03 November 2011

NSW CA on “legitimate expectation” and relevance of a purchase offer in the context of oppression proceedings

Overview


The decision of the NSW Court of Appeal in Tomanovic v Global Mortgage Equity Corporation Pty Ltd
[2011] NSWCA 104 is a helpful decision on several recurring issues relating to the remedy for oppressive conduct under Part 2F.1 of the Corporations Act. These include: an explanation of the term "legitimate expectation", the relevance of a buy-out offer and the use of the oppression remedy in response to a contractual claim.

The facts


This was not the typical oppression scenario of an exclusion from management after a falling out in a quasi-partnership company. Rather the case concerned two protagonists who each had responsibility for separate aspects of their merged business interests: Mr Sayer operated the finance side of the business and Mr Tomanovic operated the non-finance side of the business.

In late 2004, they agreed to go their separate ways and signed a non-binding heads of agreement under which Mr Tomanovic was to be paid $6 million for his share of the business. Mr Tomanovic voluntarily resigned as a director of the companies running the finance side of the business and ceased to receive a regular income from those businesses. Mr Sayer made substantial payments to Mr Tomanovic, which were to be credited towards the consideration for his shares in the business when the final agreement was executed, but in the meantime were characterised as loans.

The initial heads of agreement were never formalised, and in 2006 a new non-binding heads of agreement was signed by the parties, under which Mr Tomanovic was to be paid only $5 million, and other terms were also less favourable to him. This agreement was never formalised either.

In 2008, Mr Tomanovic sought to be reinstated as a director of the financial companies, but Mr Sayer rebuffed these suggestions.

Mr Sayer successfully sued in the common law division of the Supreme Court of NSW for repayment of the amounts paid to Mr Tomanovic by way of loan. In response, Mr Tomanovic bought this oppression proceeding.

The decision

The NSW CA reversed the first instance decision and found that the cumulative effect of Mr Sayer's conduct was oppressive. It made an order for the purchase of Mr Tomanovic's shares (declining the more drastic remedy of a winding up order). Essentially this was a decision on the facts. However, the Court's comments on legitimate expectations and the role of a reasonable offer to buy-out the plaintiff's shares are of wider interest, as comments of an intermediate appellate court on topics that frequently arise in oppression litigation.


(a)    Legitimate expectation

Campbell JA (who delivered the leading judgment) referred to the decision of the House of Lords in O'Neill v Phillips [1999] 1 WLR 1092, where Lord Hoffmann had regretted his use of the term "legitimate expectation" in earlier cases and had explained that "it should not be allowed to lead a life of its own". Rather, it was a consequence, not a cause, of equitable principles that would make it unfair for one party to exercise legal rights in a corporate context.

Campbell JA also referred to the comments of the members of the NSW Court of Appeal in Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd
[2001] NSWCA 97, all of whom had agreed with Lord Hoffman's comments in O'Neill v Phillips, although Priestley J nevertheless regarded "legitimate expectation" as "a useful label for describing the result of the way in which equitable considerations operate."

Campbell JA expressed his own reluctance to use the language of "legitimate expectation" for the additional reason that it might suggest that the subjective expectations of a party are of importance for the oppression remedy. This would not be consistent with statements of Basten JA in Campbell v Backoffice Investments Pty Ltd [2008] NSWCA 95 (who in turn was quoting from the judgment of Young J in Morgan v 45 Flers Avenue
Pty Ltd) that unfairness for the purpose of s 232 is assessed by reference to whether "objectively in the eyes of a commercial bystander, there has been unfairness, namely conduct that is so unfair that reasonable directors who consider the matter would not have thought the decision fair".

Campbell JA went on to explain that oppression is not confined to the situation where there is a breach of contract or an estoppel or conduct that would justify the winding up of the company.


(b)    The role of a "reasonable offer" in whether oppression is established.

There is a strong theme in the UK cases that it is not oppressive exclude a quasi-partner from management of a company if the "oppressor" has made a reasonable offer for the purchase of the excluded shareholder's shares.

