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LAW00004 Company Law | The Concept of the Fiduciary Duties

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Questions:

(i) In the context of corporate law, discuss the following statement and explain the fiduciary concept in detail: 

“Since the decision of the High Court in Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64, it has been accepted in this country that a fiduciary duty arises out of an undertaking, express or implied, by the person incurring such duty.”[ Oliver Hume South East Queensland Pty Ltd v Investa Residential Group Pty Ltd [2017] FCAFC 141 [33] (Dowsett J).]

(ii) Discuss examples that demonstrate this fiduciary concept in each of the following areas, referring to case law and statute as necessary: 

(a)The general law (as it relates to the formation of a company); 
(b)A Partnership Act (in an Australian State or Territory); AND 
(c)The Corporations Act 2001 (Cth). 

Answers:

1.Introduction:

Those relationships which are protected by the equity is defined as the fiduciary relationship, and it arise in those situations when one undertaking act in the interest of another undertaking in such manner as it confers the discretion on first undertaking, and this discretion directly affects the economic interest of another undertaking. Fiduciary relationship give rise to the duties in which one person owns the fiduciary duty towards another person. The most important feature of this relationship is that fiduciary agrees to act for or on behalf or in the interest of another person.

This paper discusses the concept of the fiduciary duties in context of the corporate law. “As stated in the conclusion given by the High Court in Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64, it has been accepted in this country that a fiduciary duty arises out of an undertaking, express or implied, by the person incurring such duty”. Structure of this paper includes the discussion of the relevant topic, and this is followed by the brief conclusion which concludes all the relevant aspects of this paper.

Discussion:


Directors and officers of the company own fiduciary duties towards the corporate stakeholders and also towards the organization itself. It is said that directors and officers of the organization own fiduciary duties, and these duties in the corporate law impose obligations on the directors to implement best judgement rule and ensure best interest of the organization. Directors are also under obligation to act in good faith and conduct actions for proper purpose.

It is necessary for the directors of the company to not breach their fiduciary duties sated under both common law and Corporations Act 2001. As section 180-184 of the Corporations Act 2001 defines the duties of directors, and these duties are similar to the fiduciary duties stated under the common law.

Section 180 of the Act defines the business judgement rules for the directors which ensure the protection of the directors in case of innocent mistakes. It states, directors and officers can take reasonable risk for the purpose of directing the operations and business affairs of the organization, and they can also make innocent mistakes. The business judgement rule under the corporate law imposes number of fiduciary duties on the directors and officers such as decisions related to the operations and affairs of business must be made on informed basis and in good faith, and directors must believe in their decisions in honest manner that their decision serves best interest to the shareholder’s and corporations.

A fiduciary is considered as that person who has undertaken to conduct action for or on behalf of any other person on any specific matter in those situations which give result to the trust and confidence. The actual duty of the fiduciary is considered as the duty of the trustworthiness as stated under the Bristol and West Building Society v Mothew [1998] Ch 1 per Millett LJ at 18A. 

This principle related to the fiduciary duty is allowed the individual’s loyalty of his/her fiduciary. It must be noted that, actual liability of the fiduciary has number of facts such as fiduciary must act in good faith, must not ensure their personal interest on the stake of the trust, must not involve in any conflict of interest, and must not act in any such manner which ensures benefit for them or for third party without taking the approval of his principal. These entire lists do not intend to be a complete list, but this list sufficiently shows the nature of the fiduciary obligations.

The features of the undertaking in context of fiduciary is considered as the usual illustration of different condition in which Courts will consider the assumed duties as compulsory duties even though such duties are unilateral in nature (News Ltd v Australian Rugby League Ltd). But there is no scope to doubt in terms of the utility for the purpose of determining the exact border between those activities which are fiduciary and between those also which are not fiduciary.

As stated by the Finn, rules are everything and this is the approach which regulates each and every concept. There is no such concept of fiduciary, and this concept is also deceptive because of its approach in terms of faith and sureness. It is clear that fiduciary duties arise between the parties notwithstanding the absence of any relationship related to the trust and confidence. Even in case, trustee owned any fiduciary duty, then also that duty does not ascend due to faith, which is present in the relationship between the parties. In other words, there is no need of any relationship which ensures trust and confidence between the parties. However, in context of the current law, it is considered as essential to take decision whether the concept of fiduciary is related with any specific responsibility in context of determining whether any penalties should be imposed on party or not.

