UK Directors’ Conflicts of Interest: What You Must Disclose and Manage

If you run a small company, it’s completely normal to wear multiple hats. You might be a director, a shareholder, a supplier, and the person who “knows a guy” for everything from IT to fit-outs.

But that overlap is exactly where a directors conflict of interest can pop up - sometimes without anyone trying to do the wrong thing.

And here’s the key point: in the UK, directors have legal duties around conflicts. If a conflict isn’t properly identified, disclosed and managed, it can create serious risk for your business, including disputes between founders, invalid decisions, and (in the worst cases) personal liability for directors.

In this guide, we’ll explain what counts as a directors conflict of interest, what directors must disclose under UK law, and practical ways to manage conflict of interest directors issues in a way that keeps your company protected from day one.

What Is A Directors Conflict Of Interest (In Plain English)?

A directors conflict of interest is where a director’s personal interests (or duties to someone else) could interfere with their ability to make decisions in the best interests of the company.

This doesn’t require dishonesty. A conflict can exist even when:

• the director genuinely believes they’re acting fairly;
• the deal is “good value” for the company;
• everyone involved is acting in good faith; or
• the conflict is only a potential conflict (not an actual one yet).

For small businesses, conflicts tend to come up in very normal situations, like choosing suppliers, hiring someone you know, or investing in another venture on the side.

Common Examples Of Director Conflict Of Interest In Small Companies

Here are examples we see often in owner-managed companies:

• Director as supplier: a director owns another business that supplies services to the company (e.g. marketing, cleaning, development work).
• Family connections: the company hires (or contracts with) a spouse, sibling, or close friend of a director.
• Competing businesses: a director starts a side business that competes with the company or targets the same customers.
• Property conflicts: a director is also the landlord (or has an interest in the landlord company) and negotiates the lease.
• Investment decisions: a director pushes the company toward a transaction because they personally benefit (e.g. shareholding in the counterparty, commission, or a “finder’s fee”).
• Corporate opportunities: a director learns about an opportunity through the company and takes it personally instead of offering it to the company first.

Even if the arrangement feels efficient (“it’s quicker if we just use my mate / my other company”), it’s still worth handling the disclosure and approvals properly - because if the relationship later breaks down, conflicts are one of the first things that get scrutinised.

What UK Law Requires Directors To Disclose About Conflicts

The director duties around conflicts mainly come from the Companies Act 2006. For small businesses, the most relevant duties are:

• Duty to act within powers (i.e. follow the company’s constitution and decisions properly)
• Duty to promote the success of the company
• Duty to exercise independent judgment
• Duty to avoid conflicts of interest
• Duty to declare interests in proposed transactions or arrangements

In practical terms, there are three big “buckets” of conflict-related obligations you need to understand.

1) Duty To Avoid Conflicts (Situational Conflicts)

Directors must avoid situations where they have (or could have) a direct or indirect interest that conflicts with the interests of the company.

This often includes:

• running a competing business;
• being offered a business opportunity because you are a director;
• having a personal stake in a decision the company is making.

Importantly, some conflicts can be authorised - but only if the right process is followed. For private companies, this is often dealt with in the Articles of Association (and sometimes a Shareholders Agreement). In many cases, authorisation must be given by the non-conflicted directors, and the conflicted director may not count towards the quorum or be able to vote (depending on the company’s constitution). In some situations, shareholder approval may be required instead (or as well).

That’s why it’s so important your company’s internal rules are clear. If your Company Constitution (Articles of Association) doesn’t clearly deal with director decision-making and conflicts, you can end up with messy, uncertain approvals.

2) Duty To Declare An Interest In A Proposed Transaction (Transactional Conflicts)

If the company is proposing to enter into a transaction or arrangement, and a director is interested in it (directly or indirectly), the director generally must declare the nature and extent of that interest to the other directors.

