Question

A duty of Directors

1) Tasty Treats Ltd (a Restaurant) is negotiating with Renovations center Ltd. (a construction company) for the renovation of Tasty Treats Ltd's Premises. Sash the owner of Renovations Center Ltd is also one of the five members of the board of directors of Tasty treats Ltd. The contract terms for the Construction are Standard, and the Price set for the renovations contract is fair. Sash has previously informed two of the price set for the other directors of Tasty Treats Ltd. of her ownership in Renovations contract on a three-to-two vote, with Sash voting with the majority.

Discuss the following

a) explain fully the law governing this matter (choose the appropriate duty)

b) explain whether correct procedure was followed

c) explain whether this contract is binding on the two companies

D) give a full conclusion and analysis of the matter

Answer 1

a) There are 2 companies which are negotiating a contract – Tasty Treats Ltd (a restaurant) and Renovations center Ltd (a construction company). The fundamental issue in this case is that Sash, the owner of the construction company is one of the 5 board of directors of the restaurant company. Now that both the companies are negotiating to work together, there can be conflict of interest on the part of Sash. As per the Section 175 of the Companies Act, the director of a company needs to avoid situations which may lead to a conflict of interest – either direct or indirect. The director, Sash in this case, needs to declare all interests in front of the other members of the Board.

b) Sash had declared about her interests in the construction company to the other directors of the restaurant company. This declaration was approved by a voting process, in which Sash was also given the power to vote and she was in the majority 3:2 group. This was not ethical way of dealing with declaration of conflict of interest. Sash was not required to vote in this regard. The other board of directors were required to vote and the majority decision would have been the final choice. In case of a tie, the board was required to follow the procedure mentioned in the articles of association of the company.

c) As correct procedure was not followed in the disclosure of the interests of one of the board members and there indeed was a conflict of interest situation, the contract between the construction company and the restaurant will not be considered valid.

d) Sash is required to declare all her interests ethically. The Board of Directors need to follow the approval procedure legally and then the contract between the restaurant and the construction company can be reconsidered.