ISSN 2039-2117 (online) ISSN 2039-9340 (print) Mediterranean Journal of Social Sciences MCSER Publishing, Rome-Italy Vol 5 No 9 May 2014 75 The Impact of the Companies Act 71 of 2008 on the Traditional Director’s Duty to Avoid Conflict of Interest Jean Chrysostome Kanamugire Lecturer, Faculty of Law, Mafikeng Campus, North-West University Email: jean.kanamugire@nwu.ac.za Doi:10.5901/mjss.2014.v5n9p75 Abstract The director’s duty to avoid conflict of interest has been recognised and developed by common law. This duty includes various rules. The self-dealing rule precludes a director from acting on behalf of the company in a transaction where he/she has an interest. The fair dealing rule requires the director to disclose his or her interest if he/she wants to perform a transaction with the company, or has an interest in a contract that the company plans to conclude with a third party. The director is not allowed to make secret profits at the expense of the company, nor to act in conflict with his/her duty. The director is prohibited from taking corporate opportunities that rightfully belong to the company. Occasionally, this duty may continue to exist beyond the period a person has ceased to be a director. Directors should refrain from competing with their companies. Directors must also keep information confidential in the performance of their duties. The Companies Act 71 of 2008 has codified the traditional director’s common law duty to avoid conflict of interest, specifically the self-dealing and fair dealing rules. The Companies Act provides for director’s personal financial interests, standards of directors’ conduct, liability of directors and prescribed officers, and indemnification and directors’ insurance. The codification of the duty to avoid conflict of interest will promote good corporate governance in South Africa. Keywords: Avoid conflict of interest; self-dealing rule; fair dealing rule, corporate opportunity, secret profit, confidential information. 1. Introduction A director may not place himself in a position in which he has, or can have, a personal interest or a duty to another, conflicting, or which possibly may conflict, with his duties to company. 1 This duty is “based on the consideration that, human nature being what it is, there is a danger, in such circumstances, of the person holding a fiduciary position being swayed by interest rather than duty, and thus prejudicing those whom he is bound to protect.” 2 For this reason, the courts have created an “inflexible rule.” 3 In Aberdeen Rail Co. v Blaikie Brothers, 4 Lord Granworth held that: “a corporate body can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting.” 5 He continued to say that: Such an agent has duties to discharge of a fiduciary character towards his principal, and it is a rule of universal application that no one having such duties to discharge shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or which possibly may conflict with the interest of those whom he is bound to protect. So strictly is this principle adhered to that no question is allowed to be raised as to the fairness or unfairness of a contract so entered into. 6 1 Blackman, Jooste & Everingham. Commentary on the Companies Act 2006 vol. 2 at p. 8 – 111; MS Blackman ‘Companies’ in WA Joubert LAWSA vol. 4 (2) Durban: Butterworths & Co Ltd (1996) 209 para 128; Aberdeen Rail Co. v Blaikie Brothers 1843 – 60 All ER 249 (HL) 252-253; Cowan de Groot Properties Ltd v Eagle Trust Plc 1992 4 All ER 700 (ChD) 764-765; Tvl Cold Storage Co Ltd v Palmer 1904 TS 4 at 32-34; Robinson v Randfontein Estate Gold Mining Co Ltd 1921 AD 168 at 178 – 179; T Mongalo Corporate law and corporate governance. Claremont: New Africa Books, Ltd (2003) 167. T Mongalo, C Lumina & F Kader. Forms of business enterprise theory, structure and operation. Claremont: New Africa Books (Pty) Ltd (2004) 225. 2 Bray v Dord 1895-99 All ER 1009 (HL) 1011 (by Lord Herschell). See also Breen v Williams (1996) 186 CLR 71 (HC of A) 108; Beach Petroleum NL v Abbot Tout Russel Kennedy [1999] 33 ACSR 1 (NSW) 45. 3 Bray v Ford op cit (n. 2) 1011. See also J Lowry & J Sloszar “Judicial pragmatism: directors’ duties and post-resignation conflicts of duty” 2008 JBL 83, 84; R Edmunds & J Lowry “The no conflict – no profit rules and the corporate fiduciary: challenging the orthodoxy of absolutism” 2000 JBL 122. 4 Aberden Rail Co Ltd v Baikie Brothers op cit (n. 1). 5 Ibid 252. 6 Ibid 252 I. See also R Cassim “Post-resignation duties of directors: the application of the fiduciary duty not to misappropriate corporate opportunities” (2008) 125 SALJ 731.