In one context, this undertaking is deemed as fiduciary undertaking if it includes the initiate that obligation will be achieved in any specific manner. There are number of times when this type of performance is defined as being in the best interest of the principal. In case law Hospital Products Ltd v United States Surgical Corporation[1984] HCA 64; (1984) 156 CLR 41, 96-97, Mason J explained in context of the leading formulation of the fiduciary duty in Australia. As stated by the Mason J, the most important element of the fiduciary relationship was that the concept of fiduciary was agreed to conduct action for or on behalf of any other person or in the interest of any other person while exercising their power or discretion which directly or indirectly impact the interest of any other person in the legal or practical manner. This statement of mason J was recognized by number of judges in different situations.

It is not important in terms of this paper to object the accepted design and understanding of the fiduciary duty which requires that any action must be performed in the best interest of the principal. It may be considered as more good approach because it determines such components through which undertaking can be held fiduciary responsible. It is clear that, responsibility mainly relates to the presentation of the duty. This theory also have a negative aspect which states that undertaking concern is not important in context of the fiduciary duty, and there are number of reasons because of which this negative aspect of the fiduciary duty is more preferred.

Conclusion:

After considering the above facts, it is clear that characteristics of the undertaking in context of fiduciary is considered as the usual illustration of different conditions in which Courts consider the duties as compulsory duties even though such duties are unilateral in nature. The most important element of the fiduciary relationship was that the concept of fiduciary was agreed to conduct action for or on behalf of any other person or in the interest of any other person while exercising their power or discretion which directly or indirectly impact the interest of any other person in the legal or practical manner.

2.Part 1

In context of the general law, promoter of the organization stands in the fiduciary relationship with the organization. Promoter maintains the relationship of trust and confidence with the organization, as they are under the obligation to make sure that they did not make any profit from the promotions of the company without disclosing the same to the company. For the purpose of being effective such disclosure must be made by the promoter to the completely independent board of directors of the organization or to the members who are existing and completely potential. It must be noted that High Court of the Australia decided in case law Tracy v Mandalay Pty Ltd [1953] HCA 9; (1953) 88 CLR 215, mainly examined the nature of the disclosures required from the promoter of the company.

Promoter is under obligation to make such disclosures which must be complete in nature. In other words, promoter must not make any partial or incomplete disclosure. However, it must be noted that there is no such provision which prevent the promoter of the organization from selling his/her property to the organization. As stated in answer 1, fiduciary relationship gives rise to the fiduciary duties, and because of this promoter own fiduciary duty towards the organization.

Part 2

The most important element of the fiduciary relationship was that the concept of fiduciary was agreed to conduct action for or on behalf of any other person or in the interest of any other person while exercising their power or discretion which directly or indirectly impact the interest of any other person in the legal or practical manner. It must be noted that strength of the fiduciary relationship in the partnership is depend on the subject matter of the partnership relationship. It is necessary to understand that this element is critical in context of establishing the partnership, and it is very difficult to understand those situations in which fiduciary relationships is not present between the parties but still Court found the relationship of partnership between the parties. This can be understood through case law Birtchnell v Equity Trustees Executors & Agency Co Ltd [1929] HCA 24; (1929) 42 CLR 384, in this case Justice Dixon made comment on the nature of the fiduciary relationships. Dixon further states that relationship between the parties was fiduciary relationship, but it was not possible to conceive the stronger case of the fiduciary relationship in contrast of that which exists between the parties. Mutual confidence between the parties is deemed as the life blood of the transaction. This happens because they trust each other in the capacity of partners.

In case law Bacon VC, Helmore v Smith (No 1) (1886–7) 35 Ch D 436 at 444, Court held that this happen because partners continuously trust each other in the context of business continuity. The relationship between the two is mainly based on the mutual confidence that partners of the business engage in any particular activity or transaction for the joint advantage only and not only for the personal advantage. At some point it arises from the concept that partners are associated with each other for a common result, and they both are agents for one another.
Concept of the fiduciary duty includes the number of propositions such as partners of the organization must not withdraw their business opportunity from the firm, and partners of the partnership must try to avoid the conflicts or possible conflicts of interest. Section 28, 29, 30 of the Partnership act 1958 states the fundamental principles related to the accounts, accountability for profits, and competition, and all these principles define the fiduciary obligations of the partners under the partnership.

Section 28 defines the provision related to accounts, and as per this section, partners is under fiduciary obligation to represent the true facts in the accounts of the firm.

