Case Study

Conflict of Interest

Thursday 19th March 2009

 

Charities which are set up as companies are subject to the terms of the Companies Act 2006 which recently has imposed new statutory duties on company directors.  For directors of charitable companies these duties are broadly similar to the duties already owed under charity law. 

 

However the Companies Act 2006 creates a new duty on each director of a company to avoid situations which could possibly conflict with the company's interests.  While there is no definition in the Act as to what constitutes a conflict of interest it is likely that any situation or connection that might lead a director to put the interests of the director, or some other person or body, before the interests of the company would amount to a conflict of interest and would be covered by the new rules.

 

Historically where a conflict of interest arises the director concerned would normally take steps to deal with the conflict, commonly by leaving the room when the relevant matter was being discussed and by having no part in the decision making process on that matter.

 

The new rules now require that directors prevent such conflicts, or indeed potential conflicts, arising in the first place unless prior authorisation has been given. 

 

Such authorisation can be given by the remaining directors, who are not subject to the conflict.  It is important to note however that for a company incorporated before 1 October 2008 the directors can only authorise actual conflicts of interest, or potential conflict situations, if the memorandum and articles of association of the company specifically allow them to do so.

  

Recommendation

 

While the company members can also authorise or ratify conflicts by special resolution at a general meeting it is recommended that charitable companies take advantage of the important flexibility afforded by ensuring that the board of directors have the power to authorise conflicts.

 

Practical Steps

 

Practical steps that you may wish to consider in order to address this issue include:-

 

  • Ensuring that you are aware of existing conflict or potential conflict situations
  • Checking the terms of your existing memorandum and articles of association
  • If there no provision permitting the board to authorise conflicts to amend the memorandum and articles of association to provide for this

 

If you would like any further information on the issues raised in this briefing contact

Mark Ewing

on 0141 225 2568 or mee@tcyoung.co.uk

 

 

Please note that this briefing is a short summary and is not a comprehensive statement of the law.

Legal advice should be taken on individual circumstances