What is a director’s duty to avoid a conflict of interest?

Question

Under S175 of the Companies Act 2006, what is the duty to avoid conflicts of interest?

Answer

A director’s duties are incorporated within S171-S177 of the Companies Act 2006. S175 is the duty to avoid conflicts of interest. This duty is a fiduciary duty, and is wide in its scope, deeming any situation that has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company a breach of S175 (Lowry, 2012). Section 175(2) explains that this duty relates to exploitation of property, information or opportunity.

Business opportunities are a common breach of this duty, as opportunities are considered a type of ‘property’ to the company. If the director takes up the opportunity in any capacity, it is a breach of the duty (Cook v Deeks). The duty is so wide that even if the company chooses not to take up a business opportunity, it is still considered a breach if a director subsequently takes the opportunity (Regal v Gulliver). An individual with directorship in two competing companies may also breach the S175 duty, as due to the possession of inside knowledge of both companies, a potential conflict arises (London v Mashonaland).

The most common remedies for a S175 breach are an account for profits, or an injunction preventing the conflict (Lowry, 2012).

References

Lowry, J., Reisberg, A., (2012) Pettet’s Company Law: Company Law & Corporate Finance. Fourth Edition, Pearson Education Limited

Cook v Deeks [1916] 1 AC 554

London & Mashonaland Ltd v New Mashonaland Ltd [1891] WN 165

Regal Ltd v Gulliver [1967] 2 AC 134

Companies Act 2006