In the essay given, it identifies fiduciary duties of directors as the main issue. There are a few consequences of breaching fiduciary duties. Under general law, a failure to disclose a conflict of interest rendered the transaction voidable at the option of the company. Aside from rescinding the contract, the company can seek to obtain a range of remedies such as an injunction to stop the breach of duty continuing, a constructive trust over assets acquired arising from the breach of duty, an account of profits to strip away gains made by the breach of the duty or equitable compensation. For contraventions of the statutory duties, both ss182 and 183 are civil penalty provisions under s1317E. Therefore, breach of these provisions may result in a declaration of contravention being made by the court and thereafter ASIC may apply for a pecuniary penalty order (s1317G) and/or a disqualification order (s206C) and/or compensation for the company (s1317H). A serious contravention of ss182 or 183 which is dishonest or reckless may result in a criminal liability under s184 (2). This action may be taken by ASIC and/or the Commonwealth Director of Public Prosecutions.

The word ‘fiduciary’ has its roots in the Latin word fiducia, which means trust or confidence. A fiduciary duty is a legal duty to act solely in another party’s interest. Parties owing this duty are called fiduciaries. The individuals to whom they owe a duty to are called principals. Fiduciaries may not profit from their relationship with their principals unless they have the principal’s express informed consent. As fiduciaries, they carry the duty to avoid any conflicts of interest between themselves and their principals or between their principals and the fiduciaries’ other clients. In this essay, fiduciary duties is found between company directors to the company. Directors are clearly fiduciaries to the company as principal as classified by the law. The law of fiduciary relationships is derived from equitable principles and is based upon imposing restrictions on those people in a position of power over others who may be vulnerable to harm through the exercise of that power. Directors owe a fiduciary duty to the company because they control the company and make decisions for the company. The company is therefore vulnerable to their actions and relies on the directors to act properly. It is mainly for such reasons that fiduciaries are subject to higher standards of behavior than other parties acting at arm’s length. At the same time, fiduciary duties are related to the duties of a company director because it is essential in order to improve the company’s performance and profit.

As illustrated in the case on Canberra Residential Developments Pty Ltd v Brendas, it is said that the mere existence of a fiduciary relationship does not define the nature of the duties that arise for three reasons. First it is wrong to assume that the duty owed by a fiduciary attaches to every aspect of the fiduciary’s conduct, however, irrelevant that conduct is to the relationship that is the source of the duty. Second, the scope of the duty is very much dependent upon the facts of the particular case. In most cases the duty will be determined in large part by reference to the nature of the activities of the principal. Third, defining the scope of the duty must be approached with commonsense and with an appreciation of the sort of circumstances in which it has been applied in the past. It should only be applied to a state of affairs which discloses a real conflict of duty and interest and not just some theoretical or rhetorical conflict.

As a fiduciary, there are four central obligations governing corporate behaviour. Firstly is to act in good faith, in the best interest of the company; second is to act for a proper purpose; third is to avoid conflict of interest; and lastly to not make a secret profit. It is a must for directors to avoid breaches of these equitable fiduciary duties, and a breach may result in the director holding property obtained through a breach of duty as a trustee under a constructive trustee on behalf of the company. On the other hand, the director may be liable to pay equitable damages or the company may rescind any contract that was improperly made by the director. In addition to these equitable remedies, directors may also be liable for civil or criminal penalties under the Corporations Act because these equitable duties are largely reproduced in ss181-183. Section 181(1) refers to good faith and in the best interest of the corporation and for a proper purpose, s182(1) refers to the use of position which means that the fiduciaries must not misuse position to do wrong or gain personal benefit and s183(1) is the use of information which means any information obtained must not be misused to cause detriment to the company for personal benefit or pass to others.

