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Understanding Directors' Duties: Navigating Sections 175, 176, and 177 of the Companies Act 2006
This is the fourth and final instalment of our four-part series, focusing on various important topics related to the role of Directors' Duties. If you haven't yet read our previous articles, you can read them here:
- An Introduction to Directors' Duties and their Responsibilities
- Understanding Directors' Duties: Navigating Sections 171 and 172 of the Companies Act 2006
- Understanding Directors' Duties: Navigating Sections 173 and 174 of the Companies Act 2006
In this article, Mollie Leak, Commercial Litigation Solicitor at Warner Goodman, wraps up the series by examining Sections 175, 176, and 177 of the Companies Act 2006. These sections focus on the duty to avoid conflicts of interest, the prohibition on accepting benefits from third parties, and the requirement to disclose any interest in a proposed transaction or arrangement with the company.
Duty to Avoid Conflicts of Interest (Section 175)
Under section 175, directors must avoid situations where their personal or professional interests could conflict with the company's interests. This includes direct and indirect interests and applies to any potential conflict with the company or duties owed to third parties.
Directors must ensure their actions do not compromise their responsibilities to the company by exploiting any property, information, or opportunities that the company or any third party could potentially benefit from.
How to Identify a Breach
To assess whether a breach has occurred, the court will examine whether the director was aware of the conflict but did nothing to prevent it or if the director genuinely believed no conflict existed.
A breach cannot occur in the following situations:
- The situation is unlikely to result in a conflict of interest.
- The opportunity in question is clearly separate from any company interests. For instance, a director might pursue a business opportunity previously declined by the company, provided the company made an informed decision.
- The board of directors, consisting of genuinely independent members, has granted authorisation, and the company's constitution permits it.
The duty to avoid conflicts of interest continues even after a directorship ends. If a former director uses confidential information in a way that harms the company, the company can pursue legal action for a breach of duties.
Duty not to accept benefits from third parties (Section 176)
Under Section 176, directors are prohibited from accepting any benefit from a third party due to their role as a director or to influence their actions and decision-making duties. A benefit is defined as a "favourable or helpful factor, circumstance, advantage, or profit" and stems from the fiduciary duty against making a profit from their position. The duty is not violated if accepting the benefit would not reasonably pose a conflict of interest.
Unlike Section 175, directors cannot seek board authorisation to accept benefits from third parties. Nonetheless, company constitutions may permit directors to accept benefits below a specified value, ensuring that reasonable corporate hospitality does not breach Section 176.
This duty extends beyond a director's tenure, applying to actions or omissions made during their appointment.
Duty to declare interest in proposed transaction or arrangement with the company (Section 177)
Under section 177(1), directors must disclose to their fellow directors any direct or indirect interest in a proposed transaction or arrangement that involves the company. In essence, this means informing the company when a director has interests on both sides of a potential deal.
No declaration is required in the following circumstances:
- When the director is unaware of the interest or the transaction (although they are still held to the standard of what they reasonably should know.)
- The interest is unlikely to lead to a conflict of interest.
- The company has only one director.
Subject to the company's articles of association, a director may still participate in the decision-making process for transactions in which they have declared an interest. A director will not be in breach of section 177 if they act by the provisions of the company's articles of association regarding dealing with conflicts.
Section 182 of the Companies Act 2006 pertains to existing transactions and arrangements. Directors must disclose the nature and extent of their direct or indirect interest in any existing company transactions not previously declared under section 177. Although section 182 is not a director's general duty, failure to comply is a criminal offence.
Get in Touch
For more information and guidance on Sections 175, 176 and 177 of the Companies Act 2006, contact Mollie Leak and our Commercial Litigation team on 023 8063 9311 or enquiries@warnergoodman.co.uk.
If you missed our previous articles about Directors' Duties, you can read them here: