The difference between the director duty to avoid conflicts of interest and a director declaring interested transactions under the Companies Act 2006

Directors of a company have legal duties designed to ensure that they act in the best interests of the company and its shareholders. Two key duties under the Companies Act 2006 that work together to maintain transparency and prevent misconduct are the duty to avoid conflicts of interest and the duty to declare interests in transactions. Although these duties are interrelated, they serve distinct purposes and impose different obligations on directors.

The Duty to Avoid Conflicts of Interest (Section 175)

Under Section 175 of the Companies Act 2006, a director must avoid situations in which they have, or could have, a direct or indirect conflict of interest with the company. This applies to conflicts between a director’s personal interests and the interests of the company, as well as situations where a director’s duties to another entity might interfere with their duty to the company.

Key Points:

• The duty applies even if no actual conflict has occurred; the potential for conflict is enough to trigger this obligation.
• A director must not exploit corporate opportunities for personal gain.
• The duty can be waived by the company’s board of directors (excluding the interested director), provided it is done in accordance with the company’s constitution.
• Breach of this duty can lead to civil penalties, including requiring the director to compensate the company for any losses.
• The duty does not apply to a conflict of interest relating to a transaction or arrangement with the company.

The Duty to Declare Interests in Transactions (Section 177 & Section 182)

A related but distinct duty arises under Sections 177 and 182 of the Companies Act 2006. These provisions require directors to declare any direct or indirect interest in a proposed or existing company transaction.

Key Differences from Section 175:

• Section 177 applies to transactions before they are entered into—directors must disclose their interest in advance.
• Section 182 applies to existing transactions—if a director acquires an interest after the fact, they must disclose it as soon as possible.
• The obligation here is one of disclosure, not necessarily to prevent the transaction from taking place.
• Disclosure should be made to the board of directors, ensuring transparency and allowing the company to make an informed decision.

How These Duties Are Connected

While Section 175 requires directors to avoid conflicts, Sections 177 and 182 acknowledge that conflicts may sometimes be unavoidable—hence, the law mandates transparency through disclosure.  If a conflict cannot be avoided, full and early disclosure allows the company to assess and mitigate any risks, often through board approval or shareholder oversight.  This is why it is essential to have robustly drafted articles of association and a shareholders’ agreement to set out the processes that need to be followed when considering director interests or authorising conflicts of interests. 

The Impact of Section 203: Civil Consequences of Breach

Section 203 of the Companies Act 2006 sets out the civil consequences of failing to declare an interest in an existing transaction.  If a director fails to disclose an interest as required under Section 182, they may face civil penalties and consequences, including:

• Injunctions to prevent further involvement in the transaction.
• Financial liability requiring them to compensate the company for any losses incurred.
• Reputational damage which could impact future directorships and business relationships.

This provision reinforces the importance of disclosure by ensuring that directors who fail to comply face tangible consequences.

Conclusion

The duty to avoid conflicts of interest and the duty to declare interested transactions are fundamental to maintaining corporate integrity under the Companies Act 2006.  While Section 175 seeks to prevent conflicts, Sections 177 and 182 ensure that unavoidable conflicts are transparently managed.  Section 203, in turn, reinforces these obligations by penalising directors who fail to declare their interests.  Together, these provisions help create a governance framework that promotes accountability and protects the interests of the company and its stakeholders automatically.

For directors, the key takeaway is simple: if in doubt, disclose.  Transparency is often the best way to ensure compliance with the law and maintain trust within the company. 

The action takeaway is: ensure the company’s governing documents allow the board to move forward in each scenario. 

If you have any questions director duties and declaring interests, please get in touch with Prasan Modasia.