Campbell JA rejected the blanket adoption of this approach in Australia, saying that "the application of s 232 is not properly approached by seeking to create rules containing terms that are not found in the legislation, like 'exclusion from management' and 'reasonable offer'."

Because this case was not a typical case of exclusion from management, this approach was not strictly relevant. Campbell JA nevertheless went on to consider the effect of the "offers" in this case. His Honour was prepared to have regard to the offers in the heads of agreement for this purpose nothwithstanding that they were not contractually binding, applying the approach of Barrett J in Nassar Innovative Precasters Group Pty Ltd [2009] NSWSC 342. Campbell JA was also not prepared to permit departure from the concession in the September 2007 documents that the offer was reasonable in its terms. However, his Honour was not prepared to conclude that there was no oppression. In this regard, the fact that the "offer" in the September 2007 documents was not capable of being accepted to constitute a binding contract was relevant, as was the fact that it was submitted on the basis that there might be queries or comments and at a time when Mr Tomonavoic was overseas.

28 October 2011

Meaning of “rights” of members of a managed investment scheme

In Re Centro Retail Limited and Centro MCS Manager Limited
[2011] NSWSC 1175, Barrett J had to consider the operation of s 601GC(1)
of the Corporations Act, and, in particular whether a proposed change to the constitution of a registered scheme would "adversely affect members' rights".

The change concerned the modification to the constitutional provision governing the price at which new units would be issued, and was an application to the court for judicial advice.

In the earlier case of Premium Income Fund Action Group Inc v Wellington Capital Ltd [2011] FCA 698, (which had also concerned a modification of the constitution by which the issue price of new units would be changed) Gordon J had expressed the opinion that the constitutional provision setting the issue price for new units was the source of a contractual right on the part of each existing member to insist that no new unit be issued except at that price.

Barrett J distinguished the Premium Income Fund case on the basis that Gordon J's opinion was not necessary for the decision. Rather her Honour's decision was made on the narrower basis that the responsible entity had not identified let alone considered the impact of the change on the relevant right, and so had not as a matter of fact been of the state of mind contemplated by the words "reasonably considers that change will not adversely affect members' rights."

Barrett J relied on the line of cases considering the meaning of "rights" in the context of cases challenging a variation of the class rights of shareholders, including: White v Bristol Aeroplane Co Ltd [1953] Ch 65 and John Smith's Tadcaster Brewery Ltd [1953] Ch 308. Both were cases concerning new share issues that diluted the voting power of the complaining preference shareholders and did but not change the voting rights attached to the preference shares. In both cases, the courts drew a distinction between a variation of rights and a variation in the enjoyment of those rights, and held that the share issues fell into the latter category.

Barrett J concluded that it was open to the responsible entity in the case before him to form, on reasonable grounds, the opinion that no "right" of members would be affected by the proposed change to the constitution.

His Honour went on to distinguish the question of whether the power of the responsible entity to modify the constitution under s 601GC(1)(b) was available from the question of whether that power might properly be exercised.

As a power vested in a trustee, it had to be exercised honestly, and in good faith for the benefit of the beneficiaries. However, Barrett J found on the facts that the trustee had, on reasonable grounds, come to the view that the modification would benefit the members as beneficiaries.

12 August 2010

The Prudential principle and reflective losses

The principle established by the Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 is that a shareholder cannot sue to recover damages for themselves in relation to wrongs done to the company. The proper course is to bring a derivative action on behalf of the company. Any recovery will flow through to the shareholders in the form of an increase in the value of their shares. The primary justification for the rule is said to be to avoid double recovery.

Application of this principle arose for consideration in David Ballard v Multiplex Limited [2008] NSWSC 1019 with respect to two heads of damages: liability as a guarantor; and deprivation of income and dividends. Mc Dougall J held that the principle did not apply in the first case but did in the second.

In relation to the guarantee, this was a liability that the shareholder was legally obliged to pay because the company was incapable of meeting its obligations. If the shareholder were to recover judgment for the payments, there would be no question of the defendants being exposed to double liability. Nor would there be any question of the company's assets being depleted by the recovery.

