Conflict rule

 Directors and other officers must avoid putting themselves in a position where
they will be tempted to prefer their own interests (or someone else’s interests) to
those of the company.
 The rule also applies where the director has a conflict between the duty owed to
the company and a duty owed to another party.
 Early cases: Director can breach even if act honestly and do not stand to make a
profit.
 If no profit made, then no account of profits available as remedy.
 Injunction available to stop director acting in conflicting manner or contract
entered into but not yet performed could be avoided by company. Company
can seek equitable compensation if suffers loss.
Aberdeen Railway v Blaikie Bros [1854]
P entered into contract with a Held: contract was fair, however, D was
partnership for supply of seats  in a conflict of interest. Contract can be
company seek to avoid contract as one avoided
director was partner in the partnership
 It is a rule of universal application that no-one having such duties to discharge
shall be allowed to enter into engagements in which he has or can have a
personal interest conflicting or which may possibly conflict with the interests
of those whom he is bound to protect. So strictly is this principle adhered to
that no question is allowed to be raised as to the fairness or unfairness of a
contract so entered into.
 Director had duty to make the best bargain he could for the benefit of the
company (buy the chairs at the best possible price). Personal interest as a
partner would lead him to fix the higher possible price.
 Cannot avoid liability by claiming did not make profit, their company did not
suffer loss or made a gain or that contract was fair.
 Intention/honesty cannot protect director. Court won’t assess merits of conduct -
equity is concerned with discouraging all breaches of fiduciary duty, not just
those that turn out poorly for company.
 More recent use of the “no conflicts” limb of the rule:
 It is the pursuit of a conflict rather than the mere existence of the conflict that
gives rise to a breach.
 EG: actual execution of a contract. So, if Aberdeen Railway had never entered
into the contract with the partnership, Mr B’s conflict of interest would only
have remained hypothetical and would not have given rise to a breach.
 Therefore, it is not ANY possible conflict, which results in the general law
applying.
 Professor Ford: strict formulation of the rule could be taken to mean that a
director of a company should not ever hold shares in any other company or
occupy board positions in competing companies or hold a board position as a
nominee director.
 Courts take practical approach: Lord Upjohn in Boardman v Phipps examined
‘possibly may conflict’. Held it means reasonable man looking at relevant facts
and circumstances of the particular case would think there was a real sensible
possibility of conflict, not that you could imagine some situation arising which
might, in some conceivable possibility in events not contemplated as real sensible
possibilities by any reasonable person, result in a conflict.
SO: a fiduciary will be in breach of the no conflict rule if there is a real and sensible
possibility of conflict between the fiduciary’s personal interest and their duty to
the beneficiary

Directors on the board of competing companies

 The traditional approach to the rule would suggest no scope for director to hold
position on competing board.
 More recent interpretation - rule not absolute.
 Executive Directors: contract of employment may provide services will be
devoted solely to company.
 Non-Executive Directors: usually can be director of competing companies if:
 No confidential information divulged
 Not contra constitution
 Not contra express/implied agreement
 Bell v Lever Bros (1932): non-executive director cannot be prevented from acting
as director of competing company. But, cannot divulge confidential information
obtained by them in their role as director.
 See also Markwell Bros Pty Ltd v CPN Diesels (Qld) (1983) and Riteway
Express Pty Ltd v Clayton (1987). (they are just other cases supporting and
following Bell v Lever)
On the D had two capacity in Held: She was non-executive director
Street v company, editor and director- in interim. Obligations as executive
Cott > resigned as director, and director ended. Did not disclose
[1990] then resigned as editor-> confidential information. Didn’t act
commenced at competing contra constitution. No breach of
business between the two express or implied agreement.
 Fitzsimmons the director did not disclose
v R (1997) his conflicting personal
interest and remained actively
participating in making
business decisions.
Held: director liable. Directors may
be required to both disclosure of
personal interest AND withdrawal
from making decisions

