Whitehouse V Carlton Hotel Pty Ltd (1987) 162 CLR 285: Essay On Impact Of Decision On Corporate Law In Australia.

Research on an Australian case (ideally not more than 10 years old since the decision by the Court) involving breach of company director’s/officer’s duties under the Corporations Act 2001.

This paper discussed the facts of the case law Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285, in which Court recognized the rule that, an act cannot be considered as the invalid act if third party involves in the transaction does not have any knowledge related to the surrounding situations in context of breach of duty. It is necessary for the third party to prove that they enter into the contract with the good faith, and contract will be binding and operative (Bartholomeusz, 2015). In this case, Court recognized the importance of the indoor management rule, and also states the relevancy of the director’s obligation.

Structure of this per includes the brief background of the case facts, duties breached by the directors of the company, evaluation of the decision taken by tribunal and valid reason behind the decision in context of Corporation Act 2001, and contribution of the decision taken by tribunal in the development of the corporate law in Australia and its impact on the companies operated in Australia. At the end, this paper is concluded by summarizing the important facts of this case.

Mr. Whitehouse possess the maximum shareholding and other relevant authorities such as decision taking author in the Carlton Hotel Pty Ltd. Class A shares were hold by Mr. Whitehouse and class B shares by his wife. children’s of the Couple holds shares of class C in the company. Mr. Whitehouse and Mrs. Whitehouse were already divorced, and Mr. Whitehouse issued shares in the company to his sons without providing information about the same to Mrs. Whitehouse and daughters, so that they could not get control of the company. In other words, scheme was framed by Mr. Whitehouse in which he decided to give the company’s power in the hands of boys. Later, his wife died and boys fought with their dad. Mr. Whitehouse take action against this allotment by stated that allotment of shares to his sons based on the improper purpose.

This problem decided by Court in this case was “whether allotment made by the company to the sons of Mr. Whitehouse (Appellants) was valid or not. In this case, shares were issued by Mr. Whitehouse of class B in the Carlton Hotel Pty. Ltd (respondent) and Court decide whether this action of Mr. Whitehouse was valid in context of the powers and discretion imposed under Mr. Whitehouse by provision 127 of the Articles of Association of the company.

Duties Breached by the Directors

It was defined by the Court that, in case judgment was not complied with the provision of the good faith and taken for improper purpose, then such judgment was voidable, but there is an exception also which state that judgment was not voidable in nature if third party was involved who does not possess any knowledge in context of the present situation which results in the duty contravention.

In this situation, third party was protected by the indoor management rule. It was necessary for the third party to show that they were a bona fide purchaser without notice, and in this situation transaction was valid.

Court further stated that, only existence of the impermissible purpose was not enough to reduce the exercise of the fiduciary power to make the allotment lot of the shares voidable. In this Court applied the test stated under Mills v Mills (1938) 60 CLR 150 and stated that test was invalid and will follow only if impermissible purpose was there.

Section 181 of the Corporation Act 2001 states the provisions related to good faith in context of directors and officers of the company. In context of this section, directors and other officers of the company must use their power and perform their duties in good faith and in the best of the company. This section further states that, director of the company must uses their power and perform their duties for proper purpose. This section accessed the duty of the Charles in context of this transaction on   the basis of section 181 and also on the basis of primary principles related to the best interest of the company.

In lieu of present case, Mr. Whitehouse uses his power to issue the shares of the company to his sons for improper purpose and on this ground he seeks remedy from the Court to invalidate the transaction. As per the general principle, it can be said that decision taken by the director of the company cannot be considered as invalid decision only on the fact that it impose unequal burdens or provide unequal benefits to the different class of the shareholders. However, directors of the company must not intentionally interfere in the rights hold by the shareholders for the purpose of providing advantage or disadvantage to any particular group of the shareholders even for providing the benefit to the company’s business. In other words, it can be said that directors of the company cannot justify their decision on the ground that they believed that providing advantage or disadvantage to particular group of shareholders was in the best interest of the company. In the present case, director (Mr. Charles) exercise their power to issuing shares to his two sons for abolishing an existing majority or precluding a particular group shareholders from attaining the majority in the future (Australian Senate, 1989).

Evaluation of the Decision Taken by Tribunal

Respondents of this case stated that this allotment affects the voting power of the Mariya Olivia that would be enjoyed by Mrs. Mariya after the death of Charles, and this clarify the shares were issued for the purpose of interfering in the voting power of the shareholders. It must be noted that, if the question in case related to the abuse of powers then the state of mind of those who acted and the motive of the person was also considered by the Court and their intentions were analyzed on the basis of surrounding situations.

This decision of the director fails to comply with this general rule because in this Charles intentionally interfere in the rights hold by the shareholders of particular group for the purpose of providing advantage or disadvantage to that group of the shareholders even for providing the benefit to the company’s business.

