Corporate Law: Whitehouse v Carlton Hotel Pty Ltd Case Study Analysis

This case study examines Whitehouse v Carlton Hotel Pty Ltd [1987] 162 CLR 285, a landmark ruling concerning director duties under the Corporations Act, 2001 (Cth). The case revolves around Mr. Whitehouse's actions to alter share voting rights to prevent his estranged wife from gaining control of the company upon his death, and to instead give voting rights to his sons. The analysis focuses on the breach of fiduciary duties, specifically the duty of good faith as outlined in section 181(1) of the Corporations Act. The case highlights that Mr. Whitehouse's actions were motivated by personal interests rather than the company's best interests. The court's decision, overturning the trial judge's initial ruling, emphasized that directors must act for proper purposes. The case also references Smith Ltd. v. Ampol Petroleum Ltd. and Harlowe's Nominees Pty. Ltd. v. Woodside (Lakes Entrance) Oil Co. N.L. to clarify principles of director duties, and is relevant to the 'but for test'. This case is a crucial guide for directors, emphasizing the separation of personal and corporate interests.

WHITEHOUSE V CARLTON
HOTEL PTY LTD [1987] 162
CLR 285
(Group Details: )

INTRODUCTION
 The Corporations Act, 2001 (Cth) is the current
legislation which is applicable on the operations and
working of the corporations, or as they are otherwise
referred to as in the other jurisdictions as companies.
 One of the key aspects of this legislation is
imposition of director duties.
 Whitehouse v Carlton Hotel Pty Ltd [1987] 162 CLR
285: Even though this case is more than ten years
old, it continues to be a landmark ruling in the
present time.

WHITEHOUSE V CARLTON HOTEL PTY LTD
 Mr. Charles Whitehouse: Class A Shareholder
 Voting power
 Mrs. Whitehouse: Class B Shareholder
 Partial voting power
 Children of Mr. Whitehouse and Mrs. Whitehouse: Class
B Shareholder
 No voting power
 Mr. Whitehouse and Mrs. Whitehouse legally separated.
 Mr. Whitehouse started to think that if he died at that
time, Mrs. Whitehouse would get the control of the
company.

WHITEHOUSE V CARLTON HOTEL PTY LTD
 In order to avoid this from happening, he issued the
partial voting class of shares to his sons also.
 This resulted in his sons getting rights of voting as well in
the company.
 Later on, Mr. Whitehouse had fallout with his sons.
 In anger, he decided that his sons should never have
been given the voting rights.
 This led to him directing that the share register had to be
modified/ corrected.
 These instances resulted in Mr. Whitehouse being sued
by his own sons.

DUTIES BREACHED: SECTIONS
 Section 181(1) Corporations Act, 2001: Duty of
Good Faith.
 The theme is to work towards the interests of
the company, instead of conducting the
business in a manner which does just the
opposite.
 In case the criteria lay down under this section
is not fulfilled, civil liabilities are applied.
 The civil penalty provisions are provided in detail
under section 1317E of the Corporations Act.

DUTIES BREACHED: REASONS FOR BREACH
 The reason for issuing these shares was not to bring any benefit
to the company.
 Instead, the focus here was to not let Mrs. Whitehouse get the
control over the company, in case Mr. Whitehouse died.
 The entire transaction was undertaken by Mr. Whitehouse just to
give the control of the company from the rightful shareholders,
being Mrs. Whitehouse, to his sons, due to the changed
circumstances in event of the separation of Mr. Whitehouse and
Mrs. Whitehouse.
 This makes it very clear that the purpose of this transaction was
personal.
 In no way can these be shown to be in the best interest of the
company (Australasian Legal Information Institute, 2018).

COURT DECISION
 Mr. Whitehouse had been in breach of his fiduciary duties.
 The reason given for this was the shares issued to his sons,
only to dilute the voting power held by his Mrs. Whitehouse
in events of his death.
 The fiduciary duty owed by Mr. Whitehouse required him to
undertake the work for propose purpose, but this was
completely ignored by Mr. Whitehouse in view of the court.
 The matter was initially presented before the trial judge,
which had ruled in favour of Mr. Whitehouse.
 However, when the matter went to higher court, i.e. to the
Full Court, this decision was overturned.

COURT DECISION
 The fiduciary duty owed by Mr. Whitehouse required him to
undertake the work for propose purpose, but this was
completely ignored by Mr. Whitehouse in view of the court.
 In coming to the ruling of this case, the court made
reference to Smith Ltd. v. Ampol Petroleum Ltd. (1974) A.C.
821 in terms of considering the powers which were
exercised in the case regarding the shares being issued.
 The court also made reference to the case of Harlowe's
Nominees Pty. Ltd. v. Woodside (Lakes Entrance) Oil Co.
N.L. (1968) 121 C.L.R. 483 in consideration of the improper
purpose issue beginning with general proposition.

RELEVANCE OF CASE
 This case clarified the dual aspect as is covered under
section 181(1) of the Corporations Act, where the
section has to be entirely fulfilled.
 A striking point about this case is that this is not only
used in Australia, but has also been cited in the other
jurisdictions as well.
 This case is also famous for the ‘but for test’ given
under it.
 This is an important guidance to the directors that they
have to keep their personal reasons aside and run the
company as a separate entity.

REFERENCES
 Amazon AWS. (2018) 3002LAW Exam Notes. [Online] Amazon AWS. Available from:
https://nexusnotes-media.s3-ap-southeast-2.amazonaws.com/wp-content/uploads/edd/2015/06/
Will-Barker-3002LAW-Corporate-Law-Notes23615-copya.pdf [Accessed on 14 May 2018]
 Australasian Legal Information Institute. (2018) Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11;
(1987) 162 CLR 285 (7 April 1987). [Online] Australasian Legal Information Institute. Available
from: http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/1987/11.html?
stem=0&synonyms=0&query=title(Whitehouse%20and%20Carlton%20Hotel%20) [Accessed on
14 May 2018]
 Corporations Act, 2001 (Cth)
 Eclairs Group Ltd and another v JKX Oil and Gas plc and others [2013] EWHC 2631 (Ch); [2014] 1
BCLC 202
 Harlowe's Nominees Pty. Ltd. v. Woodside (Lakes Entrance) Oil Co. N.L. (1968) 121 C.L.R. 483
 Mitchell, R., O'Donnell, A., and Marshall, S. (2016) Law, Corporate Governance and Partnerships at
Work: A Study of Australian Regulatory Style and Business Practice. Oxon: Routledge.
 Valsan, R. (2016) The exercise of fiduciary powers for mixed purposes: A comment on Eclairs
Group Ltd v JKX Oil and Gas plc. [Online] Available from:
http://www.ecclblog.law.ed.ac.uk/2016/04/08/the-exercise-of-fiduciary-powers-for-mixed-purposes-
a-comment-on-eclairs-group-ltd-v-jkx-oil-and-gas-plc/ [Accessed on 14 May 2018]
 Whitehouse v. Carlton Hotel Proprietary Limited (1987) 162 CLR 285