Directors: Watch Out For Secret Profits And Conflicts Of Interest
Picture this scenario
When you confront the manager and demand that the commission received for the loan be paid into the company’s bank account, he is puzzled and then angry. The company got the loan it required at a good interest rate. There was no fraud involved and the company had suffered no financial loss. So the manager feels he has done nothing wrong.
What went wrong?
One of the manager’s duties as a prescribed officer is to familiarise himself with the Companies Act. The Act is specific about conflicts of interest. No director or prescribed officer can receive a benefit (or any person related to such person) from an agreement that is material to the business involved.
It is important to note that the company doesn’t have to suffer a financial loss. Even more important to the framers of the Companies Act is the onus on a director (or deemed director) to always act only in the interests of the business he/she works in.
There is also precedent in common law for dealing with directors making “secret profits”. To quote from a famous English judgment (often cited with approval by our courts), the liability of a director or prescribed officer to account for any profit obtained“…in no way depends on fraud, or absence of bona fides …… The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well intentioned, cannot escape the risk of being called upon to account.”
In terms of the remedies available, the board of directors is entitled to void the deal or it may ratify the transaction and have the commission paid into the business. Alternatively, it may sue the offending party (in this case your senior manager) for the benefit that was received.
In essence, any “secret profits” belong to the company.
What should your manager have done?
Make sure all relevant senior managers understand the Companies Act. It is better to be conservative and report any conflicts or potential conflicts even if they appear trivial. Mistrust can severely damage an organisation.
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