Someone recently bought our

students are currently browsing our notes.

X

Directors’ Duty To Avoid Conflicts Notes

Law Notes > Business Associations Notes

This is an extract of our Directors’ Duty To Avoid Conflicts document, which we sell as part of our Business Associations Notes collection written by the top tier of University Of New South Wales students.

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

BA 13 Directors' duties when they have an interest in transactions with their company: duty to avoid conflict or disclose material personal interest, not to benefit or use position/information

Checklist short Rule: Directors' fiduciary obligation to avoid situations where without consent of company the director's personal interest (or other interests which the director is bound to protect) conflicts or may possibly conflict with their duty to the company. Two aspects of this (1) Duty to avoid conflicts: The fiduciary cannot put himself in a position of conflict of interests (duty vs interest; or duty vs duty); or A situation with a real and substantial possibility of conflict (Boardman v Phipps) - this affects directors' interests in their company's transactions; and (2) Duty to account for profits made from position as fiduciary (beyond an agreed retainer) (Keech; Chan; Regal v Gulliver; Boardman v Phipps ) (1) First: Is D liable because of an interest D had in a transaction with their Co?

1. Considerboth: (1) Equitable obligation (perhaps changed by company's constitution) and (2) statutory duty of disclosure in ss 191 and 192.

2. Breach of equitable duty to avoid conflicts?

3. Breached statutory duty of disclosure in ss 191 and 192? (McGellin; Camelot; Adler)?
(2) Second issue: did D profit from fiduciary position, thus breaching duty?

1. Three sources of law to consider: (1) General law and equity (2) company's constitution and (3) statutory duty of disclosure in ss 183 and 184.

2. Breach of equitable duty to avoid conflicts?
a. Duty applied?
b. Consent?
c. Consequences

3. Company's constitution?

4. Breached statutory provisions regarding use of position (s 182) and use of information (s 183)

Checklist long

`
Directors' duty to avoid conflicts, not profit, disclose etc Rule: Directors' fiduciary obligation to avoid situations where without consent of company the director's personal interest (or other interests which the director is bound to protect) conflicts or may possibly conflict with their duty to the company. Two aspects of this (1) Duty to avoid conflicts: The fiduciary cannot put himself in a position of conflict of interests (duty vs interest; or duty vs duty); or A situation with a real and substantial possibility of conflict (Boardman v Phipps) - this affects directors' interests in their company's transactions; and (2) Duty to account for profits made from position as fiduciary (beyond an agreed retainer) (Keech; Chan; Regal v Gulliver; Boardman v Phipps)

* Exam tip: S 588G and the negligence duties are probably the most important duties. But duty to avoid conflicts can trip up directors even where they believe they are acting honestly and in best interests and for proper purposes. (1) First: breach of conflicts duty or statutory disclosure obligations: because of D's interest in a transaction of their Co?

1. Consider both: (1) Equitable obligation (perhaps changed by company's constitution) and (2) statutory duty of disclosure in ss 191 and 192.

2. Breach of equitable duty to avoid conflicts?
a. Duty applied? (1) To persons in question (eg director?? (2) (a) Conflict? Or (b) a significant possibility of conflict? Between fiduciary duty vs personal interest. b. Duty continued as time of transaction/benefiting? (ie see partner/partner fiduciary relationship, good faith and honourable conduct due from each persisted for purposes of winding up affairs, under fiduciary obligation to cooperate and act consistently with agreed procedure for realization application and distribution of partnership property: Chan) c. Consent? Full and frank disclosure?
d. Consequences: Any benefit or gain obtained where conflict or significant possibility of conflict between fiduciary duty vs personal interest is held as constructive trustee (Keith Henry); Chan.

3. Breached statutory duty of disclosure in ss 191 and 192? (McGellin; Camelot; Adler). Director that has a material personal interest in a matter that relates to affairs of company must give directors notice of the interest under s 191(2) applies. a. Duty applied? (1) personal interest (2) personal interest material (3) relating to affairs of company. b. Compliance?
c. Consequences? (1) strict liability criminal offence: s 191(1A) (2) d. Exceptions?

