 (1) It is the duty of a director (or shadow director)
of a company who is in any way , whether directly or indirectly, interested
in a contract or proposed contract with the company to declare the nature of
his interest at a meeting of the directors of the company.
(2) In the case of a proposed contract, the declaration shall be made-
(a) at the meeting of the directors at which the question of entering into the contract is first taken into consideration; or
(b) if the director was not at the date of that meeting interested in the proposed contract, at the next meeting of the directors held after he became so interested; and, in a case where the director becomes interested in a contract after it is made, the declaration shall be made at the first meeting of the directors held after he became so interested. By sec317 (3) a general notice is sufficient.
(5) ..'contract' includes any transaction or arrangement.
(7) A director who fails to comply with this section is liable to a fine.
Substantial property transactions need General Meeting approval
Sec320 (1) ...a company shall not enter into an arrangement-
(a) whereby a director of the company or its holding company, or a person connected
with such a director, acquires or is to acquire one or more non-cash assets
of the requisite value from the company; or
(b) whereby the company acquires or is to acquire one or more non-cash assets
of the requisite value from such a director or a person so connected.
unless the arrangement is first approved by a resolution of the company in general meeting.
(2) Requisite value is over £100,000 or 10% of the company's net assets (whichever is the smaller), provided not less than £2,000.
sec322 (1) Any such transaction not so approved is voidable at the instance of the company unless either:
(a) restitution is no longer possible or the company has been indemnified by any other person for the loss or damage suffered by it; or
(b) rights acquired bona fide for value and without actual notice of the contravention by any person who is not a party to the arrangement would be affected by its avoidance; or
(c) the arrangement is, within a reasonable period, affirmed by the company in general meeting
(3), (4) and (5): the following may be liable to account for any gain made directly or indirectly from the arrangement and to indemnify the company for any loss or damage caused by:
(a) the director (unless he took all reasonable steps to secure compliance with the section);
(b) the connected person (unless unaware of the relevant facts);
(c) any other director who approved the transaction.
sec322A (enacted by CA 1989): If the directors exceed their powers under the company's constitution when entering into any transaction to which a director or connected person is a party, the transaction is voidable at the instance of the company (subject to sec322A(5)) and the director, any connected party and any director who authorised the transaction will be liable to account to the company for any gain and to indemnify the company for any loss or damage
sec322B (enacted by CA 1989): If a private company having one member who is also a director enters into a contract with the member the contract must be in writing, or recorded in a written memorandum or in the minutes of the first board meeting after the making of the contract. Failure to comply does not affect the validity of the contract, but the company and every officer in default is liable to a fine.
Provisions in Table A
85. Subject to the provisions of the Act, and provided that he has disclosed to the directors the nature and extent of any material interest of his, a director notwithstanding his office -
(a) may be a party to, or otherwise interested in, any transaction or arrangement with the company or in which the company is otherwise interested;
(b) may be a director or other officer of, or employed by, or a party to any transaction or arrangement with, or otherwise interested in, any body corporate promoted by the company or in which the company is otherwise interested; and
(c) shall not, by reason of his office, be accountable to the company for any benefit which he derives from any such office or employment or from any such transaction or arrangement or from any interest in any such body corporate and no such transaction or arrangement shall be liable to be avoided on the ground of any such interest or benefit
86. For the purposes of regulation 85 -
(a) a general notice given to the directors that a director is to be regarded as having an interest of the nature and extent specified in the notice in any transaction or arrangement in which a specified person or class of persons is interested shall be deemed to be a disclosure that the director has an interest in any such transaction of the nature and extent so specified; and
(b) an interest in which a director has no knowledge and of which it is unreasonable to expect him to have knowledge shall not be treated as an interest of his.
94. Save as otherwise provided by the articles, a director shall not vote at a meeting of directors or of a committee of directors on any resolution concerning a matter in which he has, directly or indirectly, an interest or duty which is material and which conflicts or may conflict with the interests of the company unless his interest or duty arises only because the case falls within one or more of the following paragraphs:
(a) the resolution relates to the giving to him of a guarantee, security, or indemnity in respect of money lent to, or an obligation incurred by him for the benefit of, the company or any of its subsidiaries;
(b) the resolution relates to the giving to a third party of a guarantee, security, or indemnity in respect of an obligation of the company or any of its subsidiaries, or by virtue of his being, or intending to become, a participant in the underwriting or sub-underwriting of an offer of any such shares, debentures, or other securities by the company or any of its subsidiaries for subscription, purchase or exchange;
(c) his interest arises by virtue of his subscribing or agreeing to subscribe for any shares, debentures or other securities of the company or any of its subsidiaries, or by virtue of his being, or intending to become, a participant in the underwriting or sub-underwriting of an offer of any such shares, debentures or other securities of the company or any of its subsidiaries for subscription, purchase or exchange;
(d) the resolution relates in any way to a retirement benefits scheme which has been approved, or is conditional upon approval, by the Board of Inland Revenue for taxation purposes.
For the purposes of this regulation, an interest of a person who is, for any purpose of the Act (excluding any statutory modification thereof not in force when this regulation becomes binding on the company), connected with a director shall be treated as an interest of the director and, in relation to an alternate director, an interest of his appointor shall be treated as an interest of the alternate director without prejudice to any interest which the alternate director has otherwise.
95. A director shall not be counted in the quorum present at a meeting in relation to a resolution on which he is not entitled to vote.
96. The company may by ordinary resolution suspend or relax to any extent, either generally or in respect of any particular matter, any provision of the articles prohibiting a director from voting at a meeting of directors or of a committee of directors.
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