 Related party transactions - Ch 2E (mandatory for public companies). Purpose - s

207:
 Protect interests of public company members as a whole by requiring
approval for giving financial benefits to related parties that could endanger
interests of the members as a whole.
 S 208 (main provision):
 For public company or entity that public company controls to give financial
benefit to related party, shareholders must have approved it, in accordance
with procedure set out in ss 217-227, or the benefit must fall within one of
the exceptions in ss 210-216.
 S 228: list of “related parties”. Includes entities that control a public company,
public company directors, a spouse or de facto spouse of directors, parent or
child…Does not include a subsidiary of a public company nor (generally) directors
of subsidiaries/sibling companies.
 Financial Benefit (s 229):
 Broad interpretation. Economic substance of the conduct prevails over the
legal form.
 Consideration that may be given for the benefit of a related party is to be
disregarded if inadequate, but adequacy may be relevant to whether the
transaction is arm’s length (which would make the transaction an exemption
to the prohibition).
 Benefit: direct/indirect, formal/informal, involve/not involve payment of
money.
 S 229(3): Examples of giving financial benefit (i.e. giving/providing the related
party with finance or property, buying an asset from or selling asset to related
party, leasing asset to related party).

 Exempt Transactions: No requirement for shareholder approval to give financial

benefit if one of the exceptions listed in ss210-216 applies, including:
 Arm’s length transactions (trading without pressure out of personal interest,
i.e. need to trade anyway), reasonable remuneration given, reasonable
 indemnities etc for legal costs/liabilities, financial benefits up to $5,000,
financial benefit to closely-held subsidiaries where 100% common ownership
of voting shares, benefits to members in capacity as members that are not
discriminatory and benefits under court order.
 If no exceptions apply, need member approval and the benefit given must be
given within 15 months of passing relevant resolution.
 S 224: related parties and associates generally cannot vote on the resolution.
 Disclosure made in notice convening meeting – explanatory statement must set
out financial benefit and each director’s recommendation (or reason for no
recommendation) s219. must also disclose interest director has in outcome of
resolution.
 If do not meet above, contravene s208. Does not invalidate contract/transaction
and entity not guilty of offence but may be breach for those involved in
transaction and subject to civil penalty.
 Compliance with Ch 2E does not relieve person of duty imposed by CA, general
law or company constitution.
 ASIC v Adler (e.g. of Ch 2E in operation):
 HIHC gives financial benefit of $10m to PEE.
 Not arm’s length and payment made without shareholder approval.
 Use of funds was not in HIHC interests and was in interests of Mr A and
Adler Corp ($4m used to buy shares in HIH to prop us its shares and rest
used to by hi-tech assets at cost price after crash in tech stocks with rest in
loans to entities associated to Mr A).
 $10m = giving benefit to PEE, Mr A and Adler Corp for purpose of s 229.
 None of the exceptions applied.
 So, HIH and HIHC contravened s 208.
 Several people (Mr A included) were held to be “involved” in the
contravention for purpose of s 79 and in breach of s 209(2).
No profit rule
 If director profits from using company information or their position, they are
accountable to company for profits.
 Strict Application: Keech v Sandford (1726) 25 ER 223:
 Fiduciary’s duty to account for profits does not depend on fraud or detriment
to beneficiary but arises from mere fact of profit having been made.
 In this case, trustee could not take up lease for own benefit when lessor
refused to renew lease for the trust.
 Rationale: if trustee were able to take up an opportunity in this case, might
discourage trustee from doing best to obtain renewal for the trust.
 Some relaxation of this rule.

 Furs Ltd v Tomkies (1936) 54 CLR 583:

 Board of Furs authorise MD (T) to negotiate sale of part of business.
 Purchaser only interested if T is part of package. T told Furs chair who told
him to take best deal for himself (remember, only GM generally has capacity
to excuse breach of duty).
 T enters service contract with purchaser (terms not disclosed to Furs): 5,000
pounds and 3 year employment contract.
 Purchaser pays 8,500 pounds for business, 5,500 less than Furs wanted.
 Held: Rule is inflexible. Except where internal governance rules allow, director
cannot obtain profit through a transaction they act on behalf of company
unless all material facts disclosed to shareholders and GM approves by
resolution.
 Unauthorised profit belongs to company. No excuse to say company would
not have been able to obtain the profit or that the company did not appear to
lose anything. Also immaterial that contract would not have happened if T
had not entered into service agreement.

Cook v 4 directors of Toronto Construction Held: breach. Entrusted with

Deeks Co (TC): 2 Deeks bros., Mr Hinds,
[1916] Mr C. Each held quarter of shares.
Ds & H want to exclude C from TC.
Enter contract to build railway in
own names. Use majority
shareholding to vote at GM that TC
has no interest in contract.
affairs of company but deliberately
excluded company, whose interest
they had duty to protect.
Opportunity arose when carrying
out functions as a director and
opportunity was one that
company could have taken up.

