Analysis Of The Duties Breached By A Director Under Corporations Act 2001: Kokotovich Constructions Pty Ltd & Ors V Wallington Case

Facts of the Case

Evaluate the facts of this care and analyse the duties breached by the director as given under the Corporations Act 2001.

Directors are required to comply with a number of duties given under the Corporations Act 2001 (Cth) in order to ensure that they exercise their powers and take business decisions for the interest of the company. This report will evaluate Kokotovich Constructions Pty Ltd & Ors v Wallington (1995) 13 ACLC 1113 case in which the breach of fiduciary duties of a director was discussed regarding issues of shares allotment in the corporation. In this present case, an appeal was made against the order given by Honourable Judge Young in Wallington v Kokotovich Constructions Pty Ltd (1993) 11 ACLC 1207 case. The Court of Appeal rejected the appeal by stating that the judgement given by Young J prevailed in this matter. The Court of Appeal evaluated all the evidence and information available in the case to provide the judgement made by the Supreme Court of New South Wales is correct in this case (Wolters Kluwer, 2018). This report will evaluate the facts of this care and analyse the duties breached by the director as given under the Corporations Act 2001 (Cth). This report will critically examine the judgement of the court and evaluate the relevance or impact of the case.

In the present case, an appeal was made on the judgement given by Young J after evaluating the four issues given in the case. While given their judgement, the Court of Appeal evaluated these four issues as well which concerns with Corporations Law and duties of directors. In this case, an intimate relationship exists between Mr Nikola Kokotovich and Mrs Elaine Wallington. Young J held in his judgement that the relationship between the parties plays a significant role in his judgement. He provided that the relationship between parties is both an emotional and business association. Both parties were married, but they divorced afterwards. Mrs Wallington left her job at the railway authority to work for Mr Kokotovich where she performs work such as preparing of quotations, writing books and performing various other administrative tasks (Bose, 2016). Mr Kokotovich decided to incorporate his business based on which two corporations were formed which include N. K. Plant Hire Pty Limited, which had been liquidated and Kokotovich Constructions Pty Limited. Mr Kokotovich testified that he always wanted to keep the business of Kokotovich Constructions under his sole direction, however, Mr Robert Bullivant, the accountant, provided that he needs a second shareholder to incorporate his business (Wolters Kluwer, 2018). He advised Mr Kokotovich that Mrs Wallington would have been such person. Based on the advice of the accountant, Mr Kokotovich and Mrs Wallington both were issued shares of “A” category, and Mrs Wallington contributed to work for Mr Kokotovich. Mr Kokotovich asked Mrs Wallington on 12^th May 1992 to go to the firm of solicitors along with the seal of the company, but she refused.

Infringement of Directors’ Duties

On 13^th May 1992, a letter for the extraordinary general meeting was received by Mrs Wallington which was to be held on 9^th June 1992 for removing her as secretary and director of the corporation. She was removed as a director in the meeting and on 10^th December 1992, Mr Kokotovich held a meeting for issuing 9,795 one dollar shares of the company. One of the main issues of this case is the validity of the issuing of the shares by Mr Kokotovich. Mrs Wallington filed a suit in Equity Division of the Supreme Court of NSW by claiming that the allotment of shares on 10^th December 1992 was invalid, failure to comply with section 194 of the Corporations Law and claim for an order of wound up of the corporation. While deciding the judgement for the appeal, Kirby J evaluated the procedure followed by Young J while providing his decision. The judgement given by primary judge held that although Mrs Wallington did not receive dividend or any rights relating to her shares however she is still a shareholder of the company of “A” category (Sharar, 2010). Young J held that there is a “moral relationship” between the parties, and she has moral claims because she owns the shares of the company. The judgement was given that Mr Kokotovich has breached his fiduciary duties towards the company by issuing shares for personal interest. Furthermore, Young J held that the corporation should be wound up.

