Business and Corporations Law: Kokotovich Constructions Case Analysis

This report provides an in-depth analysis of the Kokotovich Constructions Pty Ltd & Ors v Wallington (1995) case, focusing on the breach of fiduciary duties by a director under the Corporations Act 2001 (Cth). The case involved issues related to share allotment and the misuse of power by Mr. Kokotovich. The report examines the facts of the case, the infringement of directors' duties, and the court's decision. The analysis highlights how the director failed to act in good faith and improperly used his position for personal gain, leading to a breach of sections 181 and 182 of the Act. The court's decision emphasized the importance of directors fulfilling their fiduciary duties for the benefit of the corporation. The report also discusses the relevance of the case in demonstrating the consequences of misusing directorial powers and the validity of shares regardless of voting rights or dividends. The conclusion reiterates the significance of directors acting in the best interests of the company and the court's role in ensuring compliance with corporate law. The case highlights the legal implications of directors' actions and the potential for court intervention when fiduciary duties are violated.

Business and
Corporations Law
Kokotovich Constructions Pty Ltd & Ors v
Wallington (1995) 13 ACLC 1113

Table of Contents
Introduction................................................................................................................................2
Facts of the Case........................................................................................................................3
Infringement of Directors’ Duties..............................................................................................4
Analysis of the decision of the Court.........................................................................................5
Relevance of the Case................................................................................................................6
Conclusion..................................................................................................................................7
References..................................................................................................................................8

Introduction
Directors are required to comply with a number of duties given under the Corporations Act
2001 (Cth) in order to ensure that they exercise their powers and take business decisions for
the interest of the company. This report will evaluate Kokotovich Constructions Pty Ltd &
Ors v Wallington (1995) 13 ACLC 1113 case in which the breach of fiduciary duties of a
director was discussed regarding issues of shares allotment in the corporation. In this present
case, an appeal was made against the order given by Honourable Judge Young in Wallington
v Kokotovich Constructions Pty Ltd (1993) 11 ACLC 1207 case. The Court of Appeal
rejected the appeal by stating that the judgement given by Young J prevailed in this matter.
The Court of Appeal evaluated all the evidence and information available in the case to
provide the judgement made by the Supreme Court of New South Wales is correct in this
case (Wolters Kluwer, 2018). This report will evaluate the facts of this care and analyse the
duties breached by the director as given under the Corporations Act 2001 (Cth). This report
will critically examine the judgement of the court and evaluate the relevance or impact of the
case.

Facts of the Case
In the present case, an appeal was made on the judgement given by Young J after evaluating
the four issues given in the case. While given their judgement, the Court of Appeal evaluated
these four issues as well which concerns with Corporations Law and duties of directors. In
this case, an intimate relationship exists between Mr Nikola Kokotovich and Mrs Elaine
Wallington. Young J held in his judgement that the relationship between the parties plays a
significant role in his judgement. He provided that the relationship between parties is both an
emotional and business association. Both parties were married, but they divorced afterwards.
Mrs Wallington left her job at the railway authority to work for Mr Kokotovich where she
performs work such as preparing of quotations, writing books and performing various other
administrative tasks (Bose, 2016). Mr Kokotovich decided to incorporate his business based
on which two corporations were formed which include N. K. Plant Hire Pty Limited, which
had been liquidated and Kokotovich Constructions Pty Limited. Mr Kokotovich testified that
he always wanted to keep the business of Kokotovich Constructions under his sole direction,
however, Mr Robert Bullivant, the accountant, provided that he needs a second shareholder to
incorporate his business (Wolters Kluwer, 2018). He advised Mr Kokotovich that Mrs
Wallington would have been such person. Based on the advice of the accountant, Mr
Kokotovich and Mrs Wallington both were issued shares of “A” category, and Mrs
Wallington contributed to work for Mr Kokotovich. Mr Kokotovich asked Mrs Wallington on
12th May 1992 to go to the firm of solicitors along with the seal of the company, but she
refused.
On 13th May 1992, a letter for the extraordinary general meeting was received by Mrs
Wallington which was to be held on 9th June 1992 for removing her as secretary and director
of the corporation. She was removed as a director in the meeting and on 10th December 1992,
Mr Kokotovich held a meeting for issuing 9,795 one dollar shares of the company. One of the
main issues of this case is the validity of the issuing of the shares by Mr Kokotovich. Mrs
Wallington filed a suit in Equity Division of the Supreme Court of NSW by claiming that the
allotment of shares on 10th December 1992 was invalid, failure to comply with section 194 of
the Corporations Law and claim for an order of wound up of the corporation. While deciding
the judgement for the appeal, Kirby J evaluated the procedure followed by Young J while
providing his decision. The judgement given by primary judge held that although Mrs
Wallington did not receive dividend or any rights relating to her shares however she is still a