ASIC v Adler is the leading modern decision concerning breach of fiduciary duties and will be used as a key case for discussing these duties. The facts of this case is that Adler obtained an unsecured loan from HIH which is a company of which he was both a director and a shareholder, to purchase shares in a company in which he was involved, which the court held was in breach of his statutory duties. Adler also used some of the funds to buy more shares in HIH in the hope of increasing the share price. ASIC alleged that Adler and Williams, the founder and CEO of HIH had breached the statutory equivalent of their fiduciary duties owed to HIH according to ss181-182. The facts comprising the allegations of breach of fiduciary duty included that Adler acted for an improper purpose by attempting to gain an advantage for himself by obtaining the unsecured loan from HIH to purchase shares in a company that he was involved in. Furthermore, Adler acted improperly by seeking to obtain a benefit from the loan by using part of the loan funds to purchase HIH shares on the stock market. At the same time, William sough to use his senior position in HIH in order to benefit from Adler and himself through the increase share price of HIH that would be achieved when Adler used part of the loan funds to purchase HIH shares on the stock market. ASIC also claimed that the HIH Finance Director who is Fodera breached his fiduciary duties by facilitating the transaction.

According to s181, it is the duty to act in good faith and in the company’s best interest. All fiduciaries including directors of the company have an obligation to act in good faith and in the best interest of their principal which is the company in this case. The term ‘in the best interest’ of the company involves a consideration of ‘who’ the company is for the purposes of the law. Directors owe their duties to the company as a whole. Thus, it can be said that fiduciary duty to act in the company’s best interest is a general obligation to act in the interests of its members, at least when the company is solvent. This is also known as the shareholder primacy rule. Ordinarily, shareholders will also benefit through increased profitability, dividends and capital gains in acting in the interest of the company. The stipulation to act in ‘good faith’ is a common element of corporate regulation and is generally taken to refer to an obligation to act honestly. To put it another way is that directors have an obligation to use their powers honestly to benefit the company and not for some other ulterior purpose. For instance, obtaining a private benefit out of it. Acting for an improper purpose that is to gain a private benefit may also constitute a failure to act in good faith in the interests of the company as a whole.

Despite the extensive powers given to directors, for instance, under the replaceable rule in s198A dealing with management, they do not have unlimited power. Therefore, directors must exercise their powers for a proper purpose as part of their fiduciary duties. The proper purpose rule can be traced to the historical principle of fraud on a power as stated in the High Court case of Mills v Mills. The general rule is that directors, as fiduciaries agents of the company, they are only required to exercise their powers only for the benefit of the company. Any use of power by directors that is not undertaken for the benefit of the company is an improper use of that power and therefore resulting in a breach of fiduciary duty. An exercise of power that is designed to secure some private advantage for the director is considered to be an improper purpose because it is outside of the purpose of benefiting the company as illustrated in the case of Mills v Mills. The decision in this case clearly stated that the board may only exercise their powers for the purpose for which those powers exist. However, Mills also made it clear that the mere possibility of an improper purpose does not render the exercise of power improper.

Moreover, the power to issue shares has often created problems where the directors attempt to use that power to manipulate the voting power by issuing more shares to retain control over voting at a member’s meeting. The Whitehouse v Carlton Hotel Pty Ltd case is a classic example of this occurrence. The fact of this case is that the issue of shares by governing director which is the father to sons so that his ex-wife and daughters would not get control of company upon his death. Father fell out with sons, and purported to annul the issue of shares to sons as his ex-wife died before him and there was a realignment of loyalties. The issue of this case is that was the share issue invalid as being for an improper purpose. As a decision of this case, High Court upheld the company’s argument that issue was invalid because it was for an improper purpose. Another case is Gambotto v WCP Ltd. In this case, it suggests that an exercise of power would only be commercially essential, hence providing a director with a defence to an action for breach of their duty if it would prevent the company’s demise.

