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Legal Provisions Of Groeneveld Australia

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Question:

Discuss about the Legal Provisions of Groeneveld Australia Pty Ltd,Ors v Nolten & Ors.
 
 

Answer:

Introduction

The paper discusses the legal provisions of the case of Groeneveld Australia Pty Ltd & Ors v Nolten & Ors (No 3) [2010] VSC 533. The Corporation Act 2001 provides statutory duties which the directors of a company must comply with disposing off their duties. The legislations provide statutory directors duties through Section 180-184. Section 181 provides that the actions of the directors should be in favor of the best interest of the company. According to section 181 the directors must not misuse their position in or to gain a personal benefit or benefit for another person by bring detriment to the company. Section 183 provides that the directors must not use the information obtained through the company to get personal benefits by bringing detriment to the company. According to section 184 if the directors intentionally and recklessly breach the duties in section 181-183 they are liable for criminal proceedings[1]. There are other duties which have been imposed on the directors of the company through common law which include duty of acting bona fide and for the interest of the company, discretion retaining duty, responsibility of avoiding conflict of interest and not using power in an improper manner. The directors can be removed from the position if they fail to comply with the duties and may also have to pay compensation to the company. The directors can also be banned from managing any other corporation for a period up to five years if it is found that they have breached their duties.

Case facts  

The case took place in the Supreme Court of Victoria before the commercial and equity division commercial court. In this case the plaintiff was Groeneveld Australia pty ltd and the defendant was wouter nolten & ors. The case is concerned with director’s duties with respect to a company. In this case the plaintiff alleged that fiduciary and statutory duties of directors had been breached by the defendants. The directors did not provide accounts for profits, allowance for fiduciary’s efforts, resources, property and skills[2]. The claim was based on various payments made by Groeneveld South Island Limited who was the distributor of the plaintiff to the defendants. The first defendant was the managing director of the plaintiff at the time of incorporation. The employment was terminated because the defendant allegedly breached director’s duties which are under review of this case[3]. The plaintiff was relying on common law and equitable remedies against the defendant and the company related to him with respect to the breach of fiduciary and statutory duties by him.

 

Breach of directors duties

The plaintiff had made an allegation that the defendant breached the fiduciary and statutory duties which he owed to the defendant company by not disclosing the private arrangement he created with GSI. The plaintiff now wanted the accounts of profit which were made by the defendant due to such arrangements.  The fact provided by the plaintiff was admitted by the defendant that they received payments from the company however the claim was defended by the defendants by stating that the payments were for a legal purpose and were not related to the distribution arrangements between GSI and GA. There was no obligation imposed on Mr Nolten by law that he has to disclose his arrangements related to the IT services to GA. It was further provided by the defendants that the plaintiffs failed to provide any evidence that the payments were in form of a franchise fees and a specific allegation that such payments should be categorized as franchise payments was also not present. It was further alleged by the plaintiff that the defendant misused his position with respect to his power to put and hold the shares of the plaintiff company. The defendant in this case had made calls on share just as he got to know that he was about to get terminate from his position through notice because of incorporating a company which was competing with the plaintiff. The put option was exercised by the defendant as soon as he was dismissed. The plaintiff had thus refused to issue share with respect to the second call and the company associated with the defendant did not comply with its obligation to purchase with respect to the put and call agreement. It was also claimed by the plaintiff in this case that the defendant failed to comply with his duty of honesty towards the put and call options.

With respect to the Perth rent claim it was provided by the plaintiff that the defendant leased the a warehouse from TTM for the company without disclosing the interest which he had in TTM to the board of GA. The defendant allegedly made profits out of the lease and did not disclose it to the board. It was argued by the defendant that they have no obligation to account for the profit made through the lease to the board of GA. It was also provided by the plaintiff that an increased rent as compared to the market rate was paid to TTM with respect to the lease.

