The recent opinion of Lord Hodge in the Scottish Court of Session case of Eastford Limited v Gillespie & Anor  CSOH 119 is notable for being the first reported case to consider in detail the scope of the statutory duty of directors to avoid conflicts of interest under S175 of the Companies Act 2006 (the “2006 Act”).
Having referred to the leading authorities under common law on conflict of interests, Lord Hodge said that while the duty on directors to avoid a situation where interests or duties are in conflict is a strict one, that duty only comes into play where there is a real possibility of such conflict.
In interpreting the scope of the statutory duty on the same basis as the equivalent common law duty, Lord Hodge’s decision reinforces an important aspect of the statutory directors’ duties which has perhaps not been emphasised enough in some of the commentaries on the subject: namely, that there is express provision in the Act which clarifies the relationship of the statutory duties to the common law ones which they replace. This provision is contained in S170(4) of the Act which states as follows:-
“'The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.’'
Section 170(4) does not, however, have the effect of fixing the scope of the statutory duties for all time as being the same as the existing common law duties, but rather (per Lord Hodge):-
“Parliament has directed the courts not only to treat the general duties in the same way as the pre-existing rules and principles but also to have regard to the continued development of the non-statutory law in relation to the duties of other fiduciaries when interpreting and applying the statutory statements. The interpretation of the statements will therefore be able to evolve.”
Lord Hodge’s opinion also considered whether the statutory duties (and in particular, the statutory duty to act within the company’s constitution contained in s171 of the Act) had the effect of restricting the recognised common law principle that a company’s board can ratify acts taken by individual directors without authority. Lord Hodge decided that he could see nothing in the statutory provisions which suggested that Parliament intended to alter the pre-existing common law rules on ratification.