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LAW00004-The Concept Of Fiduciary

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Questions:

1.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).]
 
2.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:

Introduction:

1.Fiduciary duties impose obligations on the professionals in context of honesty, ethics, and fairness. In other words, professionals owns fiduciary duties in lieu of their clients, which states that services provided by the professionals to their clients must not affected by the personal interest of the professionals. It must be noted that, fiduciary duties are not an optional duties but these duties are strictly applied on the professionals, as these duties ensure the trust and confidence between the professional and client.

In the present era, honesty and trust are the most important elements for ensuring the survival and profitability of the business. It is not possible for the organization to ensure the growth of the organization without maintain trust and honesty with their customers. Growth and survival of the organizations depends on the reputation of the organization, and this image can only be made by maintaining the trust and confidence with the customers.

This essay describes the description and features of the fiduciary duty defined under the Corporate law of Australia. As stated by the High Court of Australia in case law Hospital Products Ltd v United States Surgical Corporation [1984] HCA 64, fiduciary duty arises out of an undertaking, express or implied, by the person incurring such duty. Lastly, brief conclusion concluded this essay. 

 

Fiduciary duties:

Corporation Act 2001 recognizes the concept of the fiduciary duties, and imposes these duties on directors, members, and employees of the organization. Organizations directors and officers own fiduciary duties towards the different stakeholders of the organization. As organization is deemed as legal person and holds the separate entity, because of which directors and officers own fiduciary towards the organization also.  Fiduciary duties under the corporate law impose different types of obligations on the directors and officers such as they are liable to ensure the best judgements provisions and also to ensure the best interest of the company. Fiduciary duties include some other duties also, and some of these duties are stated below:

  • Directors and officers of the organization must act in good faith, which means there intention must be good and in the best interest of the company.
  • Directors and officers of the organization must take actions and make decisions for the right purpose, which means they are under obligation to take the decisions with the good intention and after evaluating all the necessary aspects (AICD, n.d.

 Corporation Act 2001 recognizes these fiduciary duties under section 180, 181, 182, 183, and 184 of the Act. As directors and officers of the company own these duties towards the stakeholders and organizations, which means, they need to comply with the stated sections of Act. It must be noted that, these fiduciary duties are not only recognized by the Corporation Act 2001, but these duties are also recognized by the Common law.

This can be understood with the case law Fulham Football Club Ltd. v Cabra Estates in which Court stated that, directors of the organization must not enter into the contract which prevent the organization in exercising their discretion in future and also the manner in which they will vote in the future.

The most important duty imposed on the directors of the organization is to promote the success of the organization. This duty was mainly explained by the Lord Greene in case law Re Smith & Fawcett Ltd [1942] Ch 304, [1942] 1 All ER 542. In this case, Court stated that directors are under obligation to use their authority in bona fide manner.

As defined by the Berle, whole powers which were imposed under the company or the management of the company must be used only for the benefit of the shareholders of the organization. In case law Hutton v West Cork Railway Co (1883) 23 Ch D 654, Court stated that only one way was there through which directors of the organization can encourage the success of the organization is that considering the interest of the other groups in the organization. 

 


Fiduciary duty is defined as the obligation of the person who agrees to take action for the organization or on behalf of the organization or any other person related to the organization. This obligation deals with any particular action related to those circumstances which leads to the trust and confidence. It needs to be understood that fiduciary duty is derived from the duty of trust and honesty-Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28.

This principle of the fiduciary duty encourage the importance of loyalty on art of the individual, which means in context of fiduciary individual own number of duties such as duty to act for the right this, act in the best interest of the organization, must not take any personal advantage by causing harm to the organization, Directors must not conduct any such action which results in the conflict of interest. It must be noted that, scope of fiduciary is not only limited to these duties but it includes wide range of duties.

