RMIT Classification: Trusted

Directors’ Duties 2 –
Conflicts of Interest

Chapter 12
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Overview of the duty to avoid conflicts of

interest

The general law rules

Chapter 12 -
Conflicts of The company’s constitution

interest
Statutory regulation

Consequences of contravention
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Overview of the duty to

avoid conflicts of interest
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Overview of the duty to avoid conflicts of interest

• Three levels of regulation with respect to duty to avoid conflicts of
interest

General law

Constitution

Statutory Law
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• The difference between general law rules and

statutory provisions:
• The content of both rules are different (eg
Overview of s163 CA - loan to director’s related company)
the duty to • They do not apply to the same people (eg
s156(1); s157(2) CA)
avoid • Difference between general law and the
company’s constitution –
conflicts of • Disclosure under the general law is to the
interest company at general meeting:
• This is often modified by the company’s
constitution to make disclosure to board of
directors sufficient
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The General Law Rules

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• Overview:
• Directors must not place themselves in a
position where a personal interest conflicts
with duty to act in the interests of company
without making appropriate disclosure and
obtaining the necessary permission
The general
• Situations where the rule applies:
law rules • Director enters into transaction with
company – sell own property to company
• Director takes property, information or
business opportunities which belong to the
company
• Conflicting duties owed to different persons
or different companies
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1. NO CONFLICT RULE – a director or senior executive

officer must not place themselves in a position
where there is an actual or substantial possibility of
a conflict between a personal interest and their
duty to act in the interests of the company unless
the permission of the company is obtained.
What is the • The director must disclose his interest in the
general law potential conflict at the general meeting;
however, some constitution provides that the
conflict rule? rule is complied with if the director discloses the
interest to the company’s board.
2. NO PROFIT RULE – a director must not make secret
profits which may arise from the director’s position
as such – eg commission, bribe etc.
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Aberdeen Railway Co v Blaikie Bros (1854)

• A entered into contract to purchase equipment from B.
• A director of A did not tell the board that he was a partner
in B.
The general law • Court held that the director breached his duty to not place
himself in a position where his personal interest conflicted
“no conflict” rules with his duty to the company.
- transaction with • His personal interest was to have B sell at the highest price
to A; his duty to A was to obtain the lowest price from B.
the company • Does not matter whether the transaction is direct or
through indirect means (e.g. through another company)
• Does not matter whether director makes profit or whether
company suffers loss
• Duty breached if director does not disclose his interest in
the transaction
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• Duty breached if director does not disclose his interest in the

transaction
• Informal disclosure to the shareholders or knowledge
informally acquired by them is insufficient
• Dayco Products Singapore Pte Ltd ( in Liquidation) v Ong
The general law Cheng Aik [2004]
• Director argued that he had informally discussed his
“no conflict” rules interest with a sale rep of parent company and the sales
– transaction rep agreed informally to the arrangement.
• Court held that it was insufficient disclosure as he did not
with the company disclose to the board itself.
• However, if the board of directors knew of the director’s
interest in a particular transaction, the failure of that director
to make a formal disclosure does not make the director liable
for breach of this duty – Marx Universal Development Group
Pte Ltd v Lian Hwee Choo Phebe [2010].
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• The ”no profit’ conflict rule – directors must not take corporate
property, information or opportunities without the permission
of the company.
• If he does so, he has breached this duty by placing his personal
General law “no interest over the duty to act in the interests of the company.
• Personal Automation Mart Pte Ltd v Tan Swe Sang [2000] –
profit” rule – director was held liable for breach of duty because she set up a
taking corporate competing company to take advantage of an opportunity which
should have gone to the company of which she was a director.
property, • Cook v Deeks [1916] - three out of four directors set up a
company to accept a contract with Canadian Pacific Railway
information and which was negotiating with the original company. They used
their shareholding to vote that the original company had no
opportunities interest in the contract and voted for the original company to
sell equipment to the new company. The court held that they
breached their duties by placing their personal interests (taking
a corporate opportunity) above the duty to the original
company.
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• Regal (Hastings) v Gulliver [1942]

• Regal (Hastings) owned 1 cinema in Hastings
and wanted to lease another two in the area.
General law “no • They did not have enough money to do so, so
profit” rule – the directors contributed their own company
to form a subsidiary to lease the cinemas.
what if the • The cinema and leases were subsequently sold
company and the directors earned a profit.
• The court held that the directors breached
cannot take the their duty of conflict of interests
opportunity? • The directors could not take advantage of a
corporate opportunity without proper
disclosure even if the company is not in a
position to do so.
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• The director would breach his duty if he did so

