Corporations Law In Principle - ( Chapter 13 Directors’ Duties – Part 3 Conflict of Interest and Disclos PDF

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CHAPTER 13

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Directors’ Duties – Part 3 Conflict of Interest and Disclosure Useful Websites ..................................................................... 387 Recent Developments ............................................................ 387 Aim ......................................................................................... 387

Principles ............................................................................... 388 Duty to avoid conflict of interests ..................................................... 388 Statutory duties – improper use of position or information ..................... 394 Remedies and consequences for breach of directors’ duties ................... 397 Disclosure of interests .................................................................. 402 Related party transactions .............................................................. 407 Exoneration and relief for breach of duty ........................................... 410 Mentor: Test your Knowledge ............................................... 416 Practice Questions ................................................................. 416 Essay Questions .................................................................... 416

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Problems for Discussion ........................................................ 416 Guide to Problem Solving ...................................................... 419 Further Reading ..................................................................... 422

Useful Websites ...................................................................................................................................... (See http://legal.thomsonreuters.com.au/browse/mentor/corplawhub.asp for links to websites on the Topic of Directors' Duties – Part 3 Conflict of Interest and Disclosure.)

Recent Developments ...................................................................................................................................... Hydrocool Pty Ltd v Hepburn (No 4) [2011] FCA 495 Krecichwost v The Queen [2012] NSWCCA 101

Aim ...................................................................................................................................... At the end of this topic you should know:

Jeswynn, Yogaratnam, et al. Corporations Law: In Principle, Thomson Reuters (Professional) Australia Pty Limited, 2016. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/vu/detail.action?docID=4802969. Created from vu on 2020-12-11 16:14:54.

Chapter 13

Related Topics ....................................................................... 388

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• the requirements under the general law and the Corporations Act 2001 (Cth) for conflicts of interests; • the requirements under the general law and the Corporations Act 2001 (Cth) for disclosure of interests; • how directors may be excused from breaches of their duties; and • to what extent directors can be insured against personal liability.

Related Topics ...................................................................................................................................... Chapter 6 Management of Companies; Chapter 11 Directors' Duties – Part 1 Duty of Care, Skill and Diligence; Chapter 12 Directors' Duties – Part 2 Good Faith and Proper Purpose; Chapter 14 Members' Rights and Remedies

PRINCIPLES Duty to avoid conflict of interests Definition of duty .......................................................................................................................................................................

All fiduciaries, including directors, are under a duty to avoid actual or potential conflict of interest situations. The duty is a strict one. A director can be in breach even though the director acts honestly and does not stand to make a profit. A director can also be liable even if the company cannot proceed with the transaction in question.

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[13.10]

Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (CATSI Act)

Part 6-4—Duties and powers of directors and other officers and employees, Division 265-10—Use of position-civil obligations Division 265-15—Use of position-civil obligations, Division 265-25—Good faith, use of position and use of information–criminal offences, Division 265-30—Interaction of sections 2651 to 265-25 with other laws etc., Division 268—Duties in relation to disclosure of, and voting on matters involving, material personal interests, Part 6-6—Member approval needed for related party benefit of the CATSI Act. The recent case concerning the former CEO of North Australian Aboriginal Family Violence Legal Service Aboriginal Corporation highlights, inter alia, misuse of position for personal financial benefits. Extract from the ORIC's website:

Jeswynn, Yogaratnam, et al. Corporations Law: In Principle, Thomson Reuters (Professional) Australia Pty Limited, 2016. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/vu/detail.action?docID=4802969. Created from vu on 2020-12-11 16:14:54.

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http://www.oric.gov.au/publications/media-release/former-darwinceo-sentenced.

.................................................................................................................. ORICMR1415-35 – Former Darwin CEO sentenced

Ms Veronica Cubillo, the former CEO of the North Australian Aboriginal Family Violence Legal Service Aboriginal Corporation (NAAFVLS), has today been sentenced in the Northern Territory Supreme Court in Darwin.

Ms Cubillo was also ordered to repay $7,624.50 to NAAFVLS via the Registrar. In handing down the sentence, Justice Blokland said that Ms Cubillo had breached her position of trust as the CEO of an Aboriginal corporation and had not accepted responsibility for her actions. Ms Cubillo was found guilty by a jury on 23 April 2015 of 11 charges brought by the Registrar of Indigenous Corporations, Anthony Beven. Ten of the charges brought against Ms Cubillo related to her misusing her position and forging documents to obtain a personal financial benefit totalling $9,574.50.

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The eleventh charge related to Ms Cubillo intentionally and dishonestly failing to properly exercise her duties as the CEO. Ms Cubillo had directed that part of a $10,000 grant be used to fund an overseas trip to the Philippines. The funding had been provided to NAAFVLS by Imparja Television to run substance abuse workshops on Groote Eylandt. Anthony Beven said, “Ms Cubillo was the CEO of a not-for-profit corporation funded by government to assist the victims of domestic violence living in disadvantaged communities. While the amount of money involved was small, the breach of trust was significant”. “The sentence sends a strong message that it is unacceptable for the CEO of an Aboriginal corporation to use public funding meant for the most vulnerable in our community for their own personal benefit.” The matter was prosecuted by the Commonwealth Director of Public Prosecution.

