Fiduciary and Company

1 January 2017

Fiduciary Duty of Directors According to the general law and the Corporations Act ss181 -184, as fiduciaries, the directors must have the fairness, loyalty and good faith when they implement the discretions and powers entitled to them. They cannot use their position of trust to benefit themselves at the expenses of the business without the company’s consent and full knowledge. In other words, we can say since the directors are acting on behalf of their company, they owe the duties of loyalty and good faith due to the fiduciary relationship with the companies.

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In addition, refer to the Corporation Act ss180, and the case of Percival v Wright 1902, the directors owed duties to the company but not shareholders individually. On the other hand, in depth, the fiduciary obligations of the directors can be divided into four aspects: 1. Directors have the duty to act in good faith for the interests of the company This duty arises from the general law- especially from principles of fiduciary law and ss181 and 184 of the Corporations Act. Under this duty, the directors should practice their bona fide in the way that they think is the interests of the company. Re Smith & Fawcett Ltd.

This means the directors should give suitable considerations to the interests of the company as a whole in their decisions making process. However, there is difficulty in identifying which stakeholders should be considered to be part of “the company” for the purpose of this duty since these stakeholders concerned may include the company members, different classes of shareholders, creditors, employees and communities etc. For the company member, refer to Darvall v North Sydney Brick & Tile Co Ltd (1988), the directors should have the duty to think of the interests of both the company as a commercial entity and also the company members.

For different classes of shareholders, refer to the law case: Mills v Mills (1938), the directors should make the decision which was fair as among the different classes of shareholders. For the creditors of company, according to the case Walker v Wimborne (1976), the judicial opinion has held that under certain circumstances (the company is insolvent or nearing insolvency) it is the obligations for the directors, in releasing their duties to their own companies, but instead to consider the interests of the companies’ creditors.

While in Parke v Daily news (1962) UK, it was held that it is irrelevant for the directors to consider the interests of the employees before the interests of the company as whole. Only in the case that the payments to employees and also the charitable and political donations under the situation that the company is viable and there is no signs showing the company is going to cease trading, then the payments may be beneficial to the company. 2. Directors have the duty use powers for proper purposes This duty arises under the fiduciary law as part of the general law and ss181 and 184 of the Corporations Act.

Under this duty, the directors should manage a company and exercise the powers according to the company’s internal rules and the Corporations Act: like s198A listing the powers of directors and s198C listing powers of managing directors. In order to identify if the directors has fulfilled the duty, we will compare the legal purpose and the actual purpose of the directors’ power. The legal purpose refers to the intended purpose of the power that normally found in the internal rules of the company.

These rules usually confine the circumstances in which the power is to be exercised. In the case that there are absence of any guidance from the internal rules, the type of company, its internal structure and activities will be used a foundation to determine the legal purpose. While for the actual purpose, it is saying the actual reason or purpose for exercising the power. This related to what the directors subjectively believe at the time they exercised the power. Also, honest or well intended actions by directors do not equal to the proper use of their power.

For example, in Howard Smith Ltd v Ampol petroleum Ltd (1974) AC 821, Lord Wilberforce held that if the predominate purpose of the director to allot the shares was to defeat a hostile takeover or to dilute the holdings of a particular shareholder, the act would be invalid. Same principal could be found in the case Hogg v Cramphorn Ltd (1967) Ch 254, in which the Court held that directors who dilute the value of the stock in order to prevent a hostile takeover are breaching their fiduciary duty to the company. 3. Directors have the duty to retain discretions

According to the general law, there are two duties on the directors in respect of their discretions. The first one is the duty to exercise an active discretion which states that the directors should not listen to the suggestion of another person without own consideration. The second one is the duty to retain their discretions which state that directors cannot delegate their responsibilities or shackle the implementation of directions without the authority. In simply, shareholders have the right to contract on the way they can vote in the future.

However, same case cannot apply on directors even there is no personal benefit involved. In Thorby v Goldberg (1964) HCA, it was held that if the directors negotiated a contract on behalf of a company, they should bona fide consider it in the interests of the company as a whole that whether the transaction should be gone forward. In Re Country Pallative Loan & Discount Co; Cartmell’s Case (1874) Uk, it was held that the directors should not delegate its discretion to other persons without the appropriate authority assigned.

In addition, the scope of this duty may be limited by the company’s rules which may permit the directors to appoint agents, delegate functions to a managing directors or delegate an issue to a committee etc. 4. Directors have the duty to avoid conflict of interests The duty arises from the general law, as part of fiduciary law and ss182 -184 of Corporation Act. Under this duty, the directors must act in the way that they do not put themselves in a position where the possibility of conflict or bias in their actions would be emerged.

The issues of conflict of interest may emerge in the circumstances including: a. directors enter to a contract with a company he or she is appointed as director b. directors derived profit from their post c. directors receive a bribe or secret commission in exchange for securing a certain course of action d. directors misuse the company funds e. directors take up opportunities which belong to the company f. directors use the confidential company information for their own benefit Many cases have mentioned the duty of directors concern with the conflict of interest.

For example, in Aberdeen Railway Co v Blaikie Brothers (1854), it was held that if a director had an interest in a company transaction, the transaction is voidable if the company has the intention and any profit get by the director is subjected to recover by the company. In Regal (Hastings) Ltd v Gulliver (1942), The House of Lords held that a director is in breach of his duties if he takes advantage of an opportunity that the company would have the interest in but was not able to get any advantage from the opportunity .

Hence, it is the duty of directors to evade any possibility of a conflict of interest and should impose enough disclosure of their actions according to the requirements of both general law and Corporations Act. Fiduciary Duty of Promoters There is no accepted definition of the term promoter but according to the case Erlanger v New Sombrero Phosphate Company (1878), promoters are the persons who use their hand to create and mould out a company.

