The Director's Conflicted Supply Contract
Halvorsen Ltd is a private company with three directors: Aria (managing director, 45% shareholder), Ben (finance director, 30%), and Cara (non-executive, 25%). Aria's wholly-owned side company, Northstar Trading, supplies packaging to Halvorsen. In March the board approved a three-year supply agreement with Northstar at a price 18% above the previous arm's-length quote from an independent supplier. Aria did not disclose her ownership at the meeting; Ben and Cara assumed Northstar was independent. The minutes record only that 'the board approved the Northstar agreement.' Six months later Cara discovers the ownership link through a trade-press article. Halvorsen has paid £240,000 to Northstar so far. The company's articles contain no relevant modification of the statutory directors' duties, and the company has not adopted any ratification procedure.
1. Identify which statutory duties Aria has likely breached and explain the reasoning that connects the specific facts to each duty.
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Aria's failure to disclose her ownership of Northstar engages the duty to avoid conflicts of interest. That duty captures a situation where a director's personal interest, directly or through a connected person or entity, conflicts or may conflict with the company's interests. Aria's 100% ownership of the counterparty is a classic conflict, and the duty is engaged even though she did not vote or personally profit from the meeting itself; the conflict arises from the transaction, not from her participation. The duty is not infringed if the conflict was authorised in advance by independent directors or by the members, and here there is no such authorisation.
Her silence at the board meeting also engages the duty to declare an interest in a proposed transaction. The declaration must be made to the board before the transaction is entered into, and the facts show it was not made at all. The minutes' bare reference to approving the agreement does not cure the omission.
Finally, the 18% price premium over the independent quote supports an inference that Aria failed to exercise independent judgement and acted in a way she did not reasonably believe would promote the success of the company. The premium is quantifiable evidence that the terms were not in the company's best interests. Each breach is fact-specific: the conflict and declaration duties turn on non-disclosure, while the good-faith and independent-judgement duties turn on the objectively poor pricing.
2. Cara wants to challenge the contract. Assess the realistic remedies available to Halvorsen and the obstacles she will face.
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The primary route is a derivative claim brought by Cara on behalf of Halvorsen against Aria for breach of duty. The claim is against the director, not the counterparty, and any recovery belongs to the company. Cara must obtain permission from the court to continue; the court will consider whether a director acting in good faith would promote the company's success by continuing the claim, and whether the acts could be authorised or ratified. Because Aria holds 45%, she cannot ratify alone, but she can block a special resolution, so member ratification is practically unavailable.
Halvorsen may also seek rescission of the supply agreement. Rescission is possible where the counterparty had notice of the breach or where the transaction is a self-dealing contract, but it is barred if the parties cannot be restored to their original positions. The company has already paid £240,000 and received packaging, so full restoration is difficult. A more realistic remedy is an account of profits or equitable compensation measured by the 18% overpayment, which is calculable from the independent quote.
The practical obstacles are cost, the need for court permission, and Aria's 45% blocking stake. Cara's best evidence is the trade-press article, the independent quote, and the absence of any declaration in the minutes. She should also press for recovery of the overpayment rather than unwinding the entire supply relationship, which the company may still need.