Question:
Discuss about the Business Opportunity Fundamental Principles.
The Corporations Act, 2001 (Cth) is a key piece of legislation which is applicable for all the companies in Australia. This act acts as a governing act for the companies in the nation, where each and every aspect of the functioning of the company is ruled by the act. So, from the naming requirement of the company, to its type, from its incorporation to winding up, all such and more provisions are provided under this act (Latimer, 2012). One of the key provisions of this act relates to the director duties covered under Part 2D.1. When the duties laid down under this section are contravened, a case is brought against the directors and they have to face relevant penalties for such breach (Cassidy, 2006).
Hannon v Doyle [2011] NSWSC 10 is one of such cases where a breach of director duties was claimed, and these were established by the court, but as they were not claimed upon, no decision was made on these duty braches. This case revolved around the claims of minority oppression management and the resulting remedies from it (Wright, 2011). This report covers a detail of the different aspects which surrounded this case to specifically highlight the duties breached in this case.
In this case, David Hannon had applied for leave so as to initiate legal action on behalf of APH, i.e., Afro Pacific Holdings Pty Ltd and APC, i.e., Afro Pacific Capital Ltd, where APH held 88% shares, based on section 237 of the Corporations Act. As he had been a former director and the member of these companies, he made a claim pursuant to section 236(2)(a)(i) and section 236(2)(a)(ii) and left the court to decide upon whether the criteria covered under section 237 of this act was fulfilled. It was argued in the matter of serious question by Hannon that unsecured loans were made by APC to Doyle and Turner and some of these loans were interest free. He also claimed that the 15 million options which APC held in TFC, i.e., Transvaal Ferro Chrome Ltd had been “alienated” to the two companies which were owned by the two directors of APC, i.e., by Doyle and Turner, along with the options of the company being sold at a price which was below the market value. He also highlighted that Doyle and Turner were provided with excessive remuneration by APC (Wright, 2011).
A noteworthy point raised by Hannon was that APC had lent some money to Africa Pacific Capital Pty Ltd, herein referred to as Pacific, which was a company formed and owned by Turner and Doyle. Further, Turner and Doyle made Pacific supply certain services to such companies which were the existing clients of APC, and where the services’ procurement was based. There had also been diversion or transfer of assets to Pacific, and these assets were such to which APC had been entitled. Lastly, Hannon highlighted that no dividend had been paid by APC even when there was amiability of profits, where the dividends could have been paid prudentially. And this gave rise to a claim to be made under section 232 of this act for the oppressive conduct of affairs (Wright, 2011).
Under the Corporations Act, the directors of the company have been imparted with certain duties. One of the reasons for imparting these duties on directors is that the minority shareholders of the company are to be protected from oppressive conduct and where such is done, the remedies have to be awarded to the minority shareholders (Paolini, 2014). Under section 181 of this act, the directors have been given the duty to make use of their powers and to undertake their obligation for such a purpose which can be deemed as fair, which is not only undertaken in good faith but also for the best interest of the company (Australasian Legal Information Institute, 2017). A duty has been placed on the directors through section 182 for to not using their position of the company for their own, or for someone else’s benefits, particularly when a detriment is caused to the company (WIPO, 2015).
In case the provisions covered under these sections are contravened, a civil penalty is applied on the breaching party which is covered under section 1317E of the Corporations Act (Federal Register of Legislation, 2017). Based on this section, the court can make a declaration of contravention and this further gives the option to ASIC to either seek pecuniary penalties based on section 1317G or apply for disqualification order based on section 206C. Based on the duty covered under section 181, is the duty to work in the interest of the different stakeholders of the company (ICNL, 2017).
The directors’ duty is enhanced when it comes to minority shareholders as these shareholders do not hold the ability of influencing the company affairs due to their “minority” status. So, the directors need to take special care of the shareholders and ensure that the decisions are taken in a manner which denotes the best interest of not only the company but also of its shareholders. Where a director fails in doing so, not only the statutory obligations are contravened, but also claim can be made against them pursuant to section 232 and 232 of this act (Easton, 2013).
The claims of Hannon were made for granting leave to the member of company based on section 236(2)(a)(i) as per which he was satisfied that:
These points raised by Hannon showed that the directors of the company, i.e., Doyle and Taylor had breached their director duties by not working in the best interest of the company and taking advantage of their position in the company. This is evidence from Doyle and Turner were being overcompensated by the company for the financial year which ended on Feb 29th, 2008 by being paid $1,566,960 and $1,570,234 respectively as consulting fees, which was a sum higher than the reasonable fees in such situations management. Further, these sections were again breached when they benefited their own company, Pacific instead of APC and even caused detriment to APC for benefiting Pacific (Wright, 2011).
The court also analysed the use of business opportunity of the director where the business opportunity of one company was taken by another company which had been formed by such director. This diversion was seen as a breach of the fiduciary duties which were owed by the company and also a breach of the statutory duties. However, as these breaches were not claimed by Hannon, a decision was not made on the contravention of these duties. Instead, the court stated that in the best interest of APH, a claim of breach of director duties should be brought against the directors of the company on behalf of Hannon (Wright, 2011).
