New Company Law - Conflicts of interest

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30 January 2009

Both charity law and company law have long required directors to declare and manage conflicts of interest. The duty to disclose an interest in any transactions in which the charitable company is involved is part of  the fiduciary duty of all trustees/directors not to put themselves in a position where their personal interests might conflict with those of the company. 

Sections 177 and 182 of the Companies Act  2006 re-state a director's duty to declare direct or indirect interests in a proposed or existing transaction or arrangement with the company.

These company law requirements are in addition to the obligations on trustees under charity law to declare and manage conflicts of interest.

Situational conflicts

With effect from 1 October 2008, section 175 Companies Act 2006 introduced a new duty for directors to avoid conflicts arising from what are termed "situational" conflicts. This section states:

"(1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.

(2) This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether a company could take advantage of the property, information or opportunity).

(4) This duty is not infringed-

(a)  if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest; or

(b) if the matter has been authorised by the directors."

Examples of Section 175 Conflict Situations

A section 175 conflict might include the following scenarios:

  • Multiple directorships or charity trusteeships - this situation would arise where a trustee/director of the charity is also on the Board of another company/charity/organisation which is a competitor of the charity.
  • Personal interests -  this might arise where a trustee/director is himself a competitor, customer or supplier of the charity, or he is an employee of a competitor, or he owns property adjacent to the charity's property which could be affected by the charity's activities.
  • Advisory positions -  this could arise where a trustee/director has another "hat", for example as an advisor to the charity (e.g., as its lawyer or accountant), or as a consultant to a competitor of the charity.
  • Use of information or opportunities - this could arise where a trustee/director is in a situation where he can use the charity's information or opportunities, either to the benefit of himself or to the benefit of a competitor organisation with which he is involved.

These situations are ones which "can reasonably be regarded as likely to give rise to a conflict of interest".

Section 175(2) states that it is "immaterial whether a company could take advantage of the property information or opportunity". So the fact that the trustee's charitable company could not exploit its property or information commercially, and the trustee in another capacity can, does not justify the conflict situation.

Authorisation of conflict situations

Under section 175 Companies Act 2006 charity trustees have a duty to avoid conflict of interest situations.

Although the legislation permits the directors of non-charitable companies to pass a resolution to authorise any particular conflict, section 181 of the Companies Act 2006 provides that, in the case of a charitable company, conflicts can only be authorised by the board of trustees/directors if the company's constitution (its Memorandum and Articles) expressly allows them to do so. Otherwise the conflict would need the express consent of the Charity Commission.

So under section 181 the board can only authorise conflicts specifically mentioned in the charity's constitution. There are often provisions in a charity's Memorandum which permit the trustees to authorise certain specified conflict arrangements. For example, a charity trustee may receive expenses; be paid for the supply of goods or services to the charity other than for acting as a trustee; receive interest on money loaned to the charity at a reasonable rate; and receive rent for premises which are let by him to the charity. These provisions are in accordance with the Charity Commission's own model provisions on trustee benefits.

We are now advising charitable companies to review their constitutions, and if thought appropriate to adopt provisions in their Articles which under s.181 will permit boards to authorise other specific conflict situations affecting individual trustees, such as multiple trusteeships or other roles with third party organisations. This would allow the "conflicted" trustee to remain in post on the board.

However, the board of trustees/directors should still only authorise such conflicts of interest where they consider that it would be in the best interests of their charity to do so.

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