With respect to the claim for equitable compensation it was claimed by the plaintiff that the defendants must compensate them for the losses faced by the plaintiff along with an award of equitable compensation. It was submitted by the defendants that this was not in any sense a loss made by the plaintiff and the account for profit was enough as a remedy discarding equitable compensation. An order against the defendant was also wanted by the plaintiff with respect to the account of profit from the lease based on the rent in the market. It was also provided that the plaintiff had made arrangements in a flat owned by his company Nolten Investment for the purpose of accommodation for the guest of GA without disclosing his interest in the company to the board. The defendant charged $37,180 from the plaintiff as fees for accommodation.

A misleading and deceptive conduct claim was also made by the plaintiff under Section 9 of the Fair trading Act 1999. It was claimed by the plaintiff that the defendant had kept the plaintiff under an illusion that he was diligently complying with the fiduciary and statutory duties he had under law. It was also provided that the defendant had knowledge that the representation was deceptive, false and misleading and the plaintiffs were not aware about it.

The plaintiff in this case have also claimed declaration against the plaintiff with respect to 1317E of the Corporation Act 2001 which respect to this breach of acting in good faith under Section 181, not misusing his position under Section 182 and Section 183 of not misusing information obtained through the company. The plaintiff also wanted declaration from the breach of fiduciary duties by the defendant along with contravention of duty to act honestly.

 

Decision of the court

It was held by the court in this case that the approval of shares issue with respect to exercising the call option the position of manager held by Mr. Nolten had been misused for the purpose of making personal gain and initiating a conflict of interest which was not disclosed to the plaintiff[4]. It was pointed out by the court that even though a positive duty with respect to the fiduciary to disclose conflict does not exist if a fiduciary enters into a dealing which would account to the breach of duty than he must disclose such dealing and conflict to the board[5]. It was also provided by the court that the approval of board had to be required for the purpose of issue of share. In this case also the defendant did not completely disclose his interest in the resolution whereas he stated that he has bone it completely[6]. This is sufficient ground for the plaintiff to terminate the employment of the defendant and in such case the call option would have expired immediately. The court held that the second call option was invalid because of the same reason the court further held that the put option with respect to the company was also not valid. It was also held by the court that the defendant engaged in false deceptive and misleading conduct during the period of 2005-2009 by assuring the board that he was complying with the fiduciary and statutory duties of directors. He induced the other directors of the defendant company to allow the issue of shares under wrongful assumption that they could not on any basis terminate the employment of Mr. Nolten. The conduct of the defendant was also held to be of fraud and deceit by the court. The court ruled that an implied term of good faith existed with respect to both option agreements and Mr. Nolten could not establish a balance between the condition of the agreements and his statutory and fiduciary duties. The court held that because of the above mentioned reason the duty to act in good faith had been breached by Mr. Nolten. The decision of the court is discussed in details as follows[7].

 


With respect to the GSI Franchise Fee claim the evidence provided by mark Alston was accepted by the judge. The court held that the payment entered mistakenly by the bookkeeper of GSI into the MYOB accounts of the company as distributor fees for the financial year 2005-2006. The mistake was committed by the accountant of GSI into the 2005-2006 accounts as franchise fees by mistake. The evidence provided by Alston proved that the mistake had been rectified in the next year account as “communication and service co-location fees” with respect to the amount paid by GSI for IT computer services. The judge held through evidence that the agreement made between GSI and Mr. Nolten was to supply computer and the payment received were for the supply of computers. The agreement was not entered in private capacity by Mr. Nolten. However Mr. Nolter misused his position of managing director and made arrangements which would benefit him personally[8]. Thus he breached section 182 and 184 of the Corporation Act. It was held by relying on the evidence provided by Mr Alston that the defendant said he had access over the quotations of GA and would help him gain the tender and thus he misused information and breached section 183 of the corporation act[9]. It was also found through evidence that he received an extra personal amount with respect to the agreement which accounted to $2500 per month. It was unsustainable to accept the argument that a diversion in business activities did not occur[10]. The fact that the position of managing director was used to make personal gains without disclosing it to the other directors is clearly an indication related to the breach of Section 182 of the CA. Thus the plaintiff have the right to order of the defendant account for profit made with respect to the arrangements with GSI[11].

