One of the most crucial duties that you have as a company director is to avoid a conflict of interest. Conflict of interests can interfere with your ability to effectively run your company. Furthermore, neglecting to manage conflicts of interest can lead to significant fines and potential prison terms. By knowing how to manage conflicts of interest effectively, you can ensure you run your company responsibly.
What Is a Conflict of Interest?
A conflict of interest refers to when your personal interests intersect with your company interests. They interfere with your ability to carry out your director duties in ‘good faith’ and responsibly manage your company. An example of a conflict of interest is accepting personal incentives to accept specific vendors for your company. The Corporations Act 2001 (Cth) underpins your legal responsibilities to avoid conflicts of interest.Chiefly, if there are circumstances which interfere with your ability to make decisions rationally, there will be a conflict of interest. They can be actual conflicts of interest, as well as potential or perceived conflicts of interest. Your duties as a director means you have to disclose all conflicts that arise.
Keep in mind, that a conflict of interest does not necessarily have to be financial. If you have a romantic relationship with someone in the company, this may cause a conflict of interest. Furthermore, they can also arise if a family member benefits from company decisions.
Do I Need to Disclose Conflicts of Interest?
All relevant conflicts of interest are required to be disclosed as part of your director duties. A good guide, is if you are unsure whether to disclose a conflict of interest, you should disclose it. There are no consequences from ‘over-disclosing’ them , so you should err on the side of caution. Furthermore, a failure to disclose, can lead to the loss of limited liability protection if your company goes into insolvency or goes into liquidation.
How Do I Manage Conflicts of Interest?
Ideally, you should establish a process to manage conflicts of interest that occur in the running of your company. A good idea is to have a company policy which details how directors can manage them. One key strategy is for you to abstain from votes that relate to your conflict of interest and letting other directors know that you have a conflict of interest as soon as practical. You are only required to manage a conflict if it affects your ability to discharge your director duties, known as your fiduciary obligations materially and substantially. It also has to be formally recorded in your directors’ meeting.
Thus, your main responsibility as a director of a company is to make sure you disclose your conflicts of interest. If you are unsure about whether you have to disclose or how to form a policy regarding conflicts of interest, get in touch with a company lawyer today.
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