Directors’ duties: disclosing potential conflicts of interest

The recent case of Fairford Water Ski Club Ltd v Cohoon [2020] is a good reminder of the duties which directors owe to a company and the level of detail they must provide when notifying their fellow directors of a transaction or arrangement in which they are interested.  

The Facts

Fairford Water Ski Club Ltd (the “Company”) operated a members’ water skiing club. The allegations against the directors were that they had:

• misappropriated money and other property from the Company, and
• caused the Company to pay unapproved management charges to a company in which the directors in question had an interest.

A key consideration was whether two of the directors had declared the ‘nature of their interest’ in the management agreement to the Company’s board (which was a statutory requirement under the then applicable section 317 of the Companies Act 1985). From October 2008, the directors were then under a duty to declare the ‘nature and extent’ of their interest in the management agreement (section 177 of the Companies Act 2006).

The Company argued that:

1. the directors had failed to declare the ‘nature’ of their interest in the management agreement as they had not disclosed the amount of the fee payable under such agreement, and
2. using the same argument, the directors had failed to comply with the Company’s articles of association which required that each director declare the ‘nature and extent’ of any interest they had in a transaction or arrangement with the Company.

The Judgment

The High Court largely found in favour of the Company. Key points noted by the judge include:

• the directors were under a duty to disclose ‘the precise nature of the interest’ in the management agreement and to show that they had complied in ‘letter and spirit’ with the disclosure requirements
• this ruling emanates from the more general legal principle that directors are under a duty to make full disclosure of all facts material to a transaction, and
• as a result of this principle, the court found that one of the directors had failed to properly disclose the nature and extent of their interest in relation to the management agreement and he was ordered to make payments to the Company. The other director had not been a director at the time the management agreement was allegedly entered into and therefore it was decided that he was not required to disclose his interest.

What does this mean for directors?

This decision highlights that the duties owed by directors to a company will be strictly interpreted and applied by the courts.  

Key points a director should bear in mind if they have an interest in another business which may give rise to a conflict of interest are:

1. To disclose fully any personal interests that they have which are relevant to the business of the company of which they are a director
2. There are no ‘hard and fast’ perimeters around the extent of detail that should be disclosed, and of course directors should strive for a balance between providing too much information and not enough, but the ramifications of failing to disclose sufficient information can be significant
3. Decisions and meetings, including a director’s considerations and disclosures, should be documented in case they are ever challenged
4. A director’s interest in a transaction can change over time - directors should therefore always be live to any potential conflicts that arise throughout the lifetime of their directorship.

How can we help?

This article was written by Martin Davidson. If you have any questions about director’s duties to a company, please speak to your usual contact at Burges Salmon or Nick Graves.