Metal Manufactures Limited v Johnston & Anor

In this matter, the Court of Appeal was required to determine whether the conduct of a branch manager of a company, in supplying goods to another company in excess of its credit limit, amounted to a breach of fiduciary duty or a contravention of the employee’s duty pursuant to s 182(1) of the Corporations Act 2001 (Cth) not to improperly use one’s position to gain an advantage for themselves or another or cause detriment to the company itself. The Court held that, even if the branch manager were a fiduciary, he lacked any personal interest in the conduct so as to breach such duty. Furthermore, there was no contravention of s 182(1) as the purpose of his conduct had not been to gain an advantage for another or cause detriment to his employer.

Fraser and McMurdo JJA and Buss AJA

13 March 2020

Background

The appellant was a wholesale supplier of electrical products and the second respondent (Mr Stockill) was the manager of its Ipswich branch. [1]–[3]. From late 2012, a company called GMJ Electrical Projects was permitted to purchase from the appellant on credit, up to a limit of $50,000. [3]. GMJ failed to keep to its credit limit and Mr Stockill, acting outside of his authority, allowed GMJ to purchase goods on credit to the extent that by July 2013 it owed $325,797.50 to the appellant. [3].

The appellant brought claims against Mr Stockill for breach of fiduciary duty and contravention of s 182(1) of the Corporations Act 2001 (Cth) in allowing GMJ to purchase goods beyond its credit limit. [4]–[5]. It also brought claims against the first respondent, Mr Johnston, for knowingly assisting Mr Stockill in breach of his fiduciary duty and for being involved in Mr Stockill’s alleged contravention of s 182(1). [6]. Mr Johnston was the sole director of GMJ, the company itself having been wound up before trial. [4]–[5]. The claims against Mr Johnston were dependent on those against Mr Stockill being made out. [6].

The trial judge dismissed all of the appellant’s claims. [7]. His Honour held that Mr Stockill owed only a contractual duty to serve his employer’s interests, not a fiduciary duty. [7]. [18]–[21]. Further, if he had, it was not breached as Mr Stockill did not prefer his personal interest to that of the appellant. [21]–[25]. With respect to s 182(1), the trial judge concluded that Mr Stockill did improperly use his position as an employee, but held there was no contravention of s 182(1) as he did not do so in order to gain an advantage for GMJ or in order to cause a detriment to the appellant. [7], [26]–[28].

The appellant appealed the dismissal of the claims. [7]. In the Court of Appeal, the leading judgment was given by McMurdo JA (Fraser JA and Buss AJA agreeing).

The breach of fiduciary duty claim

With respect to the breach of fiduciary duty claim, Justice McMurdo rejected the appellant’s submission that every employer-employee relationship was a fiduciary one. [29]. The critical feature of the fiduciary relationship was whether the principal was vulnerable to abuse of their position by the fiduciary in the exercise of a power or discretion, and not every employee would be in such a position. [31]. Nevertheless, his Honour considered that the trial judge’s finding that Mr Stockill had no discretion and so could not have been a fiduciary ([20]) was open to doubt, given his control over what was supplied to customers by the branch. [33].

In any event, McMurdo JA held that was no breach, even if Mr Stockill was a fiduciary. [33]. There was no direct or indirect benefit that passed to him in allowing GMJ to trade outside its credit limit. [34]–[35]. Even if he had intended to confer a benefit on GMJ, he had no personal interest of his own in that outcome so as to give rise to a conflict between interest and duty. [35].

The s 182(1) claim 

Section 182(1) prohibits the improper use of an employee’s position to gain advantage for themselves or someone else or cause detriment to the corporation. [36]. In analysing the submissions on appeal, McMurdo JA observed that the word ‘to’ is to be construed as ‘in order to’, giving a purposive rather than a causative meaning to the word. [37]. It followed that, in relation to the s 182(1) claim, the appellant had to prove that Mr Stockill’s purpose in supplying goods to GMJ in excess of its credit limit was to gain an advantage for GMJ or cause a detriment to the appellant. [38]. The object of the conduct had to be such an advantage or detriment. [38].  While the evidence proved this was the result of the conduct, the evidence did not establish that Mr Stockill intentionally supplied to GMJ beyond its credit limit in order to detrimentally affect the appellant or gain an advantage for GMJ and Mr Johnston. [41]–[43]. Mr Stockill’s belief was that the unauthorised supplies on credit would ultimately be paid for, to the benefit of the appellant. [28]. As the purposive element was not made out, the s 182(1) claim failed. [44]–[45].

In the result, the appeal was dismissed with costs.

S Walpole