Legal Eyes: Director’s conflicts of interest introduced by the Companies Act 2006

The New Year sees directors of charitable companies coming to grips with recent changes introduced by the Companies Act 2006 to the law on director’s conflicts of interest – so what’s new?

The changes introduced in October 2008 relating to director’s conflicts of interest are an attempt to codify the existing law, with clarification of some previously grey areas.

Since October 2008, there are now three statutory directors’ duties as follows:

1. A duty to avoid conflicts of interest.  There is no definition of interest or conflict of interest in the Act but the conflicting interest can be indirect or direct.  What is new is that the duty applies not just to actual conflicts but also to potential conflicts.
2. A duty to not accept benefits from third parties.  This duty is not infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
3. A duty to declare an interest in proposed transactions or arrangements.  There is also a separate requirement (not a duty) to disclose interest in an existing transaction or arrangement.

So what can directors of charitable companies do to ensure they are not in breach of their duty to avoid a conflict of interest?

The most common way is for the directors to act in accordance with conflicts provisions in their Articles (provided these would have been lawful prior to 2006). 

Typical conflicts provisions require a director with a conflict to declare the conflict and to not vote or be counted in the quorum.  Complying with this will mean a director with a conflict of interest is not in breach of his or her duty to the company.

Alternatively, there is now a new power for the board of directors to authorise a conflict; previously, the power lay with the members.  For charitable companies, the unconflicted directors can only authorise a conflict of interest if the constitution contains a provision enabling them to authorise the conflict and the matter is proposed to and authorised by the directors in accordance with the constitution.

Authorisation cannot be retrospective and authorisation only applies to the duty to avoid conflicts, it does not authorise breaches of other duties.

So what can charities do to comply with the new provisions?

Although optional, charities are recommended to include one or more of the following in their Articles of Association:

1. provisions for dealing with conflicts that are tailored to suit the charity;
2. authorisation for trustees to authorise any other conflict; and
3. a list of transactions or arrangements where the duty to avoid conflicts is specifically disapplied.  (This is another way of protecting directors from being in breach of a duty to avoid a conflict.)

Again, it is optional but good practice for each agenda for a directors’ meeting to include:

1. declaration of directors’ interests in a proposed transaction;
2. declaration of directors’ interests in an existing transaction or arrangement;
3. any general notices given by directors since the last meeting;
4. update by any directors to earlier declarations made; and
5. directors’ authorisations of any conflicts of interest.

by Leona McHugh, a solicitor in the charity and social enterprise department at  Bates Wells & Braithwaite London LLP
www.bateswells.co.uk