If you fail to comply with your duties your position on the board may be under threat, as you can be held liable by the company and in some circumstances by minority shareholders. In the most serious of cases directors may be disqualified or face criminal sanctions.
The duty to avoid conflicts of interest
A director must avoid a situation in which they have a direct or indirect interest that may conflict with the interests of the company. This duty is extremely broad, extending to situations where any information or opportunity available to the director is exploited for their own benefit. The liability of the director who breaches this duty is severe: they will be personally liable to account to the company for any profits or benefit they have received as a result of the breach. The conflict of duty may be breached even in situations where there has been no actual loss caused to the company, it continues after a director has resigned.
The easiest way to avoid liability for a conflict of interest is to obtain advance authorisation from the company for any proposed activity, unless the articles of association prohibit them. Directors who have a personal interest in a proposed transaction can avoid liability by declaring their interest in advance.
There is a defence relating to unforeseeable conflicts, where ‘the situation cannot reasonably be regarded as being likely to give rise to a conflict of interest’.
The duty not to accept benefits from third parties
A director must not accept a benefit from a third party that arises as a result of being, or doing anything as, a director. Such benefits commonly occur as a ‘commission’ paid to the director personally whilst the director is in the process of negotiating a business transaction on the company’s behalf.