However McDougall J classified the shareholder's claim for loss of income and dividends arising because the company had lost earnings (as a consequence of the actions of the defendants) as a reflective claim. The shareholder submitted that because the company had been wound up and dissolved, there was no prospect that it would sue or recover the underlying losses, so that the policy reasons underlying the Prudential principle did not apply and nor should the principle. The court rejected that submission.

Comment

The Prudential principle was considered by the House of Lords in Johnson v Gore Wood & Co (a firm) [2002] 2 AC 1. In that case, the House of Lords recognised that there were exceptions to the principle, one of which applied where the shareholder's claim was based on lost dividends or a fall in value of the plaintiff's shares, but the company did not have a cause of action. The reason for the exception was that on these unusual facts there is no risk of double recovery. Indeed if the shareholder were unable to pursue their personal action, there would be no recovery at all (direct or indirect). However, the House of Lords qualified this exception by saying that the shareholder can sue to recover their losses assuming they are quantifiable; not too remote; and there is a separate duty owed to the shareholder.

This final requirement, namely that there be a separate duty owed to the shareholder, arguably explains the court's decision in Ballard v Multiplex. Another way of expressing the policy operating in this situation might be to say that the loss to the shareholder is caused by the company's failure/inability to pursue its remedy and not by the defendant's wrongdoing.

In some situations, the effect of this decision might be able to be overcome by reinstatement of the company.

Three recent decisions on the statutory derivative action

The three cases are Wood v Links Golf Tasmania Pty Ltd [2010] FCA 570, Fehring v Brighter Directions Pty Ltd [2010] VSC 287 and Vinciguerra v MG Corrosion Consultants Pty Ltd [2010] FCA 763. Each case adds to the former understanding of the operation of the statutory derivative action. The case that has the greatest potential to invigorate the provision is Wood v Links Golf Tasmania Pty Ltd. However, that potential remains under a cloud as a result of the failure of later cases to refer to it.

Wood v Links Golf Tasmania Pty Ltd - costs

This was a decision regarding costs, following the granting of leave to bring an action on behalf of the company. Under s 242 of the Corporations Act the court is given power to make "any orders it considers appropriate" about costs, including an order requiring indemnification for costs. The possibility that a court would make an order indemnifying the applicant for the costs of bringing an action on the company's behalf was one of the key reasons put forward for replacing the rule in Foss v Harbottle with a statutory derivative action. However, the approach taken by the courts to exercising their power under s 242 has been the reverse, namely to require the applicant to pay the company's costs and indemnify the company against any adverse costs order.

Finkelstein J was referred to this practice, but disagreed with it, referring the court's unconfined discretion and to the passage from the Explanatory Memorandum relating to the intended operation of the court's power under s 242. His Honour concluded that the starting point should be an expectation that the company would bear the costs of the action, but that this could be overridden by the circumstances. As an example of a case where an order for the company to indemnify the applicant might not be appropriate Finkelstein J referred to Fiduciary Limited v Morningstar Research Pty Ltd [2005] NSWSC 442, where the company's claim was only one aspect of a much wider dispute between the parties.

However, there were no countervailing circumstances on the facts. Accordingly, Finkelstein J ordered that the company meet the fair and reasonable costs of running the action, noting that the order could be recalled if, at a later time, the action turned out to be unmeritorious.

Fehring v Brighter Directions Pty Ltd – ex parte interim leave

This case also dealt with a relatively confined point, namely the procedure for applying for leave when a limitation period is about to expire and reasonable notice has not been given to the respondents.

The applicants sought an interim order of leave, subject to various undertakings directed to ensuring that the company would not be prejudiced if leave were granted but later revoked on a contested hearing of the application. They chose this path out of an abundance of caution, rather than filing the statement of claim and seeking leave nunc pro tunc. However, Davies J expressed obiter agreement with the decision of Middleton J in South Johnson Mill Ltd v Dennis & Scales [2007] FCA 1448 that the court had power to grant leave nunc pro tunc.

Vinciguerra v MG Corrosion Consultants Pty Ltd – critera for leave

This is the most recent of the three cases and raised issues regarding a number of the criteria for granting leave.


