Director fails to uphold his statutory and fiduciary duties to company

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In the recent case of Groeneveld Australia Pty Ltd & Ors v Nolten & Ors (No 3) [2010] VSC 533, the Supreme Court of Victoria held that a company director was found to have breached his statutory and fiduciary duties owing to a company of which he was the managing director by failing to disclose his conflict of interest.

Facts

Mr Nolten (the defendant) was managing director of Groeneveld Australia Pty Ltd (GA). The Court considered several situations in which Mr Nolten, directly or through companies controlled by him, received substantial benefits not disclosed to GA. One of the central claims was in respect of put and call options held by Mr Nolten over shares in GA.

The plaintiff’s claim was that Mr Nolten had breached statutory and fiduciary duties that he owed to GA and his contractual duty of honesty in exercising the put and call options. Mr Nolten had contractual rights to call for shares in GA and to put such shares to a company related to GA. Those rights were set out in two agreements entered into with GA and the related company. The first agreement entitled Mr Nolten to call for the issue of shares in GA in two lots.

The sequence of events was such that Mr Nolten exercised the second call option just prior to him receiving notification from GA of its intention to dismiss him for setting up a company in competition with GA. After Mr Nolten was dismissed, he exercised the put option. GA refused to issue shares pursuant to the second call and the related company refused to comply with its purchase obligations under the call and put option agreement.

Judgment

The Court held that, in approving the share issue for exercise of the call options, Mr Nolten had misused his position as managing director of GA for personal gain, placing himself in a position of conflict, which he did not disclose to GA. The Court pointed out that, while a fiduciary has no positive duty to disclose a conflict, if a fiduciary proposes to enter into a transaction which would amount to a breach of duty, the fiduciary must make full disclosure to the person/entity to whom the duty is owed of all relevant facts known to the fiduciary.

The issue of shares in response to the call required the approval of the board of GA. That approval was given by way of a circulating written resolution signed by the directors including Mr Nolten. Although the resolution recorded that Mr Nolten “declared his interest in the subject matter of this resolution”, he failed to disclose that his conduct may be a “proscribed circumstance” as that term was defined in the Call Option Agreement. This may have entitled GA to terminate his employment with GA, in which event, the call options under that agreement would have expired immediately and would not have been exercisable.

The Court noted that it was not enough for Mr Nolten just to declare his personal interest in the share issue but he had a duty to protect the interests of the company by disclosing to the board the matters that were relevant to GA’s decision to issue shares to him. It was his responsibility to ensure that the other directors appreciated that the conditions necessary for termination in “proscribed circumstances” may have been satisfied.

It was held that the same reasoning rendered the second call option invalid. It followed that the exercise of the put option with reference to the related company was also invalid.

The Court also found that the representations by Mr Nolten that between 2005 and 2009 he was performing his duties as managing director of GA consistently with his statutory and fiduciary obligations were false, misleading and deceptive. The other directors were found to have been induced by the misleading and deceptive conduct to authorise the share issue under the erroneous assumption that there was no basis to terminate Mr Nolten’s employment in proscribed circumstances.

Further, the Court determined that Mr Nolten’s conduct amounted to fraud or deceit.

It was also held that there was a “good faith” implied term in both option agreements to the effect that Mr Nolten’s contractual rights pursuant to the call option agreements were conditional on him upholding his fiduciary and statutory duties owed to GA. As a result, Mr Nolten had breached the good faith terms.

GA was entitled to remedies against Mr Nolten for breach of his fiduciary and statutory duties on each of the claims made by it.

Comment

The decision serves as a timely reminder for directors to ensure that they make full and frank disclosures regarding any possible conflict or profit out of their fiduciary position where failure to do so would amount to a breach of duty. A director considering entering into an arrangement, on behalf of a company, which entitles the director to a financial benefit must always ensure they are acting in the best interests of the company and for a proper purpose and must make full disclosure of such matters to the board of directors.

To view a full extract of the Court’s decision click here

Contact details

Melbourne
Michael Linehan, Partner
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Sydney
Darren Pereira, Partner
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Jon Cane, Partner
T: +61 (0)2 8083 0489
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Brisbane
Philip Vickery, Partner
T: +61 (0)7 3135 0632
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