4. Exceptions?
a. Under general law: liability to account as a constructive trustee does not arise where (1) person under fiduciary duty has been duly authorized either by instrument creating fiduciary duty or (2) by cirumcstance sof appointment or (3) by informed and effective assent of the person to whom the obligation is owed to act in manner in which he acted; or (4) Right to require an account from fiduciary may be lost by equitable estoppel: Chan. (2) Second: breach of duty not to take profits or improperly use information/position as fiduciary: because of D's use of certain info/position to make money/cause detriment?

5. Three sources of law to consider: (1) General law and equity (2) company's constitution and (3) statutory duty of disclosure in ss 183 and 184.

6. Breach of equitable duty to avoid conflicts?
a. Duty applied?
b. Consent?
c. Consequences: Any benefit or gain obtained where conflict or significant possibility of conflict between fiduciary duty vs personal interest is held as constructive trustee (Keith Henry); Chan.

7. Company's constitution?

8. Breached statutory provisions regarding improper use of position (s 182) and use of information (s 183). [DKS: 'improper use' is determined by general law.]
a. Duty applied?
b. Compliance?
c. Consequences?

9. Exceptions?
a. Under general law: liability to account as a constructive trustee does not arise where (1) person under fiduciary duty has been duly authorized either by instrument creating fiduciary duty or (2) by cirumcstance sof appointment or (3) by informed and effective assent of the person to whom the obligation is owed to act in manner in which he acted; or (4) Right to require an account from fiduciary may be lost by equitable estoppel: Chan. LIST OF CASES:

10. Renewing partnership lease himself breaches both no profit and no conflict: in Chan a doctor in a recently ended partnership with another doctor used the partnership's option to renew a lease in his own name exclusively. There was a fiduciary obligation from the winding up of the partnership (ie, until property's split still some relationship), and breach of both rules: conflict between obligation to get the partnership property, and profit made through the partnership's position as a tenant, in renewing the partnership lease for himself exclusively. EXAM TIP: Consider:

11. Whether breach of related party transactions in Ch 2E

12. Whether Co tried to indemnify the D for breaches of the duty

13. Shareholders remedies?

(1) Did D breach duty or provision because of an interest in a transaction with their company?
(under general law (eg Chan; Phipps) or statute s 181

1. Intro to Sources of law to consider: sources of (i) First, equitable principle enjoins conflict avoidance and makes transactions law voidable at suit of company (irrespective of fairness of transaction from company's perspective provided possible to restore parties to their original position.) [So long as conflict between interest and duty, court won't look at fairness: Furs v Tomkies. a. Note: company's constitution may modify equitable rule. (ii) Second, statutory duty of disclosure imposed by Act under ss 191, 192. (Under s 193, statute has effect in addition to any provision in a co's constitution (iii) Third, duty to not fetter board discretions (Thorby v Goldberg) (iv)Fourth, note no blanket prohibition on competing. (Mashonaland) Exam tip:

1. Consider: Was there a breach of the prohibitions on related party transactions?
Chapter 2E

2. Did the company try to indemnify the director for breaches of duty? Ss 199A - 199 C Did D breach equitable obligation to avoid conflict between duty and interest?
Breach of equitable duty to avoid conflicts?

1. Duty applied? (1) To persons in question (eg director?? (2) (a) Conflict? Or (b) a significant possibility of conflict (Chan) or real or substantial possibility of conflict (Hospital Products).

