#8572 - Directors’ Duty To Avoid Conflicts - Business Associations

Rule: Directors’ fiduciary obligation to avoid situations where without consent of company the director’s personal interest (or other interests which the director is bound to protect) conflicts or may possibly conflict with their duty to the company. Two aspects of this (1) Duty to avoid conflicts: The fiduciary cannot put himself in a position of conflict of interests (duty vs interest; or duty vs duty); or A situation with a real and substantial possibility of conflict (Boardman v Phipps) – this affects directors’ interests in their company’s transactions; and (2) Duty to account for profits made from position as fiduciary (beyond an agreed retainer) (Keech; Chan; Regal v Gulliver; Boardman v Phipps )

(1) First: Is D liable because of an interest D had in a transaction with their Co?

1. Considerboth: (1) Equitable obligation (perhaps changed by company’s constitution) and (2) statutory duty of disclosure in ss 191 and 192.

2. Breach of equitable duty to avoid conflicts?

3. Breached statutory duty of disclosure in ss 191 and 192? (McGellin; Camelot; Adler)?

(2) Second issue: did D profit from fiduciary position, thus breaching duty?

1. Three sources of law to consider: (1) General law and equity (2) company’s constitution and (3) statutory duty of disclosure in ss 183 and 184.

2. Breach of equitable duty to avoid conflicts?

   1. Duty applied?

   2. Consent?

   3. Consequences

3. Company’s constitution?

4. Breached statutory provisions regarding use of position (s 182) and use of information (s 183)

Rule: Directors’ fiduciary obligation to avoid situations where without consent of company the director’s personal interest (or other interests which the director is bound to protect) conflicts or may possibly conflict with their duty to the company. Two aspects of this (1) Duty to avoid conflicts: The fiduciary cannot put himself in a position of conflict of interests (duty vs interest; or duty vs duty); or A situation with a real and substantial possibility of conflict (Boardman v Phipps) – this affects directors’ interests in their company’s transactions; and (2) Duty to account for profits made from position as fiduciary (beyond an agreed retainer) (Keech; Chan; Regal v Gulliver; Boardman v Phipps)

• Exam tip: S 588G and the negligence duties are probably the most important duties. But duty to avoid conflicts can trip up directors even where they believe they are acting honestly and in best interests and for proper purposes.

(1) First: breach of conflicts duty or statutory disclosure obligations: because of D’s interest in a transaction of their Co?

1. Consider both: (1) Equitable obligation (perhaps changed by company’s constitution) and (2) statutory duty of disclosure in ss 191 and 192.

2. Breach of equitable duty to avoid conflicts?

   1. Duty applied? (1) To persons in question (eg director?? (2) (a) Conflict? Or (b) a significant possibility of conflict? Between fiduciary duty vs personal interest.

   2. Duty continued as time of transaction/benefiting? (ie see partner/partner fiduciary relationship, good faith and honourable conduct due from each persisted for purposes of winding up affairs, under fiduciary obligation to co-operate and act consistently with agreed procedure for realization application and distribution of partnership property: Chan)

   3. Consent? Full and frank disclosure?

   4. Consequences: Any benefit or gain obtained where conflict or significant possibility of conflict between fiduciary duty vs personal interest is held as constructive trustee (Keith Henry); Chan.

3. Breached statutory duty of disclosure in ss 191 and 192? (McGellin; Camelot; Adler). Director that has a material personal interest in a matter that relates to affairs of company must give directors notice of the interest under s 191(2) applies.

   1. Duty applied? (1) personal interest (2) personal interest material (3) relating to affairs of company.

   2. Compliance?

   3. Consequences? (1) strict liability criminal offence: s 191(1A) (2)

   4. Exceptions?

4. Exceptions?

   1. Under general law: liability to account as a constructive trustee does not arise where (1) person under fiduciary duty has been duly authorized either by instrument creating fiduciary duty or (2) by cirumcstance sof appointment or (3) by informed and effective assent of the person to whom the obligation is owed to act in manner in which he acted; or (4) Right to require an account from fiduciary may be lost by equitable estoppel: Chan.

(2) Second: breach of duty not to take profits or improperly use information/position as fiduciary: because of D’s use of certain info/position to make money/cause detriment?

5. Three sources of law to consider: (1) General law and equity (2) company’s constitution and (3) statutory duty of disclosure in ss 183 and 184.

6. Breach of equitable duty to avoid conflicts?

   1. Duty applied?

   2. Consent?

   3. Consequences: Any benefit or gain obtained where conflict or significant possibility of conflict between fiduciary duty vs personal interest is held as constructive trustee (Keith Henry); Chan.

7. Company’s constitution?

8. Breached statutory provisions regarding improper use of position (s 182) and use of information (s 183). [DKS: ‘improper use’ is determined by general law.]

   1. Duty applied?

   2. Compliance?

   3. Consequences?

9. Exceptions?

   1. Under general law: liability to account as a constructive trustee does not arise where (1) person under fiduciary duty has been duly authorized either by instrument creating fiduciary duty or (2) by cirumcstance sof appointment or (3) by informed and effective assent of the person to whom the obligation is owed to act in manner in which he acted; or (4) Right to require an account from fiduciary may be lost by equitable estoppel: Chan.

LIST OF CASES:

10. Renewing partnership lease himself - breaches both no profit and no conflict: in Chan a doctor in a recently ended partnership with another doctor used the partnership’s option to renew a lease in his own name exclusively. There was a fiduciary obligation from the winding up of the partnership (ie, until property’s split still some relationship), and breach of both rules: conflict between obligation to get the partnership property, and profit made through the partnership’s position as a tenant, in renewing the partnership lease for himself exclusively.

EXAM TIP: Consider:

11. Whether breach of related party transactions in Ch 2E

12. - Whether Co tried to indemnify the D for breaches of the duty

13. Shareholders remedies?

Sources of law to consider:

1. First, equitable principle enjoins conflict avoidance and makes transactions voidable at suit of company (irrespective of fairness of transaction from company’s perspective provided possible to restore parties to their original position.) [So long as conflict between interest and duty, court won’t look at fairness: Furs v Tomkies.

   1. Note: company’s constitution may modify equitable rule.

2. Second, statutory duty of disclosure imposed by Act under ss 191, 192. (Under s 193, statute has effect in addition to any provision in a co’s constitution

3. Third, duty to not fetter board discretions (Thorby v Goldberg)

4. Fourth, note no blanket prohibition on competing. (Mashonaland)

Exam tip:

1. Consider: Was there a breach of the prohibitions on related party transactions? Chapter 2E

2. Did the company try to indemnify the director for breaches of duty? Ss 199A – 199 C

Breach of equitable duty to avoid conflicts?

1. Duty applied? (1) To persons in question (eg director?? (2) (a) Conflict? Or (b) a significant...