According to the Corporations Act 2001 (Cth), it is important that the directors of a company must comply with their fiduciary duties which are imposed by the Act. Fiduciary duties focus on the legal relationship between director and the corporation which are based on notions of good faith and trust, and they cannot be compromised by the directors while performing their day-to-day duties (Queensland Government, 2016). The fiduciary duties of directors as given by the Corporations Act include:

• Duty to act in good faith
• Ensure care and diligence
• Avoid improper use of position
• Avoid improper use of information
• Disclose certain interests

Section 180 of the Act provides provisions regarding care and diligence which are required to be followed by directors. Directors must discharge their duties and exercise their powers with care and diligence unless the court can impose a penalty. As per section 181, directors must ensure that they discharge their duties towards the corporation in good faith while considering the best interest of the company and for a proper purpose (Austlii, 2018a). Section 182 provides that directors must not improperly use their position for gaining a personal advantage or causing detriment to the organisation (Austlii, 2018b). These duties create a civil obligation of the directors for which the court can penalise the defaulting director.

Analysis of the decision of the Court

In the case of Kokotovich Constructions Pty Ltd & Ors v Wallington, Mr Kokotovich was held liable for breaching his fiduciary duties towards the corporation. Kirby J held that the judgement given by Young J prevailed in this case because Mr Kokotovich issued the shares of the company for personal gain. If the case were judged based on the principles of the Corporations Act 2001 (Cth), then Mr Kokotovich would have held liable for breaching section 181 and 182 of the Act. By issuing shares to his brother and then to another company in which he had substantial interest did not consider as an act of good faith. Although Kirby J held that the matter of financial decisions are a responsibility of directors and the court cannot interfere in their judgement, however, Kirby J held that the decision was not bona fide, and the court is required to forsake its responsibility to uphold the law in the particular situation (Wolters Kluwer, 2018). Therefore, Mr Kokotovich had breached section 181 and 182 by not acting in good faith and improperly using his position for personal gain.

The first issue before the court was the beneficial ownership of the shares of “A” category. Young J used the principle of “moral relationship” between the parties for describing the relationship between the parties. Kirby J dismissed the claim made by the defendants by stating that they did not provide any evidence which provides that an appropriate legal ground has not been established. Kirby J argued that the judgement of Young J was based on two factors which include that the evidence of Mrs Willington was less inconsistent and more reliable than Mr Kokotovich and the evidence which supports the beneficial interest of Mrs Wallington in the shares. Young J reached a conclusion based on these two factors and Kirby J held that his judgement must stand in this case. The second issue was relating to validation of the issue of shares under section 194 of Corporations Law. It was held that even though no dividend was issued and no voting right was attached to the shares of Mrs Wallington, however, there was no issue regarding the validity of the legitimacy of the shares allotment. Kirby J rejected the claim regarding the invalidity of shares. Another issue was the validity of 1992 share allotment in which it was held that there are no fiduciary duties are imposed on the directors by the Memorandum of Association of the corporation. The key question before the court was whether the share allotment was in good faith and whether the purpose for which powers were exercised is correct.

Kirby J provided that although the court should not interfere between the decision of a company to raise finance, however, this decision was clearly not take in good faith based on which the court is required to uphold the law. It was also held the allotment of the share was not for a “substantial object” and the allotment could not have made “but for” the purpose of conflicting and manipulating the voting rights of Mrs Wallington. Furthermore, Kirby J disagreed that Mr Kokotovich is responsible for managing the daily operations of the corporation, and he had a wide range of powers, but he cannot vote in an ordinary general meeting. He was the manager however when it comes to specific issues, Kokotovich and Wallington have equal voices which confirm the moral partnership between the parties. Therefore, the allocation was set aside by Kirby J by stating that Mr Kokotovich breached his fiduciary duties by allocating shares for an improper purpose in order to devalue the shares of Mrs Wallington (Wolters Kluwer, 2018). Kirby J also rejected the appeal of the appellants which provided that it is unjust to wound by a successfully running company. He stated that the judgement was given by Young J because the real risk is further oppression and limited nature of company’s present activities which is limited to one piece of land. Based on which Kirby J rejected the appeal, and Priestley JA and Handley JA agreed with his judgement.

