Discuss about the Case Study of Whitehouse v Carlton Hotel Pty Ltd 1987.
The directors of a company have been provided with various duties in relation to abiding by the responsibilities imposed on them in relation to the company one of such duty as present in both common law and statutory provisions of the Corporation Act is the duty of acting in good faith proper purpose and the best interest of the company. 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  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. The provisions related to section 181 analysed in details in the case of Whitehouse v Carlton Hotel Pty Ltd  162 CLR 285. In this assignment the main facts of this case have been highlighted. The assignment further provides the duties which the directors have been alleged to violate in the situation. In addition the assignment discusses the decision which has been made by the courts in this case and then critically analyse such decision. The paper in the end sets out any implications which company law may have relations the decision provided in this case.
Introduction of the Case
There primary issue which had to be addressed in Whitehouse v Carlton Hotel Pty Ltd  162 CLR 285 is related to the director’s duties to act in good faith, proper purpose and best interest. In the above mentioned case, the court had presented a judgement that a test of under this duty not objective, rather honesty and good faith needs to be subjectively analyzed so that it can be determined if the directors have obeyed the duty to act bona fide or not. The duty contained under section 181 of the CA has been complied or not is analyzed through making consideration of the facts surrounding the issue. In order to determine if there was a presence of element of good faith in directors activities or not, there were no fixed rules that might be applied. With reference to such facts any actions with respect to the organization taken by the directors will be taken to be in bad faith if the action is beyond the company’s purpose. Where there has been an intentional breach of law by an officer or director of the company it would be deemed by the court that such actions are not in good faith.
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. 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. Therefore, it must be determined if there was a validity of share or not.
Breach of directors duties.
The above circumstances states that the directors with respect to the company have gone against the duties to act bona fide in relation to the affairs of the corporation. The duty is imposed on the directors as both fiduciary duty and a statutory duty under the corporate legislation. The director’s actions must be in the company’s best interest. Recently, according to the section 181 of the Corporation Act, it has been provided that the directors discharging their duties to the organization must act bona fide and the purpose must be proper. The directors can be prosecuted under the provisions of civil liability as provided by section 1317E of the legislation if the provisions have not been compiled by the company’s directors. This can be done because the directors have acted in the bad faith and by transferring the shares that was unlawful with respect to the organization. Indulging neither in an action which purports to deny rights to the shareholders or strengthening own position is neither for proper purpose nor in best interest of the company let also the elements of good faith.
Discussion and analysis of court’s decision
The case had been addressed by a bench of five judges. They are namely Mason, Dawson, Brennan, Wilson and Deane JJ. In the given situation the decision that has to be taken by them it is that whether the power that has been exercised by the director is valid or not, to transfer his shares to his son under the discriminatory power under Article 127 of the Article of Association of the company provided to the director. As per the article that has been mentioned above, it has been stated that Mr Carlton has to be the company’s Permanent Governing Director and directors of the company every power that is vested on the board of directors must be vested on him alone. A judgement was passed by the court that the decision is said to be voidable if it is not made in good faith and if the purpose is improper. However, the decision that has been held by the court is not against the third party because they were unaware of the situation that caused the breach of the duty. The rule of indoor management given them the protection. The transaction can only be stated as valid if the third party knows about that transaction that has been made in good faith and about the violation of duty. Further, it was determined that where a purpose which is of a permissible nature is present it will not invalidate the act of the director to issues shares.
Adding to it, the judgement of the court is that a test that has been mentioned in the case named Mills v Mills cannot be applied in the aforementioned case because it will only follow if the purposes that are not permitted are said to be dominant. In this case the court had ruled that impermissible purpose is causative in nature “but for” its presence where there is no use of authority, rather a view which has been concluded as the issue is not in relation to permissible or competing impermissible purpose.
There was an appeal against the decision that was given by the full court on the invalidity of allocating the shares, was made by Carlton’s son regarding to the above mentioned case was discharged with the cost by the court. This decision that was given by the court was also been held by another case named Fraser v. Whalley (1864) 2 H. &M. 10, at pp 30-31. In this case it is explained that there were no allowance that was given to the directors to use the fiduciary power with respect to allocation of shares for overpowering the shareholder’s voting power by creating the new majority. However, for the same reason, the decision of the court was also held by the case named Ashburton Oil N.L v. Alpha Minerals N.L. (1971) 123 CLR 614, at p 640.
A statement that was given by the court in another case named Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cuninghame (1906) 2 Ch 34 that because the company’s shareholders does not carry any power to regulate the director’s decision, it might not be legitimate for the company’s director to make use of their power for creating the new majority and for terminating the power to vote of the shareholders who are already existing. Therefore, if this happens then the power is against the elements or provisions of their constitution.
According to the case Piercy v. S. Mills and Company (1920) 1 Ch 77, at pp 84-85, the court has given a statement that in the situation of allotting the shares falsely for the purpose that has not been permitted, the company’s directors might think that it is being done for company’s best interest. Certainly, this kind of belief does not seem to be suitable to overcome the allotment of shares’ invalidity.
However, there was a disagreement by Wilson J from majority’s decision and made a statement that he will permit the appeal that is based on the reason that is similar because it has been given by trail court. It has been stated by him that the allocation of the share can be valid in case it is done for the purpose that is improper and is in bad faith and where the third part knows about the circumstances.
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. The case further clarifies that where there has been an intentional and wilful transaction entered upon by the director contrary to legal provisions than such actions would be considered to be in a bad faith
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. Although there was dissent by two judges in relation to the decision, the decision was provided by the court as the majority of judges ruled in its favour.
Ashburton Oil N.L v. Alpha Minerals N.L. (1971) 123 CLR 614
Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cuninghame (1906) 2 Ch 34
Corporation Act 2001(Cth)
Fraser v. Whalley (1864) 2 H. &M. 10
Piercy v. S. Mills and Company (1920) 1 Ch 77
Whitehouse v Carlton Hotel Pty Ltd  162 CLR 28