Director Conflicts Of Interest In The UK

If you run a small company, it’s completely normal for your directors to wear multiple hats. A founder might also be a shareholder, a paid consultant, or even have another business on the side. That’s when “director conflict of interest” issues arise.

Handled well, conflicts are manageable and transparent. Handled poorly, they can derail decision-making, sour investor and team trust, and even breach the Companies Act 2006.

In this guide, we’ll demystify what counts as a conflict, what UK law requires, and the simple, practical steps to spot, disclose and authorise conflicts so your board can keep moving confidently.

What Counts As A Director Conflict Of Interest?

A director conflict of interest is any situation where a director’s personal interests (or duties owed elsewhere) could interfere with, or appear to interfere with, what’s best for your company.

Think of it in two broad buckets:

• Situational conflicts (section 175 CA 2006): The director’s other roles or relationships pull against their duty to the company. Example: a director is also a director of a competing startup, or they have a family member who owns a key supplier.
• Transactional conflicts (sections 177 and 182 CA 2006): The director has a direct or indirect interest in a specific deal the company is entering into. Example: the company is buying equipment from a business the director part-owns, or hiring a consultancy owned by their spouse.

Other common forms include:

• Benefits from third parties (section 176): Gifts, hospitality or incentives offered to a director because of their position.
• Multiple roles: Director is also a landlord, lender, contractor or employee of the company.
• Competing opportunities: The director pursues an opportunity the company could reasonably have taken.

Importantly, “conflict” includes perceived or potential conflicts. If a reasonable person would think there could be bias, treat it as a conflict and manage it transparently.

What Does UK Law Require?

Under the Companies Act 2006, directors must follow core duties. The ones that matter most for conflicts are:

• Section 172: Promote the success of the company for the benefit of its members as a whole.
• Section 173: Exercise independent judgement.
• Section 175: Avoid situations where there is, or could be, a conflict between the director’s interests and the company’s interests (unless authorised).
• Section 176: Not accept benefits from third parties which could create conflicts.
• Section 177/Section 182: Disclose interests in proposed (177) or existing (182) transactions with the company.

Here’s how those duties translate into practical obligations for small companies:

• Disclose early and in writing: Directors must declare the nature and extent of any interest in a proposed deal before the company enters it (s177). For existing deals, declare as soon as reasonably practicable (s182).
• Board authorisation: Situational conflicts (s175) can be authorised by the board if your Articles of Association permit it (most modern private company articles do). The conflicted director cannot vote on their own authorisation.
• Abstain where required: A director with a conflict usually should not vote or count in the quorum on that item (check your articles for exact rules).
• Shareholder approval for certain transactions: Some deals need shareholder approval regardless of disclosure. Key examples include substantial property transactions with directors (s190), long-term director service contracts (over 2 years, s188), substantial loans to directors (s197–214), and payments for loss of office (s215).

Consequences for getting this wrong can be serious: transactions may be voidable, the director may have to account for profits, and in egregious cases disqualification or claims for breach of duty can follow. The good news is that with clear processes and the right paperwork, you can manage conflicts smoothly and lawfully.

How To Handle Director Conflicts Day-To-Day

Put simple processes in place and follow them consistently. Here’s a practical approach that works for small boards:

1) Set Expectations Upfront

• Adopt a short Conflict Of Interest Policy explaining what counts as a conflict, how to disclose, and what happens next.
• Ensure your Articles of Association allow board authorisation of conflicts and clearly set voting/quorum rules for conflicted directors.
• Mirror those expectations in each director’s Directors Service Agreement so responsibilities are contractually clear.

2) Keep a Conflicts Register

• Maintain a simple register of declared interests: other directorships, shareholdings, related businesses, and recurring relationships (e.g., a relative’s company that may supply you).
• Ask directors to review and update it regularly (e.g., at each quarterly meeting).

3) Require Declarations For Each Relevant Agenda Item

• Before discussing a proposed transaction, the interested director declares their interest again (to the extent not already captured).
• Record the declaration and the decision in your minutes. Good minutes are your best evidence of fair process. If you need a refresher on governance mechanics, have a look at how you structure Running Directors’ Meetings and what to include in Board Resolutions.

