Director Duties and Conflict of Interest

This assignment explores the responsibilities of directors in managing conflicts of interest. It delves into relevant legal frameworks like the Corporations Act 2001 and analyzes case studies like Groeneveld Australia Pty Ltd & Anor v Nolten Vastgoed BV & Anor to illustrate how directors are expected to act ethically and transparently when faced with potential conflicts. The analysis covers the disclosure requirements, duties owed to the company and shareholders, and the consequences of failing to uphold these obligations.

[Corporate law]
A discussion on the case of Groeneveld Australia Pty Ltd & Ors v Nolten& Ors (No 3) [2010] VSC 533
2018
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Introduction
Case laws are the guides for the directors and the other officers of the company on what has to be
done, and more importantly, on what should not be done, for the reasons of the same attracting
penalties under the Corporations Act, 2001 (Gibson and Fraser, 2014). This legislation is
applicable on all the companies which operate in the nation and impose the directors with some
important duties, to ensure that they carry on the work for the shareholders of the company,
instead of being focused on their personal objectives. The duties imposed on the directors, touch
both civil and criminal branch of law, which makes the nature and adherence of such duties, all
the more crucial (Paolini, 2014).
Groeneveld Australia Pty Ltd & Ors v Nolten & Ors (No 3) [2010] VSC 533 is amongst the
recent cases where the Supreme Court of Victoria had established that the director of the
company had been in contravention of his statutory, as well as, the fiduciary duties which he had
owed to the company, where he held the position of a managing director, for the reasons of his
failure in disclosing the conflict of interest. The following parts cover an effective analysis of
this case.
Background of the case
In this case, Nolten was the defendant who held the post of managing director in the company
called Groeneveld Australia Pty Ltd. A number of situations were considered by the court where
the defendant attained major benefits, through the companies which were under his control or in
a direct manner, particularly where these transactions or the benefits, were not disclosed to the
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company. Amongst the claims which were central here were regarding the put and call options
which had been held by Nolten on the shares of the company. The claim of the plaintiff was that
the fiduciary and the statutory duties had been contravened by Nolten which he had owed to the
company and the contractual duty of honesty was also contravened in context of exercising of
the put and call options (Holding Redlich, 2011).
Nolten had the contractual right for call of shares in the company and also to put such shares to a
company which was related to Groeneveld Australia Pty Ltd. These rights had been set out in the
two agreements which had been entered in with the Groeneveld Australia Pty Ltd and the
companies related to Groeneveld Australia Pty Ltd. The first agreement gave Nolten the right to
call for the issuance of shares in the company in two lots. The events were aligned in such a
manner that Nolten used the second call option just before he got the notification from the
company regarding the intent of the company to dismiss Nolten for the reasons of setting up a
company which directly competed with Groeneveld Australia Pty Ltd. Upon the dismissal of
Nolten, the put option was exercised by him. The company refused the issuance of shares based
on the second call; in addition to this, the related company refused to fulfil the obligations of
purchase based on the call and put option agreement (Holding Redlich, 2011).
The duties/responsibilities breached
As briefed upon in the introduction segment of this discussion, the directors of the company have
been imposed with certain duties, which have to be fulfilled properly (Latimer, 2012). The first
section relevant to this discussion is covered under section 181 of the Corporations Act which
provides that the directors of the company have the civil duty of discharging their duties in best
interest, in good faith of company and for a purpose which can be deemed as proper. The next
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duty is covered under section 182, where the directors are required to make use of the position
held by them for proper purpose. In other words, the directors are restricted from making an
improper use of the position which they hold for the purpose of gaining an advantage for
themselves, or for the advantage of some else, or makes such use which is detrimental for the
company (Cassidy, 2006). The next important duty which is placed on the directors is covered
under section 183 of this act, which relates to the use of information. As per this section, any
such individual who gets the information for the reasons of holding the position in the company,
that of director or officer of the company or an employee, they should not make an improper use
of the information which has been attained for the purpose of gaining an advantage for
themselves, or for the advantage of some else, or makes such use which is detrimental for the
company (Jade, 2011).