Probable that the defendant will not itself bring the proceeding

This is the first criterion under s 237 of the Corporations Act, and is usually established by the company's response when the plaintiff gives it notice of the intention to apply for a grant of leave. Here, however, the company's response was equivocal. It stated that it intended to appoint an additional independent director, and that the two independent directors would then investigate the allegations to see whether they warranted the company taking action against the third director. As part of its investigation, the company commissioned its own report, which refuted many of the claims made in a report prepared on behalf of the plaintiff.

On the facts, Gilmour J concluded that this element was satisfied. His Honour found that the first so-called independent director was not in fact independent. This finding undermined the probative value of the company's report, since Gilmour J was not prepared to accept that the company's expert was fully instructed with all relevant material for the purpose of preparing his report.


Good faith

The company put forward a number of factors as alleged bases for a finding of lack of good faith. These included:

  • That the plaintiff left the running of his application to his solicitors;
  • That the plaintiff's purpose was to cause the defendant to pursue a cause of action which, if successful, would increase the defendant's assets and consequently the value of the plaintiff's (30%) shareholding;
  • That the plaintiff had rejected an offer to buy his shares at fair value;
  • That the plaintiff had indicated that one option, after conclusion of derivative action, would be to wind up the company;
  • That after his employment with the company had ceased, he had competed with the company;
  • That the plaintiff declined to have his expert meet with the company's expert; and
  • That the plaintiff was complicit in the matters complained of in the statement of claim.

The court rejected all of these arguments and was satisfied that the plaintiff was acting in good faith. Specifically it found that:

  • Leaving matters to one's solicitors does not distract from good faith;
  • This was not a case where the plaintiff was seeking to further his personal interests other than as a shareholder of the company rather than the interests of the company as a whole. In this regard Gilmour J contrasted the case of Goozee v Graphic World Group Holdings Pty Ltd [2002] NSWSC 640 (at [68]) where the court had found that the applicant had the collateral purpose of seeking to persuade other shareholders to concur in and procure the payment of dividends by the company or the purchase of the applicant's shares in the company;
  • The offer to purchase the plaintiff's shares was unreasonable because it provided for the shares to be purchased at "fair value" as determined by an accountant, without providing any means for the purchase price to compensate the plaintiff for the amounts claimed to have been paid out by the company in breach of the director's duties;
  • There was no reason why a proposal to wind up the company must demonstrate bad faith. The plaintiff was merely trying to realise his interest in the company by the most expedient means available. He may have said some ill-advised things in anger, but the objective circumstances were a better guide to good faith;
  • It is not unlawful of itself to work for a competitor of a former employer, and the evidence did not establish that the plaintiff had attempted to sell the company's customer list and business without board approval while still employed by the company;
  • In the circumstances, the fact that the plaintiff's expert considered that nothing could be gained in him meeting the company's expert did not cast doubt on the plaintiff's good faith; and
  • The matters complained of occurred after the plaintiff had ceased to be a director.

It is in the best interests of the company that the plaintiff be granted leave

Gilmour J referred to previous cases but concluded that there was no fixed test for this criterion. However, his Honour regarded it as significant that none of the company's directors had provided any evidence as to any impact that the pursuit of a derivative action might have on the company's ongoing business.

Gilmour J also rejected the submission that the redress sought by the plaintiff could be achieved by other means, noting that the oppression remedy was not apt in this case, and that s 233 of the Corporations Act does not contemplate an order for payment of damages or compensation by a director to the company for breach of statutory and/or fiduciary duties.

In relation to this criterion, the court also:

  • considered that there was no evidence from the defendant that it would not be in a position to meeting any judgement debt;
  • rejected a submission that the plaintiff had a conflict of interest; and
  • found that the plaintiff had the financial resources to indemnify the defendant against any liability it might incur as a result of any adverse costs orders made in the derivative action. [Note in this regard that the court was acting on the basis that leave would be conditional on the plaintiff undertaking to pay the company's costs and to indemnify it against adverse costs orders.]

Serious question to be tried

Finding this criterion to be satisfied did not require the court to enter into the merits of the proposed action to any great degree or to reach any conclusion as to the strength of the arguments of the parties.

