Whitehouse V. Carlton Hotel Proprietary Limited: Breach Of Directors’ Duties

Background of the case

Discuss about the Case of Whitehouse v. Carlton Hotel Proprietary Limited.

The Corporations Act, 2001 (Cth) is a comprehensive legislation, which is applicable on the corporations working in the nation. This statute is significant and has to be followed to the T, as it brings forth the manner in which a company can conduct its business and operations. It also acts as guidance on what would be deemed as legal or illegal conduct by any company. In context of the director’s/ officer’s duties, this legislation is important. There is specifically a part covered under this legislation, which presents the duties and obligations of the officers and directors of the companies (Latimer, 2016).

Whitehouse v. Carlton Hotel Proprietary Limited (1987) 162 CLR 285 is a leading case which presents an example of how a director would be deemed to have contravened the duties, which are covered under the Corporations Act. This report is focused on provided a brief background to this case, the duties which were breached, the reasons for their breach, the reason behind court decision, and the significance of this case in the present scenario. This would help in gaining an insight on how the Corporations Act works in disciplining the directors, where they are made to work towards the best interest of the company, instead of being focused on personal interests.

Before going in on the law aspect of the case of Whitehouse v. Carlton Hotel Proprietary Limited, there is a need to understand what actually happened in this case. In this case, Charles Whitehouse had been the governing director of a hotel known as the Carlton Hotel. Charles held full voting shares, which were known as the A class shares. Mrs. Whitehouse, the wife of Charles Whitehouse, owned B class shares, which only carried partial voting rights. The sons and the daughter of the couple held C class shares and this class of shares did not hold any voting right. After some time, the couple got divorced. As a result of it, the sons aligned themselves to the father and the daughter aligned themselves to the mother (Barker, 2018).

Charles Whitehouse began to worry that once he died his ex-wife and his daughters would get the complete control of the company as his sons did not have shares with voting rights. This led him to issue B class shares to his sons as well, as this class of shares held voting rights. With regards to his shares, he had fallout with his sons, which led Charles Whitehouse to resolve that his sons had never been given with B class shares, and also directed that there was a need of amending the share register. This led to the sons of Charles Whitehouse brining a suit against him. Not only questions were raised on allotment of shares, which is not the focus of this discussion, but also questions were raised on the breach of fiduciary duties by Charles Whitehouse based on the shares he issued to his sons (Barker, 2018).

Duties/ responsibilities breached and the reasons for such breach

This case was decided even before the present legislation of Corporations Act, came into force. However, based on the theme of this discussion, the breach of director duties by Charles Whitehouse have been discussed in context of provisions of Corporations Act.

As has been touched upon in the very start of this discussion, the Corporations Act imposes some important obligations/ duties on the directors and officers of the companies. One of the prominent sections under this legislation is section 181. Section 181(1) of the Corporations Act, 2001 provides that the directors or the other officers of the companies have to discharge their duties and have to exercise their powers for proper purpose, and further, this has to be done in good faith, which is in the best interest of the company. This section also provides that where this section is not upheld, the civil penalty provisions, as are covered under section 1317E of the Corporations Act, would be applied. The entire section, i.e. section 181 would be deemed to be breached by the directors and/or officer, where the provisions covered under subsection 1 of this section are not fulfilled.

A careful analysis of this section reveals that it has two parts. The first part is focused on the need for working in best interest and in good faith for the company. And the second part is based on the work done by the directors to be undertaken for proper purpose. The second part of this section is related to the present case in discussion, i.e. for Whitehouse v. Carlton Hotel Proprietary Limited. This was a case which involved a new category of shares being created by father for his sons, so that upon his death, his ex-wife would not get the complete control over the company. This was possible due to the fact that the ex-wife held shares with partial voting power, whilst his sons had shares with no voting power. In order to avoid the company going under the control of his ex-wife, Charles Whitehouse brought forth this scheme of giving shares to his sons, which carried voting power. If the theme of this act is put in simple words, it becomes clear that the act undertaken by Charles Whitehouse, the director of Carlton Hotel, were fuelled with personal motives. In allocating the shares with voting powers to his sons, he worked for his/ his son’s benefit, instead of working towards the benefit of the company (Jade, 2018).