Where any of the aforementioned sections are not fulfilled, a civil breach is held based on
section 1317E of this act. This section allows the court to make a declaration of contravention, in
which they provide the details of the undertaken violation, its features, its magnitude, and the
relevant details pertaining to the contravention. When declaration of contravention has been
made by the court, the ASIC can make an application for getting a disqualification order passed
against the breaching director based on section 206Cof this act and also can apply for pecuniary
penalties to be imposed on the contravening director based on section 1317G of this act (Federal
Register of Legislation, 2018).
Decision of Court and its analysis
The court took into consideration the facts of this case in detail and came to the viewpoint that in
the approval of share issue for the purpose of exercising the call options, Nolten had made a
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misuse of the position which he held in the company, i.e., managing director, for his own gains,
and in doing so, he placed himself in a conflicting position; furthermore, he failed to disclose this
conflicting interest to the company. It was pointed out by the court that even though a fiduciary
does not have a positive duty of disclosing the conflict where the fiduciary put forth the proposal
of entering in a transaction which could result in the duty being contravened, there was a need
for the fiduciary to make a full and complete disclosure to the entity or to the person to whom
they owed the duty, regarding all of the facts which were known to such fiduciary (Australasian
Legal Information Institute, 2011).
In the matter of the issue of shares as a response to the call there was a requirement of getting an
approval from the board of the company. The approval had been given through a manner where a
written resolution was circulated, which had been signed by the directors and in this pool of
directors was included Nolten. Even though in the resolution, it had been recorded that Nolten
had made a declaration of his interest in the resolution’s subject matter, there had been a failure
in making the discloser regarding the conduct of Nolten being proscribed circumstance since this
term had been defined in the agreement of call option. This could have given the company the
entitlement to terminate the employment of Nolten, and where this would have taken place, the
call options which were based on the agreement would have ended at that very movement and
would not have been capable of exercising (Jade, 2015).
It was noted by the court that for Nolten, it was not enough for simply declaring the personal
interest in the issue of share and that Nolten instead had a duty of protecting the company’s
interest by proper disclosing to the board of the company all the matter at hand, particularly the
ones which were relevant to the decision of issuance of shares made to him. It was the
responsibility of Nolten to make certain that the other directors did appreciate the conditions
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which were substantial for the purpose of termination of the earlier mentioned proscribed
situations could have been satisfied. It had been held by the court that for the same reasons the
second call option was rendered invalid. The exercise of the put option followed by this, with
reference to related company had also been invalid. Even though in this case, the article of
association of the company permitted the director to vote on the subject proposed by him/her,
subjected to the disclosure of the personal interest, and the same being done, it was held by the
court that due to the failure in disclosing certain wrong thing, which were relevant to this vote,
the duties owed by him, were breached (Supreme Court, 2015).
It was held by the court that that the representations which were made by Nolten in between
2005 and 2009 when he was performing the duties as the company’s managing director
regarding his fiduciary and statutory obligations had been deceptive, false and misleading. It was
found out by the court that the other directors had been induced through the deceptive and
misleading conduct of Nolten for the purpose of authorizing the issue of share based on the
flawed presumptions regarding the lack of proper basis to for terminating the employment of
Nolten based on the proscribed situations. Furthermore, it was determined by the court that the
conduct of Nolten had to be deemed as deceit or fraud. They also stated that there was a good
faith in context of the implied terms of both off the options agreement to such an affect where the
contractual rights of Nolten based on the call options agreements had been conditional on him
following the statutory and the fiduciary duties which he owed to the company. Due to these
reasons, the duties had been contravened by Nolten on the good faith terms. The company was
thus held to be entitled by the court for the remedies against Nolten owing to him contravening
hi statutory and the fiduciary duties on each and every claim made against the defendant by the
company (Holding Redlich, 2011).