Section 29 defines the provision related to accountability for profits, and as per this section, partners of the organization must be held accountable for their firm in terms of the private profits earned by the partners in their firm without the consent of other partners and from the transaction of partnership.  

Section 30 defines the provision related to competition, and as per this section, partners must not use any unfair tactics against their competitors.

Part 3

Corporation Act 2001 imposes number of fiduciary obligations on the directors and officers of the organization, and all these fiduciary obligations are stated under this Act. Individuals hold the position of directors and officers of the organization are under obligation to fulfill their fiduciary duties and also statutory duties. As stated, directors and officers own fiduciary duties towards all the stakeholders of the organization and towards the organization also. It must be noted that those individuals who are appointed at the government board and these boards are not companies then such individuals are not bound by the Corporations Act 2001. Statutory duties are parallel to the common law duties, and these duties must be adhere by the common law. Under Corporation Act 2001, following are the fiduciary duties imposed on the directors and officers of the organization:

  • Directors and officers of the organization must act with care and diligence. This duty is also recognized under the Corporations Act 2001 under section 180 of the Act, which states that directors must take any decision and perform all the functions after considering the aspects of the business and its impact.
  • Directors and officers must act in good faith and for proper purpose. This duty is also recognized under the Corporations Act 2001 under section 181 of the Act.
  • Directors and officers must avoid the improper use of any information which they receive in the capacity of director. This duty is also recognized under the Corporations Act 2001 under section 182 of the Act.
  • Directors and officers must avoid the improper use of position. This duty is also recognized under the Corporations Act 2001 under section 182 of the Act.

Directors also own duty towards the creditors of the organization at the time when company becomes insolvent or at the time when there is real risk of insolvency. This can be understood through the case law Kinsela v Russell Kinsela Pty Ltd (in liq.) (1986) 10 ACLR 395,  in which court determine this duty as fiduciary duty of the director of the company.

In case of Howard Smith v Ampol Petroleum, both Ampel and its associated company try to takeovers the Millers, and on the other side Howard Smith also tries to get the control of the Millers. In this director of the Millers provoke the Howard Smith to make the rival takeover offer by issuing shares the Howards Smith. Millers need the additional capital at the similar time, and it has been advised to the miller that they must borrow the money instead of issuing more shares.

In this case, Court held that directors exceed their powers while issuing the shares and this action breach their duty of the good faith. Court further stated that directors breach their fiduciary duties imposed by the common and Corporation Act 2001

References

Legal match.. What are Corporate Fiduciary Duties?. < https://www.legalmatch.com/law-library/article/corporate-fiduciary-duties.html>

Denton, Fiduciary Duty – Principles,

<https://www.davidhdenton.com/uploads/2/3/1/2/23125402/fiduciary_duties_-_principles.pdf. Accessed on 16th August 2018>

McCarthy, A Summary of John Finnis’s Theory of Natural Law, (2015 < https://hughmccarthylawscienceasc.wordpress.com/2015/01/03/a-summary-of-john-finniss-theory-of-natural-law/>.

Joves Edelman, The role of status in the law of obligations: common callings, implied terms and lessons for fiduciary duties, (2013), <https://www.supremecourt.wa.gov.au/_files/The%20Role%20of%20Status%20in%20the%20Law%20of%20Obligations%20Edelman%20J%20July%202013.pdf>.

James Glover, Conflicts of interest, conflicts of duty and the information professional. <https://classic.austlii.edu.au/au/journals/AdelLawRw/2002/14.pdf>.

Moores, The Directors Series: Part 2 - Fiduciary Duties, (2014).  <https://www.moores.com.au/news/the-directors-series-part-2-fiduciary-duties>.

Case laws

Tracy v Mandalay Pty Ltd [1953] HCA 9; (1953) 88 CLR 215.

Birtchnell v Equity Trustees Executors & Agency Co Ltd [1929] HCA 24; (1929) 42 CLR 384.

Bacon VC, Helmore v Smith (No 1) (1886–7) 35 Ch D 436 at 444.

Kinsela v Russell Kinsela Pty Ltd (in liq.) (1986) 10 ACLR 395.

Hospital Products Ltd v United States Surgical Corporation[1984] HCA 64; (1984) 156 CLR 41, 96-97.

Bristol and West Building Society v Mothew [1998] Ch 1 per Millett LJ at 18A.

News Ltd v Australian Rugby League Ltd (1996) 64 FCR 410.

Statute

Corporation Act 2001

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