They are responsible to decide the starting time of the business’ existence as well as the outline of the operation model of the business, hence, promoter is generally defined as a person or an entity that takes active steps in the formation, organization or financing of a corporation. However, since the promoter is such a crucial person in the creation of the company, according to the Australian general law, promoter is in a fiduciary relationship with the business. In other words, once a person is identified as promoter of a company, he or she automatically has the fiduciary duties to the business.

In depth, promoter has the obligation to avoid any actions that would create conflict with the interests of those to whom his obligations extend to and to do those things that would best serve their interests. Therefore, the fiduciary duties of the promoter lie in following aspects: 1. The promoter has the duty not to make any secret profit at the cost of the company. 2. The promoter has the duty to provide full explanation to the company for the benefit for any property he would purchase with the intention of selling the property to Company for a profit afterwards. . The promoter has the duty not to swindle the company by actively hiding any affairs relating to the company. 4. The promoter has the duty not to hide his personal interests through a nominee. Among the above duties, the most important one is the duty not to make a secret profit at the expense of the Company. Secret profit refers to enter into a transaction on the directors own behalf and afterwards, selling the related property to the company at a profit, without making disclosure of the profit to the company concerned.

Refer to the case of Fairview Schools Sdn. Bhd v Indrani a/p Rajaratnam (No1)(1998), it was held that without the consent and knowledge of the company, the promote is not allowed to make any secret profit beyond the promotion of the company. Therefore, the promoters need to disclose to the company with any interest they have in any transaction that are proposed to be involved by the company. In other words, the bottom-line requirement from promoters is that they must not be opaque in their dealings with the Company.

On the other hand, if the promoter is found to be breaching the fiduciary duties, three remedies can be adopted: 1. Rescission: In the case that a Company has entered into a Contract with the promoter and it is later discovered there had been no enough disclosure, the Company has the right to rescind the contract. Like in the case Erlanger v New Sombrero Phosphate Company (1878), the court held that as there had been no adequate disclosure of the conditions of the sale of the land, so the Company was entitled to rescind the contract. 2.

Recovery of the Secret Profit: A company is entitled to recover the profit from promoters if they breach their duties. Like in the case of Gluckstein v Barnes, the court held that the company has the right to recover the secret profit concerned with the redemption of the company’s debentures from the promoters since there were in breach of their duties as promoters. 3. Claim the damages for breach of fiduciary duties: The promoter is exposed to pay the damage to the company for breaching their fiduciary duties. In the case of RE Leeds & Hanley Theatres of Varieties Ltd. 1902), the court held that the promoters had fraudulently omitted to disclose the profit made by them on the selling of the property to the company, therefore, the promoters needed to pay damages to the company which was equivalent to the amount of profit made by the promoters. Fiduciary Duties Between Partners Generally, a partnership involves people carrying on a common business for profit. Since the partners have mutual confidence in combining efforts for the success of the partnership, the partners owe fiduciary duties to one another in the matters related to the partnership.

This kind of relationship, similar to the fiduciary obligations of directors, is one of trust loyalty and confidence. These duties are regarded to impose upon the partners the standard to act for the common benefit of all partners in all transactions relating to the business. Refer to the case Meinhard v Salmon, the New York Courts of Appeal held that partners in a business owe fiduciary obligations to each other where business chances arises during the course of the partnership.

In details, the fiduciary duties between partners include following aspects: 1. Partners have the duties on full disclosure Partners are required to disclose all the information relating to the business to other partners. With this fiduciary relation, if a partner gets any benefits from the partnership, he or she must share them with other partners according to the terms of partnership agreement. The disclosure includes different aspects like contracts made, contributions made, the availability of business opportunity etc.

This disclosure requirement is especially crucial in the case that the business may be sold to one of the partners or to an outsider. 2. Partners have the duties to avoid conflict of interest As fiduciaries, partners must not put themselves in a situation there will be any conflict of interest between the business and themselves. They also cannot put their own interest s before those of the business. Moreover, they cannot perform actions that are not in the best interests of the business. 3.

Partners have the duty to avoid conflict of duty As fiduciaries, partner cannot have conflicting fiduciary duties between the business and themselves. In other words, they must not put themselves in a situation where there will be any conflict between their duty as partners and their personal duty. 4. Partners have the duty to maintain good faith Partners have the obligation to act in good faith to other partners and the business. This obligation continues throughout the life of the partnership.

Even when relations between partners are in tension, the partners still need to implement the standard of good faith at the highest level in all transactions relating to the partnership business. 5. Partners have to duty to avoid taking advantage of being a fiduciary As fiduciaries, partners must not take advantage of their position to make any personal profit. Opportunities for partners may emerge because of their position and it is their obligation for them to make known to all partners any profit they receive as a result of being in the position they are in.

They must account for any private profits made without the consent of the other partners. Actually, we can say how far are the fiduciaries duty owed between partners is not limitless. The duty changes depending on different environment as well as what have been stated in the partnership agreement. Conclusion From the above elaboration, it is not difficult to observe that the fiduciary obligation in the Australian law is similar to the general body of elementary fiduciary law found in English Common law.

No matter in which kind of relationship mentioned above, “loyalty” & “prohibition against self-dealing” can be regarded as the core components of the duties. This is the reason why a duty is only accepted to be a fiduciary duty if it is a duty of loyalty. Therefore, in Australia, fiduciary duties do not occur in many relationships but only in certain ones that require one party to have entrusted power over another at the aim that the services are to be completed including the three kinds of relationship illustrated above.

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