The recognition of the issue of improper purpose initiated with the general proposition that the power of allotment of shares is the fiduciary power, and this power must be exercised by the directors bona fide for the best interest of the company in complete. This is considered as a broad statement of principle and cannot restrict with the narrow criteria. In case law, Harlowe's Nominees Pty. Ltd. v. Woodside (Lakes Entrance) Oil Co. N.L. [1968] HCA 37; (1968) 121 CLR 483, court consider the issue of shares which was made to a large oil company for the purpose of securing the financial stability of the company, anyhow this transaction defeat the attempt made by the third party to gain the company’s control. In this case, Court decided that on the basis of primary principle, power was imposed in the director of the company to issue shares whenever required for the benefit of the company. There were number of situations when directors of the company issue shares in fair and proper manner, but such situation must provide benefit to the company only. These situations were separated from the situation when directors issue shares for maintaining the control of the company in the hands of themselves or their friends. Director’s decision was accessed in context of the rights and duty to decide whether company’s interest lie or not and this was evaluated on the basis of different practical conditions. In the present case, Mr. Charles issue shares to his two sons for the purpose of for maintaining the control of the company in the hands of themselves or their friends. Therefore, it can be said that decision taken by Charles was not for proper purpose and he fails to take decision in the good faith and in the best interest of the company (Dundas Lawyers, 2011; Fridman, n.d.).

Contribution of the Decision to the Development of Corporate Law in Australia

The majority of the judges in the Court held that allotment made by Charles to the appellants were void, and for this Court provide two reasons. First reason state that while making the allotment company fails to complied with the article 59 and second allotment was made for improper purpose. Later appeal was made by the appellants in whom they argued that court made mistake while deciding this case and even though court made the correct reasoning then also allotment can be made voidable and not void. This Appeal was dismissed by the Appellate Court with the cost, which was made by the appellant.

In this case, Court concluded that the most important purpose for which this power was used by the Charles was to make changes in the balance of the voting power and for giving the ultimate control of the company in the hands of the appellants. Court reached to the conclusion that while exercising his power Charles acted in a secret manner and these results in the non-bona fide use of the powers. Court considers two elements in context of the resolution of the issues in this context. First element deals with the improper purpose which fails to provide sufficient weight to the results of the trail judge. Second element deals with the Charles confession that his main purpose was achieved by altering the article, and result of this alteration imbalance the voting power of the shareholders (Austlii, 1987).

In this case, high Court of the Australia conduct proper purpose test for the purpose of analyzing the intention of the directors who issued shares for influencing the control of the company. In this case, court accepts the fact that director of the company was motivated with the intention to act in the best interest of the company. Majority of the judges in the high court believed that the main issue discussed in this case was purpose of Mr. Whitehouse to allot the shares and the clear answer of this question was manipulating the voting rights of the shareholders.

Decision of this court introduce new test which was named as purpose test for the directors under which Court analyzed the intention of the directors while exercising their powers either in allotment of the shares or for any other purpose. It imposed one more fiduciary obligation on part of the directors to act in best interest of the company and their intention behind any action must be good.

In this Court also state the rule that, an act cannot be considered as the invalid act if third party involves in the transaction does not have any knowledge related to the surrounding situations in context of breach of duty. It is necessary for the third party to prove that they enter into the contract with the good faith, and contract will be binding and operative

Conclusion:

After considering the above facts of the case, it is clear that there were number of situations in which directors of the company issue shares in fair and proper manner, but such situation must provide benefit to the company only. These situations were distinguished by the Court from the situation when directors issue shares for maintaining the control of the company in the hands of themselves or their friends. Directors of the company cannot justify their decision on the ground that they believed that providing advantage or disadvantage to particular group of shareholders was in the best interest of the company.

References:

Austlii, (1987). Whitehouse & Anor v. Carlton Hotel Pty. Ltd., High Court of Australia. Available at: https://iknow.cch.com.au/document/atagUio386332sl10537884/whitehouse-anor-v-carlton-hotel-pty-ltd. Accessed on 17^th May 2018.

Australian Senate, (1989). Report on the Social and Fiduciary Duties and Obligations of Company Directors. Available at: https://www.takeovers.gov.au/content/Resources/parliamentary_reports/downloads/social_fuduciary_duties_obligations.pdf. Accessed on 17^th May 2018.

Bartholomeusz, S. (2015). Directors’ Duties: Duty Not To Act For An Improper Purpose. Available at: https://youlegal.com.au/directors-duties-in-focus-improper-purpose/. Accessed on 17^th May 2018.

Corporation Act 2001- Section 181.

Dundas Lawyers, (2011). Directors’ Duties in Australia. Available at: https://www.dundaslawyers.com.au/directors-duties-in-australia/#_ftnref5. Accessed on 17^th May 2018.

Fridman, S. An Analysis of the Proper Purpose Rule. Available at: https://epublications.bond.edu.au/cgi/viewcontent.cgi?article=1145&context=blr. Accessed on 17^th May 2018.

Harlowe's Nominees Pty. Ltd. v. Woodside (Lakes Entrance) Oil Co. N.L. [1968] HCA 37; (1968) 121 CLR 483.

High Court of Australia. Whitehouse v Carlton Hotel Pty Ltd, .[1987] HCA 11. Available at: https://eresources.hcourt.gov.au/showbyHandle/1/9713. Accessed on 17^th May 2018.

Mills V Mills (1938) 60 CLR 150.

Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285.