Appropriately managing a conflict of interest or duty goes beyond just declaring it, as shown by recent events at the National Anti-Corruption Commission.
Many directors will face situations where they have a personal interest, or owe a duty to another person, in a matter affecting their company. As fiduciaries, they must always declare it. However, as recent events involving Commissioner Paul Brereton AM RFD SC of the National Anti-Corruption Commission (NACC) demonstrate, making the declaration is just the start.
When the NACC was deciding whether to investigate referrals from the Royal Commission into the Robodebt scheme, Commissioner Brereton declared an interest because one of the referred persons was a close ADF Army reserve colleague. While the formal decision was delegated to a deputy commissioner, a later investigation found Brereton had failed to remove himself from related decision-making processes or to limit his exposure to relevant factual information. His continued involvement on the Robodebt referral amounted to “officer misconduct” under the terms of the NACC legislation. He has accepted the “apprehended bias” finding, but rejected calls to resign.
Directors face similar challenges. First, the director must be able to recognise when a potential conflict arises, and properly disclose it to the company. Then, the director needs to follow the complex legal rules that arise under the general (judge-made) law and relevant statutes.
Recognise and disclose
Recognising when a personal interest or duty to another person touches on a matter affecting the company is the first step. The starting point is to think about the action or decision the board is being asked to take. Does the director or someone associated with them stand to benefit from it, financially or in some other material way? Does the director have a duty to someone else that makes it awkward to serve the interests of both?
The test is not whether the director thinks they can set aside the other interest or duty and not have it affect their decision-making. It is whether a fair-minded third person might see the potential for their decision-making to be impacted by it.
Once a potential conflict is identified, it must be declared. Under the Corporations Act 2001, a director who has a material personal interest in a matter that relates to the affairs of the company must give the other directors notice of the interest unless it is covered by a specific exemption. Failure to do so is a strict liability offence. Most boards maintain a standing register of directors’ interests that is updated when needed and confirmed annually. But it is not set and forget. If something previously disclosed on the register does impact a decision before the board or an action of the board, the director should draw it to the specific attention of the chair.
Managing the conflict
Recognising and disclosing the existence of the interest or duty is just the start. The statutory disclosure requirements “have effect in addition to, and not in derogation of” any general law rule about conflicts of interest and any relevant restrictions in the company’s constitution.
At this point, four legal questions arise. The first is whether the company can take a decision or action at all, given the director’s conflict. The second is whether the director can participate in board deliberations around the decision or action. The third is how the director must conduct themselves in relation to the decision or action to ensure they meet their other legal duties, including to act with care and diligence in the best interests of the company. The fourth is whether the express consent of the company’s members is required.
Usually, the company’s constitution addresses the first question. For example, a replaceable rule for proprietary companies expressly provides that a transaction in which a director has a material personal interest can proceed — with full disclosure and the company’s informed consent. Most company constitutions include similar provisions.
The replaceable rule, and most proprietary company constitutions, go on to say that the director may vote on the matter despite their interest. However, the rule for directors of public companies is different. Under the Act, interested directors cannot be present at a director’s meeting where the matter in which they are interested is discussed and cannot vote on the matter. This restriction can be removed by a resolution of the rest of the board or by ASIC, but that is rarely appropriate. If the restriction means the board cannot form a quorum, the general meeting should deal with the matter instead.
Interested directors must continue to comply with their other duties. Importantly, this includes the statutory duties to act in good faith in the best interests of the company and not to misuse their position as a director to confer an advantage on themselves or someone else. Merely disclosing the other interest or duty does not give the director permission to pursue it if the decision or action is contrary to the company’s interests. When the conflicted director knows something about what is proposed that indicates it is not in the company’s interest, they may have a “duty to warn”.
Directors must also act with care and diligence. Having a material personal interest in a matter prevents a director from relying on the statutory business judgment rule, and all directors can expect close scrutiny of their conduct. As Justice Kim Santow observed in 2002 in ASIC vs HIH Insurance Ltd (2002) NSWSC 171, “Where there is a transaction involving the potential for conflict between interest and duty… the duty of care and diligence falls to be exercised in a context requiring special vigilance, calling for scrupulous concern on the part of those officers… to ensure that any necessary corporate approvals are obtained and safeguards put in place. While the primary responsibility will fall on the director or officer proposing to enter into the transaction, this does not excuse other directors or officers who become aware of the transaction”.
Sometimes, those corporate approvals include obtaining the consent of members. This includes for related party transactions entered into by public companies and their subsidiaries other than on arm’s-length terms, and for major transactions with “persons in a position of influence” by listed companies. These requirements must be carefully observed. But a decision or action by a director that involves a breach of their statutory duties cannot be cured by a resolution of members sanctioning their behaviour.
The overriding principle is that, as fiduciaries, directors must be loyal to the interests of their company and exercise their powers having regard only to its best interests. Where a personal interest or duty to another person could be seen to impinge on that loyalty, directors (like NACC commissioners) must tread carefully.
This article first appeared under the headline ‘Divided loyalties’ in the February 2025 issue of Company Director magazine.
Dr Pamela Hanrahan MAICD is an Emerita Professor of the University of NSW and a consultant at Johnson Winter Slattery.
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