Regal (Hastings) Held: D made profits “by reason of the fact that they were
Ltd v Gulliver directors of Regal and in the course of the execution of that
[1967] office”. Irrelevant that acted in GF or that company could not
take opportunity. They therefore had to account for their
profits to the company.

Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443:

irrelevant that unlikely P would get contract even if D had complied with his duties.
Irrelevant that opportunity communicated to D in his personal capacity rather than
as director during negotiations. C put himself in conflict position by dealing with gas
board while still acting as MD. Info. should have been passed on to IDC.

Peso Silver Mines Ltd v Cropper [1966]:

TP approached P to sell mining claims-> P Held: D acted in good faith the
rejected since it had limited finance and receiving reject P buying the claims,
a lot of similar offers-> D buy claims at same level with solid reasons.
of price offered to P-> 2 years later as control in P No confidential information
changed D disclosed the interest-> P dismissed D involved and received by P.
and ask for account of profit When C was approached later,
it was not in his capacity as a
director, but as an individual.

Canadian D and another executive work in a Held: Fiduciary can’t divert

Aero project initiated by P-> they later to themselves or another
Service Ltd resigned and started a new company to co with which they are
v O’Malley compete with P in a contract bid-> D associated a maturing
[1974] won the contract and P sued business opportunity which
the co is pursuing.
Relevant factors to consider:
 Position or office held;
 Nature of corporate opportunity, its ripeness, specificness and fiduciary’s
relation to it;
 Amount of knowledge possessed;
 Circumstances in which knowledge obtained and whether special or private;
 Factor of time in continuation of fiduciary duty where alleged breach occurs
after termination of the relationship with co and circumstances under which
relationship terminated - retirement, resignation or discharge.

Queensland D owes 51% of shares of P, K owns Held: H won. Company, by

Mines Ltd v 49%-> D&K asked for license to do
Hudson mining and used D’s name to apply->
(1978) when issued K was in financial
difficulties-> K & chairman tell D
okay to start new company using the
license
rejecting opportunity had
put it outside scope of H’s
relationship with company,
or because company had
given fully informed
consent for H to go ahead.
Statutory provisions
 Two legislative provisions:
 S 182: prohibits improperly using position (overlap with Regal Hastings);
 S 183: prohibits improperly using information acquired because of position
(overlap with fiduciary duty to not misuse confidential information).
 Key difference between ss 182/183 and common law equivalents:
 Apply to directors, officers & employees
 & for s 183 former office holders of these positions also included.
 Chew v R (1992) 173 CLR 626: distinguish purpose from consequences. If officer
makes improper use of position to gain advantage or cause detriment,
contravenes section whether or not advantage obtained or detriment suffered.
 Affirmed: R v Byrnes (1995) 183 CLR 501
 Impropriety is objective. Subjectivity not necessarily component of the duty.
 Impropriety = breach of standards of conduct expected of person in position
of alleged offender by reasonable person with knowledge of the duties,
powers and authority of the position and circumstance of the case…although
relevant where abuse of power involved.
 S 182: may also involve breach of other duties (ie GF/Proper Purpose). Two
relevant cases:
 Forge v ASIC [2004] NSWCA 448;
 HIH Insurance Ltd (in prov liq); ASIC v Adler [2002] NSWSC 171.
 S 183: potential for overlap between ss 182-3. This was the case in Adler. Two
other cases are relevant:
 Grove v Flavel (1986) 43 SASR 410;
 ASIC v Vizard [2005] FCA 1037. (refer “director” for facts)
 Civil penalty provisions - Pt 9.4B. Also, s 184 provides director will commit
offence if sections breached if use position or information obtained through
position dishonestly:
 With intention of directly/indirectly gaining advantage for selves or someone
else or causing detriment to corporation; or
 Recklessly as to whether the use may result in selves or someone else
directly/indirectly gaining advantage or in causing detriment in the
corporation.
 S 185: these provisions apply in addition to general law.
Disclosure obligations
 Conflict issue can be resolved through full disclosure and consent of the
company.
 Equity:
 not a duty of disclosure that breach occurred, but rather if fiduciary receives
benefit as a result of a breach, cannot retain benefit unless establish company
gave fully informed consent (Regal Hastings).
 Need disclosure and consent. Cases like Cook v Deeks and Furs Ltd suggest
approval by SH.
 Cook v Deeks shows that where majority SH are also relevant directors with
the conflict, may be limits on their ability to approve.
 But, Queensland Mines suggests sometimes board approval enough
(although note special facts of this case: 2 SH were represented on the
board).
 Equitable obligation to disclose conflicts reflected in s 191(1). Does not override
equitable duties. Stands alongside them (s 193).
 Imposes obligations in relation to specific conflicts of interest.
 Public and PTY Companies:
 Directors must disclose material personal interests in matters being
considered by the board.
 Public Companies:
 Directors subject to restrictions on board participation if have interest
in a matter.
 Detailed provisions regarding financial benefits that may be given to
directors and other related parties.
 Minimum requirements: cannot be displaced by constitution.
 Breach of statutory provisions may result in criminal sanctions, but unlike
common law, statutory provisions do not affect validity of contract or transaction.