There are number of situations when Courts consider the fiduciary duties as the compulsory duties of the directors and officers, even though such duties are not compulsory. However, it is necessary to understand that there is very thin line of difference between the fiduciary and non-fiduciary duties, and because of this it is difficult to determine the utility and importance of these duties.

If obligation of the directors and officers of the organization are specified in the articular manner then such obligations are considered as the fiduciary obligations. Generally, these duties of directors and officers of the corporation are considered as in the best interest of the organization. As stated by Court in case law Hospital Products Ltd v United States Surgical Corporation[1984] HCA 64; (1984) 156 CLR 41, 96-97, fiduciary obligations on directors and officers must be determined as compulsory obligations. Mason J defined the primary features of the fiduciary duties in the Australia. Mason J further defined the important components of the fiduciary relationship, and in this context Judge stated that under fiduciary duty individual was ready to take any action on behalf of other person or for other person or for the good of any other person at  the time of performing their functions and also using their authority. These authorities and use of power affects the other person interest either in direct or indirect manner. In number of cases, this explanation of the Masson J was used by the Courts. 

 


It is clear from the above explanation that the most important component of the fiduciary duty is the interest of the principle. In other words, creation and understanding of the fiduciary obligation depends on the fact whether action taken by the individual is performed by considering the best interest of the principles. Therefore, it can be said that fiduciary responsibility mainly deals with the duty presentation.

Conclusion:

This part of the paper presents the fiduciary duty components in context of the Corporation Act 2001. Corporation Act 2001 recognizes these fiduciary duties under section 180, 181, 182, 183, and 184 of the Act. As directors and officers of the company own these duties towards the stakeholders and organizations, which means, they need to comply with the stated sections of Act. It must be noted that, these fiduciary duties are not only recognized by the Corporation Act 2001, but these duties are also recognized by the most important duty imposed on the directors of the organization is to promote the success of the organization.

2.General Law-In general law fiduciary duties are deemed as the most important approach, as it impose obligation on the individual to fulfill the obligations related to the trust and loyalty. Common law states that promoter of the company owns fiduciary duty towards the company because promoter and organization is in the fiduciary relationship.  

In other words, promoter own duty to ensure the trust and confidence with the company, which means, they must not take any benefit for them or any third person while conducting the promotions of the company without making the disclosures of the same to the company and the board of directors. For making the disclosures effective, promoter needs to make the disclosures to the board of directors which are independent, directors does not own any interest in the matter, existing members, and other authorized officer in this context.

In case law Tracy v Mandalay Pty Ltd [1953] HCA 9, High Court stated that disclosure made by the promoter needs to be examined by the directors of the company. In other words, promoters while making the disclosures must ensure that they were making the complete disclosure, which means, there was no requirement to incomplete disclosures.

Partnership law- As stated the most necessary component of the fiduciary relationship is the nature of these duties. In different situations Court defined these duties as the compulsory obligations of each and every individual, if they own the relationship of trust with the other person. Important components of the fiduciary relationship and in this context Court stated that under fiduciary duty individual was ready to take any action on behalf of other person or for other person or for the good of any other person at the time of performing their functions and also using their authority. These authorities and use of power affects the other person interest either in direct or indirect manner. It is necessary to understand that power of the fiduciary concept in terms of the partnership law based on the question of the relationship of the partnership.  This component of the partnership is very necessary for ensuring the development and formation of the partnership, and this component is also important for understanding the circumstances in which fiduciary duties of the individual is not exist. In these situations also relationship of partnership exists between the parties (Ferguson, 2011. In Bacon VC, Helmore v Smith (No 1) (1886–7) 35 Ch D 436 at 444, Court stated that fiduciary relationship exist between the partners because of their trust on each other in context of the business continuity. The relationship between the partners mainly based on the mutual trust and confidence owned by the partners on each other in terms of conducting any specific business activity. However, such activity must be conducted for the benefit of all the partners and not only for the benefit of the one partner. It is the common notion that basic element of the partnership deals with the fact that partners work for the common result and not for the personal advantage.

