Conflicts of interest and the Companies Act 2006 - questions and answers

Does my charity need to move any authorising provisions from its memorandum to its articles because of section 175 of the Companies Act which took effect on 1 October 2008?

No.

Where the memorandum prior to 1 October 2009 authorises certain benefits arising from arrangements with the company, that is still sufficient to authorise the conflict of interests arising from those benefits.

S.175(3) - as modified by s.181(2) for charitable companies - requires any authorising provision to be contained in the company’s articles of association but prior to 1 October 2009 a transitional provision (Schedule 1 paragraph 1(3) of the Companies Act 2006 (Commencement No.3, Consequential Amendments, Transitional Provisions and Savings) Order 2007 (SI 2007/2194)) made clear that references in the Companies Act to a company’s articles included the company’s memorandum.

As from 1 October 2009 such authorising provisions are treated as provisions of the company’s articles (s.28).

Do we need to change our articles to permit directors to authorise a conflict of loyalty arising from a director being a trustee of another charity working in the same area?

Concern has been expressed about authorising conflicts arising from directors being trustees of other charities whose interests may conflict with those of the charitable company. Many sets of articles will contain a provision similar to that recommended in the Commission’s model articles for a charitable company GD1 requiring conflicted directors to withdraw from directors’ discussions and take no part in decisions in which they have an interest. This is likely to be sufficient to avoid a conflict of loyalty arising in such situations.

Such a provision does not authorise any benefit to the director but it does permit a conflict arising from, for instance, a director’s other trusteeship to be avoided.

What can be done where the existing provisions of the memorandum or articles are not sufficient to avoid or authorise a conflict of interests?

Circumstances may arise where the existing provisions of the memorandum and articles are insufficient to permit a director to avoid a conflict of interests. In such cases it is possible for the Commission to authorise a director or directors to do something which would otherwise breach the duty to avoid a conflict by an order under s.26 where the Commission is satisfied that would be expedient in the interests of the charity.

Accordingly, it is the view of the Commission that it may not be necessary for charitable companies to amend their memorandum and articles in order to comply with the duties of s.175 of the Companies Act 2006. However, we appreciate that some charities may wish to do so. We have ensured that GD1 is compatible with the conflict provisions of the Companies Act 2006.

GD1 (Model Articles for a Charitable Company) – Relevant Articles

Article 6 authorises certain benefits arising from a transaction or arrangement with the company. This takes into account the statutory powers with regard to payments to trustees for services and to take out trustee indemnity insurance.

Articles 6(4) and 6(5) in Option 2 authorise all of the benefits which were previously authorised by clause 5 (Option 2) of our pre-October 2009 model memorandum and articles. These benefits are all accommodated within the terms of s.175(3) or are to be authorised by the Commission so that the duty in s.175(1) does not apply.

Article 44 complies with the directors’ statutory duties to declare an interest in any transaction of the charity and to absent themselves from any discussion where there may be a conflict between their personal interests and those of the charity. These statutory duties came into force on
1 October 2008 (s.177 and s.182 of the Companies Act 2006). These duties would include, for example, discussions about the need for the provision of a particular service which one of the directors might have an interest in supplying (although in this example the terms of s.73C of the Charities Act 1993 would disqualify the director from participating in decisions related to their supply of services). In addition, article 45 makes some provision for authorising conflicts of duty where a director owes a duty of loyalty to another organisation but the unconflicted directors consider it is in the interests of the charity for that director to continue as a director. This process can be used if it is considered that article 44 is not sufficient to avoid the conflict.

If existing charitable companies wish or need to adopt additional provisions and to amend their memorandum and/or articles accordingly, the Commission’s consent is required where the alteration authorises, or would permit the directors to authorise, a benefit to one of their number (s.64 of the Charities Act 1993). We consider that inserting a clause permitting the unconflicted directors to authorise a conflict of interests on the part of a director is likely to be a regulated alteration unless the provision makes clear that it only applies where there is no direct or indirect benefit to the director concerned.

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