Source of duty ....................................................................................................................................................................... [13.20] The duty to avoid conflicts of interest arises under the general law, as part of fiduciary law. It is supplemented by the statutory duties under ss 182 – 184 of the Corporations Act 2001 (Cth) (Corporations Act). The duty gives rise to a number of disclosure obligations, including:

Jeswynn, Yogaratnam, et al. Corporations Law: In Principle, Thomson Reuters (Professional) Australia Pty Limited, 2016. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/vu/detail.action?docID=4802969. Created from vu on 2020-12-11 16:14:54.

Chapter 13

Ms Cubillo was sentenced to three months imprisonment, backdated to 30 April 2015 when Ms Cubillo was first remanded in custody. After she is released Ms Cubillo will be required to serve five months in home detention.

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• the requirements in ss 191 – 194, 195, 205G (listed companies) and 200A – 200J (retirement payments); • Ch 2E (related party transactions); and • Pt 7.10, Div 3 (insider trading provisions). Listed public companies must also comply with the disclosure obligations in the ASX “Corporate Governance Principles and Recommendations with 2010 Amendments”. As well, companies are encouraged by industry associations (for example, the Investment and Financial Services Association (IFSA)) to “self-regulate” by adopting mechanisms for avoiding conflicts of interests, such as audit committees, codes of ethics and appointing more non-executive directors. Examples of conflict of interest ....................................................................................................................................................................... [13.30] The conflict of interest issue is a very common one in practice. The following are some examples of situations where the issue of conflict of interest arises. They often overlap each other.

Contracts with the company

A director may be in breach of duty by entering into a contract with the company of which he or she is a director. This breach of duty may also occur where the relationship is indirect – that is, where the director is a director or member of another company which enters into the contract: see Transvaal Lands Co v New Belgium (Transvaal) Land & Development Co [1914] 2 Ch 488; and South Australia v Clark (1996) 66 SASR 199. The risk of breaching the duty to avoid conflicts of interest may be reduced by:

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[13.40]

• a provision in the constitution which authorises a director to have an interest in a contract with the company. The directors can thereby be absolved from a breach of this duty (Re Automotive & General Industries Ltd [1975] VR 454); or • the interested director making full and frank disclosure of their interest in any contract with the company (Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378; and Furs Ltd v Tomkies (1936) 54 CLR 583); and • the director abstaining from voting on the matter. Mere abstinence may not be sufficient in certain circumstances. The directors may also have an obligation to protect the company's interest – for example, by taking steps to prevent the transaction from going ahead: Permanent Building Society v McGee (1993) 11 ACSR 260; Fitzsimmons v The Queen (1997) 15 ACLC 666; and Duke Group Ltd (in liq) v Pilmer (1999) 73 SASR 64 (these issues

Jeswynn, Yogaratnam, et al. Corporations Law: In Principle, Thomson Reuters (Professional) Australia Pty Limited, 2016. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/vu/detail.action?docID=4802969. Created from vu on 2020-12-11 16:14:54.

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were not relevant to the High Court appeal in this case: Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165). The provisions of the Corporations Act mentioned under the heading “Source of duty” are particularly relevant to contracts between a director (or person related to a director) and a company. These statutory provisions need to be complied with even if the contracts are permitted by the company's constitution. Personal profits arising from acting as director

Directors are under a duty not to make profits from their office. Because the opportunity exists for directors to take advantage of their privileged position, not only must they act in good faith, they must be seen to act in good faith. The leading case is Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378. Regal (Hastings) v Gulliver

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[13.53] Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 (House of Lords) FACTS: The directors of Regal (Hastings) Ltd (Regal) owned a cinema and wanted to buy the lease of two more cinemas in order to sell the whole operation as a going concern. Regal formed a subsidiary company for this purpose and the subsidiary was offered a lease of the cinemas on the condition that it increased its paid up capital. Regal could not afford to provide the full amount required so the remaining capital was contributed by four of Regal’s directors and two other people taking up shares in the subsidiary. Shortly afterwards, all the shares in both Regal and the subsidiary were sold for a very large profit. The new shareholders, who now controlled Regal, caused it to sue the directors and the others involved, claiming that they had to account for the profit they made from the sale of the shares. DECISION: The directors had acted honestly and the company had benefited from their actions (Regal did not have the money to take up all the shares itself), but the House of Lords still held that the four directors had breached their duty and had to give up all their profits to the company. The House of Lords said that the directors would have been protected if they had made full disclosure to a general meeting and the meeting had approved the transaction.

The end result in a case of this kind may be different today as the court has discretion under ss 1318 and 1317S, to excuse directors and officers from liability where they have acted honestly.