03 December 2009

Director excused from liability for insolvent trading

Summary

McLellan, in the matter of The Stake Man Pty Ltd v Carroll
[2009] FCA 1415 concerned liability for insolvent trading under s 588G of the Corporations Act. The case applies established principle in finding a breach of the insolvent trading provisions. Significantly, however, Goldberg J ultimately relieved the director from liability under s 1317S of the Corporations Act.

Background

The liquidator of the The Stake Man Pty Ltd (in liquidation) ("the company") applied for orders against its sole director, Mr Carroll under sections 588G and 588M of the Corporations Act. These sections allow a liquidator to recover money from a director where the director has breached the statutory provisions relating to insolvent trading.

The company had operated successfully and profitably for many years processing and wholesaling raw timber. In 2004 the company purchased a kiln and related equipment to enable it to dry and machine its own timber rather than being limited to selling green timber.

Unfortunately, the kiln and related equipment did not function as expected. By mid-2005, the continuing kiln problems were having an adverse effect on the company's cashflow, as were the significant losses suffered because of timber becoming unsaleable through damage in the kiln.

In March 2005, the company engaged a new accountant, Mr Bright, who had experience in the timber industry. In June 2005, Mr Bright told Mr Carroll that the business was close to insolvency and, as a result, both Mr Carroll and the other shareholder, (the Cameron Family Trust) advanced substantial funds to the company. Mr Carroll also approached the kiln manufacturer, Brunner-Hildebrand, to invest in the company but nothing came of that proposal.

In February 2006, the funds invested by the shareholders in July 2005 had been exhausted, and Mr Bright consulted an insolvency practitioner, Mr Marchesi. Mr Marchesi advised Mr Carroll that if he believed that the business was viable, he should find an investor or further capital. Following this advice, Mr Carroll engaged a consultant to help him find an investor in the Company potentially to provide further capital. During April and into May, Mr Carroll was also seeking further avenues of finance for all the Company's business.

On 3 May 2006, the Australian Taxation Office advised Mr Carroll that the company owed it $110,000 and that Mr Carroll had until 17 May to review how he was going to reduce that debt over the next 18 months. On 4 May, Mr Carroll spoke to Mr Bright about this conversation and said that the company did not have the funds on hand to pay the tax bill. On 5 May, Mr Bright gave Mr Carroll the contact details of a restructuring specialist, Mr McLellan. Mr Carroll met Mr McLellan on 7 May, and on 10 May Mr Carroll appointed Mr McLellan as voluntary administrator of the company. On 6 June the creditors resolved that the company be wound up and Mr McLellan became the liquidator of the company.

This case concerned the solvency of the company between 31 December 2005 and 10 May 2006.

Findings on sections 588G and 588H

The court referred to and applied the authorities on the meaning of insolvency, including: Sandell v Porter
[1966] HCA 28; (1966) 115 CLR 666 at 670-1, ASIC v Plymin
[2003] VSC 123; (2003) 46 ACSR 126, at [370]-[380], Re United Medical Protection Ltd (prov liq appt)
[2003] NSWSC 1031; (2003) 47 ACSR 705 at 718 and Hall v Poolman
[2007] NSWSC 1330; (2007) 65 ACSR 123 at [267]. In particular, the court adopted the broard general guide laid down in the last case that "a director would be justified in 'expecting solvency' if an asset could be realised to pay accrued and future creditors in full within about 90 days."

The court found that the company was insolvent during the relevant period, and that each of the elements of s 588G was satisfied. The court also found that Mr Carroll had not established either of the defences under sections 588H(2) (reasonable grounds to expect solvency) or 588H(3) (expectation of solvency based on reasonable reliance on a competent and reliable person who was responsible for providing him with information).

In relation to the defence under section 588H(2), the court applied the staged inquiry explained by Palmer J in Hall v Poolman at [269]-[275].

In relation to the defence under section 588H(3), Mr Carroll had argued that he relied on the advice of his accountant Mr Bright. The court found that Mr Bright was engaged by the company as its accountant, but that Mr Bright was not "responsible" for providing adequate information to Mr Carroll about whether the company was solvent in the sense that he was specifically given that role or task. This was notwithstanding that Mr Bright did give advice about whether the company was solvent on various occasions.

