Directors’ Conflicts of Interest – How Sections 175 and 177 of the Companies Act 2006 Work

Managing conflicts of interest is fundamental to good corporate governance.  The Companies Act 2006 (“CA 2006”) sets out the directors’ duties, including two key provisions relating to conflicts of interest:

1. 175 (duty to avoid conflicts of interest); and
2. 177 (duty to declare interest in proposed transactions or arrangements).

Understanding how these provisions operate together is essential for directors, company secretaries, and their advisers.

1. 175: The Duty to Avoid Conflicts

S.175(1) CA 2006 provides that a director must avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. This duty is broad and it:

• applies to situational conflicts, rather than specific transactions;
• covers the exploitation of any property, information, or opportunity, regardless of whether the company could itself have taken advantage of it (s.175(2)); and
• applies to both actual and potential

However, s.175(4) CA 2006 provides that the duty under s.175(1) is not infringed if the matter has been authorised by the directors in accordance with the company’s articles of association.  The provision recognises that conflicts are sometimes unavoidable in a commercial context and allows them to be managed through informed authorisation by non-conflicted directors.

For private companies which have adopted the Model Articles, directors generally have this power of authorisation by default. However, many companies adopt bespoke articles of association which may exclude, limit or modify that power. Companies should therefore check their articles of association to determine how conflicts of interest should be managed in each case.

2. 177: The Duty to Declare Interest in Proposed Transactions

S.177 CA 2006 imposes a further obligation.  Where a director is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, they must declare the nature and extent of that interest to the other directors before the company enters into the transaction.

Crucially, s.175(3) expressly provides that the duty to avoid conflicts under s.175 does not apply to conflicts arising in relation to a transaction or arrangement with the company.  Instead, such conflicts are addressed through the disclosure regime in s.177.

S.177: Permitting Conflicts Through Disclosure

The CA 2006 does not prohibit all conflicts of interest.  Instead, s.177 provides a framework for managing transactional conflicts through disclosure.

In practice, the process is as follows:

1. A director identifies that they have a personal interest in a transaction the company is proposing to enter.
2. The director makes a full and frank declaration to the board, setting out the nature and extent of that interest.
3. The board, now fully informed, can exercise its judgment: proceed with the transaction, impose conditions, exclude the conflicted director from the decision, or decline the transaction altogether.
4. Provided the declaration has been properly made, the director is not in breach of their duties. The transaction is not liable to be set aside merely because the director had a personal interest (s.180(1) CA 2006).

S.177 therefore reflects the principle that transactional conflicts can be managed through transparency and informed decision-making.  The conflict is not removed, but it is disclosed and considered by the board before the company proceeds.

How s.175 and s.177 Interact

The two provisions are designed to work together as a comprehensive framework:

• 175 governs the director’s general position – their ongoing obligation not to put themselves in a position of divided loyalty. It covers situations such as competing with the company, exploiting corporate opportunities, or holding conflicting appointments.
• 177 governs the specific transactional moment, for example, when the company is about to enter a deal and the director has a stake in it.

The carve-out in s.175(3) avoids overlap by ensuring that transactional conflicts are dealt with under s.177, while broader situational conflicts remain subject to s.175.

Both sections share a common philosophy: conflicts need not be fatal, provided they are managed through either authorisation (s.175) or disclosure (s.177).  In practice, a single set of facts may engage both provisions – for example, a director who sits on a competitor’s board (a s.175 situational conflict requiring authorisation) and who then faces a specific transaction between the two companies (a s.177 disclosure obligation).

Practical Implications

For directors and their advisers, the key lessons are:

• Identify conflicts early – both situational and transactional.
• Check the company’s articles for provisions relating to conflicts of interests and how they should be dealt with (for example, whether shareholder approval is required).
• Declare interests promptly and fully under s.177 before transactions proceed.
• Seek authorisation for ongoing situational conflicts under s.175.
• Document all declarations and board decisions in the minutes.

Failure to comply exposes directors to personal liability, potential disqualification, and the risk that transactions may be set aside.

Our corporate team can support companies and directors in managing conflicts of interest effectively, ensuring that the right processes are followed and decisions are properly documented. For more information, please contact our Corporate Team.