[13.56]

Bribes and other undisclosed benefits

Directors are in breach of duty if they accept a bribe or secret commission in return for securing (or attempting to secure) a certain course of action: Boston Deep Sea Fishing & Ice Co v Ansell (1888) LR 39 Ch D 339; and

[13.60]

Jeswynn, Yogaratnam, et al. Corporations Law: In Principle, Thomson Reuters (Professional) Australia Pty Limited, 2016. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/vu/detail.action?docID=4802969. Created from vu on 2020-12-11 16:14:54.

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[13.50]

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Furs Ltd v Tomkies (1936) 54 CLR 583. The company does not have to suffer any detriment for the director to be in breach. Misuse of company funds [13.70] Directors must use company funds for company business: TotexAdon Pty Ltd v Marco (1982) 1 ACLC 228. They must not mix the company's funds with their own. In Paul A Davies (Aust) Pty Ltd (in liq) v P A Davies [1983] 1 NSWLR 440, the directors partly financed a holiday resort in their own names from company funds. When the resort was sold, the court held that all the profit belonged to the company.

Taking up a corporate opportunity

Directors are in breach of their duty if they take up opportunities which belong to the company. Any profit from such ventures must be given up to the company. The classic case is Cook v Deeks [1916] 1 AC 554. It seems that the courts generally take the view that, even if the company cannot or will not take up the opportunity, the director is precluded from doing so: see Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378; Green v Bestobell Industries Pty Ltd [1982] WAR 1; Marson Pty Ltd v Pressbank Pty Ltd [1990] 1 Qd R 264; Gemstone Corporation of Australia Ltd v Grasso (1994) 62 SASR 239; and Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (2001) 37 ACSR 672. [13.80]

Cook v Deeks

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[13.83] Cook v Deeks [1916] 1 AC 554 (Privy Council) FACTS: A successful railway construction company (Toronto) was owned equally by four shareholders who were also its directors. After completing a project for Canadian Pacific Railways (CPR) three of them started further negotiations with CPR for a new contract with the intention of excluding the fourth (Cook) altogether. The three formed a new company which was awarded the new contract. They then held a general meeting of Toronto and used their 75% majority to approve the sale of part of Toronto ’s plant to their new company and to declare that Toronto had no interest in the new contract. DECISION: The Privy Council held that the three directors had breached their duty of loyalty to Toronto by taking up a corporate opportunity that belonged to Toronto. It upheld Cook’s claim that the other three directors and the new company held the contract for the benefit of Toronto and had to account to Toronto for any profits resulting from it.

[13.86] Perhaps the way out for a director is to obtain express authorisation of what would otherwise be a breach, by making full disclosure to, and obtaining the consent of, a general meeting to the taking up of an opportunity rejected by the company. Compare the above cases with Queensland Mines Ltd v Hudson (1978) 18 ALR 1, the Canadian case of Peso Silver Mines Ltd v

Jeswynn, Yogaratnam, et al. Corporations Law: In Principle, Thomson Reuters (Professional) Australia Pty Limited, 2016. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/vu/detail.action?docID=4802969. Created from vu on 2020-12-11 16:14:54.

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Cropper (1966) 58 DLR (2d) 1 and SEA Food International Pty Ltd v Lam (1998) 16 ACLC 552, where directors were permitted to take up opportunities that had earlier been considered and rejected by the companies. Using confidential information

Directors are not permitted to use confidential company information for their own benefit. What is meant by “confidential information” is discussed in Thomas Marshall (Exports) Ltd v Guinle [1978] 3 WLR 116. Sections 183 and 184(3) supplement the fiduciary duty regarding the use of confidential information and secret profits. These provisions also apply to employees and are, therefore, broader than the general law. In Australian Securities & Investments Commission v Vizard (2005) 145 FCR 57 the Federal Court held that Vizard, a non-executive director of Telstra Ltd, had contravened s 183 of the Corporations Act on three separate occasions. The Court was of the opinion that Vizard had used information acquired as a director of Telstra Ltd for the purposes of benefiting himself and his family. According to Finkelstein J, the contraventions were dishonest and were carefully concealed, and only discovered by chance. Competing with the company

In general, fiduciaries must not compete with the person for whom they act. However, it seems that a person can be a non-executive director of two companies which are in competition, provided there is no other conflict of duty: Bell v Lever Bros [1932] AC 161. Where a person is engaged in special duties dealing with confidential information, there seems to be a stricter rule imposed. In Hivac Ltd v Park Royal Scientific Instruments Ltd [1946] 1 All ER 350 there was held to be a conflict and the director was in breach. The directors in Mordecai v Mordecai (1988) 12 NSWLR 58 closed down the company's business and set up a rival company. The court held that their aim was to benefit themselves at the expense of their nephew: see also On the Street Pty Ltd v Cott (1990) 101 FLR 234; Forkserve Pty Ltd v Jack and Aussie Forklift Repairs Pty Ltd (2001) 19 ACLC 299; and compare Southern Real Estate Pty Ltd v Dellow (2003) 87 SASR 1.

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