Companies and conflicts of interest

Companies have long been a feature of the local authority scene. Back in the 1980s, they were often regarded as a 'cunning wheeze' and worth a whirl to try and get round irksome statutory restrictions. But while this was not inevitably effective (since the acts of a local authority-controlled company could often at common law be imputed to its proprietor local authority), the government nevertheless stepped in to try and bring these beasts under some statutory regulation.

So was born part V of the Local Government and Housing Act 1989 and its subsequent offspring the Local Authorities (Companies) Order 1995 (S.I. 1995 No 849). These (among other things) regulate companies controlled by, or under the influence of, local authorities. But although for many years subject to prospective repeal (following the Local Government and Public Involvement in Health Act 2007) they still apparently remain alive, well - and on legislative 'death row'.

For the purposes of the 1995 order, a 'regulated company' is a company controlled by, or under the influence of, a local authority and where, during any financial year, the authority exerts a 'dominant influence' over the company (in the company law sense). Alternatively (or in addition), if it were a company the authority would be required to prepare group accounts in respect of the company in question.

A controlled company (per section 68 of the 1989 act) is either a subsidiary of the authority (per section 1159 of the Companies Act 2006), or where the authority controls the majority of the votes at the company's general meeting, or where the authority has power to appoint or remove a majority of the company directors. And, in a corporate hall of mirrors, a company is also controlled if it is under the control of another controlled company.

An influenced company (under section 69 of the 1989 act) is where a business relationship exists between authority and company. This is where the authority provides more than 50% of funds or value to the company and either at least: 20% of voting rights are held by those associated with the authority, 20% of the company's directors are so associated, or 20% of total voting rights at directors' meetings are held by people so associated. Associated persons are specified in section 69(6).Part II of the 1995 order sets out the requirements for regulated companies. These include mentioning the regulated status on notepaper and other relevant documents, restrictions on director remuneration, and provision of information to the authority's members and auditor

Invisible hazards act within powers in accordance with the company's constitution and to use those powers only for the purposes for which they were conferred;

promote the success of the company for the benefit of its members as a whole;

exercise independent judgement;

exercise reasonable care, skill and diligence;

avoid conflicts, or possible conflicts, between interests as a director and the interests of the company;

not accept benefits from third parties, if they may be regarded as likely to give rise to a conflict of interest; 

and declare any direct or indirect interest in a proposed transaction or arrangement.

This article was first published in the Law Society Gazette on 2nd May 2016.

The content of this page is a summary of the law in force at the date of publication and is not exhaustive, nor does it contain definitive advice. Specialist legal advice should be sought in relation to any queries that may arise.