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Relevance
The decision given in this case is a timely reminder for all of the directors in the nation to make
certain that they make frank and also full disclosures in the matter of the possible conflicts or in
such cases where they make profit owing to the fiduciary position held by them, as a failure of
doing so could result in the duties of such director being contravened, and the relevant provisions
of Corporations Act, resulting in civil or criminal penalties being imposed by the court. Any
director who is considering to get into an arrangement on the company’s behalf, and through
which such a director becomes entitled to a financial benefit, in such cases the directors must at
all times make certain that they act in the company’s best interest, for a purpose which can be
deemed as proper, and should also make the disclosure of these matters before the company’s
board of directors (Hodgkinson, 2010).
Conclusion
Thus, from the discussion, which was undertaken in the previous segments, it becomes clear that
the managing director of Groeneveld Australia Pty Ltd had breached the duties which he owed
towards the company and due to the actions undertaken by Nolten, the court made him liable for
the same. In the quoted case, the court took into consideration, the extent of the duties which a
managing director of the company owed to the company, in context of conflict of interest. In
such a case where the managing director held a private interest in question, which was under the
consideration of the board of the company, simply the declaration of the personal interest in the
outcome was not deemed as sufficient for discharging the owed fiduciary and statutory duties. In
such cases, it was crucial that the managing director disclosed all of the matters which had been
relevant to the decision. It was required that the other directors had been appraised in a deficient
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manner in order to appreciate all of the details of the conflict of interest. All such situations
through which the conflict can be raised had to be thus disclosed in a full and frank manner.
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Reference List
Australasian Legal Information Institute. (2011) Groeneveld Australia Pty Ltd & Anor v Nolten
Vastgoed BV & Anor [2011] VSC 18 (2 February 2011). [Online] Australasian Legal
Information Institute. Available from: http://www.austlii.edu.au/cgi-
http://www9.austlii.edu.au/cgi-bin/viewdoc/au/cases/vic/VSC/2011/18.html [Accessed on:
05/01/18]
Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: The Federation Press.
Federal Register of Legislation. (2018) Corporations Act 2001. [Online] Federal Register of
Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed
on: 05/01/18]
Gibson, A., and Fraser, D. (2014) Business Law 2014. 8th ed. Melbourne: Pearson Education
Australia.
Hodgkinson, J. (2010) MD’s duties in a conflict of interest. [Online] John Hodgkinson. Available
from: https://johnhodgkinson.wordpress.com/2010/12/29/mds-duty-to-disclose-a-conflict-of-
interest/ [Accessed on: 05/01/18]
Holding Redlich. (2011) Director fails to uphold his statutory and fiduciary duties to company.
[Online] Holding Redlich. Available from: https://www.holdingredlich.com/corporate-
commercial/director-fails-to-uphold-his-statutory-and-fiduciary-duties-to-company [Accessed
on: 05/01/18]
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Jade. (2010) Groeneveld Australia Pty Ltd & Ors v Wouter Nolten & Ors (No. 3) [2010] VSC
533; 80 ACSR 562. [Online] Jade. Available from: https://jade.io/article/203554 [Accessed on:
05/01/18]
Jade. (2017) Corporations Act 2001 (Cth). [Online] Jade. Available from:
https://jade.io/article/216652/section/2204 [Accessed on: 05/01/18]
Latimer, P. (2012) Australian Business Law 2012. 31st ed. Sydney, NSW: CCH Australia
Limited.
Paolini, A. (2014) Research Handbook on Directors Duties. Northampton, Massachusetts,
United States: Edward Elgar.
Supreme Court. (2015) Australian Accountants, Lawyers and Directors Conference at Aspen,
Colorado, USA on 9 January 2015. [Online] Supreme Court. Available from:
http://www.supremecourt.justice.nsw.gov.au/Documents/Publications/Speeches/
2015%20Speeches/kunc_20150109.pdf [Accessed on: 05/01/18]
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