Section 175: Duty to avoid conflicts of interest
338.This duty replaces the no-conflict rule applying to directors. Under the current no-conflict rule, certain consequences flow if directors place themselves in a position where their personal interests or duties to other persons are liable to conflict with their duties to the company, unless the company gives its consent. A conflict of interest may, in particular, arise when a director makes personal use of information, property or opportunities belonging to the company or when a director enters into a contract with his company. Conflicts of interest may also arise whenever a director makes a profit in the course of being a director, in the matter of his directorship, without the knowledge and consent of his company.
339.This duty covers all conflicts, actual and potential, between the interests of the director and the interests of the company. This includes conflicts relating to the exploitation of the company’s property, information or opportunity for personal purposes. The only conflicts not covered by this duty, are those relating to transactions or arrangements with the company (interests in transactions or arrangements with the company must be declared under section 177 in the case of proposed transactions or under section 182 in the case of existing transactions unless an exception applies under those sections).
340.Section 180(4) preserves any current ability of the members of a company to authorise conflicts that would otherwise be a breach of this duty.
341.Under subsections (4) to (6) the duty is also not infringed if:
the situation cannot reasonably be regarded as likely to give rise to a conflict of interest;
in the case of a private company, unless its constitution prevents this, authorisation has been given by directors who are genuinely independent (in the sense that they have no direct or indirect interest in the transaction);
similarly, in the case of a public company, but only if its constitution expressly permits this, authorisation has been given by the independent directors.
342.The present law is that in all cases, conflicts of interest must be authorised by the members of the company, unless some alternative procedure is properly provided. The CLR were concerned that this strict requirement might stifle entrepreneurial activity; and therefore recommended that, in the case of a private company, it should be possible for conflicts to be authorised by independent directors unless the company’s constitution prevents this.
343.Under subsection (6), board authorisation is effective only if the conflicted directors have not participated in the taking of the decision or if the decision would have been valid even without the participation of the conflicted directors: the votes of the conflicted directors in favour of the decision are ignored and the conflicted directors are not counted in the quorum.