Conflicts of Interest
- Introduction
- Statutory provisions
- Duty to disclose interest
- Substantial property transactions
- Provisions in Model Articles
- Provisions in Table A
Introduction
Quite apart from the following provisions of the Act, Model Articles (for companies registered after 1.10.2009) and Table A (for companies registered pre-1.10.2009), a director must always act in what s/he honestly believes to be the best interests of the company. See Directors' duties. 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:
Duty to disclose interest
CA 2006, sec182 (1)Where a director of a company is in any way, directly or indirectly, interested in a transaction or arrangement that has been entered into by the company, he must declare the nature and extent of the interest to the other directors in accordance with this section. (This section does not apply if or to the extent that the interest has been declared under section 177 (duty to declare interest in proposed transaction or arrangement).)
sec182(2) The declaration must be made—(a) at a meeting of the directors, or (b) by notice in writing (see section 184), or (c) by general notice (see section 185).
sec182(5) This section does not require a declaration of an interest of which the director is not aware or where the director is not aware of the transaction or arrangement in question.
For this purpose a director is treated as being aware of matters of which he ought reasonably to be aware.
The penalty for failure to declare an interest under sec183 CA2006 is a fine
Substantial property transactions need General Meeting approval
Sec190 A company may not enter into an arrangement under which—
(a) a director of the company or of its holding company, or a person connected with such a director, acquires or is to acquire from the company (directly or indirectly) a substantial non-cash asset, or
(b) the company acquires or is to acquire a substantial non-cash asset (directly or indirectly) from such a director or a person so connected,
unless the arrangement has been approved by a resolution of the members of the company or is conditional on such approval being obtained.
What is a 'Subtantial' non-cash asset?
Sec191(a) exceeds 10% of the company’s asset value and is more than £5,000, or (b) exceeds £100,000.
Consequences of Contravention
Sec195(2):The arrangement, and any transaction entered into in pursuance of the arrangement (whether by the company or any other person), is voidable at the instance of the company, unless
(a) restitution of any money or other asset that was the subject matter of the arrangement or transaction is no longer possible,
(b) the company has been indemnified in pursuance of this section by any other persons for the loss or damage suffered by it, or
(c) rights acquired in good faith, for value and without actual notice of the contravention by a person who is not a party to the arrangement or transaction would be affected by the avoidance.
Sec195(4): 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.
Procedure for Companies with Sole Director to declare interest in a transaction:
Sec186 CA 2006 provides that the Sole Director should still make a declaration of the interest in writing. This is then deemed to form part of the next board meeting.
Provisions in the Model Articles
14. (1) If a proposed decision of the directors is concerned with an actual or proposed transaction or arrangement with the company in which a director is interested, that director is not to be counted as participating in the decision-making process for quorum or voting purposes.
(2) But if paragraph (3) applies, a director who is interested in an actual or proposed transaction or arrangement with the company is to be counted as participating in the decision-making process for quorum and voting purposes.
(3) This paragraph applies when-
(a) the company by ordinary resolution disapplies the provision of the articles which would otherwise prevent a director from being counted as participating in the decision-making process;
(b) the director's interest cannot reasonably be regarded as likely to give rise to a conflict of interest; or
(c) the director's conflict of interest arises from a permitted cause.
(4) For the purposes of this article, the following are permitted causes-
(a) a guarantee given, or to be given, by or to a director in respect of an obligation incurred by or on behalf of the company or any of its subsidiaries;
(b) subscription, or an agreement to subscribe, for shares or other securities of the company or any of its subsidiaries, or to underwrite, sub-underwrite, or guarantee subscription for any such shares or securities; and
(c) arrangements pursuant to which benefits are made available to employees and directors or former employees and directors of the company or any of its subsidiaries which do not provide special benefits for directors or former directors.
(5) For the purposes of this article, references to proposed decisions and decision-making processes include any directors' meeting or part of a directors' meeting.
(6) Subject to paragraph (7), if a question arises at a meeting of directors or of a committee of directors as to the right of a director to participate in the meeting (or part of the meeting) for voting or quorum purposes, the question may, before the conclusion of the meeting, be referred to the chairman whose ruling in relation to any director other than the chairman is to be final and conclusive.
(7) If any question as to the right to participate in the meeting (or part of the meeting) should arise in respect of the chairman, the question is to be decided by a decision of the directors at that meeting, for which purpose the chairman is not to be counted as participating in the meeting (or that part of the meeting) for voting or quorum purposes.
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.