The duty under s181 requires all directors to exercise their duties and powers in good faith for the best interest of the company and for a proper purpose. Section 181 may be enforced either by the company or by ASIC. The principles that apply under this section are the same as those that apply under fiduciary duties in equity. However, a significant difference between the statutory duty and its fiduciary equivalent lies in the consequences for breach. A breach of this section is a civil penalty provision. The severity of the penalty will depend upon whether there was any intention to deceive or defraud the company, members or creditors. If there is an attempt to be reckless or intentionally dishonest, a separate criminal offence maybe committed under s184(1). A breach of fiduciary duties will allow the company, at general law, to sue the directors for equitable compensation, rescission of contract, an account of profits, a constructive trust or an injunction. T

Some individuals commonly refer fiduciary duties as involving a ‘no conflict rule’ and a ‘no profit rule’. Both rules derive from the overarching duty of loyalty and good faith that all fiduciaries including directors owe. This is also explained in the Grand Enterprises case. Grand Enterprises Pty Ltd v Arium Resources Ltd illustrates that as a fiduciary the interest of a director in relation to a corporation may in some cases be measured in terms of financial profit that a director might stand to earn. In other cases the question of profit may not be in issue, but a director may have a conflict of duties owed to different entities. It is for that reason that the authorities and texts usually draw a distinction between a ‘profit rule’ and a ‘conflict of interest rule’. Nonetheless, there is a tendency to conflate the two rules and for a complainant simply to assert that a fiduciary has a “conflict of interest” without specifying more. The profit rule is called as the ‘conflict of duty and interest’. A director as a fiduciary has an obligation not to allow a conflict between his or her duty to the company and his or her personal interest. Accordingly, a director should not use his or her position as director to derive an unauthorized benefit. The conflict of interest is referred to as a ‘conflict of duty and duty’, and obliges a director to avoid a conflict of the duty owed to the company with a duty owed to some other person. This conflict rule has particular application in circumstances where a person is a director of two companies which have common dealings.

A key and important responsibility of being a director, which arises from fiduciary position that directors occupy, is the need to avoid conflicts of interest. In the case of AberdeenRailway Company v Blaikie Bros, Lord Cranworth LC said that “no one, having fiduciary duty to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect.” This principle and duty to avoid conflicts of interest are very well established across all persons that hold a fiduciary position. It is an inflexible rule of a Court of Equity that a person in a fiduciary position, such as the director of a charitable company, is not, unless otherwise expressly provided, entitled to make a profit. The director is not allowed to put himself or herself in a positive where his or her interest and duty conflict.

Three common situations involving the rule against conflict of interests are the diversion of business opportunities, misappropriation of company property: and secret profits. It is a fundamental rule of equity that fiduciaries may only act for the benefit of their principal. Therefore, directors may not use their position as directors to take away business opportunities that properly belong to the company.

Directors may only use the company’s property for the purpose of benefiting the company, not for a private benefit. It is important to note that although knowledge in not always considered property, the company’s property for the purposes of the conflict rule may include intellectual property and trade secrets. Cook v Deeks is a famous example of misappropriation of company property by directors. The fact of this case is that 3 directors negotiated a contract on behalf of the company to build a railway, then claimed that the contract had been negotiated with them personally and not the company. They arranged for the contract be executed and performed by a new company that they incorporated in whom one of the 4 directors didn’t have an interest. The issue of this case is did the directors breach their fiduciary duty by giving the business opportunity to the new company rather than Toronto Construction? The court held that the directors’ personal interests conflicted with their duties to the company, so they held the contract on trust for the company. The directors acted in breach of their fiduciary duty and the shareholder’s resolution was invalid because the directors were acting under a conflict of interest. The court said that those who assume the complete control of a company’s business must remember that they are not at liberty to sacrifice the interest which they are bound to protect, and, while acting for the company, divert in their own favor business which should properly belong to the company they represent.