Approach related to the fiduciary obligation involve number of proposals like partners of the firm must not use any occasion related to the business for their own personal advantage, and they must not involve in any conflicts. In other words, partners of the firm must take action which only ensures the interest of the form and interest of all the partners in the common. This is considered as most important duty of the partners in the firm in terms of the fiduciary obligation.

Section 28 of the Partnership act 1958 defines the important provisions in terms of the accounts, which states that partners must maintain the fair accounts of the firm, and does not include any false or misleading information in the accounts.

Sections 29 of the Act states, partners of the firm are accountable in context of the profit of the partners in common.

Section 30 of the Act defines the provisions related to the competition which states that, partners need to ensure the healthy competition.

All these sections introduce the fiduciary obligations of the partners in terms of the partnership law. 

 


Corporation Act 2001- This is another important law which recognizes the importance of the Fiduciary duties in terms of the directors, officers, members, and other stakeholders. Both directors and officers of the organization own fiduciary obligations in terms of each and every stakeholder such as creditors, employees, suppliers, community, and shareholders, and consumers. Fiduciary obligations recognized by the common law are similar to the statutory duties imposed by the Corporation Act 2001. It is necessary for the directors and officers of the company to comply with both statutory law duties and fiduciary obligations (Norsworthey, 2016. As per the Corporation Act 2001, some of these fiduciary duties imposed by the Act are stated below:

  • Section 180 of the Act introduce both statutory as well as fiduciary obligation for the directors, as it states that directions of the company must carry their actions with due care and diligence. In other words, directors need to take their actions with the care and after evaluating all the aspects of the situation.
  • Section 181 of the Act states that directors and officers need to conduct their all actions in the good faith and for the right person. This duty is defined as both statutory and also fiduciary duty under the Corporations Act 2001 and common law.
  • Section 182 of the Act also impose obligation on the directors of the organization to not use any information in wrong way or for their own personal advantage, which they get in the capacity of the director. This duty is also considered as both statutory as well as fiduciary duty.
  • Section 183 of the Act defines the duty of the director to not use their position for any wrong reason and for getting the advantage for themselves. This duty is also considered as both statutory as well as fiduciary duty.

This can be understood with the help of the case law ASIC v Adler, as in this Court stated that all the above stated sections are not only the statutory duties, but also the fiduciary duties. In other words, Corporation Act 2001 not only recognizes the importance of the statutory obligations but also the fiduciary obligations. 

 

References:

AICD. General duties of directors. Available at https://aicd.companydirectors.com.au/~/media/cd2/resources/director-resources/director-tools/pdf/05446-6-2-duties-directors_general-duties-directors_a4-web.ashx. Accessed on 27th August 2018.

ASIC v Adler 2002.

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

Corporation Act 2001- Section 180.

Corporation Act 2001- Section 181.

Corporation Act 2001- Section 182.

Corporation Act 2001- Section 183.

Criterion Properties plc v Stratford UK Properties LLC [2004] UKHL 28

Ferguson, G. (2011. partnerships-breach of duty. Available at https://www.businesslawtoday.com.au/corporate-structuring/partnerships-breach-of-duty/. Accessed on 27th August 2018.

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

Hutton v West Cork Railway Co (1883) 23 Ch D 654

Nosworthy, B. (2016). Nosworthy, Beth --- "A Directors' Fiduciary Duty of Disclosure: The Case(s) Against" [2016] UNSWLawJl 51; (2016) 39(4) University of New South Wales Law Journal 1389. Available at https://www.austlii.edu.au/au/journals/UNSWLJ/2016/51.html. Accessed on 27th August 2018.

Partnership Act 1958- Section 28.

Partnership Act 1958- Section 29.  

Partnership Act 1958- Section 30.

Re Smith & Fawcett Ltd [1942] Ch 304, [1942] 1 All ER 542

OR

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