James Mather explains why the Companies Act 2006 does little to ease the difficulties facing lawyers advising directors on avoiding conflict of interest


'The main purpose in codifying the general duties of directors is to make what is expected of directors clearer and to make the law more accessible to them and to others.' So said Lord Goldsmith in commending the Companies Act 2006 to the House of Lords in February 2006.



The existing duties to avoid conflicts of interest are without question among the more difficult on which to offer clients firm advice. Unfortunately, it is doubtful whether the new statutory provisions - which come into force on 1 October 2008 - will render their true scope much clearer to lawyers, let alone to directors.



This article is concerned with four sections of the act. In section 175, the equitable no-conflict and no-profit rules are conflated into a general duty to avoid conflicts of interest. This general duty does not, however, apply as regards any transaction or arrangement with the company itself. Here, a distinction is drawn between proposed transactions (to which section 177 applies) and existing ones (to which section 182 applies). Finally, the associated duty not to accept bribes or secret commissions is embodied in section 176.



In contrast to the arguable radicalism of the new duty to promote the success of the company, the codification of these other aspects of directors' obligations rooted squarely in fiduciary law appears markedly conservative from the outset. Thus the language imposing the general duty in section 175 is heavily influenced by the classic dictum of Lord Cranworth LC in Aberdeen Railway Co v Blaikie Bros [1854] 1 MACQ 461. A director of a company must, as he has been required to do since the 19th century, if not before, 'avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company'.



That the principle is not quite so rigorous as the latter provision, taken alone, might appear to suggest is made clear by subsection 175(4)(a). By virtue of this, the duty is not infringed if the situation 'cannot reasonably be regarded as likely to give rise to a conflict of interest'. The touchstone for establishing the scope of the general duty, then, is not the mere possibility of a conflict, but a reasonable possibility. That, in fact, only imports into the statutory formulation a position already reached at common law: see, in particular, Bhullar v Bhullar [2003] EWCA Civ 424.



So, after 1 October, the general duty to avoid conflicts of interest will retain what, depending on one's point of view, might be characterised as the virtue of flexibility or the vice of unpredictability. Advice on the question of whether a situation would involve a breach will continue to be highly fact-sensitive, necessarily based on the uncertain application of general principle and therefore hedged about with caveats. There is no attempt at statutory clarification to compare to the list of factors designed (albeit with a debatable degree of success) to illuminate the contours of the duty to promote the success of the company. Given the historical prevalence of disputes in this area, that is probably a cause for regret to all except litigators.



There is little reason to suppose that the new provisions will lead the courts to decide such cases very differently. The act makes plain that, as presently, whether a company could take advantage of property, information or an opportunity is immaterial to whether a director has wrongly exploited it. What of the situation where a company considers a venture and decides, on an informed and bona fide basis, that it does not wish to pursue it? Arguably, the effect of section 175(4)(a) might be that the director is free to do so in his own right. Really, however, the act takes us no closer to answering this controversial question.



It is worth highlighting that, in one important regard, the act reinforces the strict policy evident of late in the courts. It is specifically provided at section 170(2) that a person who ceases to be a director continues to be subject to both the section 176 duty as regards his conduct while a director, and - of special practical significance - the section 175 duty as regards the exploitation of any property, information or opportunity of which he became aware at a time when he was a director. The arrival of the statutory provisions, then, will bring no respite from the risks faced by disillusioned or unscrupulous directors wanting to set up in competition.



In other regards, one can see infelicities of drafting in the process of intended codification giving rise to confusion. The provisions of section 176, for instance, are plainly intended to do no more than enshrine in statute the position regarding secret commissions established by Attorney General for Hong Kong v Reid [1994] 1 AC 324 PC. Yet the imprecise reference to benefits from third parties conferred on a director 'by reason of... his doing (or not doing) anything as director' would conceivably allow the floating of arguments to the effect that an unauthorised profit is caught by section 176 and not by section 175.



The incentive to do so springs from the different provisions the two sections make for the authorisation of acts that would otherwise constitute breaches. It is arguably here that the act achieves the most helpful advance from the position existing at common law. Though this tends to be the practical position in any event, section 175 renders authorisation by the board the default means of doing so as regards private companies and a possible means as regards public companies. By contrast, section 176 contains no provision for authorisation by the board. Note that the position is different still as regards transactions with the company: see the requirements contained in section 177 and section 182.



'There are two ways of looking at the statutory statement of directors' duties,' wrote Minister for Industry Margaret Hodge in the preface of the collection of relevant ministerial statements the Department of Trade and Industry circulated last year. 'On the one hand it simply codifies the existing common law obligations of company directors; on the other... it marks a radical departure in articulating the connection between what is good for a company and what is good for society at large.' There can be no doubt into which camp the provisions concerning directors' conflicts of interest fall. Yet that, one suspects, renders them no less likely to be dragged repeatedly before the courts in years to come.



James Mather is a barrister practising at Serle Court Chambers