Corporate Law Report: Breach of Duties in Whitehouse v Carlton Hotel

This report provides a comprehensive analysis of the case Whitehouse v Carlton Hotel Pty Ltd, examining the breach of duties by the directors. The report begins with an executive summary outlining the key aspects of the case, including the facts, the breach of duties, and the court's decision. It then delves into the specifics of the case, focusing on the allotment of shares and the actions of Mr. Whitehouse. The report highlights the breach of duties under sections 171, 173, and 181(1) of the Corporations Act 2001 (Cth), emphasizing the importance of acting within powers, fulfilling fiduciary duties, and acting in good faith. A critical analysis of the court's decision is provided, evaluating the reasoning behind the judgment and the application of relevant legal principles, such as the 'but for' test. Finally, the report discusses the relevance of the decision to the development of Australian corporations, emphasizing the importance of directors' duties and responsibilities in maintaining corporate governance and protecting the interests of shareholders. References to relevant legal cases and academic literature are included to support the analysis.

Running head: BREACH OF DUTIES
Breach of Duties
Name of the Student
Name of the University
Author Note

1BREACH OF DUTIES
Executive Summary:
The intention of the report is to conduct extensive research on the case of Whitehouse v Carlton
Hotel Pty Ltd [1987] 162 CLR 285. In this regard, the report emphasizes on the facts of the case
as well as on the breach of duties on the part of the directors. The report intended to highlight the
decision of the court or tribunal by complying with the provisions of the Corporations Act.
Lastly, the report is commissioned to examine, the impact of the decision on the operation of the
companies in Australia.

2BREACH OF DUTIES
Table of Contents
Introduction:..................................................................................................................................3
Breach of Duties and Responsibilities:........................................................................................4
Duties of the directors to act within powers (Section 171):....................................................4
Fiduciary duties of the directors (Section 173):......................................................................5
Section 181(1) of the Corporations Act 2001(Cth):.................................................................6
Critical Analysis of Court decision:.............................................................................................6
The relevance of the decision to the development of Australian corporations:.......................8
References:...................................................................................................................................10

3BREACH OF DUTIES
Introduction:
The issue of the case study is related to the fact that whether the purported allotment on
the part of Mr. Whitehouse to his sons Wilson and Alexander (the plaintiffs) with a “B” class
shares in the capital of the Carlton Hotel (the respondent) has been exercised according to the
provisions of Articles 127 of the Articles of Association of the company. According to Article
127 of the Articles of Association Mr. Whitehouse should be considered as the Permanent
Governing Director of the company for a considerable period as long as he decides to hold the
office. In this regard, the provisions of Article 127 states that the powers and authorities
including the discretion that vests with the Board of Directors under the Companies Act shall be
vested on Mr. Whitehouse.
The issue began during the time when Mrs. Whitehouse was living however both the
couples were divorced. Thereafter their four daughters coordinated themselves with their mother
however; the plaintiffs (their sons Wilson and Alexander) aligned themselves with their father
(Mr. Whitehouse). In this regard, it is worth mentioning that the shares of the company was
divided into three classes- share “A”, “B” and “C”. The “A” class shares were held by Mr.
Whitehouse and the “B” class shares were assigned to Mrs. Whitehouse. It is worth mentioning
that both the “A” and “B” class shares had unrestricted voting rights on their part. However,
there was no voting right in class “C” shares which were beneficially owned by their sons (the
plaintiffs) and daughters. However, the class “C” shares had the right to shares in profit and
surplus capital. It is worthwhile to mention here that, the case has been conducted on the basis of
both sides regarding the “B” class shares held by Mrs. Whitehouse which were assigned to Mr.
Wardley during her lifetime who acted as the subscriber to the memorandum of association.

4BREACH OF DUTIES
However, Mr. Whitehouse was worried about his part of shares and regarding the fact that to
whom the shares will be allocated after his death. Therefore, Mr. Whitehouse decided to purport
the rights vested in class “B” shares to his sons for the purpose of ensuring the fact that his
daughters shall not be entitled to gain practical control over the assets of the company in future
and at present other than the shares allocated to them. In this regard, it is noteworthy to mention
here that, the company was under the control and governance of Mr. Whitehouse and his
decision regarding the allotment of class “B” shares to his sons has been considered to be invalid
as it was made without good faith and created negative impact among the surviving members of
the family.
Breach of Duties and Responsibilities:
The duties and responsibilities that have been breached in the present case are concerned
with the Sections 171 and 173 of the Companies Act 2006. The breach of duties and
responsibilities are also contained in the provisions of Section 181(1) of the Corporations Act
2001(Cth). In the case of Whitehouse v Carlton Hotel Pty Ltd [1987] 162 CLR 285, it was
observed that Mr. Whitehouse issued the shares of “B” class which belonged to his former wife
to his sons for the purpose of preventing his daughters to claim interest in the assets of the
company or takeover the company in future after his death. Therefore, in this case, it was
observed that Mr. Whitehouse being the director of the company breached various duties and
responsibilities on his part which can be emphasized as-
Duties of the directors to act within powers (Section 171):
The provisions of Section 171 of the Companies Act 2006 requires the directors to
perform their duties and responsibilities within the authority that has been assigned to them by