4) Decide How To Manage The Conflict

• Proceed with safeguards: The non-conflicted directors discuss and, if appropriate, authorise the conflict or approve the deal (subject to any shareholder approvals required by law).
• Exclude the conflicted director: Typically, the conflicted director leaves for that agenda item. They don’t vote or count towards quorum unless your articles expressly allow limited participation.
• Independent input: For material deals (e.g., a related party contract), consider an independent valuation or market testing to show the terms are arm’s length.

5) Consider Shareholder Approvals

• Check if the deal needs an ordinary or special resolution of shareholders. If you’re unsure, it’s sensible to revisit the difference between Ordinary vs Special Resolutions before you circulate a notice.
• Provide clear, transparent information to shareholders so they can make an informed decision.

6) Document, Document, Document

• Minute the declaration, authorisation and the reasons for your decision.
• File resolutions promptly and keep your conflicts register current. This paper trail is essential if your process is ever scrutinised by investors or regulators.

These steps sound formal, but they’re quick to put in place. Over time, they become routine and help your board make faster, stronger decisions with less risk.

Common Conflict Scenarios In Small Companies

Conflicts often pop up in predictable ways for SMEs. Here’s how to spot them early and handle them fairly.

Founder Provides Services Through Their Own Company

A director’s personal consultancy invoices the company for marketing or software development. This is a transactional conflict (s177/s182) and possibly a situational conflict (s175) if the external entity presents broader loyalty issues.

Practical steps:

• Director declares the interest.
• Board (excluding the conflicted director) confirms a genuine business need, market rates, and that terms are arm’s length.
• Minute the approval and consider a short services agreement on standard terms reviewed by a neutral director.

Director’s Relative Owns a Supplier

Even if the director doesn’t benefit directly, an indirect interest through a spouse or close family member should be disclosed.

Practical steps:

• Get comparable quotes to evidence fair pricing.
• Have the non-conflicted directors make the decision and record their rationale.

Competing Ventures Or Opportunities

A director launches a side project that overlaps with your market, or pursues a sales lead your company could have taken. This is mainly a situational conflict (s175), and it may also raise issues around misuse of corporate opportunities.

Practical steps:

• Require early disclosure. The board decides whether to authorise (if articles allow) or to prohibit the activity.
• If authorised, set guardrails: no use of confidential information, no poaching, clear boundaries on customer segments.

Loans, Guarantees Or Substantial Property Transactions With Directors

These are high-risk areas with specific Companies Act rules (s190 for substantial property transactions; s197–214 for loans/guarantees). You will likely need shareholder approval and detailed board minutes.

Practical steps:

• Check statutory thresholds (e.g., asset value relative to company size) and approval requirements early.
• Obtain an independent valuation for property where appropriate.
• Use clear resolutions and, where needed, shareholder notices aligned with your Board Resolutions process.

Investor Nominee Directors

Nominee directors often balance duties to their appointing investor with duties to the company. They still owe duties under s172–s177 to your company. That can create situational conflicts if an investor’s interests diverge from minority shareholders.

Practical steps:

• Make conflict authorisation mechanics crystal clear in your Shareholders Agreement and articles.
• Define reserved matters that require shareholder consent so sensitive decisions are escalated appropriately.

Sole Director Or Two-Director Companies

With a sole director, conflicts can feel tricky because there’s no unconflicted board to authorise. The same with two-director boards where one is conflicted and you lose quorum.

Practical steps:

• Use articles that expressly allow the board to authorise conflicts and set quorum rules for small boards.
• Where shareholder approval is available, use it to validate the decision (especially for material or related-party transactions).
• Consider appointing an additional independent director as the business grows to improve governance and reduce bottlenecks.

What Documents And Policies Should You Have?

A little bit of paperwork goes a long way. These are the key governance tools that make conflict management smooth and defensible.

Articles Of Association

Your articles are the rulebook for board decisions, voting, quorum and conflict authorisation. Modern private company articles usually allow non-conflicted directors to authorise a conflict and set out when a conflicted director can vote or be counted for quorum.