without permission and where the resignation was
prompted or influenced by a desire to acquire the
General law “no opportunity.
profit” rule – can • Canadian Aero Service Ltd v O’Malley (1973)
a director resign • President and CEO of Canadian Aero Service
to take up a resigned and formed another company to take up
opportunity to obtain contract which belonged to
corporate Canadian Aero Service.
opportunity? • The court held that they breached fiduciary duties
even though they were not directors.
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• A director can take up an opportunity that the rest

of the board, in good faith, has decided not to
General law “no pursue. Because in a sense, the opportunity no
longer belongs to the company as the board has
profit” rule – decided to abandon it.
what if the • Peso Silver Miner Ltd v Cropper (1966)
company’s • The board of directors in Peso rejected a mining
offer. A director Cropper was later approached to
directors have, in form a syndicate to acquire the claims of the offer.
He did not disclose this information to the board.
good faith, • Cropper was later dismissed.
rejected the • The court held that Cropper had not breached his
opportunity? duty because Peso had, for good commercial
reasons, rejected the offer and thus had no
interest in the offer.
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• Where a director came to know of an opportunity prior to

information about the opportunity coming to the knowledge
of the company’s other directors, the director has a duty to
disclose information about the opportunity to the company.
General law “no • This is so even if he acquires the opportunity in his personal
profit” rule – capacity.
• Bhullar v Bhullar – two brothers set up a bowling hall. Two
must a director families fell out and decided to go separate ways and was
disclose his told not to buy anymore investment properties.
• Two directors from one camp found out about an
intention to take opportunity to buy adjacent carpark and land. They set up
another company to purchase the land in their own capacity.
up an • Held – directors breached fiduciary duties – the test was not
opportunity? whether the company had some kind of beneficial interest in
the opportunity but whether a “reasonable man looking at
the relevant facts and circumstances of the particular case
would think that there was a real sensible possibility of
conflict”.
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• A director must not make secret profit from one’s position

as director without the company’s approval.
• Furs Ltd v Tomkies (1935) – director Tomkies was the
managing director of Furs. A part of the company was being
sold to a buyer. The director was in charge of negotiating
the deal. The company informed the director that he won’t
be employed by them after the deal and told him ‘to make
General law “no the best possible arrangement’.
• The buyer offered the director a job with them after the
profit” rule – deal and a substantial cash payment (￡5000) if he would
disclose some important information (tanning formulae)
secret profits about the company. The director complied, which led a
reduction in the purchase price from ￡14,000 (￡8,500 for
plant and equipment + ￡ 5,500 for formulae) to ￡8,500.
The company discovered the substantial cash payment and
claimed breach of fiduciary obligations.
• The court held director breached his duty by placing himself
in a position where his personal interest conflicted with the
duty to act in the best interest of the company.
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• Conflicting duties:
• This rule prohibits directors placing themselves in a
position of conflict where a personal interest conflicts with
their duty to at in the interest of company.
• Where a director places himself in a position where he
serves two competing interests: State of South Australia v
Marcus Clark (1996)
The general law • Managing director of State Bank caused the bank to
”no conflict” rule – purchase a company where he is also a director.
• The court held that the director breached his duty to avoid
conflicting duties conflict of interests.
• Other conflicting interests: competing companies and secret
profits:
• Directorships in competing companies – must not place
himself in a position of conflict
• Secret profits – bribes, commission etc
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• Nominee directors:
• Nominee directors clearly owe fiduciary duties to the
company of which they are appointed
• Townsing Henry George v Jenton Overseas Investment
Pte Ltd [2007]
• Whose interests can the nominee director act in?
• Only in the interest of the company of which they
are directors, Bennetts v Board of Fire
The general law no Commissioners of NSW (1967)
• What if nominee directors breach their duty when
conflict rule – acting?
• They are entitled to be indemnified of liabilities they
nominee directors incurred in the course of acting as agents
• When can nominee directors divulge information to their
appointer?
• Section 158 allows directors to disclose information to
persons whose interests he represents, or whose
directions the director may be required to act in relation
to the director’s powers and duties, provided that the
information is not likely to prejudice the company and is
made with the authorisation of the board of directors.
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The Company’s
Constitution
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• How can the constitution affect the duty to

avoid conflicts of interest?
• Common for companies to have
provisions that allow directors to have a
conflict of interest provided the director
discloses that interest and for directors to
abstain from voting in relation to matters
The in which there is such a conflict.
company’s • S156 CA – disclosure to board of directors
deemed disclosure to have complied with
constitution general law of disclosure to members of
company
• No directors shall vote in respect of any
contract or proposed contract … if he had
a direct/indirect interest
• Appendix 2.2 SGX Listing Manual –
directors shall not vote in proposed
contract in which has has interest in
directly or indirectly.
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Statutory Regulations
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• Disclosure of transactions with the company

(sec 156(1) CA) disclosures:
Statutory • S156 CA imposes duty on directors and
regulation — CEO to make appropriate disclosure to the
board if they are directly or indirectly
sec 156(1) CA interested in transaction or a proposed
transaction with the company where the
- Disclosure interest is a material interest.
of interests in • What must be disclosed?
transactions, • The nature of director’s interest in the
transaction to be made at board meeting
property, or in a written notice to the company
offices etc detailing the nature, character and extent
of the interest.
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• What constitutes interest?

