Directors authorising a director's conflict of interest in a private company (CA 2006 s.175)
Quillon Robotics Ltd is a private company limited by shares with unamended model articles and three directors: Nadia, Oskar and Priyanka. Through her role as a director, Nadia learns of a consultancy contract that the board has decided the company cannot take on because it lacks capacity. Nadia wants to take the contract through her own consultancy business. At a properly convened board meeting she discloses the full facts. Oskar and Priyanka vote to authorise her to take the opportunity. Nadia is present but does not vote and is not counted in the quorum. Nothing in the company's constitution restricts directors' authorisation of conflicts.
Has Nadia's conflict of interest been effectively authorised?
Choose one answer to see the reasoning.
Worked answer
Correct answer A: Yes: in a private company whose constitution does not invalidate it, the directors may authorise the conflict, and they decided without counting Nadia.
THE RULE TO REMEMBER
In a private company, unless the constitution prevents it, independent directors may authorise a director's conflict, provided the quorum is met and the vote carried without the interested director (CA 2006 s.175(5)(a), (6)).
Directors authorising a director's conflict of interest in a private company (CA 2006 s.175)
Section 175(1) CA 2006 requires a director to avoid situations in which she has, or can have, an interest that conflicts with the company's interests, and s.175(2) applies this to exploiting an opportunity whether or not the company could take advantage of it. Nadia's plan is therefore a conflict. The duty is not infringed if the matter has been authorised by the directors (s.175(4)(b)). In a private company, the directors may authorise it where nothing in the constitution invalidates such authorisation (s.175(5)(a)). Under s.175(6), the authorisation is effective only if the quorum is met without counting the interested director and the matter is agreed without her vote. The model articles fix a quorum of two; Oskar and Priyanka formed a quorum without Nadia and voted in favour without her. The authorisation is therefore effective, and Nadia may take the contract without breaching s.175.
Why B is wrong: Section 175(2) states it is immaterial whether the company could take advantage of the opportunity, so a conflict still arises.
Why C is wrong: Section 175(4)(b) and (5)(a) allow the directors of a private company to authorise the conflict; a shareholder resolution is not required.
Why D is wrong: Express power in the articles is required only for a public company (s.175(5)(b)); a private company's directors can authorise unless the constitution invalidates it.
Why E is wrong: A declaration under s.177 concerns transactions with the company; exploiting an opportunity for oneself requires authorisation under s.175.
A little more practice done.
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