2. Duty continued as time of transaction/benefiting?

3. To who was the duty owed?

4. Breached?

5. Consent? Full and frank disclosure? (note that if directors continue with it could be a breach of duty of care, s 180)

6. Exceptions? (1) authorized (2) authorized by appointment (3) full and frank consent (4) equitable estoppel (5) where unconscientious for co to assert this liability to account, for eg where no possible conflict, and plainly in interests of co that fiduciary obtained for himself rights to benefits

7. Consequences: Any benefit or gain obtained where conflict or significant possibility of conflict between fiduciary duty vs personal interest is held as constructive trustee (Keith Henry); Chan?

1. Did the duty Two requirements: apply?
(1) To persons in question (eg director??
(i)

(2) (a) Conflict? Or (b) a significant possibility of conflict? Between fiduciary duty vs personal interest. (a) was there a conflict?
(b) Significant possibility of conflict?
(c) Requisite extent?

* The Bell Group Ltd Owen J posed the question whether the interest is such that a reasonable person would think there is a real or substantial possibility of the director being swayed by it.

*

Can be indirect interest - eg when trustee of shares in company A that company B is contracting with when director of B: Transvaal

Notes:

* Other tests: strict: ' a possibility of conflict' (Aberdeen (no fiduciary should enter engagements which possibly may conflict with the interests of those he is bound to protect) - very strict). More recently: lenient formulation - the reasonable man would think there was a real sensible possibility of conflict (Phipps v Boardman). Now in Australia: significant possibility of conflict - chan v zacharia ' a real or substantial possibility of conflict' - hospital products

* Fairness of contract entered into irrelevant: Aberdeen All categories of conflicts: DKS "VI Content of the Duty":

* Duty versus interest o Aberdeen Railway v Blaikie Bros o Nature and effect of disclosure
? Imperial Mercanitle Credit ASsoc v Colman

* Duty versus Duty (clear example in Aberdeen - at same time there was a duty vs interest conflict). o In Aberdeen - came because relevant person was a director of Aberdeen and also a partner of blaikie bros (partner owes fidcuariy duties to fellow partners) o If conflict vs interest conflict can be resolved by full and frank disclosure and consent to company - how do you resolve a duty vs duty conflict? Disclose to both parties that you owe the duty to. o Duty as director of P vs duty as trustee of shares held in D (Director Harvey in Transvaal Lands v New Belgium). o Duty as director of P vs (soon appointment as) director of D company (Transvaal) ( when P company received letter accepting offer of shares from D.

* Competing Directorships o Longon v Mashonaland exploration o Transvaal lands o On the street v cott

* Using the company's own assets o Gray v new augaita porcupine mines Examples:

* in Aberdeen Facts: Railway company contracted to purchase goods from a partnership. One of its directors was a member of that partnership. Sought to avoid the contract. Held: the interest would have assumed actual significance in the deliberations. The duty was of a fiduciary nature - no one having such duties should be allowed to enter into an engagement in which he has, or can have, a person interest conflicting, or which possibly may conflict, with the interest of those whom he is bound to protect. Irrelevant how fair the contract was.

*

2. Apply at relevant time?

In Imperial Mercantile Credit Association v Coleman - D was a stockbrocker in Knight, and a director of the P. D contracted with 3rd party to procure subscriptions for debentures for commission of 5%, proposed to P that they subscribe and get a commission of 1.5%. Did not inform P of agreement with P&C. Said he was interested in transaction. P went into liquidation, sued to compel D to account for commission received. Article 83 had changed the duties of disclosure - said that if a comply didn't declare his interest he wasn't entitled to vote and would be vacated. HELD: a man declares his interest when he states what his interest is, not when he states that he has an interest. (Not sufficient to state to other fiduciaries something that could have led them to further inquiry but leave it open to chance whether or not they would.) REMEDY: Liable for whole profits obtained, not for the share that he would have had to hand over if he had split them with the co.