5BREACH OF DUTIES
the company for the purpose of acting according to the best interests of the company (Cox 2015).
In this regard, it is important on the part of the directors to act according to the constitution of the
company and therefore exercise the power that has been assigned to then for the purpose
concerned (Asic.gov.au 2018). According to the provisions of Section 171(b), the powers of the
directors should be utilized for the benefit of the company and not for abusing their powers
beyond the constitutional limits of the company (Gelter and Helleringer 2015). In Hogg v
Cramphorn Ltd [1967] Ch 254, it was observed that the directors acted according to the best
interest of the company by not involving themselves in the process of take-over. According to
the directors taking over the company would be a dishonest act and protecting their position as
the director of the company would be the best interest of the company (Leahy 2015). In this case,
Mr. Hogg being the shareholder sued the directors for misusing their powers regarding the illegal
distribution of shares. The Court in this regard, held that the distribution of new shares were void
and unlawful.
Fiduciary duties of the directors (Section 173):
There is a duty on the part of the directors to make autonomous use of their fiduciary duties
without the influence of unlawful interests (Legislation.gov.au 2018). In this regard, it is worth
examining the fact that the powers to delegate are not vested with the directors of a company.
Therefore, it is required on the part of the directors to act in a way which would prove to be best
for the company and its members and not for the interests offered to them by the third parties
(Comlaw.gov.au 2018). In Thorby v Goldberg [1964] HCA 41; (1964) 112 CLR 597, the High
Court of Australia held that the directors did not act according to the best interests of the
organization.

6BREACH OF DUTIES
Section 181(1) of the Corporations Act 2001(Cth):
According to the provisions of Section 181(1) of the Corporations Act 2001(Cth), it is
required on the part of the directors to act in good faith and in proper purpose of the company
which was held in Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33. In some
cases, it can be observed that the directors fail to act in good faith and breach the rules of conduct
without providing proper justification on their part (Laster and Zeberkiewicz 2014). In this
regard, the statement of proper purpose has been defined as an advantage which involves
genuine commercial favorable opportunity on the part of the director for the best interest of the
company (Australiancompetitionlaw.org 2018)
In the case of Whitehouse v Carlton Hotel Pty Ltd [1987] 162 CLR 285, it has been
observed that, Mr. Whitehouse has breached his duties and responsibilities as a director because,
it occurred to him that it would be appropriate to transfer the class “A” shares on his part as well
as the class “B” shares on the part of his deceased wife to his sons. This was done by Mr.
Whitehouse in order to ensure that his daughters do not claim their rights in the assets of the
company.
Critical Analysis of Court decision:
It has been found by the trial Judge after evaluating the evidences presented before it that,
the decision on the part of Mr. Whitehouse being the director has been made without good faith
and for an improper purpose. In this regard, the trial Judge was of the opinion that, though the
decision on the part of Mr. Whitehouse was void and made without involving good faith
however; it was not against any third party without prior notice for the breach of duty. The Court
was of the opinion, that in such cases, the interests of the director of a company are protected by

7BREACH OF DUTIES
the rule of indoor management. In this regard, if there are relevant evidences on the part of the
third parties which clearly indicates that the third parties were the bona fide purchasers of the
shares then the transaction in such process shall stand.
It is worth examining the fact that the mere existence of impermissible purpose does not
provide adequate evidence to ensure the exercise of the fiduciary power towards the allotment of
voidable shares. In this case, it was held by the trial Judge that, the test which was applied in
Mills v. Mills (1938) 60 CLR 150, was regarding invalidation of decision which shall be taken
into consideration only if there is a presence of impermissible purpose in the matter concerned.
In this regard, it can be argued that the “but for” test has been applied for the purpose of
evaluating that whether the presence of impermissible purpose was the main cause of the
decision. However, it has been argued on trial on the part of the defendant that the allotments of
shares were meant for the purpose of fulfilling own interests, therefore the decision was held to
be invalid. In this regard, it is worthwhile to argue that according to the decision of the Full
Court, it has held by the majority decision that the allotments of shares can be considered to be
void based on two reasons. Firstly, the company did not act according to the provisions of Article
59 of the Articles of Association of the company while making the allotment of shares.
Secondly, the allotments were made with an intention of improper purpose. In this context, the
respondents did not accept the decision and it has been argued on their part that, the class “B”
shares which were previously allotted to Alexander should have been allotted to the wife of Mr.
Whitehouse who was then shareholder of class “B” shares. Therefore, it has been argued that the
provisions of Article 59 are not applicable in case of allotment of shares which from the
beginning has been forming a part of unissued capital of the assets of the company. In this
regard, it is noteworthy to mention here that the primary issue of the appeal is concerned with the

