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Law Notes Business Associations 1 Notes

Directors’ Duty Not To Make Secret Profits Notes

Updated Directors’ Duty Not To Make Secret Profits Notes

Business Associations 1 Notes

Business Associations 1

Approximately 387 pages

A 243 page bible of cases and materials summaries. Includes all extra cases discussed in 2011 (e.g. ASIC v Adler) and super summaries intended for quick reference in an open book exam. Structure of cases and materials summaries is as follows:

Class 1 - Introduction to 'The Corporation' and incorporating under Australian Law
Class 2 - Separate Legal Personality
Class 3 - Implications of Limited Liability
Class 4 - The Corporate Constitution and Decision Making by the Board of Directors
Clas...

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The following is a more accessible plain text extract of the PDF sample above, taken from our Business Associations 1 Notes. Due to the challenges of extracting text from PDFs, it will have odd formatting:

Class 14 – Directors’ duty not to make secret profits

Ss 182-183

S 182 Use of position – civil obligation

  1. A director, secretary, other officer or employee of a corporation must not improperly use their position to:

    1. Gain an advantage for themselves or someone else; or

    2. Cause detriment to the corporation

  2. A person who is involved in a contravention of (1) contravenes this subsection

(These are civil penalty provisions)

S 183 Use of information – civil obligations

  1. A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:

    1. Gain an advantage for themselves or someone else; or

    2. Cause detriment to the corporation

  2. A person who is involved in a contravention of (1) contravenes this subsection

S 79 Involvement in contravention

A person is involved in a contravention if, and only if, the person:

  1. Has aided, abetted, counselled or procured the contravention; or

  2. Has induced, whether by threats or promises or otherwise, the contravention; or

  3. Has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to the contravention; or

  4. Has conspired with others to effect the contravention

Secret Profits: The Appropriation of Corporate Property, Information and Opportunity

[7.455] The distinct bases of the equitable obligation

  • Though directors are not generally trustees of company property – they are treated as such for funds in their hands or under their control

    • Thus if they misapply company funds, they are liable to make good the moneys as if trustees (O’Brien v Walker)

    • Also a director who misappropriates other property of the company will be liable as constructive trustee of the property (Re Lands Allotment)

  • But more difficult questions arise when directors/senior officers derive profits/acquire property not by direct appropriation but by use of their position in the company or other circumstances where personal interest is opposed to duty.

    • This chapter deals with the remedies that arise with respect to such transactions – not from misappropriation but in circumstances bearing a nexus with the corporate office that the assets or profits are impressed with a constructive trust or subject to the equitable remedy of account

  • A company director or senior officer is under a fiduciary obligation to account to the company for benefits derived when:

    • The benefit was obtained in circumstances where there exist a conflict/significant possibility of one between the director’s duty to the company and personal interest or another interest which they are bound to protect (Phipps v Boardman)

    • Or where the benefit was obtained or received by use or reason of the office of the director or of an opportunity or knowledge resulting from it (Chan v Zacharia)

  • The CB writers quote the main principle from Chan v Zacharia above and also note the previous statements to the effect that the rule of equity is ‘inflexible’

    • They note that in some cases the outcomes of this inflexibility is not consonant with the fiduciary ideology

      • Furs v Tomkies – sets out the principles, their rationale and the remedies

      • Cook v Deeks looks at the circumstances in which directors may be under a duty to acquire an opportunity for their company and the limits of shareholder renunciation of interest in such an opportunity

Furs Ltd v Tomkies (1936) 54 CLR 583

Facts: Tomkies was MD of FL and Manager of its ‘tanning, dyeing and dressing branch’. Another company expressed interest in purchasing this portion of the business and Tomkies was directed by the board to conduct negotiations. During this, the purchaser told Tomkies he was interested in acquiring the business only on assurance of his services – he conveyed this to the Chariman and the chairmen said if the sale did go ahead FL could not retain him on its staff. The price sought for the business was initially 8,500 for the plant and 4500 for the formulae – after Tomkies agreed to a service contract the latter payment was slashed and the total price reduced to 8500 (with a payment to Tomkies of 5000 for his services). The board were not aware of the payment to Tomkies and he concealed it from them – once it became known FL claimed it as ‘undisclosed profit’ received while acting in a fiduciary capacity.

Held (Primary judge): Tomkies was in a position of conflict and was entitled to secure to his own advantage as long as he treated the plaintiff fairly. There was no unfairness here. The plaintiff appealed to the HCA

Rich, Dixon and Evatt JJ remarked that the decision is governed by the inflexible rule of equity that unless under authority of the articles a director cannot obtain a profit for himself in a transaction in which he is concerned with the company is it raises a conflict of duties – the consequences of such a conflict not being relevant.

  • Here the paramount legal significance is attached to the fact that the payment was obtained by the respondent in the course of a transaction where he was carrying out a duty on behalf of his company as MD. It was because of this the sale and the extra payment was able to be negotiated. His fiduciary character was alike the occasion and the means of securing the profit for himself

  • It is clear that he diminished the price obtainable for the company (he admitted in cross he depreciated the value of the formulae – whether completely or not)

  • This case is not similar to one where sale by a fiduciary to his principle of property which, although the principal doesn’t know, belongs to the agent but was not required in the course of agency. In such a case rescission is the only remedy. There is no transaction by the directors of the company – nothing to rescind.

  • It is true the board was the one who exposed him to the temptation of preferring his advantage – but they cannot relieve him of the equitable obligations arising out of this conflict of duty.

    • The only possible resource was...

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