Directors Duties – Avoiding conflicts of interest.
Director’s are obligated to promote the interests of the Company above and apart from their own personal interests. This is achieved by avoiding an actual or potential conflict of interest. Where a conflict exists, it is the Director’s duty to give preference to the interests of the Company. A Director may also be required to disclose ‘material personal interests’ within the requirements of the Corporations Act (‘the Act’).
There are various sources of law which dictate a Directors obligation.
The duty to avoid conflicts of interest stems from the following sources of law. The sources may overlap with one another:
- General law: Duties to avoid conflicts of interest and not make secret profits;
- s 182 and 183 of the Act: prohibiting improper use of position and/or information; and
- s 191 of the Act: ‘Material personal interests’ must be disclosed
A company’s constitution and by-laws may also specify the procedures to be undertaken where a conflict of interest arises.
Below we answer three questions which are critical in understanding the obligations regarding conflict of interest.
1.What is a ‘conflict of interest’?
The Act does not contain a specific definition of a ‘conflict of interest’. Broadly speaking, a conflict of interest might exist where a director’s personal interests collide with the interests of the company. This includes actual or potential conflicts. The possibilities are therefore endless. The following are just some examples of conflicts of interest that might arise for directors:
- A director will or might personally profit from a proposed deal;
- Proposing to contract personally with the company;
- Sitting on the Board of a direct competitor of the company; and
- Using information or position to take advantage of a business opportunity that belongs to the company
2.What does disclosure of material personal interests require?
Although a Director must always put the interests of the company before their own personal interest, this does not mean that Directors cannot have any personal overlap with the company at all. For example, many Directors hold shares in the company or in related companies. So what should you do if you find yourself in this situation?
Under s 191 of the Act, a Director has a duty to notify the other Directors when a material personal interest arises. Again, the Act does not specify what a ‘material personal interest’ is, but is generally taken to mean a matter of ‘some real substance’ which has the ability to influence the vote of the Director. McGellin v Mount King Mining NL (1998) 144 FLR 228
The Director must give details of the nature and extent of their interest in the matter. All details must be given at a Directors meeting and as soon as practicable after the Director is aware of the conflict.
The Act also sets out the circumstances in which a Director is not required to disclose their interest, as well as the process of disclosure at a Director’s meeting.
3.What are the penalties for breaching the Duty to Avoid Conflicts of Interest?
A Director who violates their duty to avoid a conflict of interest may be subject to both civil and criminal liability and further consequences under the general law. It is immaterial whether or not the Director involved has actually received personal gain or whether the company suffered damage. It is important to properly establish whether there was a conflict of interest when the act, contract or transaction was entered into.
Penalties under the Act:
- Pecuniary penalty of up to $200,000;
- Disqualification from managing a company;
- Compensation for any damage caused;
- Criminal penalties if recklessness or dishonesty is present.
A contract entered into in breach of this duty may or may not render the contract voidable. This will be dependent on whether proper notice was given to the other Directors of the company as well as whether the contract was ratified by the company’s shareholders (if required).
What Should I Do Next?
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* This blog is for general guidance only. Legal advice should be sought before taking action in relation to any specific issues.