shareholder of the company of “A” category (Sharar, 2010). Young J held that there is a
“moral relationship” between the parties, and she has moral claims because she owns the
shares of the company. The judgement was given that Mr Kokotovich has breached his
fiduciary duties towards the company by issuing shares for personal interest. Furthermore,
Young J held that the corporation should be wound up.
Infringement of Directors’ Duties
According to the Corporations Act 2001 (Cth), it is important that the directors of a company
must comply with their fiduciary duties which are imposed by the Act. Fiduciary duties focus
on the legal relationship between director and the corporation which are based on notions of
good faith and trust, and they cannot be compromised by the directors while performing their
day-to-day duties (Queensland Government, 2016). The fiduciary duties of directors as given
by the Corporations Act include:
 Duty to act in good faith
 Ensure care and diligence
 Avoid improper use of position
 Avoid improper use of information
 Disclose certain interests
Section 180 of the Act provides provisions regarding care and diligence which are required to
be followed by directors. Directors must discharge their duties and exercise their powers with
care and diligence unless the court can impose a penalty. As per section 181, directors must
ensure that they discharge their duties towards the corporation in good faith while
considering the best interest of the company and for a proper purpose (Austlii, 2018a).
Section 182 provides that directors must not improperly use their position for gaining a
personal advantage or causing detriment to the organisation (Austlii, 2018b). These duties
create a civil obligation of the directors for which the court can penalise the defaulting
director.
In the case of Kokotovich Constructions Pty Ltd & Ors v Wallington, Mr Kokotovich was
held liable for breaching his fiduciary duties towards the corporation. Kirby J held that the
judgement given by Young J prevailed in this case because Mr Kokotovich issued the shares
of the company for personal gain. If the case were judged based on the principles of the
Corporations Act 2001 (Cth), then Mr Kokotovich would have held liable for breaching

section 181 and 182 of the Act. By issuing shares to his brother and then to another company
in which he had substantial interest did not consider as an act of good faith. Although Kirby J
held that the matter of financial decisions are a responsibility of directors and the court
cannot interfere in their judgement, however, Kirby J held that the decision was not bona
fide, and the court is required to forsake its responsibility to uphold the law in the particular
situation (Wolters Kluwer, 2018). Therefore, Mr Kokotovich had breached section 181 and
182 by not acting in good faith and improperly using his position for personal gain.
Analysis of the decision of the Court
The first issue before the court was the beneficial ownership of the shares of “A” category.
Young J used the principle of “moral relationship” between the parties for describing the
relationship between the parties. Kirby J dismissed the claim made by the defendants by
stating that they did not provide any evidence which provides that an appropriate legal
ground has not been established. Kirby J argued that the judgement of Young J was based on
two factors which include that the evidence of Mrs Willington was less inconsistent and more
reliable than Mr Kokotovich and the evidence which supports the beneficial interest of Mrs
Wallington in the shares. Young J reached a conclusion based on these two factors and Kirby
J held that his judgement must stand in this case. The second issue was relating to validation
of the issue of shares under section 194 of Corporations Law. It was held that even though no
dividend was issued and no voting right was attached to the shares of Mrs Wallington,
however, there was no issue regarding the validity of the legitimacy of the shares allotment.
Kirby J rejected the claim regarding the invalidity of shares. Another issue was the validity of
1992 share allotment in which it was held that there are no fiduciary duties are imposed on
the directors by the Memorandum of Association of the corporation. The key question before
the court was whether the share allotment was in good faith and whether the purpose for
which powers were exercised is correct.
Kirby J provided that although the court should not interfere between the decision of a
company to raise finance, however, this decision was clearly not take in good faith based on
which the court is required to uphold the law. It was also held the allotment of the share was
not for a “substantial object” and the allotment could not have made “but for” the purpose of
conflicting and manipulating the voting rights of Mrs Wallington. Furthermore, Kirby J
disagreed that Mr Kokotovich is responsible for managing the daily operations of the
corporation, and he had a wide range of powers, but he cannot vote in an ordinary general