Action point: review and, if needed, update your Articles of Association so they work for a small, founder-led board and align with your investors’ expectations.

Shareholders Agreement

This is where you set commercial guardrails: reserved matters, information rights, appointment of nominee directors, and what happens if conflicts stall decisions. It’s also the place to deal with things like related-party transactions, competition restraints, and dispute resolution, so conflicts don’t become stalemates.

Action point: adopt a clear, tailored Shareholders Agreement that complements your articles and addresses conflicts head-on.

Conflict Of Interest Policy

A short policy (2–3 pages) explains how to disclose, who decides, and what records to keep. It turns an abstract duty into a simple, repeatable workflow every director understands.

Action point: roll out a concise Conflict Of Interest Policy and keep a live conflicts register.

Directors Service Agreement

This sets out pay, benefits, confidentiality, IP, and any outside interests or non-compete obligations. It should require prompt disclosure of conflicts and compliance with your policy and articles.

Action point: issue a tailored Directors Service Agreement to each director.

Board Resolutions And Minutes

Your decision-making record is critical evidence. Resolutions should reference the conflict declared, the basis for authorisation or approval, any abstentions, and why the decision is in the company’s best interests.

Action point: standardise how you draft Board Resolutions, and keep your team comfortable with the flow of Running Directors’ Meetings.

Shareholder Approval Mechanics

For deals needing shareholder sign-off (e.g., s190 substantial property transactions), make sure your notice, resolution type and voting thresholds are spot on.

Action point: double-check whether you need an ordinary or special resolution, and structure your notice accordingly using the principles in Ordinary vs Special Resolutions.

FAQ: Quick Answers To Tricky Conflict Questions

Do We Always Have To Exclude A Conflicted Director From The Meeting?

Not always, but it’s best practice when there’s a material conflict. Your articles may allow the conflicted director to be counted in quorum for certain matters or to provide information before stepping out. The decision should ultimately be taken by the non-conflicted directors.

Can The Board Authorise Any Conflict?

The board can usually authorise situational conflicts (s175) if your articles allow it. However, certain transactions still require shareholder approval by law (e.g., substantial property transactions, certain loans, long-term service contracts). Authorisation is not a rubber stamp-document why it’s in the company’s interests.

What If We Discover A Conflict After A Deal Is Done?

Make the declaration as soon as reasonably practicable (s182), minute the circumstances, and take legal advice on whether the transaction is voidable or whether ratification by shareholders is appropriate.

How Do We Handle Gifts And Hospitality?

Adopt a sensible threshold in your policy (e.g., declare anything over a set value), keep a log, and prohibit anything that might influence (or be seen to influence) decisions. Remember s176 prohibits benefits from third parties that create conflicts.

We’re A One-Director Company-Is Authorisation Even Possible?

Yes, but you’ll usually rely more on shareholder approvals and robust documentation, and you should consider adding an independent director as you grow. Make sure your articles are updated for small-board realities and escalate material decisions to shareholders when appropriate.

Key Takeaways

• Conflicts are common in small companies-treat them as a governance issue to manage, not a crisis to avoid.
• UK law requires directors to avoid conflicts (s175), declare interests (s177/s182), and not accept conflicting benefits (s176), while always promoting the company’s success (s172).
• Build a simple workflow: early disclosure, independent decision-making by non-conflicted directors, clear minutes, and-where required-shareholder approval.
• Equip your board with the right tools: strong Articles of Association, a practical Conflict Of Interest Policy, a tailored Shareholders Agreement, and clear meeting processes for Running Directors’ Meetings and Board Resolutions.
• Some related-party deals are fine if they’re transparent and on fair terms; others require shareholder approval (e.g., s190 substantial property transactions, s188 long-term service contracts, and loans under s197–214).
• When in doubt, disclose early and document thoroughly-it’s the easiest way to stay compliant and maintain trust with investors and your team.

If you’d like tailored help updating your articles, drafting a conflicts policy, or setting up approval processes that work for your board, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.