• Companies Act does not provide definition
• S 156(13) – interest of a member of
director’s family is to be treated as being the
director’s interest – family member to
Statutory include spouse, natural, step and adopted
children; may also include parents and
regulation — siblings.
• S 156(3) — the mere fact that the director is
sec 156(1) CA a member or creditor of a corporation that is
interested in a transaction or proposed
transaction with the company of which he is
a director does not fall within the purview of
sec 156(1) unless the interest is a ‘‘material
interest’’
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• When must disclosure be made?

• As soon as practicable after facts come to
his knowledge
• To give a written notice to the company,
and the company sends copy of notice to
Statutory all the directors and to form part of
proceedings at next board meeting.
regulation —
• Can director give other directors general
sec 156(1) CA notice about an interest?
• Section 156(5) states that a director of a
company may give the other directors
general notice pertaining to interests in
transactions or proposed transactions
with the company
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• Disclosure of potential conflict – s156(6) CA:

• The Companies Act requires directors and
CEO who hold any office or possess any
property where duties or interests might,
whether directly or indirectly, be created in
Statutory conflict with their duties or interests as
director, to declare the fact, nature, character
regulation — and extent of the conflict

sec 156(6) CA • What constitutes conflict?

• Section 156(6) targets situations where
directors hold an office or possess property
that may result in potential conflict
• Yeo Geok Seng v PP [2000] – director
convicted under s156 CA, criminal liability
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• When must disclosure be made?

• For pre-existing conflicts: At first meeting
after appointment as company’s director
Statutory • For conflicts that arise after appointment
as director: At first meeting after
regulation — appointment to conflicting office or
sec 156(6) CA coming into possession of property that
gives rise to conflict
• Director to send a written notice to the
company setting out the conflict.
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• Interaction between sec 156 and general law

rules and constitution

Statutory • Non-compliance with sec 156:

regulation — • Failure to adhere to the disclosure
requirements under sec 156 constitutes a
other issues criminal offence punishable with a fine
not exceeding $5,000 or to imprisonment
relating to not exceeding one year – s156(15)

sec 156 • Special procedures for single director

disclosures companies
• s157B – the director may make a
declaration by recording the declaration
and signing the record.
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• Improper use of position or information:

• S157(2) - An officer or agent of a company shall not
make improper use of his position as an officer or
Statutory agent of the company or any information acquired by
virtue of his position as an officer or agent of the
regulation — company to gain, directly or indirectly, an advantage
sec 157(2) CA for himself or for any other person or to cause
detriment to the company.
• Breach s157(3)(a) – may be liable for any profits
made or any detriment suffered by the company that
results from the breach
• Breach s157(3)(b) — the person may be prosecuted
for a criminal offence and fined up to a maximum of
$5,000 or be imprisoned up to one year.
• May be disqualified from being a director under
s154(2) CA.
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• Prohibited financial assistance to directors:

• Granting loans or entering any guarantee in
relation to loans made to their directors or the
directors of their related companies and their
spouses / children
Statutory • Exceptions – many exceptions under s162(3)
and s162(4)
regulation —
• Prohibition not applicable to exempt private
sec 162 CA companies
• Consequence of breach
• May attract criminal sanction – max fine of
$20,000 or max imprisonment of 2 years
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• Financial assistance to director-related companies

• Under sec 163(1), companies (other than
exempt private companies) are not permitted to:
• Make a loan to another company
• Enter into any guarantee or provide any
Statutory security in connection with a loan made to
another company by a third party - Co A
regulation — borrows money from Bank, Co B provides
security or guarantee for this loan by Co A
sec 163 • Where its director or directors are interested
in shares in that other company of a nominal
value equal to 20% or more
• Consequences – s163(7) - criminal offence, liable up
to a fine not exceeding $20,000 or to imprisonment
not exceeding 2 years
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• Directors’ remuneration and benefit:

• Provision of emoluments (fees) for directors
Statutory (s169)
• Payment for loss of office (s168(1)(a))
regulation — • Payment for transfer of company property
directors’ (s168(1)(b))
• Provision indemnifying director for breach (sec
remuneration 172) – this is void, except for very limited
circumstances.
and benefits
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Consequences of
Contravention
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Contravention of general law:

• Where there is a breach of general law duty to

avoid a conflict of interest, the company may
obtain a civil remedy such as compensation or
Consequences damages (where company suffers a loss) or an
of account of profits (where directors make a
profit)
contravention
Contravention of statutory provisions:

• Criminal prosecution
• Imposition of fine or a prison sentence