meeting. He was the manager however when it comes to specific issues, Kokotovich and
Wallington have equal voices which confirm the moral partnership between the parties.
Therefore, the allocation was set aside by Kirby J by stating that Mr Kokotovich breached his
fiduciary duties by allocating shares for an improper purpose in order to devalue the shares of
Mrs Wallington (Wolters Kluwer, 2018). Kirby J also rejected the appeal of the appellants
which provided that it is unjust to wound by a successfully running company. He stated that
the judgement was given by Young J because the real risk is further oppression and limited
nature of company’s present activities which is limited to one piece of land. Based on which
Kirby J rejected the appeal, and Priestley JA and Handley JA agreed with his judgement.
Relevance of the Case
This case focuses on the fiduciary duties which are required to be fulfilled by the directors of
a company. Directors have powers to make business decisions for a company, therefore, they
are required to ensure that they exercise their power properly and take business decisions
based on good faith. In this case, a number of concerns are raised in the case relating to the
application of the Corporations law and fiduciary duties of a director. Firstly, the case proves
that validity of shares is not affected by the fact whether a shareholder has voting rights or
whether the dividend is given or not. The case also shows how directors can misuse their
powers for gaining personal interest. Therefore, many fiduciary duties are given to the
directors under the Corporations Act which are required to comply by them for ensuring that
they properly use their powers and making a business decision for company’s interest
(Tomasic, Bottomley and McQueen, 2002). This case shows that misusing of directors
powers for achieving personal interest is wrong and the court can wound up the company in
case directors failed to adhere to their fiduciary duties.

Conclusion
In conclusion, directors have to fulfil their fiduciary duties while taking business decisions
for ensuring that they make business decisions for the interest of the corporation rather than
personal interest. In Kokotovich Constructions Pty Ltd & Ors v Wallington case, the appeal
made by the appellants against the judgement of Young J was rejected by Kirby J. It was held
that the shares held by Mrs Wallington are valid and Mr Kokotovich breached his fiduciary
duties by misusing his powers and not taking decisions in good faith. It was held that the
decision of allocation of shares by Mr Kokotovich was for devaluing the shares of Mrs
Wallington based on which he breached his fiduciary duties. Furthermore, Kirby J agreed
with the judgement of wound up of the company because according to him the real risk was
further oppression and the operations of the business were limited. This case focuses on the
importance of directors’ fiduciary duties which ensure that they make business decisions for
the interest of the corporation rather than fulfil personal interest.

References
Austlii. (2018a) CORPORATIONS ACT 2001 - SECT 181 Good faith--civil obligations.
[Online] Austlii. Available at:
http://www8.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ca2001172/s181.html
[Accessed on 18th May 2018].
Austlii. (2018b) CORPORATIONS ACT 2001 - SECT 182 Use of position--civil obligations.
[Online] Austlii. Available at:
http://www8.austlii.edu.au/cgi-bin/viewdoc/au/legis/cth/consol_act/ca2001172/s182.html
[Accessed on 18th May 2018].
Bose, P.K. (2016) Corporate Governance & Plight of Minority Shareholders: An Attempt to
Reconcile. Journal of Advances in Social Science and Humanities, 2(05).
Corporations Act 2001 (Cth)
Kokotovich Constructions Pty Ltd & Ors v Wallington (1995) 13 ACLC 1113
Queensland Government. (2016) Corporations Act 2001 (Cth) (the Corporations Act).
[Online] Queensland Government. Available at:
https://www.premiers.qld.gov.au/publications/categories/policies-and-codes/handbooks/
welcome-aboard/member-duties/corp-act-2001-c.aspx [Accessed on 18th May 2018].
Sharar, Z. (2010) Minority Shareholders' Remedies In Public Shareholding Companies:
Comparing The State of Qatar and Australia. [PDF] Austlii. Retrieved from
http://www.austlii.edu.au/au/journals/ElderLRev/2010/2.pdf [Accessed on 18th May 2018].
Tomasic, R., Bottomley, S. and McQueen, R. (2002) Corporations law in Australia.
Annandale: Federation Press.
Wallington v Kokotovich Constructions Pty Ltd (1993) 11 ACLC 1207
Wolters Kluwer. (2018) KOKOTOVICH CONSTRUCTIONS PTY LTD & ORS v
WALLINGTON, Supreme Court of New South Wales, Court of Appeal, 14 July 1995. [Online]
Wolters Kluwer. Available at:
https://iknow.cch.com.au/document/atagUio382129sl10487613/kokotovich-constructions-

pty-ltd-ors-v-wallington-supreme-court-of-new-south-wales-court-of-appeal-14-july-1995
[Accessed on 18th May 2018].