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Directors: duties, appointment and removal — SQE1 BLP question

A worked single-best-answer question on directors: duties, appointment and removal, with why each wrong option is wrong — the way SQE1 traps candidates.

Directors: duties, appointment and removal

Daniel is one of three directors of Fenwick Interiors Ltd, a private company that has adopted the model articles without amendment. A long-standing client of the company approaches Daniel personally and offers him a lucrative interior design contract. The company has the capacity and resources to carry out the work itself. Daniel would like to take the contract personally without breaching his duties to the company.

Which of the following best describes how Daniel can take the contract personally without breaching his duties?

  1. AHe may do so if the matter is authorised by the other directors, with the quorum and vote achieved without counting him, as nothing in the articles prevents such authorisation.
  2. BHe may do so if he declares the nature and extent of his interest to the other directors before he accepts the contract.
  3. CHe may do so only if the members authorise it by special resolution, because directors cannot authorise each other's conflicts.
  4. DHe may do so freely, provided he first resigns as a director of the company.
  5. EHe may do so without any approval, because the opportunity was offered to him personally rather than to the company.
Show answer and reasoning
A is the best answer. Exploiting an opportunity the company could take is a situation of conflict within s 175 Companies Act 2006, and it is immaterial whether the opportunity was offered to him personally (s 175(2)). In a private company whose constitution does not invalidate it, the duty is not infringed if the matter is authorised by the directors (s 175(4)(b), (5)(a)), but only if the quorum is met and the matter agreed without counting the interested director (s 175(6)). A declaration under s 177 applies to transactions with the company, not to conflicts with third parties (s 175(3)).

Rule: In a private company, a director's conflict of interest may be authorised by the independent directors unless the constitution invalidates such authorisation (CA 2006 s 175(4)-(6)).

  • B A s 177 declaration covers interests in transactions with the company; it does not deal with a s 175 conflict involving a third party. (wrong rule)
  • C Directors of a private company may authorise a conflict under s 175(5)(a), and members' authorisation would not require a special resolution. (wrong rule)
  • D The s 175 duty continues to apply to opportunities he became aware of while a director, even after he ceases to be one (s 170(2)). (wrong rule)
  • E It is immaterial whether the company could take, or was offered, the opportunity; using it is still a conflict (s 175(2)). (wrong rule)

Source: Companies Act 2006, ss 170(2), 175(1)-(6)

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