Duties of directors: Conflicts of interest

What's the Issue?

Corporate governance is heavily regulated in Australia and there are a number of duties of directors that must be observed as highlighted by the Australian Securities and Investment Commission.

A breach of the duty to avoid any conflict of interest will have serious consequences for both the director and the company.

What is a Conflict of Interest?

A conflict of interest arises when a director puts his or her own personal interests ahead of the interests of the company.

Conflicts of interest may be direct or indirect and are more prevalent than one might expect. This is because of the complexity of relationships that exist between directors, other businesses, their families and the community.

Not all personal overlaps between the director and a company lead to a conflict of interest. It must be noted, however, that directors have a duty to notify the other directors when a material personal interest arises.

What are some examples of conflicts of interest that might arise?

Sitting on the board of a competitor company

• If a director or a member of his or her family profits (or potentially could profit) from a deal made by the company as it is prohibited under the Corporations Act 2001 (Cth) to use information or a position to take advantage of a business opportunity that belongs to the company.
• A Director conducting business with a subsidiary company in the context of a corporate group of companies may also lead to a conflict of interest. Awarding contracts to family members may lead to a conflict if the contract is not on commercial terms and in the best interests of the company.

Any Tips?

Check your company constitution to see how it addresses actual or potential conflicts of interest. It may be a good idea to update the constitution or introduce a new company policy which identifies what steps should be taken if a conflict of interest arises. As soon as you may think that a conflict or potential conflict has arisen, give full disclosure of the nature of your interests to the board. If the board is concerned that there is or may be a real or perceived conflict, then it is recommended that legal advice be obtained as soon possible. Lead by example and make sure that all members of the board set a high standard of ethical and lawful behaviour which the rest of the company can follow.

For further guidance on duties of directors, please feel free to give Mitchell Zadow (Managing Principal and Accredited Specialist in Commercial Law) on (03) 8561 3318.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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