Whether Mr Carroll should be excused under sections 1317S or 1318.

These sections give the court power to excuse a director from the contravention of section 588M of the Corporations Act, where the director has acted honestly and, having regard to all the circumstances of the case, he ought fairly to be excused.

In finding that Mr Carroll had acted honestly, the court applied the criteria set out by Palmer J in Hall v Poolman at [325] which adopt the ordinary meaning of that term.

The circumstances of the case leading to the finding that Mr Carroll ought fairly to be excused included that:

  • Mr Carroll was taking advice from Mr Bright during the relevant period;
  • Mr Bright told Mr Carroll on several occasions that he did not believe that the company was insolvent
  • It was reasonable for Mr Carroll to rely on Mr Bright because of his qualifications and experience and, in particular, his experience in the timber industry. (This was notwithstanding the finding that Mr Bright was not a person to who was responsible for providing information on solvency under section 588H(3));
  • Mr Carroll was active throughout the period, taking steps to expand sales and trying to get the kilns working properly;
  • Mr Carroll took advice from Mr Marchesi, an insolvency practitioner, who told him that if he believed the company's business was viable it would be necessary to find an investor or further capital, and Mr Carroll attempted to do this; and
  • When finally confronted with the ultimatum from the Australian Taxation Office on 3 May 2006, Mr Carroll did not procrastinate. He spoke to Mr Bright the next day, who put him in contact with Mr McLellan and Mr Carroll met Mc McLellan three days later.


 

The court accordingly found that Mr Carroll should be excused from his contravention of s 588G(2) and that he should be relieved from a liability to pay the plaintiffs the amount of the loss suffered by creditors of the company throughout the relevant period.

Commentary

This case is significant as a rare instance where a director has been excused from liability under section 1317S. The key factors in the finding that Mr Carroll should be excused were Mr Carroll's reliance on his accountant, Mr Bright, and the fact that Mr Carroll acted promptly on the expert advice he received.

This corresponds with ASIC's draft guidance to directors earlier this month (09-236AD ASIC releases consultation paper outlining proposed guidance to directors on their duty to prevent insolvent trading), that, in seeking to avoid liability for insolvent trading, a director:

  • must keep him or herself informed about the financial affairs of the company and regularly assess the company's solvency;
  • immediately on identifying concerns about the company's viability, should take positive steps to confirm the company's financial position and realistically assess the options available to deal with the company's financial difficulties;
  • should obtain appropriate advice from a suitably qualified person; and
  • should consider and act appropriately on the advice received in a timely manner.


 


 

23 October 2009

Public and private enforcement of disclosure breaches in Australia

In an article published this week in the Journal of Corporate Law Studies, (2009) 9 JCLS 409, I discuss the remedies that are available for continuous disclosure breaches and for false or misleading disclosure. The article examines the enforcement options available to ASIC, ASX, individual litigants and classes. It also looks at the interaction between public and private enforcement. The abstract of the article is as follows:

The law relating to disclosure breaches in Australia has developed incrementally, with the result that there is a range of potentially overlapping remedies, and the Australian Securities and Investments Commission, which is the primary regulator in this context, will often have to bring more than one type of action in order to achieve a desired regulatory outcome. Actions for compensation by investors have received a fillip from reforms to facilitate class actions. However, uncertainty remains as to the extent to which investors are required to establish reliance. Recent growth in enforcement of disclosure breaches has highlighted the need to rationalise the available remedies and, in that process, to consider the desirable balance between compensatory and deterrent remedies, entity and individual liability, and public and private enforcement.

21 October 2009

Diversion of corporate opportunity

Two recent cases on diversion of corporate opportunities highlight:

  • The strictness of the equitable rule; and
  • The importance of the facts in determining whether it has been breached.

The two cases are the decision of the Supreme Court of New South Wales in Manildra Laboratories Ltd v Campbell
[2009] NSWSC 987 and the decision of the English Court of Appeal in O'Donnell v Shanahan
[2009] EWCA Civ 751.

