28 October 2014
(This summary prepared by Mr Ananian-Cooper of Counsel)
This matter concerned allegations against a director for misusing information known to her in that capacity to divert a business opportunity to another company of which she was the sole director and shareholder. Ms Rushbrook, the first defendant, and Mr and Mrs Chalmers incorporated the plaintiff, Cornerstone Property & Development Pty Ltd (CPD), for the purpose of acquiring and pursuing the development of a parcel of land in Chinchilla, Queensland (Lot 7). They were each a director and shareholder of CPD. A contract for the purchase of Lot 7 was executed. However, before the contract became unconditional or could settle, the Chalmers fell out with Ms Rushbrook, deliberately ceased all business involvement with her, forcefully intimated that they expected nothing further from her in relation to Lot 7 and resigned as directors of CPD. They remained shareholders of CPD. Subsequently, while CPD lay moribund and engaged in no business, Ms Rushbrook, as the sole director of the first defendant, Suellen Properties Pty Ltd (SP) caused it to enter into a contract to buy Lot 7 “effectively in substitution for CPD’s contract”, although she did not seek the Chalmers’ express consent to that contract. Ms Rushbrook later sold her shares in SP to a third party investor. All the while, the Chalmers were aware of the steps being taken by Ms Rushbrook, but did nothing. However, following the completion of the sale of Lot 7 to SP, Mr Chalmers sought and obtained leave under s 237 of the Corporations Act 2001 (Cth) to bring a statutory derivative action on behalf of CPD against both Ms Rushbrook and SP, seeking the full range of equitable relief, including as against SP a constructive trust in respect of Lot 7.
The claims against Ms Rushbrook
CPD alleged that Ms Rushbrook breached her fiduciary and other statutory duties to CPD. Jackson J dismissed these allegations. It was held that the scope of Ms Rushbrook’s “trust and agency” to CPD had been reduced by the circumstances of the ending of the relationship between the Chalmers and Ms Rushbrook such that her conduct on behalf of SP was outside that scope.
Alternatively, it was emphasised that “what is required for a fully informed consent is a question of fact in all the circumstances” (Maguire v Makaronis (1997) 188 CLR 449 at 466). It was thus inferred from the circumstances that the Chalmers gave such consent to the diversion of the opportunity to purchase Lot 7, albeit it was emphasised that this was a rare result and particular to the facts.
It was also held that the Chalmers’ conduct in doing nothing to bring their claim to Ms Rushbrook or the investors’ attention was objectively calculated to cause them to assume that the Chalmers did not wish to proceed with CPD’s Lot 7 contract, and that the claim now made was one “adventitiously made through Mr Chalmers lying by”. In those circumstances, it was held to be unconscientious for CPD to assert that either of the defendants was liable: Chan v Zacharia (1984) 154 CLR 178; and consequently unnecessary to analyse the facts as an estoppels.
On the Corporations Act claims, it was held Ms Rushbrook did not breach her statutory duties not improperly to use her position: s 182(1); and to exercise her powers and discharge her duties in good faith in the best interests of the corporation and for a proper purpose: s 181(1). It was found that any lack of appreciation that she was not free to continue with the project separately to CPD was in all the circumstances not in bad faith or improper: referring to R v Byrnes (1995) 183 CLR 501 at 514–515.
The claims against SP – Third party liability for breach of fiduciary obligation
As against SP, CPD’s primary case was based on the grounds for the liability of third parties recited in obiter by Lord Selborne in Barnes v Addy (1873-74) LR 9 Ch App 244, namely where such a party would “receive and become chargeable with some part of the trust property” (“the first limb”), or “assist with knowledge in a dishonest and fraudulent design on the part of the trustees” (“the second limb”).
In respect of the first limb, accepting that liability under that limb extended to a breach of fiduciary duty by a company director involving misapplication of the company’s property, it was emphasised that the true sense in which CPD’s interest in the land was diverted was limited to SP taking advantage of the opportunity to purchase Lot 7 because it knew of that opportunity from Ms Rushbrook. By virtue of SP’s indefeasibility of title under s 184, Land Titles Act, it was held that CPD did not have any proprietary interest in Lot 7: Farah Constructions v Say-Dee Pty Ltd (2007) 230 CLR 89. As such, the question was narrowed to whether CPD could make out any personal claim against SP. On that issue, it was held that where a company director provides information to or otherwise assists a third party to acquire property in breach of fiduciary obligation not to act in conflict of duty or personal interest, the property acquired by the third party is not trust property within the operation of the first limb.
Interestingly, this decision can be seen to differentiate on liability under the first limb, between fiduciary obligations concerning custody of another’s property, typical of trustees but also imposed on company directors, and those concerning loyalty, including avoiding conflicts of duty and personal interest.
Further, in reaching the above conclusion, a number of negative impacts were identified which might flow from an acceptance that information may constitute trust property in this context, including the result on a tracing analysis that a beneficiary could recover an unfairly enlarged gain, at least without proper allowance for expenditure, skill and effort. Particularly, in his Honour’s view, there is no reason per se why a third party should be subjected to the strict burden imposed on defaulting fiduciaries.
In respect of the second limb, the focus was on the requirement of proof of a dishonest and fraudulent design by Ms Rushbrook. Rejecting the view that all save trivial breaches of duty were dishonest, it was held that there must be a transgression of ordinary standards of honest behavior to engage the second limb: see Hasler v Singtel Optus Pty Ltd (2014) 311 ALR 494, cf Westpac Banking Corporation v Bell Group (2011) 44 WAR 1. In that light, even assuming a breach of duty, it was found that there was no dishonest and fraudulent design because, throughout the process, Ms Rushbrook did not know that the Chalmers, as the only other persons interested in the plaintiff’s affairs, had any ongoing interest in Lot 7.
With respect to the other bases for liability, it was noted that there was some authority in favour of an “alter ego basis” for third party liability: see Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296; such that the corporate alter-ego of the wrongdoing fiduciary might be made liable. However, his Honour was skeptical of such a broad basis of liability, particularly in a context of changes of control and ownership. In the circumstances of the other findings, it was not necessary to decide the question.
As against the possibility of error, his Honour considered the question of relief. It was held to be inequitable to impose a remedial constructive trust in the circumstances. That was because while significant costs and expenses were incurred in obtaining the interest in Lot 7, there was no evidence that those could be reimbursed by CPD. In relation to any equitable compensation, it was found that the plaintiff had not proved any loss or damage because the evidence was that the value of Lot 7 was uncertain, SP not having yet found a buyer and there was the possibility that the development may have missed the market for accommodation for workers brought in by the expansion in the coal seam gas mining industry.
However, as against Ms Rushbrook, it was held that there might have been relief for the consideration paid to her for her shares in SP, there being no evidence of any allowance to be made for work and skill in her part in making that profit.
NB: Jackson J will deliver the W A Lee lecture later this month which will concern the second limb of Barnes v Addy. Details are set out above.