Discussion and critical analysis of decision of court and reasons for it based on Corporations Act

The acts undertaken by Charles Whitehouse cannot be deemed as one undertaken for proper purpose. A personally motivated decision, which has no consideration of interest of the company, cannot be claimed as being in the best interest of the company, just because no damage is caused to the company. Moreover, in this case, the company’s best interest was being hindered, as the personal motives were being given preference over the interests of the company, where each shareholder is given equal treatment, instead of certain shareholders being treated in a favourable manner, and others being prejudiced against. It was the duty of Charles Whitehouse to work for proper purpose and for best interest of Carlton Hotel, where the good faith towards the hotel was fulfilled, instead of towards his sons, where his intentions were personally fuelled. As a result of not upholding the basics of section 181(1) of the Corporations Act, there was a breach on part of Charles Whitehouse, regarding the duties set out under the quoted section (Austlii, 2018).

After analysing the case in detail, the court came to the conclusion that the shares which were issued in this case, were done for an improper purpose. This was because the purpose of Charles Whitehouse was to dilute the control of his ex-wife in the company, which was not a proper purpose, based on the quoted legislation. It was held that where one shareholder was favoured by diluting the shares of other shareholders, or by diluting the voting powers of other shareholders, it could not be deemed as the act done by director, for proper purpose. Even though the trial judge had held that the allotments which were made by Charles Whitehouse had the interest of the company in his heart, this contention was rejected by the Full Court. The Full Court held that the allotments done by Charles Whitehouse were void as a result of two reasons. The first one was that by making these allotments to his sons, Charles Whitehouse failed in complying with Article 59. And secondly, the allotments were void as they were made for improper purpose (Austlii, 2018).

The appeal made in this case was related to the allotment having been undertaken for proper purpose. This began with the general proposition that the power of allotting shares was a fiduciary power and had to be used bona fide for company’s benefit as a whole. In supporting this statement, the judges made reference to Harlowe’s Nominees Pty. Ltd. v. Woodside (Lakes Entrance) Oil Co. N.L. (1968) 121 C.L.R. 483 and Smith Ltd. v. Ampol Petroleum Ltd. (1974) CLC ¶40-101 at p. 27,716; (1974) A.C. 821 at p. 836. After giving sufficient weight to the findings and the referred cases, the breach of present day section 181(1) was established in this case (Austlii, 2018).

The court analysed the case thoroughly and gave the decision that a decision which was made in absence of good faith and was based on improper purpose, would be deemed to be voidable. However, this was not voidable against a third party, as they had no notice of the situation which lead to the contravention of the quoted duty, and were thus protected through the doctrine through the indoor management rule. Thus, where the third party could establish that they had been bona fide purchaser in absence of any such notice, the transaction would continue to stand. The court further stated that just because of presence of impermissible purpose, it was not enough to render the use of fiduciary power as voidable for a lot of shares (Fridman, 1998).

This case also brought forth a landmark aspect, where it provided that the test as had been given under Mills v Mills (1938) 60 CLR 150 was based on invalidation (High Court of Australia, 2018). This case clarified that the test given under Mills v Mills would follow only where the impermissible purpose or the combination of such purposes, can be deemed as dominant, i.e. only when it is shown as moving cause or substantial object. This case brought with it the “but for” test, which provides that the view which is preferable is one where the impermissible purpose is causative based on the “but for” of the presence of such purpose. Where this happens, the power would be deemed to have not been exercised (Redmond, 2013).