O'Donnell v Shanahan

This case concerned a quasi-partnership company which at the time of these events had three director/shareholders. The key transaction complained of related to the engagement by the company to find a purchaser for a property called Aria House. The initial purchaser pulled out of the transaction at a late stage. In an attempt to salvage the deal, the defendants approached a client of the company, Mr Holleran. He expressed interest in buying a 50% interest in the property, but only on the basis that the defendants would take the other 50% stake. Mr Holleran was also not prepared to pay the £30,000 commission to the company that was part of the original deal.

At first instance, the judge had found that proceeding with this transaction was not a breach of duty by the defendants because there was no suggestion that the company might buy the property and because purchasing property fell outside the scope of the company's business. In reaching this conclusion the judge relied on Aas v Benham [1891] 2 Ch 244. In that case, a partner was free to exploit information he obtained as a partner in the firm where the opportunity did not compete with and was beyond the scope of the business of the partnership.

That decision was reversed on appeal. For Rimer LJ, with whom the other members of the Court of Appeal agreed, the critical fact was that the defendants had obtained the information in the course of acting as directors of the company. The court also distinguished trusts and companies on the one hand from partnerships and held that there was no support for a "scope of business" exception in relation to the application of the "no profit" rule to companies. In the case of a partnership, the extent of a partner's fiduciary duties is determined by the nature of the partnership business. In contrast, the authorities about directors' fiduciary duties "make it clear that any inquiry as to whether the company could, would or might have taken up the opportunity itself is irrelevant; so also, therefore, must be a 'scope of business' inquiry". (para 70).

Manildra Laboratories Ltd v Campbell

This was a case where senior manager who left his employment and established a competing business was found not to have breached his fiduciary duty to his former employer. Mr Campbell was the manager of a flour mill owned by Manildra. He later left that employment, completed the purchase of a flour mill (negotiations for which had commenced while he was an employee of Manildra) and began exporting wheat flour to Indonesia. It was also found that he had approached Manildra's employees to join his new venture while he was still employed by Manildra.

The court formulated Mr Campbell's duties in virtually identical terms to the Court of Appeal in O'Donnell's case. However, it also pointed out the importance of assessing the existence and scope of fiduciary obligations in their context. The court found as follows:

  • It is not necessarily a breach of duty if during the course of employment the defendant prepares to compete with their employer once the employment comes to an end. It will only be a breach if some or all of the steps taken involve a breach of duty, not because, collectively, they can be described as "preparing to compete".
  • Purchasing the flour mill was not a breach of duty because Mr Campbell did not become aware of the possible availability of the mill through any aspect of his duties or responsibilities as an employee of Manildra, and it was not part of his responsibilities to seek out opportunities for Manildra to grow by acquiring competitive businesses.
  • It was not a breach of duty to compete with Manildra in selling flour to Indonesia after his employment ceased. Manildra's capacity to sell flour into that market was limited by its own internal decision to sell the bulk of its flour for ethanol production, and Mr Campbell did not take part in that decision. Mr Campbell had also not diverted or usurped any of Manildra's contracts for the sale of flour in Indonesia. Rather, the court classified Mr Campbell's knowledge of the Indonesian market and potential customers within it as part of his general stock of knowledge or know-how.
  • To the extent that the business plan that Mr Campbell developed embodied knowledge or experience gained by Mr Campbell in the course of his employment, it was not something that was capable of protection in equity. The information, though notionally confidential, fell into the category of information which was capable of being reverse engineered by a person with Mr Campbell's substantial industry experience rather than being a secret formula or process.
  • Although Mr Campbell did approach Manildra's staff while still employed by Manildra, there was no suggestion that Manildra had suffered substantial damage as a result. At most there was an entitlement to some nominal amount of damages for breach of contract.

In light of the court's finding that there was no breach of fiduciary duty and no breach of contract in relation to confidential information, the court also found that there was no contravention of sections 182 or 183 of the Corporations Act.

Comment

It is possible for companies to limit their activities by specifying objects in their constitutions. Query whether if a company did this, it would operate in the same way as regards fiduciary duties as the limitation on the scope of the business of the partnership in Aas v Benham.