Director’s Duties and Conflict of Interest

Directors have many duties and obligations under the Corporations Act 2001 (Cth), but those pertaining to conflict of interest demand additional considerations from directors. Directors regularly act for multiple companies, and are not prohibited from acting for companies in competition by the Corporations Act (though they may be prohibited by the company constitution). However, this increases the risk of a director breaching provisions relating to conflict of interest.

Breaches of Duties Relating to Conflict of Interest

Common pitfalls in which directors may breach their duty to avoid conflict of interest include:

  • Failing to disclosure a material personal interest that may give rise to a conflict of interest;
  • Failing to act in the company’s best interests, and instead acting in favour of your personal interests or interest in another company;
  • Failing to advise company boards of your financial or other interest in a competing company;
  • Failing to accurately disclose the nature and extent of your interest in another company;
  • Prioritising the needs or interests of one company over another company;
  • Making decisions for one company based on information you obtained by being a director of another company;
  • Using your position as a director of one company to gain advantage for yourself or another company.

The Corporations Act

The Corporations Act outlines director’s duties regarding conflict of interest in sections 180-183. These are of utmost important to review when assessing your risk associated with any possible conflicts of interest.

  • Section 180: Directors must act with the degree of care and diligence that a reasonable person would exercise if they were a director in the corporation’s circumstances.
  • Section 181: Directors must act in good faith and for a proper purpose.
  • Section 182: Directors must not use their position to gain advantage for themselves or something else, or cause detriment to the company of which they are a director.
  • Section 183: Directors must not use information improperly because they are, or have been, a director or employee of another company.

The Corporations Act also outlines disclosure requirements for directors in sections 191-192. These sections explain what must be disclosed and what time the disclosure must take place.

  • Section 191: Directors must notify other directors of material personal interests when conflict arises.
  • Section 192: Directors may give other directors standing notice about an interest.

The Fiduciary Duty

In addition to the Corporations Act and the company constitution, the common law mandates a fiduciary duty. This is an inherent duty to operate in good faith in the interests of the company as a whole. This means that any collateral purposes are prohibited by your fiduciary duty. If you are meeting the requirements of the above duties contemplated in the Corporations Act, there is sufficient enough overlap to suggest that you are likely meeting the requirements of this fiduciary duty. However, if you are not meeting the standards associated with conflict of interest, you may also find yourself in breach of the common law.

Penalties and Best Practice to Avoid Them

There are serious civil and criminal penalties for breach of director’s duties, including those duties related to conflict of interest as outlined above. These penalties can result whether your breach was intentional or otherwise. While you may be able to maintain your material personal interest and your directorship while avoiding a conflict of interest, it is important to proceed carefully and with full disclosure at every step of the way.

If you are a director of a company or are considering directorship and have questions about meeting your obligations, speak with one of our experienced business lawyers by calling us at (02) 4929 7002, emailing us or completing an enquiry form.