As a director of a company, you have many duties and obligations arising from common law and statute. It is important to be aware of these duties regardless of how large the company is or the extent of your involvement in the company.
The main duties of a director include:
- Duty to act in good faith
- Duty of care, diligence and skill
- Duty to avoid conflicts of interest
- Duty not to improperly use your position or information
- Duty not to trade whilst insolvent
Failing to be aware of the existence and extent of these duties can get you into serious trouble with, amonst others, ASIC and can cause significant personal liabilities.
This article addresses the duty to avoid conflicts of interest. Other articles on this website will address other duties.
Duty to Avoid Conflicts of Interest
As a director you have a duty to avoid situations where there is a real possibility of conflict between your personal interests and the company’s interests. This complements the duty of good faith to prioritise the interests of the company.
Conflicts of interest can arise when a company is considering entering into a venture or contract with another company in which a director has a material personal interest.
Whether the interest is material is usually determined by examining whether there is a substantial likelihood that the interest would affect the impartiality or independence of your judgment.
What do I have to do?
If you have another interest or duty and there is a real possibility of conflict or the appearance of conflict, you should seek legal advice before you act.
The duty is ‘strict’, which means it doesn’t matter if you intended to profit from the conflict or not; the fact there has been a conflict is enough to constitute a breach.
However, many companies attempt to limit this strict duty by having provisions in their constitutions which allow participation by a director who has a material personal interest, subject to certain conditions, such as full disclosure and board consent. Companies have different rules relating to conflicts so it is important to check your company’s constitution and seek legal advice if you think that a conflict exists.
What happens if I breach this duty?
If you breach the strict duty or you have failed to fulfil the conditions required by your company’s constitution, under certain circumstances the company might try to treat the transaction as void , and the law permits this in certain circumstances. Clearly if third parties suffer loss, serious consequences can ensue for the company. If the company honours the transaction, you could be required to pay the company any profits earned from the conflicted venture.
You cannot assume your personal interests won’t matter because you aren’t involved in the day-to-day running of the company. You should protect yourself by disclosing the extent of any potential conflicts to your board members as soon as possible, regardless of how minor they may seem.
If you need advice, please phone us.