This case focuses on the fiduciary duties which are required to be fulfilled by the directors of a company. Directors have powers to make business decisions for a company, therefore, they are required to ensure that they exercise their power properly and take business decisions based on good faith. In this case, a number of concerns are raised in the case relating to the application of the Corporations law and fiduciary duties of a director. Firstly, the case proves that validity of shares is not affected by the fact whether a shareholder has voting rights or whether the dividend is given or not. The case also shows how directors can misuse their powers for gaining personal interest. Therefore, many fiduciary duties are given to the directors under the Corporations Act which are required to comply by them for ensuring that they properly use their powers and making a business decision for company’s interest (Tomasic, Bottomley and McQueen, 2002). This case shows that misusing of directors powers for achieving personal interest is wrong and the court can wound up the company in case directors failed to adhere to their fiduciary duties.

Conclusion

In conclusion, directors have to fulfil their fiduciary duties while taking business decisions for ensuring that they make business decisions for the interest of the corporation rather than personal interest. In Kokotovich Constructions Pty Ltd & Ors v Wallington case, the appeal made by the appellants against the judgement of Young J was rejected by Kirby J. It was held that the shares held by Mrs Wallington are valid and Mr Kokotovich breached his fiduciary duties by misusing his powers and not taking decisions in good faith. It was held that the decision of allocation of shares by Mr Kokotovich was for devaluing the shares of Mrs Wallington based on which he breached his fiduciary duties. Furthermore, Kirby J agreed with the judgement of wound up of the company because according to him the real risk was further oppression and the operations of the business were limited. This case focuses on the importance of directors’ fiduciary duties which ensure that they make business decisions for the interest of the corporation rather than fulfil personal interest.

References

Austlii. (2018a) CORPORATIONS ACT 2001 – SECT 181 Good faith–civil obligations. [Online] Austlii. Available at: https://www8.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ca2001172/s181.html [Accessed on 18^th May 2018].

Austlii. (2018b) CORPORATIONS ACT 2001 – SECT 182 Use of position–civil obligations. [Online] Austlii. Available at: https://www8.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ca2001172/s182.html [Accessed on 18^th May 2018].

Bose, P.K. (2016) Corporate Governance & Plight of Minority Shareholders: An Attempt to Reconcile. Journal of Advances in Social Science and Humanities, 2(05).

Corporations Act 2001 (Cth)

Kokotovich Constructions Pty Ltd & Ors v Wallington (1995) 13 ACLC 1113

Queensland Government. (2016) Corporations Act 2001 (Cth) (the Corporations Act). [Online] Queensland Government. Available at: https://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/welcome-aboard/member-duties/corp-act-2001-c.aspx [Accessed on 18^th May 2018].

Sharar, Z. (2010) Minority Shareholders’ Remedies In Public Shareholding Companies: Comparing The State of Qatar and Australia. [PDF] Austlii. Retrieved from https://www.austlii.edu.au/au/journals/ElderLRev/2010/2.pdf [Accessed on 18^th May 2018].

Tomasic, R., Bottomley, S. and McQueen, R. (2002) Corporations law in Australia. Annandale: Federation Press.

Wallington v Kokotovich Constructions Pty Ltd (1993) 11 ACLC 1207

Wolters Kluwer. (2018) KOKOTOVICH CONSTRUCTIONS PTY LTD & ORS v WALLINGTON, Supreme Court of New South Wales, Court of Appeal, 14 July 1995. [Online] Wolters Kluwer. Available at: https://iknow.cch.com.au/document/atagUio382129sl10487613/kokotovich-constructions-pty-ltd-ors-v-wallington-supreme-court-of-new-south-wales-court-of-appeal-14-july-1995 [Accessed on 18^th May 2018].