In a small company, this typically applies where you’re about to sign a contract and one of the directors:

• is the supplier (or connected to the supplier);
• will receive a personal benefit;
• has a financial interest in the counterparty; or
• has another duty (e.g. to another business) that could affect their judgment.

The point isn’t to stop directors doing business. It’s to ensure the company can make an informed decision, and that the conflict is transparently handled.

3) Duty To Declare An Interest In An Existing Transaction

If the company has already entered into a transaction or arrangement, and a director is interested in it, the director generally must still declare the nature and extent of that interest to the other directors as soon as reasonably practicable (even if the interest only arises after the contract is entered into).

This matters in practice because conflicts in small companies are often spotted late (for example, once an invoice is raised, a lease is renewed, or the supplier relationship becomes ongoing). Late discovery doesn’t remove the duty - it usually just means you should disclose and minute it promptly, then ensure the company properly manages the arrangement going forward.

What Does “Declare The Nature And Extent” Actually Mean?

For many small businesses, the safest approach is to document:

• what the interest is (e.g. “I own 50% of Supplier Ltd”);
• how the director benefits (e.g. profit, salary, commission, reduced rent, equity);
• how significant it is (e.g. approximate value, whether it’s ongoing); and
• any relevant connections (e.g. spouse is an employee of the supplier).

If you’re ever thinking “this is probably obvious, do we really need to write it down?”, that’s usually your cue that you should write it down.

Why Managing Conflict Of Interest Directors Issues Matters (The Real Business Risks)

Conflicts are a governance issue - but they quickly become a commercial issue if they’re not handled properly.

Common risks include:

• Founder disputes: when co-directors fall out, historic conflicts are often used as leverage (“you were paying your other company!”).
• Decisions being challenged: if the conflicted director voted and shouldn’t have, someone may argue the board decision was invalid or unfair.
• Reputational damage: especially where customers, investors, or partners discover related-party dealings that weren’t transparently managed.
• Regulatory or legal claims: directors can face claims for breach of duty, and the company may seek to unwind transactions or recover profits.
• Operational distraction: disputes about conflicts consume time, cash, and focus - exactly what small businesses can’t afford.

It’s also worth remembering that good conflict management isn’t just defensive. It’s part of building a business that can scale - because investors, buyers, and lenders tend to ask governance questions during due diligence.

How To Manage A Directors Conflict Of Interest: A Practical Step-By-Step Process

Most conflict issues become messy because they were handled informally. The good news is you can put a simple, repeatable process in place that keeps your decisions clean and defensible.

Step 1: Identify Conflicts Early (Before The Decision Is Made)

Try to spot conflicts at the time a proposal is first discussed - not after the contract is signed.

As a practical rule, ask at the start of any major decision:

• Does any director (or someone connected to them) benefit personally from this?
• Is any director on “both sides” of the deal?
• Could this compete with (or divert opportunities from) the company?

If you want this to become routine (and not awkward), many businesses bake it into internal governance and staff training with a simple Conflict Of Interest Policy.

Step 2: Disclose The Conflict Clearly (And Record The Disclosure)

Disclosure shouldn’t be vague. “Just so you know, I know the supplier” is usually not enough.

Make sure the disclosure is:

• specific (what is the interest?),
• timely (before decisions are made), and
• recorded (so there’s evidence later).

The easiest way to “future-proof” disclosures is to capture them in formal records like Meeting Minutes, with enough detail that an outsider can understand what was declared.

Step 3: Follow The Right Approval Route (Board Vs Shareholders)

How a conflict is authorised depends on:

• your Articles of Association / constitution;
• any shareholder arrangements; and
• the type of conflict (situational vs transaction).

In many companies, the non-conflicted directors can approve certain conflicts if the Articles permit it (and the company follows any quorum/voting restrictions for conflicted directors). In other cases, you might need shareholder approval - especially if:

• the conflict is significant (large value or long-term);
• the company has a small board and there are limited non-conflicted directors; or
• your internal documents require it.

