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Company Directors – Take Legal Advice to Avoid Conflicts of Interest

Company Directors – Take Legal Advice to Avoid Conflicts of Interest

Directors are required to exert themselves in the best interests of the companies they serve and, very importantly, to declare any potential conflicts of interest. The latter duty came under close analysis in a guideline Court of Appeal ruling.

The case concerned a former director of an incorporated sports club. He was during the relevant period also a partner in a firm which received fees for providing services to the club under the terms of a management contract. The somewhat intertwined relationship between the club and the firm was an informal one and no rigorous attention had been given to the requirements of company law.

After a falling out between them, the club launched proceedings. Following a trial, a judge found that, when serving as a director of the club, the man had failed in his strict obligation under Section 317 of the Companies Act 1985 to declare his interest in the management agreement at a board meeting. He was ordered personally to reimburse the club for fees it had paid to the firm over a six-year period.

In upholding his appeal against that outcome, the Court noted that he had acted honestly and reasonably throughout and all concerned were well aware of his role within the firm. If there had been a breach of his duty of disclosure, the Court observed that it could only be viewed as a highly technical one.

The man and the firm were, for all practical purposes, one and the same. Although he did not, in terms, declare his interest in the management contract at the relevant board meeting, it was obvious in that all those present knew about it. The meeting had been convened specifically to address his potential conflict of interest.

The board meeting could not be viewed in isolation. Issues arising from his dual role as a director of the club and a partner in the firm had been discussed at a previous board meeting and expressly raised at the club’s annual general meeting. The Court concluded that the disclosure made by the man at the board meeting was sufficient to achieve compliance with his duties under Section 317.

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