The restriction on directors from making secret profits is another aspect of the broad fiduciary duty imposed on company directors under equity. It is permissible for a director to make a profit, but the issue of breach of fiduciary duty often relates to disclosure and this will vary depending on the circumstances of each case. Importantly, the director will be in breach of their fiduciary duty regardless of the impact on the company. The breach arises because the fiduciary allows him- or herself to be put in a position where they are motivated by personal interest rather than purely seeking to benefit the company’s interests. A good example of the realization of a profit that was deemed to be ‘secret’ occurred in Regal (Hastings) Ltd v Gulliver. Lord Russell of this case said that the rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud, or absence of bona fides, or upon such questions or considerations as whether the profit would or should otherwise have gone to the plaintiff, or whether the profiteer was under a duty to obtain the source of the profit for the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however honest and well intentioned, cannot escape the risk of being called to account.

The directors’ fiduciary duty to avoid conflicts of interest, at general law, is reinforced under the Corporations Act. Sections 182 and 183 provide that one must not improperly use their position (s182) or information (s183) obtained because of their position in order to either gain a benefit for themselves or someone else or to cause detriment to the company. These rules prevent directors from keeping advantages that properly belong to the company. Besides that, the equitable obligation to disclose conflicts of interest is reflected in s191(1) of the Corporations Act. It should be noted that s191 does not override equitable duties but stands alongside them: s193. Section 191(1) states that a director of a company who has a material personal interest in a matter that relates to the affair of the company must give the other directors notice of the interest unless subs(2) says otherwise. The first element requires consideration of the board definition of a director in s9 of the Act. This section does not apply to the broader category of ‘officers’. The second element requires identification of what is meant by a ‘material personal interest’. Importantly, s191(2) provides a range of situations where discloser by the director is not required. For example, notice is not required if the director’s interest arises because the director is a member of the company and the interest is held in common with the other members of the company. It is also common for the company’s constitution to make provision for dealing with conflicts of interest by directors. Clearly, the extent to of fiduciary obligations is shaped by the nature of the contractual dealing between the fiduciary and his or her principal which in this case is the director and the company. Section 191(3) requires that the director gives notice of the details of the ‘nature and extend of the interest’ and ‘the relation of the interest to the affairs of the company’. This generally reflects the position under general law principles. Section 192 allows a director to give standing notice of their conflicts to the board, without the need to raise the issue at every board meeting. For public companies, s195 prohibits a director with a material personal interest that requires disclosure from voting on a resolution concerning the transaction or being present during the vote, unless specifically exempted under s195(2). Contravention gives rise to a criminal offence and the offence is one of strict liability s195(1B).

As a conclusion, directors are fiduciaries to the company as principal as classified because they control the company and make decisions for the company. The company is therefore vulnerable to their actions and relies on the directors to act properly. Fiduciary duties are to be followed or else the consequence of breaching fiduciary duties may be severe.

References
Journals
Langford R 2009, The Fiduciary Nature of the Bona Fide and Proper Purposes Duties of Company Directors, 31 Australian Bar Review pp326.

Sealy L 2006, Directors’ Fiduciary Duties, 27 Australian Bar Review pp192.

Hruby 2008, Private Equity Birds: Managing Conflicts of Interest When Public Companies Go Private, 26 Company and Securities Law Journal pp304.

Ong D 1999, Breach of Fiduciary Duty: The Alternative Remedies, 11 Bond Law Review pp336.

Kirby J 2004, The History and Development of the Conflict and Profit Rules in Corporate Law – A Review, 22 Company and Securities Law Journal pp259.

Sivehla J 2006, Directors’ Fiduciary Duties, 27 Australian Bar Review pp192.

Frankel T, The New Palgrave Dictionary of Economics and the Law, Definition of "fiduciary duties", Vol. 2 p127-128.

Textbooks
Harris J, Hargovan A, Adams M 2013, Austrlian Corporate Law 4th Edition, Lexis Nexis Australia.

Websites https://www.law.cornell.edu/wex/fiduciary_duty, accessed on 19/6/2015

http://www.supremecourt.wa.gov.au/_files/The%20Role%20of%20Status%20in%20the%20Law%20of%20Obligations%20Edelman%20J%20July%202013.pdf, accessed on 20/6/2015