This is a substantial case not just because of the “but for” test given through it, but also because it clarified on how and when a breach of section 181(1), with focus on improper purpose, can be claimed upon. This case has been referred to in a number of cases, due to its significance and the examples of it include  Eclairs Group Ltd and another v JKX Oil and Gas plc and others [2013] EWHC 2631 (Ch); [2014] 1 BCLC 202.  The reason for emphasis being laid on this case stems from the fact that not only the Australian courts use and apply this test, but this test has also been applied by the British courts. The “but for” test presented through this case is the most consistent and most appropriate test in the reported cases. This is because the “but for” test avoids the pitfalls which were present in the earlier tests (Valsan, 2016).

Conclusion

Thus, the discussion undertaken in the previous parts of this report highlighted the different elements of the selected case of Whitehouse v. Carlton Hotel Proprietary Limited. With regards to the theme of this report, the aspect related to breach of director duties, in context of the quoted case were highlighted. In doing so, the background of the case was initially highlighted to understand what happened in this case. This was followed by analysis on how the present day provisions of Corporations Act were breached in this case, with regards to the directors’ duties. The decision given by the court in this case was also highlighted in the earlier segments. And lastly, the reasons for this decision to be significant and relevant in the present day, was also elucidated. This helped in presenting a comprehensive summary of the quoted case where it was shown that the acts undertaken by Charles Whitehouse, in terms of issuing shares to his sons, for avoiding the control of company going in hands of his ex-wife, was deemed as a breach of section 181(1) of the Corporations Act .

References

Austlii. (2018) Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11; (1987) 162 CLR 285 (7 April 1987). [online] Available from: https://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/1987/11.html?stem=0&synonyms=0&query=title(Whitehouse%20and%20Carlton%20Hotel%20) [Accessed 24/04/18]

Barker, W. (2018) 3002LAW Coporate Law Notes. [online] Available from: https://nexusnotes-media.s3-ap-southeast-2.amazonaws.com/wp-content/uploads/edd/2015/06/Will-Barker-3002LAW-Corporate-Law-Notes23615-copya.pdf [Accessed 24/04/18]

CCH Australia Limited. (2018) Whitehouse & Anor v. Carlton Hotel Pty. Ltd., High Court of Australia, 07 April 1987. [online] Available from: https://iknow.cch.com.au/document/atagUio386332sl10537884/whitehouse-anor-v-carlton-hotel-pty-ltd-high-court-of-australia-07-april-1987 [Accessed 24/04/18]

Corporations Act, 2001 (Cth)

Eclairs Group Ltd and another v JKX Oil and Gas plc and others [2013] EWHC 2631 (Ch); [2014] 1 BCLC 202

Fridman, S. (1998) An Analysis of the Proper Purpose Rule. Bond Law Review, 10(2).

Harlowe’s Nominees Pty. Ltd. v. Woodside (Lakes Entrance) Oil Co. N.L. (1968) 121 C.L.R. 483

High Court of Australia. (2018) Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11. [online] Available from: https://eresources.hcourt.gov.au/showbyHandle/1/9713 [Accessed 24/04/18]

Jade. (2018) Whitehouse v Carlton Hotel Pty Ltd [1987] 162 CLR 285. [online] Available from: https://jade.io/article/67343 [Accessed 24/04/18]

Latimer, P. (2016) Australian Business Law 2016. 35^th ed. Oxford: Oxford University Press.

Mills v Mills (1938) 60 CLR 150

Redmond, P. (2013) Corporations and Financial Markets Law. 6^th ed. Sydney, NSW: Thomson Reuters (Professional) Australia Limited.

Smith Ltd. v. Ampol Petroleum Ltd. (1974) CLC ¶40-101 at p. 27,716; (1974) A.C. 821

Valsan, R. (2016) The exercise of fiduciary powers for mixed purposes: A comment on Eclairs Group Ltd v JKX Oil and Gas plc. [online] Available from: https://www.ecclblog.law.ed.ac.uk/2016/04/08/the-exercise-of-fiduciary-powers-for-mixed-purposes-a-comment-on-eclairs-group-ltd-v-jkx-oil-and-gas-plc/ [Accessed 24/04/18]

Whitehouse v. Carlton Hotel Proprietary Limited (1987) 162 CLR 285