Whitehouse v Carlton Hotel Case: Directors' Duties and Section 181

This case study analyzes the Whitehouse v Carlton Hotel Pty Ltd [1987] 162 CLR 285 case, focusing on directors' duties under Section 181 of the Corporations Act 2001 (Cth), which mandates good faith, proper purpose, and the best interest of the company. The case involves a director, Charles Whitehouse, who attempted to allocate shares to his son to prevent control from passing to his daughter and wife after his death. The court examined whether the allocation was in good faith, for a proper purpose, and in the best interest of the company. The analysis includes the court's reliance on previous cases like Mills v Mills, Fraser v. Whalley, Piercy v. S. Mills and Company, Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cuninghame, and Grant v. John Grant & Sons Pty. Ltd. The court ultimately ruled that the allocation was invalid due to bad faith and improper purpose, emphasizing the subjective nature of the test for Section 181 and its impact on Australian company law. The case underscores that directors must prioritize the company's interests and act with bona fide intentions. The document provides a detailed overview of the case facts, the duties breached, the court's ruling, and the implications of the decision.

Corporation Law
Section 181
corporation act 2001 (Cth)
Directors Duties
Proper purpose, Good Faith and
Best Interest
Whitehouse v Carlton Hotel Pty Ltd [1987]
162 CLR 285

INTRODUCTION
 Section 181 of the Act incorporates the duty of good faith, proper purpose and best
interest of the company
 It has been established by the case of Salomon v A Salomon and Co Ltd [1897] AC 22
that a company is a separate legal entity and the best interest of the company is not
the best interest of the directors.
 As directors have been provided the responsibility of managing the company and
taking decisions related to it, there are various situations in which a conflict of personal
and company interest takes place
 The duty provided under section 181 obliges the directors in such situation to act in
the best interest of the company rather than personal interest and ensure that their
actions depict good faith and are towards a proper purpose

Case Facts
 Charles Whitehouse was the director who had the responsibility of governing the
company in the case in context
 There were three classes of shares that were owned by Charles, his wife and his
children.
 The A class share was owned by Charles that contained the rights of the voting.
 The B class share was owned by his wife that contained the rights of partial voting and
the C class share was owned by his children that contained no rights of voting.
 Further, divorce had taken place between Charles and his wife.

Facts continued…
 Charles separated from his wife with while having the custody of his son while his wife
got the custody of his daughter
 Meanwhile, he was worried about the control of the corporation in context that will be
transferred to his daughter and wife after his death
 Therefore, he decided to issue the class B shares to his son so that such problems can
be prevented in future
 However, he got separated from his son also and then he claimed that such transfer of
shares was not considered to be valid because it was done in bad faith.
 The trial court had stated that the allocation was valid

Duties breached by the director
 The duty is imposed on the directors as both fiduciary duty and a statutory duty under
the corporate legislation
 Section 181 of the Corporation Act 2001
 Duty to work for a proper purpose
 Duty to pursue best interest of company
 Duty to take decisions in good faith

Question before the court
 Was the act of allocation of shares in good faith?
 Was the act of allocation of share for a permissible and proper purpose
 Was the act in the best interest of the company
 Subsequently was the allocation invalid

Ruling by the court
 The appeal had been dismissed by the court
 The ratio of the decision was 3:2
 The dissenting judges were BRENNAN J and WILSON J who wanted the appeal to be
allowed
 The majority was MASON, DEANE AND DAWSON JJ who held that the allocation was in
Bad faith and improper purpose

Discussion and analysis of court’s decision
 The court held that in this case the test given in Mills v Mills cannot be applied.
 The court rightly relied on Fraser v. Whalley (1864) 2 H. &M. 10, at pp 30-31 where
allocation of share to maintain majority was declared as an improper purpose
 The court further discussed the case of Piercy v. S. Mills and Company (1920) 1 Ch 77,
at pp 84-85 where it had been stated that even if allocation of shares to maintain
majority is in good faith it is not for a proper purpose

Discussion and analysis of court’s decision
 The court relied on the case of Automatic Self-Cleansing Filter Syndicate Co. Ltd. v.
Cuninghame (1906) 2 Ch 34 where creation of a new majority by suppressing the
powers of the shareholders was rendered invalid
 The court relied on the case of Grant v. John Grant &Sons Pty. Ltd. (1950) 82 CLR 1
where it was stated that the altering the voting power of the shareholders for an
improper purpose was invalid
 The decision of the court had been made appropriately and in compliance of law

Impact of the decision on company law in Australia
 The primary impact of this case in relation to company law in Australia is that it makes it clear
that unlike the objective test which is applied for the purpose of determining an issue related
to section 180(1) of the Act, the test which is imposed for the purpose of determining an issue
related to section 181 is subjective in nature. This test is that of “honesty or good faith”.
 The case signifies that whether or not good faith is present is to be analyzed by taking into
consideration the circumstances surround the issue in this case. This is a primary reason why
which there has not been any precise rule developed by the courts for the purpose of
analyzing an issue related to section 181 of the CA.
 No fixed ruled is present for analyze the existence or presence of the element of good faith in
a particular action. one of the guidelines which this case provided in relation to analyzing a
issue under section 181 is that when a director commits an action which is not in compliance
with the purpose of the company the action may be considered by the court to be an action n
bad faith based on the circumstances of the case.

Conclusion
It can be concluded from analyses that any person who has been provided with the role of
managing an organization has to ensure that they must prioritise the interest of the
corporation and depict bona fide intentions through their actions
Their actions should be based in compliance to the purpose for which the company has
been formed
The trial court in this matter ruled that the allocation of the shares have been valid
irrespective of such actions being in bad faith as the there was no knowledge on the part
of the third parties in relation to such facts.
However the decision of the trail court was rejected by the court of appeal and in doing so
the court invalidated the allocation of shares attempted in this case by the director.