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NOVEMBER 2011

The Companies Act 2006 provides that company directors have a duty to declare any interest, whether direct or indirect, in a proposed transaction or arrangement of the company, including the nature and extent of that interest, to the other directors. Such a declaration must be made prior to the company entering into the relevant transaction or arrangement. The only defence available to a director for failure to disclose an interest is if it cannot reasonably be regarded as being likely to give rise to a conflict between the director’s interests and the company’s interests in that situation.

A recent Court of Appeal case discussed directors’ duties in relation to conflicts of interests and applied the statutory duties very strictly. In Philip Towers v Premier Waste Management Ltd [2011] EWCA Civ 923 Mr Towers, a director of Premier Waste Management Limited (“PWM”), entered into an agreement to borrow equipment from a customer of PWM. The equipment was to be used for renovations of Mr Towers’ own property, infrmation not disclosed to PWM’s board.

PWM became aware of the agreement as a result of the unapproved actions of an employee who set up the arrangement for Mr Towers. PWM investigated the situation and as a result took action against Mr Towers for breach of duty, in particular for failing to avoid a conflict between his personal interests and those of the company. The court found in favour of PWM, ordering Mr Towers to pay to PWM the sum of £5,200.

The court decided that the ‘no conflict’ duty in s 175 is intended to prevent a director depriving the company of the ability to decide whether or not to allow to an opportunity with one of its customers being taken up by a director rather than the company. In considering this it is irrelevant that the company would not have chosen to take up the opportunity and that there is no corrupt motive on the part of the director. Thus the director is not entitled to the benefit of the statutory provision relieving liability where s/he has acted honestly and reasonably.

This ruling suggests that a company is entitled to the undivided loyalty of its directors and all arrangements that give rise to a possibility of a conflict should be disclosed to the company prior to their engagement. With the information at hand the company then has the ability to decide whether or not the customer and the director can deal in the manner in which the transaction or arrangement requires.

This decision emphasises the importance of disclosing any arrangement or transaction that could in any way amount to a conflict of interest with the company. The very fact that a case of such moderate value ended up in the Court of Appeal indicates the delicate nature of this issue and more importantly, the strict nature of the statutory duties under the Companies Act 2006.

Chris Smith
Trainee Solicitor

If you would like any further information about the issues raised in this article please contact a member of Goodman Derrick LLP’s corporate team on 0207 404 0606.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice.