#8573 - Directors’ Duty Not To Make Secret Profits - Business Associations

STATUTE

• Use of position--civil obligations (for directors, officers and employees): s 182: (1) A director, secretary, other officer or employee of a corporation must not improperly use their position to: (a) gain an advantage for themselves or someone else ( s 182(1)(a); or (b) cause detriment to the corporation ( s 182(1)(b)).

  • Reqs for s 182 to apply :

    • (1) director, secretary, other officer or employee of corporation (s 182(1))

    • (2) improperly use position (s 182(1))

    • (3) (a) gain an advantage or (b) cause detriment (s 182(1))

    • (4) optional: involved in contravention? Under s 182(2) A person who is involved in a contravention of s 182(1) contravenes this subsection.Under s 79: a personisinvolved ina contravention if, and only if, theperson:

      • (a) has aided, abetted, counselled or procured the contravention;

      • (b) has induced, whether by threats or promises or otherwise, the contravention; or

      • (c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or

      • (d) has conspired with others to effect the contravention.

• Use of information- - s 183. (1) Apersonwho obtainsinformationbecause they are, orhavebeen, adirectoror otherofficeror employee of acorporationmust not improperly use theinformationto: (a) gain an advantage for themselves or someone else; or (b)causedetriment to thecorporation.

  • Note 1: This duty continues after thepersonstops being anofficeror employee of thecorporation.

  • Note 2: This subsection is acivil penalty provision(seesection1317E).

  • (2) Apersonwho isinvolved ina contravention of subsection(1) contravenes this subsection.

Note 2: This subsection is acivil penalty provision(seesection1317E).

On s 1317E:

Under s 1317E, (1) If a Court is satisfied that a person has contravened s 182 and/or s 183, it must make a declaration of contravention:

• Note: Once a declaration has beenmadeASICcan then seek a pecuniary penaltyorder(section1317G)or (in the case of acorporation/schemecivil penalty provision) a disqualificationorder(section206C).

• (2) A declaration of contravention must specify the following:

(a)the Courtthatmadethe declaration;

(b) thecivil penalty provisionthat was contravened;

(c) thepersonwho contravened theprovision;

(d) the conduct that constituted the contravention;

(e) if the contravention is of acorporation/schemecivil penalty provision--thecorporationorregistered schemeto which the conduct related.

Distinct bases of equitable obligation

• Directors are treated as trustees of company funds in their hands or under their control.

  • If directors misapply company funds they are liable to make good the moneys upon the same footing as if they were trustees: O’Brien v Walker; Re Lands Allotment

  • A director who misappropriates other property of the company will also be liable as a constructive trustee of the property: Re Lands Allotment Co

• What if the directors/senior officers acquire property or derive profits not by direct appropriation of company funds or tangible property but by use of their position in the company or in other circumstances where personal interest is opposed to duty? Where there is a sufficient nexus with corporate office that assets or profits are impressed with a constructive trust or are subject to equitable remedy of account.

• When will a director/officer be under a fiduciary obligation to account to company for benefits derived? In 2 situations.

  • (1) where benefit was obtained in circumstances where there existed a conflict or significant possibility of conflict between the director’s duty to the company and personal interest or another interest which the director is bound to protect: Phipps v Boardman; Chan v Zacharia

    • liability is imposed not to redress abuse but prophylactically to prevent fiduciary from being swayed by considerations of personal interest

    • Req: director/office can obtain benefit only if all material facts are disclosed to appropriate organ of the company and approved by it.

  • (2) where benefit was obtained or received by use or by reason of office of director or of opportunity or knowledge resulting from it: Chan v Zacharia . (objective is to preclude fiduciary from actually misusing his position for his personal advantage).

    • Req: director/office can obtain benefit only if all material facts are disclosed to appropriate organ of the company and approved by it.

• Consequences of finding that there is a benefit or gain held by fiduciary in either of those two circumstances? The benefit is held by the fiduciary as a constructive trustee: Chan v Zacharia

  • Note: immaterial is no absence of good faith or damage to person to whom fiduciary obligation was owed.

  • Note: In perhaps most cases –constructive trust is consequent upon an actual breach of fiduciary duty; for eg, an active pursuit of personal interest in disregard of fiduciary duty or a misuse of fiduciary power for personal gain. (ie Actual breach of fiduciary duty and then a constructive trust appears any benefit acquired is held in that trust)

  • In other cases – may be no breach of fiduciary duty unless and until there is an actual failure by the fiduciary to account for the relevant benefit or gain: for eg, the receipt of an unsolicited personal payment from a third party as a consequence of what was an honest and conscientious performance of a fiduciary duty. (ie actual failure by fiduciary to account for relevant benefit or gain this benefit is held to be held in trust)

• Strictness of duty:

  • Very strict: parker v mckenna (inflexible rule; not relevant at all whether or not there was any damage suffered)

  • Perhaps parker is an exaggeration: Industrial development v cooley

Principles

• No director shall obtain for himself a profit by means of a transaction in which he is concerned on behalf of the company unless all material facts are disclosed to shareholder and by resolution a general meeting approves of his doing so, or all the shareholders acquiesce (unless constitution provides): Furs v Tomkies

• Business that properly belonged to company – was regarded as being held on behalf of company by the directors: Cook v Deeks

  • Here in Cook v Deeks: the entire management of company was in 3 directors hands. They accelerated their work on expiring contract of TCC with CPR in order to stand well with CPR when next contract offered. But the directors never let TCC have the chance to acquire the contract and did not tell 4^th director about this. Made another company and the company carried out the new contract.. Thus while entrusted with affairs of company the defendant directors deliberately designed to exclude and used their influence and position to exclude the company whose interest it was their first duty to protect. Thus regarded as holding benefit on behalf of company.

Cases: