As a director of a company, you have a duty to act in its best interests.
In undertaking your role as a director, you may face a situation where the interests of the company come in to conflict with your own personal interests.
What duties do you owe to the company in relation to conflicts of interests?
If you are a director and the interests of the company are in conflict with your own interests, you are in risk of being personally liable for a breach of fiduciary duty. Being in conflict may also impact on your ability to comply with your other statutory duties as a director, such as acting in good faith, impartially, and in the best interests of the company.
Conflict of interest issues can arise where:
- The company you are a director of is contracting with another company you have an interest in.
- You are deciding on your own remuneration or on remuneration of people with whom you have a personal relationship.
- You use information you receive as a director to gain some sort of personal or business advantage.
- You make a personal profit from a particular decision of the company.
Civil action can be taken by the company or ASIC where a conflict of interest has arisen and not been appropriately dealt with. Criminal sanctions are also available where the breach of a statutory duty was a result of reckless or intentionally dishonest behaviour.
What to do if a conflict of interest occurs?
It is important to ensure that the company you are a director of has policies in place to recognise and identify potential material interests, and also to minimise its risk of creating circumstances where a conflict may arise.
It is left to the discretion of the individual director and the company to decide whether an interest is a ‘material interest’ for the purposes of attracting the duty. A material interest is one that has the capacity to influence a director’s ability to be impartial when making decisions.
Where a material interest is identified, and it becomes clear that there is a real possibility of conflict, as director you must disclose the nature and extent of the interest, as well as how it might impact the interests of the company. This may be done at the outset of your term as director or by way of a standing notice, and updated as further material interests are identified.
It is common for companies to have a provision in their constitutions that allows for a director to have a conflict of interest provided this interest is disclosed. Such provision also often provides for the director’s rights and responsibilities once the conflict is disclosed.
It can often be useful to have a standing agenda item for meetings of directors to enable a director to note a conflict of interest. A conflict of interest should also be noted in the minutes of meeting of directors.
Other steps which will minimise the likelihood of a breach of the duty to avoid a conflict of interest include:
- Refraining from voting on the particular transaction or matter;
- Ensuring that any decision made by you as a director is clearly in the best interests of the company, even where this involves actively stopping a transaction from occurring.
For advice or further information, please contact: