Chapter 16 - Guided Response to Problem Question PDF

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Australian Corporate Law, 5th ed, Jason Harris, Anil Hargovan and Michael Adams Problem Questions and Solutions by Marina Nehme and Margaret Hyland © 2016 Reed International Books Australia Pty Limited trading as LexisNexis. Permission to download and make copies for classroom use is granted. Reproducing or distributing any material from this website for any other purpose requires written permission from the Publisher.

Chapter 16: Directors and Officers: Conflicts of Interest Problem Question Barry Badler is the CEO of HealthCo Pty Ltd, a major supplier of medical equipment in Queensland. Barry also has a broad range of personal investments in a number of companies. These investments are managed by his superannuation trustee (his wife) and he has no direct control over the trust. Lately, his wife has been investing the trust funds into a number of medical supply companies including MediCall Ltd, in which she has built up a 10% stake. She has not told Barry about her investment strategy. In early August, HealthCo considers a tendering process for one of its major supply contracts. MediCall lodges a tender bid and Barry is on the tender committee. As a result of Barry’s recommendation, MediCall wins the tender contract. In October, Barry takes over control of his superannuation trust and builds up a further stake in MediCall so that his trust controls 19% of the company. Barry then pressures the company to appoint his wife to the board of directors. Advise Barry of his obligations under the Corporations Act arising from his dealings with MediCall. Were his actions in August and October in breach of the no-conflict rule? The duty to avoid conflict of interest is a duty that is imposed on directors and other officers of the company. This duty is present under equity and statute. This answer is focused on the statutory duty to avoid conflict of interest. See 16.20. Barry should be aware that directors have a statutory duty to avoid conflicts of interest. Therefore, directors and officers must not misuse their position (s 182) to:  gain a benefit for themselves or someone else; or  cause damage to the company. The statutory duties are similar to the fiduciary duty relating to avoiding a conflict of interest and not to make a secret profit. In Chew v R (1992) 173 CLR 626, the High Court considered that the sections may still be breached even when there was no proof of the attempted advantage actually being gained. The requirement was merely to show that the intended result was to benefit the director or another person or to cause detriment to the company. Australian Corporate Law, 5th ed, Problem Questions with Guided Responses Chapter 16 © 2016 Reed International Books Australia Pty Limited trading as LexisNexis. Learning materials created by Marina Nehme. Page 1

This reasoning was applied in R v Byrnes and Hopwood (1995) 183 CLR 501 (Byrnes). In Byrnes, the High Court assessed the misuse of position objectively, and an indicator in this case was the fact that the directors breaching the sections acted without the rest of the board’s knowledge. The directors’ statements that they considered they were doing the right thing were not sufficient. In ASIC v Vizard (2005) 145 FCR 57, a director used information obtained as a result of his position on the board to trade shares, and even though most of the time the director made losses as a result of the trades, and no funds were used from the company on which he sat as a board member, the director had to pay significant penalties and was disqualified from acting as a director for ten years. No harm had resulted to the company and the director had not utilised an opportunity belonging to the company, but was considered by the court to have misused his position. In August, Barry has an interest in MediCall which is in conflict with his position as a director in HealthCo since both companies are medical supply companies; however, he is not aware of it. The question that may arise is this: Does Barry have an obligation to be aware of his interest in MediCall? If the answer is no, which is likely in this case, then this may mean that there is no impropriety and as a result s 182 may not be breached. However, in October, he takes control of his superannuation funds and furthers his stake in MediCall. If he starts using information of HealthCo to further his or his wife’s position in MediCall, he will be in breach of his duty under s 183.

Australian Corporate Law, 5th ed, Problem Questions with Guided Responses Chapter 16 © 2016 Reed International Books Australia Pty Limited trading as LexisNexis. Learning materials created by Marina Nehme. Page 2...