Each of the issues which were raised by Hannon was separately considered by the judges in this case. With regards to the point raised for the loan, no contention had been made regarding the loans being made. It was noted by the judges that each of the loans was made to either the director or to the entity which was related to the directors. This was seen as a contravention of the fundamental principles as were stated under the case of Aberdeen Railway Co v Blaikie (1854) 1 Macq HL 461. In this case it had been stated that none of the agent of the company could enter into arrangements where a conflicting interest is present, particularly with the interests of such individuals who could be in conflict. This was necessary so that a contract cannot be claimed as being fair or unfair later on. And so, the judges were satisfied that the claims made under section 237(2)(c) and section 237(2)(d) had been rightly claimed (New South Wales Caselaw, 2011).
When it came to the options claim regrading TFC, the same reasoning was applied by the judges. It was noted by the judges that it was of not relevant if the options were sold at a price which was lower than the market value based on the “no question is allowed to be raised as to the fairness or unfairness” of the particular contract. And so, the claims made based on the two sections were also satisfied. The court also addressed the claims regarding the overcompensation of Doyle and Turner and stated that indeed the consulting fees were higher than the reasonable fees. And on this basis, again the two subsections were satisfied (New South Wales Caselaw, 2011).
In the matter of the last claim regarding the major claims in reference to Pacific, it was noted by the judges that a letterhead was deliberately designed adopted by Pacific which was deceivingly similar to that of APC and there were several misrepresentations made on their website which resulted in an impression being created that APC and Pacific were the same business. Further, Pacific had informed the bankers that the income was received by them from the sale of shares where these shares belong to APC and not to Pacific. Lastly, in this matter, the judges also noted that Pacific and APC operated as one and so they had to be considered as one. Hence, it was concluded by the judges that a serious question indeed had to be tried in this case (New South Wales Caselaw, 2011).
It was held by the judges that a serious question was present in this case regarding the claim of oppression made by Hannon which was related to the non-payment of the dividend. However, it was held that the absence of the dividends could not be deemed as sufficient for fulfilling claims under section 232 and that these claims had to be assessed after considering all of the relevant circumstances.
In the case at hand, there was a lack of dividends which “may properly be made part of the matrix” of the claims made under section 232, in addition to the particular claims regarding the breach of duty. In the end, it was held by the judges that in this case, section 237(2)(a) and section 237(2) (b) had been clearly fulfilled.
And so, it was concluded by the judges that Hannon actually and honestly believed that a good cause of action was present due to the evidence which had been put forward by Hannon, along with the efforts which he had put into for pursing the claims which were made under this section and the findings with regards to the serious question being present. Lastly, they stated that all these claims made by Hannon were indeed in the best interest of the company (New South Wales Caselaw, 2011).
Conclusion
In the preceding sections, the case of Hannon v Doyle was discussed, which acts as a key example for a claim being raised by the member of the company on behalf of the company, when the company fails to do so itself, as a result of the directors being involved in activities which were not in the best interest of the company. This claim saw a leave appeal being made by Hannon where the judges took into consideration the presence of serious question so as to allow this claim. The claims raised by Hannon were allowed in this case due to the questionable loans made by the directors, the alienation of the share options to the companies of the directors, the provisions whereby excessive remuneration was being provided to the directors, the diversion of business of the company to another company which was owned by the directors and by being engaged in oppressive conduct, which satisfied the criteria laid down under the different sections of the Corporations Act. The director duties were breached in this case by Doyle and Taylor on several grounds but owing to the absence of a claim being raised in this regard, a claim of breach of directors’ duty could not be allowed by the court.
References
Australasian Legal Information Institute. (2017). Corporations Act 2001. Retrieved from: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/
Cassidy, J. (2006). Concise Corporations Law (5th ed.). NSW: The Federation Press.
Easton, M. (2013). Don’t forget minority shareholders. [Retrieved from https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/nsw/NSWSC/2009/342.html?context=1;query=Nassar%20v%20Innovative%20Precasters%20Group%20Pty%20Ltd
Federal Register of Legislation. (2017). Corporations Act 2001. Retrieved from: https://www.legislation.gov.au/Details/C2013C00605
ICNL. (2017). Corporations Act 2001. Retrieved from: https://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf
Latimer, P. (2012). Australian Business Law 2012 (31st ed.). Sydney, NSW: CCH Australia Limited.
New South Wales Caselaw. (2011). Hannon v Doyle [2011] NSWSC 10. Retrieved from: https://www.caselaw.nsw.gov.au/decision/54a634483004de94513d82c7
Paolini, A. (2014). Research Handbook on Directors Duties management. Northampton, MA, USA: Edward Elgar.
WIPO. (2015). Corporations Act 2001. Retrieved from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817
Wright, G. (2011). 5.13 Granting of leave to bring derivative proceedings under section 237 of the Corporations Act. Retrieved from: https://www.glenwright.net/files/Granting%20of%20leave%20to%20bring%20proceedings%20under%20the%20Corporations%20Act%202001,%20section%20237.pdf
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