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Directors’ Duties: Traversing the corporate landscape of the bona fide and proper purposes rules in Bell

02May
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The Western Australian Supreme Court of Appeal decision in Westpac Banking Corporation v Bell Group Ltd (in liq) [No 3] [2012] WASCA 157 shone a spotlight on the issue of the fiduciary duties owed by directors to act in the bona fide interests of the company, and for proper purposes. Although Bell was settled before the High Court was able to determine whether the bona fide and proper purposes rules formed part of the fiduciary duties for directors, a closer look at how the rules fits within corporate law is worth further exploration.

Before examining the issue of directors and fiduciary duties, it should be noted that the Western Australian Supreme Court of Appeal also had to consider the rule in Barnes v Addy (1874) LR Ch App 244, relating to liability and accountability issues of third parties when dealing with a company. However for our purposes, this piece will be primarily focused on the other question of Bell, namely, the fiduciary duties owed by directors to act in the bona fide interests of the company and for proper purposes within common law.

Directors and fiduciary duties

The Honourable William Gummow AC writing about Bell, outlined three matters in relation to the character of directors as fiduciaries, with his Honour stating the following:

“The first in the accessorial liability in equity of third parties with respect to those equitable duties of directors which are not of the prescriptive character associated with conflict of interest and duty and with unauthorised profits. Three equitable duties to be considered are duty of care and diligence, that to act in good faith in the best interests of the company, and that to act for proper purpose.”1

Although the Western Australian Supreme Court of Appeal did not consider the statutory rules which run in conjunction with the common law rules, it’s still useful to outline the general duties that directors (and other officers) are required to follow in the exercising of their powers as outlined in ss 180-184 of the Corporations Act 2001 (Cth).

The basic duties include:

  • act with reasonable care and diligence;
  • act bona fide in the best interests of the company;
  • act for proper purposes;
  • avoid conflicts of interest; and
  • avoid unauthorised profits.

Fiduciary duties: Only limited to actions that directors must avoid?

In Bell, the banks argued that fiduciary duties are proscriptive in nature, therefore, only regulating actions that a director cannot do. The argument is given some credence with the remarks of the High Court in Breen v Williams (1996) 186 CLR 1 in which Gaudron and McHugh JJ stated that in Australia, the “fiduciary obligations arise because a person has come under an obligation to act in another’s interests. As a result, equity imposes on the fiduciary proscriptive obligations – not to obtain any unauthorised benefit from the relationship and not to be in a position of conflict… But the law of this country does not otherwise impose positive legal duties on the fiduciary to act in the interests of the persons to whom the duty is owed.”2

In R v Byrnes (1995) 183 CLR 501, Brennan, Deane, Toohey, and Gaudron JJ observed the following in relation to conflict of duties that arise from multiple directorships, with their Honours stating (at 516-517):

“A company is entitled to the unbiased and independent judgment of each of its directors. A director of a company who is also a director of another company may owe conflicting fiduciary duties. Being a fiduciary, the director of the first company must not exercise his or her powers for the benefit or gain of the second company without clearly disclosing the second company’s interests to the first company and obtaining the first company’s consent. Nor, of course, can the director exercise those powers for the director’s own benefit or gain without clearly disclosing his or her interest and obtaining the company’s consent. A fiduciary must not exercise an authority or power for the personal benefit or gain of the fiduciary or a third party to whom a fiduciary duty is owed without the beneficiary’s consent.”

Equity and fiduciary duties

However, Millet LJ in Bristol & West Building Society v Mathew [1998] Ch 1 at 16-17 stated that not every breach can be seen to be a breach of a fiduciary duty. His Lordship also further added that the application of the term breach of fiduciary duty to the failure of a trustee or director to use proper skill and care in the discharging of his or her duties, may be seen as inappropriate due to the fact that the source of the obligations of directors can be found in equity, since the common law may not attach the obligation of fiduciary duty.

In Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, Gibbs J noted that (at 397): “The strict rule of equity that forbids a person in a fiduciary position to profit from his position appears to be designed to deter persons holding such a position from being swayed by interest rather than by duty…”

His Honour William Gummow observed that the judgment of Gibbs J seems to indicate that the “fiduciary duties of directors serve to encourage performance of their equitable but non-fiduciary duties.”3

Concluding remarks

The opportunity to answer a number of significant questions in relation to fiduciary duties of directors may have passed on this occasion. Writing in the Australian Business Law Review, Robert Baxt stated that from his perspective, the question of “how the court would deal with what I regard is a disappointing treatment by the majority of the Western Australian Court of Appeal of some fundamental principles involving director’s duties… The basic duty of the directors in such a case was to act in the best interests of the company in accordance with the common law rules of law…”4

Although the decision of the parties in Bell to settle may have left the question of how the bona fide and proper purposes rules fits within the fiduciary duties of directors unanswered, we will continue to look on with interest to where the bona fide and proper purposes rules may fit within directors duties.

This article or the information contained therein does not purport to provide a full explanation of the law, give advice or any guidance to anyone in connection with director’s duties or other issue and this article is not to be used by anyone to support their legal position or otherwise. This article is provided on the basis of the assumption of particular facts and circumstances. This article is limited only to what is the generally accepted view in Australia with regard to director’s duties. This firm cannot take responsibility for any action readers take based on this information. We would be happy to assist you with any commercial legal issues you may have, please get in touch via enquiries@usherlevi.com or telephone our Brisbane office on (07) 3087 3463 or Sunshine Coast office on (07) 5413 9270 and one of our experienced corporate lawyers will respond to you.

1 Gummow W, “The equitable duties of company directors” (2013) 87 ALJ 753 at 753.
2 Breen v Williams (1996) 186 CLR 1 at 113.
3 Ibid.
4 Baxt R “The Bell case – Opportunity lost?” 41 ABLR 308 at 308

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