* If just holding shares in a trust in company X, while a director of Y, if as Y's director cause Y to buy shares in X - conflict of interest - should hav disclosed interest in X before causing Y to buy: Transvaal (Here Harvey, a director of the plaintiff company,

* If about to be appointed as director of X, while director of Y, and caused Y to buy property from X, that can be a conflict of interest: Transvaal

* Agency relationship - means notice of irregularities and breaches of fiduciary duty is capable of being received - so rescission ordered: in Transvaal . Note that here Samuel was a director of the D company, who was acting as an agent for D in relation to transactions with a P company, that he was also a director of. He knew everything happening in the D company. Was their servant or agent for purposes of entering into those transactions and thus capable of receiving notice of the irregularities. Thus rescission orders made in regards to transactions between D and P cos.

* Two directors of Transvaal were involved in another company (NB): (1) Samuel was a shareholder and director of NB (2) H was just a shareholder in NB (holding shares on trust for his wife), although was going to become a director soon. They persuaded D company to agree to have the company buy property from the P company without disclosing their interest in the benefit they would obtain (as shareholders in the D company). H did not disclose his trust shareholding in the P company

* Conflict of interest can mean that no quorum is reached: Transvaal Issue: what if directorship has ended?

3. To who was the duty owed?

(ie see partner/partner fiduciary relationship, good faith and honourable conduct due from each persisted for purposes of winding up affairs, under fiduciary obligation to cooperate and act consistently with agreed procedure for realization application and distribution of partnership property: Chan) III To whom is the duty owed?
to the company
exceptionally - vanishingly rare to the shrs individually (coleman v myers) o where directors do this to gt shareholders to sell them to us o GAlvanics v Brunninghuasen

4. Breached?

Question of fact mostly - consider where in the facts there was a transaction

5. Consent?

6. Exceptions?

where there was a conflict etc.]

* Issue 1#: Did the constitution change the nature of disclosure?
o In Imperial Mercantile Credit: Article 83 had changed the duties of disclosure - said that if a comply didn't declare his interest he wasn't entitled to vote and would be vacated. HELD: a man declares his interest when he states what his interest is, not when he states that he has an interest.

* Issue 2#: Was there full disclosure? (Jenkins; Gray; Imperial Credit) o Test: no amount of etail required depends on each case upo nature of contact or arrangement proposed and context in which it arises - btu normally insufficient o Must state nature of interest: A man declares his interest when he states what his interest is, not when he states that he has an interest. (Not sufficient to state to other fiduciaries something that could have led them to further inquiry but leave it open to chance whether or not they would.): Imperial Credit o

* Issue 3#: Withdraw from voting o Where a director of company A is engaged in a transaction with company B of which he or she is also a director, the director must make full disclosure of his or her interest and, in some cases, may be obliged to abstain from taking part in the negotiations or voting on the transaction: Jenkins v Enterprise Gold Mines

* Note: irrelevant what effect the lack of disclosure may or may not have had upon the transaction: Gray v New Augarita (here irrelevant whether or not the company would have changed their settlement with gray if he had made full disclosure or not)

* Note: irrelevant whether transaction impugned was reasonable and fair: Gray v New Augarita Examples:
Insufficient to say 'I am interested' without explaining the nature of it
Insufficient to attend meeting that notes that the D is 'interested' but not disclose how much he gained by the transaction: Gray v New Augarita Porcupine Mines ( here director took shares at an effective discount of 80% on their par value and sold them on the stock exchange at uch higher prices. Directors resolved to charge him with approximately 20c for every share that had been issued for cash. It was imperative that he reval that to settle with him on basis of 20c released him from liability at a singularly favourable agreement. (Only he at the time knew how much he gained from the transaction. He regarded himself as not required to make any disclosure. Exam tip:

* If there was consent by other directors, did they breach their duty of care or s 180?
Under general law: liability to account as a constructive trustee does not arise where (1) person under fiduciary duty has been duly authorized either by instrument creating fiduciary duty or (2) by cirumcstance sof appointment or (3) by informed and effective assent of the person to whom the obligation is owed to

Buy the full version of these notes or essay plans and more in our Business Associations Notes.