Directors duty to disclose a personal interest

By Vivian Michael | Company

Directors duty to disclose a personal interest

Photo credit:  Warren Wong, Unsplash 

Director’s have a duty to disclose a material personal interest.

Now, it’s important to know about this duty because a breach is a strict liability offence. 

So, strict liability means intent is not necessary. A breach is a breach. 

Below, I will take you through what the duty to disclose means for directors in practical terms. 

Disclosure

Director's have a duty to notify other directors of material personal interest when a conflict arises.

Now, this duty applies where the director of a company has a material personal interest in a matter that relates to the affairs of the company.

Material personal interest example

Bill is a director at Zippy Pty Ltd, Zippy is looking to source extra USB-C cables from a supplier.

The supplier happens to be Bill’s brother who runs Speedy USB-C Pty Ltd, a company that Bill holds 55% of the shares.

As bill stands to gain from the purchase so should disclose this material personal interest to the other directors.

No disclosure

Now, a director does not need to give notice of an interest if the interest arises because:

  • the director is a shareholder and the other shareholders have the same interest; or
  • the interest relates to the director's pay; or
  • relates to a company contract that is subject to approval by shareholders and will not impose any obligation on the company if there's no approval by the shareholders; or
  • arises only because the director is a guarantor or has given an indemnity or security for all or part of a loan to the company;
  • relates to directors insurance for the director's liability as long as the contract does not make the company or a related body corporate the insurer.
  • relates to any payment by the company or a related body corporate for an indemnity or any contract relating to such an indemnity; or
  • is in a contract for the benefit of, or on behalf of, a related body corporate and arises only because the director is a director of the related body corporate; or
  • the company is a private company and the other directors are aware of the nature and extent of the interest and its relation to the affairs of the company; or
  • all the following conditions are met:
    • the director has already given notice of the nature and extent of the interest and it relates to the company;
    • if a person who was not a director of the company at the time when the notice was given is appointed as a director of the company - the notice is given to that person;
    • the nature or extent of the interest has not materially increased above that disclosed in the notice; or
    • the director has given a standing notice of the nature and extent of the interest is still effective in relation to the interest.

Disclosure contents

A director's disclosure must give details of:

  • the nature and extent of the interest; and
  • the relation of the interest to the company; and
  • be given at a directors' meeting as soon as possible after the director becomes aware of their interest.

And the details must be recorded in the minutes of the meeting.

Effect of a director’s breach

A breach by a director does not affect the validity of any act, transaction or agreement. And, these rules won't apply to a single director of a private company. 

Director may give other directors notice

A director of a company who has an interest in a matter may give the other directors standing notice of the nature and extent of the interest.

So, this means the notice may be given at any time and whether or not the matter relates to the affairs of the company at the time the notice is given.

Standing notice rules

The standing notice may be given to the other directors before the interest becomes a material personal interest.

And the notice must:

  • give details of the nature and extent of the interest; and
  • be given:
    • at a directors' meeting (either verbally or in writing); or
    • to the other directors individually in writing.
  • The standing notice is given under subparagraph (b)(ii) when it has been given to every director.
  • Standing notice must be tabled at meeting if given to directors individually
  • If the standing notice is given to the other directors individually in writing, it must be tabled at the next directors' meeting after it is given.

Minutes

The director must ensure that the nature and extent of the interest disclosed in the standing notice is in the minutes of the meeting where the standing notice is given or tabled. 

Dates of effect and expiry of standing notice

The standing notice:

  • takes effect as soon as it is given; and
  • stops having an effect if a person who was not a director of the company at the time when the notice was given is appointed as a director of the company. 

Also, the notice may be given to the person by someone other than the director to whose interests it relates (for example, by the secretary).

Effect of material increase in nature or extent of interest

The standing notice ceases to have effect for a particular interest if the nature or extent of the interest materially increases above what's in the notice.

Effect of a breach

And it's important to note that a breach by a director does not affect the validity of any act, transaction, agreement, instrument, resolution or other thing.

Interaction of sections 191 and 192 with other laws

Now, section 191 of the Corporations Act 2001 deals with a director disclosing a material interest and section 192 has to do with giving a standing notice. 

Also, sections 191 and 192 of the Corporations Act 2001 are in addition to, and wont reduce the effect of any law about:

  • any general law rule about conflicts of interest; and
  • any provision in a company's constitution (if any) that restricts a director from:                              
    •  having a material personal interest in a matter; or            
    •  holding an office or possessing property; or 
    • involving duties or interests that conflict with their duties or interests as a director.                      

Voting and transactions

Section 194 of the Corporations Act has rules about directors of private companies voting and completing transactions when they have a material personal interest.

Importantly, section 194 is a replaceable rule. It's not mandatory. This means it can be replaced by a company's own internal rules in a constitution. 

Section 194 replaceable rule

Below is the replaceable rule in section 194 of the Corporations Act. 

If a director of a private company has a material personal interest in a matter that relates to the affairs of the company and:

(a) the director discloses the nature and extent of the interest and its relation to the affairs of the company at a meeting of the directors; or         

(b) the interest is one that does not need to be disclosed; then:                    

(c) the director may vote on matters that relate to the interest; and        

(d) any transactions that relate to the interest may proceed; and                  

(e) the director may retain benefits under the transaction even though the director has the interest; and                      

(f) the company cannot avoid the transaction only because of the existence of the interest.

Finally, paragraphs (e) to (f) will only apply if disclosure is made before the transaction.





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About the Author

Vivian Michael is a lawyer and founder of Michael Law Group. Vivian's mission is to make quality business legal services accessible to entrepreneurs launching in Australia that would otherwise DIY, rely on legacy contracts or go without.

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