It is trite law that a director of a company should avoid placing him or herself in a position where his or her duty to the company conflicts with his or her personal interest. What is harder to understand is how such principles are applied in particular circumstances. In the case of Hart, a company director decided to pursue an opportunity, which ultimately never eventuated, in circumstances where he planned to dilute the existing shareholding of the company and obtain for himself employment and shareholding in a new entity. He was accused of breaching his fiduciary duty to the company and was said to be liable for the loss of an opportunity suffered by the company.
Basic Facts
Hart Security Australia wanted to provide security services to Northern Territory Airports Pty Ltd. Boucousis was the sole director of Hart Security Australia and the other defendants were partners in a law firm engaged to advise on the transaction. Northern Territory Airports was only prepared to proceed with the transaction if a bank guarantee in the order of $1 million was provided and this was something that Hart Security Australia was not prepared to agree to.
Boucousis then entered into a “secret” proposal under which a new company would be incorporated and shares would be issued to it so that it would be the holding company of Hart Security Australia with Investec providing a bank guarantee to facilitate the transaction. Moreover, Boucousis would receive a shareholding and directorship in the new entity.
Proceedings against the director for breaches of fiduciary and statutory duties under sections 181 (1), 182 (1) and 183 (1) of the Corporations Act 2001
As a matter of general law a fiduciary must not be in a position where his duty and interest conflict or there is a risk of there being such a conflict. The Court of Appeal affirmed at paragraph 94 of the decision in Hart Security Australia Pty Ltd v Boucousis [2016] NSWCA 307 that the interest must not be too remote, and in that sense would not apply if it was a feeble inducement. The Court of Appeal also held that where the possibility of conflict arises it must be a real and sensible one before a breach of fiduciary duty will be found. It was also held that these matters are judged from the perspective of a reasonable person looking at the facts of the matter in accordance with the decision in Boardman v Phipps [1967] 2 AC 46. The rationale of course is to prevent directors from being swayed by their personal interest when a duty is owed towards the company.
The court considered that it was necessary to consider the precise duties owed and to determine the precise interests alleged in accordance with what the High Court said in Howard v Federal Commissioner of Taxation (2014) 253 CLR 83. In this instance the director’s interest in obtaining a shareholding in a new entity together with employment conflicted with the interests of the company since the proposal would dramatically alter share ownership of Hart Security Australia. Moreover, the company was deprived of the opportunity to consider the proposal which of course would not be in its interests.
As a consequence this ground of appeal was upheld even though the appeal overall was dismissed.
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