Company and Commercial Law - LAWS62023

Module Name : Company and Commercial Law
Module Code : LAWS62023-1
SU Reference No: SU17029393
Word Count: 2693

Introduction
Domestic development of coperate governance in enterprises were limited to a framework where
effective enhancement was recognized prior to Companies Act 2006 (CA-2006). In order to
simplify the regulations of companies in the private sector, CA-2006 came into force. A vast
effect was brought out with the birth of this act related to roles of officials in a company
remaining it to be a landscape legislation in UK. Board members of a company is ensured to
make decisions that would benefit the company. This concept was derived from the Latin term
‘fiducia’ meaning that the officials have a duty to build a relationship of loyalty, confidence and
trust between director, company and shareholders.1 This essay is focused on director’s duties in
light with no-conflict-no-profit rule to be harsh or flexible in the modern use.
An immune effect is brought upon to the company with director’s decisions. Directors are
configured to be in a fiduciary relationship with the company. Equity puts them at a position
where they are required to work towards the benefit of the interest of the company by excluding
other personal interests with the exercise of powers2. No-conflict-no-profit rule, refrain from
accepting benefits from third parties and declaring interests in proposed transactions are duties in
relation to fiduciary of directors. No-conflict rule is given more focus with the backing of
judicial interference in deciding how changes should be applied in the modern era.
Scope of No-conflict-no-profit rule
Acting outside the scope given will lead to corruptions. Oversaturation of power vested within an
individual may self-center with abuses requiring balanced decent duties discharged evenly3. In
order to mitigate this, CA-2006 brings out Sec.175 dealing with no-conflict-no-profit rule.
According to the statutory definition, conflict of interest rule is interpreted as “the director
should not, without company’s consent, put himself in a position where there is a possible
conflict between duties owed to the company, personal interests conflicting or interests of third
parties”.4
1 Bristol and West Building Society v Mothew [1996] EWCA Civ 533
2 Burges Salmon, 'The Responsibilities And Duties Of A Company Director' (Burges-salmon.com, 2019)
<https://www.burges-salmon.com/news-and-insight/publications/the-responsibilities-and-duties-of-a-company-
director/> accessed 1 May 2020
3 John Farrar, 'Abuse Of Powers By Directors' (2020) 33 The Cambridge Law Journal 222
4 Companies Act 2006, s175

Directors are expected to act in accordance with policies of the company and exercise their
powers to increase the value of the company for a long term. Board members including directors
are fiduciary responsible to act accordingly to be beneficial to the enterprise. Therefore, they
should be cautious with the depth of relationship to ensure no interests are conflicted. If a strict
governance of the rule is not carried out, stakeholder’s confidence on the association will not be
guaranteed. A director engaging in wrongful trade resulting in a debt because of it, will be liable
as a conflict arises.5 Conflict of interest positions the company at risk to act in the best interest of
the organization. Any incident which associates conflicting interests with another, director is
expected to excuse themselves from the transaction unless told otherwise.
Doctrine of conflicting interests incorporated in Aberdeen V Blaikie
Strict compliance of this notion was set out in the case Aberdeen. This essay revolves around the
concept from this case; Directors having conflicting interests with another party. Mr.Blaike was
self-dealing while acting with conflict of interest resulting the contract to be void. Fixing a
higher price dealt with personal interest rather than looking for the best interest of the company6.
As Fullerton J reiterated, would the same rule apply if the accused party was a trustee or a
manger apart from being a body of directors.7 In the same aspect it is clear that this rule is
dysfunctional in some aspects.8 This essay derives onto each defects of the rule while explaining
if the rule is associated with the duties of directors subjected to being too harsh. The question of
‘can these rules be enforced if they are stricter than before?’ will be addressed.
The principle adhered in the prominent case Aberdeen is strict where no questions are raised
related to the fairness/unfairness of the contract. Moreover, the provision of Sec.175 stands as a
prophylactic ethical rule as laid down in this case.9 With the origin of this case, the concept of
coperate opportunity was evolved. A situation where a duty to avoid conflict of interest is
exercised is interpreted as ‘coperate opportunity’. If the Director appropriate for his own
5 Re a company [1988] BCC 526
6 Aberdeen Rail Co v Blaikie [1854] UKHL 1 Macqueen 46
7 Ibid n6 (Fulleton J)
8 David Gibbs, 'Aberdeen Rail Co V Blaikie [1843-1860] All ER Rep 249: Lord Upjohn, Was It Really "So Well
Settled"?' (Gibbslawandlife.blogspot.com, 2010) <http://gibbslawandlife.blogspot.com/2010/10/aberdeen-rail-co-v-
blaikie-1843-1860.html> accessed 1 May 2020.
9 Anthony Nwafor and Chinwe Okoli, 'The Corporate Opportunity Doctrine - An Inflexible Or Flexible Rule' (2013)
9 Corporate Board: role, duties and composition 24

economic benefit by excluding any other extraneous benefits owned to the company because of
the opportunity is in breach of his duty as a fiduciary.10 CA-2006 creates controversy for modern
directors to be uncertain in terms of Sec.175. The legislation focuses on safeguarding the
integrity of Director’s loyalty11 and on promoting company’s culture.12 In order to accomplish a
concise application of no-conflict-no-profit rule, the author of this essay is bringing out
arguments to make the rule more flexible in the modern use.
Critical Analysis on flexible approach to no-conflict-no-profit rule
I. No-profit and no-conflict applied simultaneously
Sec.175,17713,18214 are required to encompass equitable obligations colliding together as no-
conflict, no-profit and self-dealing rule.15 The initial issue answered with this context is in
relation to the separate rules of ‘no-conflict’ and ‘no-profile’ rule. Firstly, to establish the conflict
of interest notion, the interest of Directors and transaction in question needs to be linked. The
objective of no-conflict rule is to preclude director from being dominated by personal interests
whereas no-profit rule precludes director from misusing his position for personal monetary
advantages.16 This rule had been applied simultaneously to directors as precisely applied to
managers and trustee pre-2006 era.17 However, after the enactment of CA-2006, these two rules
have been adopted to act separately.
Whether these two rules are applied separately has not been clearly established in recent cases
and this issue was subjected to academic reviews.18 Many scholars have argued to reconsider the
demarcation of objectives between the rules. CA-2006 expressly states about conflict and a
mention of profit to be too vague in Sec.175. Even though academics argue a strict scrutiny
involving the distinction of the rules being appreciated, the author of the essay beg to differ.
10 Prentice [1984] MLR 464
11 Douglas Kershaw, ‘Lost in Translation: Corporate Opportunities in Comparative Perspective' (2005)
25(4) Oxford Journal of Legal Studies 603
12 Lowry and Edmunds, ‘The Corporate Opportunity Doctrine: The Shifting Boundaries of the Duty and its
Remedies’ (1998) 61 Modern Law Review 515
13 Ibid n4, s177
14 Ibid n4, s184
15 Alan Dignam and John Lawry, Company Law (7th edn, Oxford University Press 2012) 413
16 Kak Loui Chan v Zacharia (1984) 154 CLR 178
17 Keech V Sandford [1726] EWHC Ch J31
18 Pearlie Koh, ‘Once a Director, Always a Fiduciary?' (2003) 62(2) Cambridge Law Journal, 403