8BREACH OF DUTIES
fact that whether the allotment of shares was issued for an improper purpose. Therefore, it can be
argued that, the consideration regarding the issue related with improper purpose must have been
addressed with a general proposition. However, emphasis should have been laid upon the fact
that the power exercised for the allotment of shares is in fact a fiduciary duty which must be
exercised by the directors for the best interests of the company.
The relevance of the decision to the development of Australian corporations:
There is a duty on the part of the directors to act bona fide i.e. in good faith. However, in
some cases, when a person occupies the position of a director for a long time then, it is obvious
that he might forget that a company possesses a separate legal personality. It is evident that a
company without its directors cannot act in its own or fulfill its legal responsibilities (McDonnell
2014). Therefore, it is important on the part of the directors to comply with the duties that have
been assigned to him for the purpose of the development of Australian Corporations. According
to the requirements of the principles of common law, a director must act in good faith for the
efficient functioning of the affairs of the company (Strine Jr 2014). The decisions of the directors
must be exercised in good faith and for the best interests of the shareholders as well.
The decision that has been held by the Court regarding the fact that whether the duty
assigned to the directors are in compliance with the subjective test of honesty and good faith
created favorable impact upon the operation of Australian companies. In this regard, it is
noteworthy to mention here that, the presence or absence of good faith on the part of the
directors depends upon certain circumstances. It is worth noting that no uniform rule has been
established so far for the purpose of evaluating whether there was a presence of good faith in
those circumstances. Therefore according to the decision, transactions entered on the part o a

9BREACH OF DUTIES
director on behalf of the company which is outside the scope of the purpose in which the
company has been established shall be considered to be in bad faith. In such cases, if the
directors of the Australian company consent to such contract knowingly, then it shall be
considered as bad faith as well.

10BREACH OF DUTIES
References:
Cases:
Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33.
Hogg v Cramphorn Ltd [1967] Ch 254.
Mills v. Mills (1938) 60 CLR 150.
Thorby v Goldberg [1964] HCA 41; (1964) 112 CLR 597.
Whitehouse v Carlton Hotel Pty Ltd [1987] 162 CLR 285.
Websites:
Asic.gov.au. (2018). ASIC Home | ASIC - Australian Securities and Investments Commission.
[online] Available at: http://www.asic.gov.au/ [Accessed 5 May 2018].
Australiancompetitionlaw.org. (2018). Australian Competition Law. [online] Available at:
http://www.australiancompetitionlaw.org [Accessed 5 May 2018].
Comlaw.gov.au. (2018). Federal Register of Legislation - Australian Government. [online]
Available at: http://www.comlaw.gov.au/Search/ [Accessed 5 May 2018].
Legislation.gov.au. (2018). Federal Register of Legislation. [online] Available at:
https://www.legislation.gov.au/ [Accessed 5 May 2018].
Journals:
Cox, J.D., 2015. Corporate Law and the Limits of Private Ordering. Wash. UL Rev., 93, p.257.
Gelter, M. and Helleringer, G., 2015. Lift Not the Painted Veil: To Whom Are Directors Duties
Really Owed. U. Ill. L. Rev., p.1069.

11BREACH OF DUTIES
Laster, J.T. and Zeberkiewicz, J.M., 2014. The rights and duties of blockholder directors. The
Business Lawyer, pp.33-60.
Leahy, J.K., 2015. Corporate Political Contributions as Bad Faith. U. Colo. L. Rev., 86, p.477.
McDonnell, B.H., 2014. Committing to doing good and doing well: Fiduciary duty in benefit
corporations. Fordham J. Corp. & Fin. L., 20, p.19.
Strine Jr, L.E., 2014. Making it easier for directors to do the right thing. Harv. Bus. L. Rev., 4,
p.235.