For owner-managed businesses, it’s also common to set out additional conflict rules (and consequences) in a Shareholders Agreement, so everyone knows where the line is before tensions arise.

Step 4: Manage Participation (Sometimes The Conflicted Director Steps Back)

Managing a director conflict of interest doesn’t always mean the director can’t be involved at all - but it often means their involvement should be limited.

Depending on the situation, you might decide that the conflicted director should:

• leave the room (or drop off the call) for the relevant discussion;
• not vote on the decision;
• not receive confidential documents relating to competitor bids; or
• only provide factual information (e.g. what their supplier can offer), while others evaluate and decide.

This isn’t about mistrust. It’s about keeping the decision-making process robust and reducing the risk of challenge later.

Step 5: Put The Decision In Writing (Resolutions And Supporting Paperwork)

If a decision is important enough to create a conflict risk, it’s important enough to document properly.

Often this means a written resolution (board and/or shareholder), especially where:

• the company is approving a related-party contract;
• there’s a material financial commitment; or
• you want a clean paper trail for future buyers/investors.

Many small companies use a Directors Resolution to record approvals, who voted, and what was authorised.

And if you’re making a major change that needs shareholder sign-off, you might also need a formal Company Resolution that’s consistent with your constitution and any shareholder arrangements.

Special Scenarios: Where Director Conflicts Commonly Go Wrong

Some conflict scenarios are particularly common in small businesses - and they’re the ones most likely to cause problems if handled casually.

“My Other Business Can Do It Cheaper” (Related-Party Supplier Deals)

It can be genuinely good for the company to buy from a director’s other business - sometimes that’s the most reliable and cost-effective option.

To manage the risk, you’ll usually want to:

• disclose the interest and record it;
• show the decision is commercially reasonable (e.g. alternative quotes, clear scope);
• ensure the contract terms are properly documented; and
• record the approval properly (including any abstentions, and whether the conflicted director counted towards the quorum or vote under the Articles).

Remember: the question isn’t just “is the price fair?”. It’s also “was the process fair and transparent?”.

Side Ventures And Competing Activities

Directors often want to explore new ideas - and that’s not necessarily a problem. The risk appears when the side venture:

• competes with the company;
• uses the company’s confidential info or relationships;
• takes an opportunity that should have been offered to the company; or
• creates divided loyalties for the director.

This is where having clear written rules around founder obligations, IP, and decision-making can be crucial. It’s very common for these topics to be addressed upfront in a Shareholders Agreement (and aligned with your Articles).

When You’re Raising Money Or Planning A Sale

If you’re bringing in investors (even friends and family), conflicts become more sensitive because you’re dealing with other people’s money.

Investors often expect to see:

• clean governance documents;
• transparent disclosures of related-party arrangements;
• board minutes and approvals; and
• evidence that decisions were made in the company’s interests.

Getting your conflict management right now can make later fundraising, exits, or restructuring much smoother.

Key Takeaways

• A directors conflict of interest can arise even when everyone is acting in good faith - it’s about competing interests, not necessarily wrongdoing.
• Under the Companies Act 2006, directors generally must avoid conflicts, declare interests in proposed transactions or arrangements, and (where relevant) declare interests in existing transactions.
• For small businesses, conflicts commonly arise with related-party supplier deals, family hires, property arrangements, and directors running side ventures.
• The safest way to manage conflict of interest directors issues is to identify conflicts early, disclose them clearly, and record disclosures in writing (e.g. meeting minutes).
• Depending on your company’s Articles and any shareholder arrangements, conflicts may need authorisation by non-conflicted directors and/or shareholders - and sometimes the conflicted director should step back from voting (and may not count towards quorum).
• Good governance documents (like your constitution and Shareholders Agreement) help prevent conflict disputes from turning into expensive, time-consuming business problems.

Note: This article is general information only and isn’t legal advice. Director duties and the right approval process can vary depending on your company’s Articles and the specific facts.

If you’d like help putting conflict processes in place, reviewing your director duties, or documenting approvals properly, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.