 S 191(1): director of a company who has a ‘material personal interest’ in a matter

that relates to the affairs of the company must give the other directors notice of
the interest unless one of the exceptions in s 191(2) applies:
 Membership interests held in common with all other members;

 Directors’ remuneration (報酬);

 Contract requiring shareholder approval;

 Director giving guarantee etc in relation to loan to the company or having a
right of subrogation in relation to the guarantee or indemnity;
  Insurance of the director against liability incurred in that capacity;
 An indemnity under s 199A;
 Contracts with a related body corporate where the director’s interest arises
because the director is a member of both boards (see Chapter 2E discussion);
 For Ptys, where the other directors are aware of the nature and extent of the
interest and its relation to the affairs of the company.
 Breach of s191 does not affect validity of transactions but is offence with
potential pecuniary and imprisonment penalty. In contrast, contract entered into
in breach of general law conflict rule is voidable at option of company.

 What is a ‘material personal interest’?

 Not defined in the CA.
 Must be some substance or value rather than slight interest.
 Personal interest suggests not normally applied to situations where director’s
conflict involved being on board of two companies engaged in business
dealings.
 McGellin v Mount King Mining NL (1998) 144 FLR 288:
 considering predecessor to the section, Murray J says that it equates to
something having capacity to influence the vote of the particular director
upon the decision to be made.
 Director had material personal interest in board discussions about whether
the company should issue shares to him.
 S 193 sets out how interests are to be disclosed:
 Notice must give details of nature and extent of interest and its relation to
company affairs.
 Notice must be given at director meeting as soon as practicable after director
becomes aware of interest and must record interest in minutes.
 Standing notice can be given (including those not yet considered material
personal interests).
 Camelot Resources Ltd v MacDonald (1994) 14 ACSR 437:
 disclosure must be in sufficient detail for board as a whole to
understand scope of benefit and potential profit to director.
 S 193 says that s 191 acts IN ADDITION to general law rules regarding conflicts of
interest and constitution. So, compliance with one set of rules does not mean
director complied with both sets of rules.

 S 195 (relating to public companies):

 director must not vote or be present at director meeting considering matter
 in which director has material personal interest. Three exceptions:
 Where disclose interest in accordance with s 191;
 Where directors who do not have material personal interest resolve
that they are satisfied that the interest shouldn’t disqualify director
voting/being present (subject to constitution);
 Where ASIC makes declaration or order under s 196.
 When interest means don’t have quorum:
 One or more directors can call GM to deal with matter; or
 If urgent or not appropriate for GM, ASIC can, under s 196, make
order or declaration to allow interested directors to vote/be present.
 Again, works in addition to general law.
 General law: failure to disclose renders transactions voidable at option of
company. Company can also seek:
 Injunction;
 Constructive trust;
 Account of profits;
 Equitable compensation.
 Statute: ss 182-3 are civil penalty provisions under s 1317E.
 Remember: Ratification may provide a defence of sorts. But cannot ratify if:
 Members not given fully informed consent;
 Ratification found to constitute oppression of minority;
 Company becomes insolvent;
 Acts are illegal or beyond company power (i.e. issue shares for improper
purpose);
 Acts represent misappropriation by directors of company property.
 Shareholders cannot release directors from statutory duties imposed under
statute law: Angas Law Services Pty Ltd (in liq) v Carabelas (2005) 53 ACSR
208. Might affect penalty imposed.