Director's Conflict of Interest: Non-Disclosure and the Voidable Supply Contract

Aoife owed the general duties in ss.171–177 UK Companies Act 2006 (or ss.228–235 Irish Companies Act 2014). The key duties are: (i) the duty to avoid conflicts of interest under s.175 (Irish s.228), which requires a director to avoid situations where they have, or can have, a direct or indirect interest that conflicts with the company's interests; and (ii) the duty to declare an interest in a proposed transaction under s.177 (Irish s.221). Aoife had a clear conflict: she was a director and 40% shareholder of FreshFarm, the counterparty. She did not disclose this to the board. Abstaining from voting does not cure the failure to declare the interest; the duty is to disclose, not merely to abstain. The fact that the other directors might have approved the contract anyway is irrelevant to whether the duty was breached. Breach is assessed objectively at the time. Therefore, Aoife breached both the no-conflict duty and the disclosure duty. Her argument that FreshFarm offers unique certification may go to whether the contract was fair, but it does not excuse non-disclosure.

Under s.178 UK CA 2006 (Irish s.222), a transaction entered into in breach of the conflict rules is voidable at the instance of the company, unless rescission is barred. Rescission may be barred if: (i) restitution is no longer possible; (ii) a third party has acquired rights for value without notice of the breach; or (iii) the company has affirmed the contract. Here, FreshFarm is the counterparty. If FreshFarm knew of Aoife's interest and the non-disclosure, rescission is more likely. If FreshFarm was unaware, it may be a bona fide third party, but the company can still seek rescission against Aoife personally. The contract is five-year supply and part performance may complicate restitution, but rescission remains possible if the parties can be restored to their original positions. The company may also affirm the contract expressly or by conduct, such as continuing to accept deliveries after discovering the conflict. On the facts, the shareholder audit has just revealed the issue, so affirmation is unlikely. GreenLeaf should act promptly to rescind and notify FreshFarm. If rescission is unavailable, the company may claim equitable compensation or an account of profits from Aoife.

Aoife is liable for breach of fiduciary duty. The 'no profit' rule requires a director not to make a secret profit from their position. If Aoife received any personal benefit from the FreshFarm contract-such as dividends from FreshFarm's increased profits-she must account for that profit to GreenLeaf. The 'no conflict' rule supports equitable compensation for losses caused by the breach. GreenLeaf can claim the €100,000 overpayment as damages or equitable compensation, subject to causation and remoteness. Aoife's argument that the other directors would have approved the contract anyway may reduce causation, but the burden is on her to show that the loss would have occurred regardless. The company may also seek restitution of any benefit Aoife received. Additionally, the company could pursue Brian and Ciara for breach of duty if they knew or ought to have known of the conflict and failed to act, but the primary claim is against Aoife. Rescission and an account of profits are not mutually exclusive; the company can elect. If the contract is rescinded, the company may also recover the price paid. In practice, a court may order an account of profits and compensation, and possibly indemnify the company for losses.