With respect to the Perth rent claim the court accepted the evidence provided by Mr. Bellerby with respect to the market rent. It was held by the court after analyzing the market rent that the price which had to be paid by BA to Perth was in excess by $10.700 as compared to the market rent. It was also found by the court that GA paid the rent in excess for many years. Thus it was ruled by the court that the defendant misused his position in this respect for personal gains which bought detriment to the company. The court considered the background of Mr. Hazebroek along with his experience in the market could not be regarded as the subject of the evidence. Thus the court rejected the evidence on anticipated returns provided by him[12].

 


In relation to the equitable compensation claim court based its decision on cases such as Pilmer v Duke Group Limited (in liq) (2001) 207 CLR and Maguire v Makaronis (1997) 188 CLR 449. In these cases also the question before the court was to determine equitable compensation. An argument was provided by the senior counsel for the defendant that such accounts have a “clear element of double-dipping”. It can be said that starting point for GA would be that they should be entitled to all the profit which had been made by Mr. Nolten and his company.  The burden proof is on the defendants to show that it would not be just if GA is made to receive the total profit and some profit should be allowed towards the defendants. The court held that they were not able to prove the preceding sentence[13]. No proof had been provided with respect to the position which the defendant would have been if the plaintiff would have not leased the place from them. In the same way the defendant were not able to prove that the plaintiff would receive no benefit from the allowance or the allowance is unjustified[14].

With respect to the baker street flat the defendants admitted that they should account for the profit made with respect to the rent paid by GA. However they claimed that they should be provided with certain allowance with respect to the cost which GA would have incurred for any other flat. They cited the case of Warman International Ltd v Dwyer (1995) 182 CLR 544, 557 where the court provided for such allowance for the defendants. However in this case the contention related to the allowance was rejected by the court. Similar to the case of Perth rent claim the court did not find any evidence in relation to what would have been the position of the defendant if GA would have not availed the flat.

With respect to the general law claim made by the plaintiff the court held that the defendants were libel for he breach of statutory and fiduciary duties. In relation to the duty to act in good faith and best interest of the company the court held that the defendants had breached the duty as no actions taken by them were for the interest of the company. All actions discussed and analyzed in this case had been taken with the intention of making personal gains. In relation to the duty not to use the position of a director for personal gain of himself or for others without making disclosure as provided in section 182 the defendant had in various situations misused his position for personal benefits and the benefits of companies associated with him . Thus the court had no doubt that the statutory and fiduciary duty had been breached[15]. Similarly, the defendant unethically used the information he gained acting as the director of the company in various situations for personal benefits without disclosure and thus was entitled to the breach of section 183 of the CA. Thus the court upheld the claim of the plaintiff and held the defendants liable for breach.

 

References

Breen v Williams (1995-6) 186 CLR 71

Breen v Williams (1995-6) 186 CLR 71; Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165.

Centofanti v Eekimitor Pty Ltd (1995) 15 ACSR 629

Chan v Zacharia (1984) 154 CLR 178

Corporation Act 2001

Demetrious v Gikas Dry Cleaning Industries (1991) 22 NSWLR 561

Esso Australia Resources Pty Ltd v Southern Pacific Petroleum NL [2005] VSCA 228

Fair Trading Act 1999

Garry Rogers Motors (Aust) Pty Ltd v Subaru (Aust) Pty Ltd

Groeneveld Australia Pty Ltd & Ors v Nolten & Ors (No 3) [2010] VSC 533

Hospital Products Limited v United Surgical Corporation (1984) 154 CLR 41

Joint Stock Discount Co v Brown (1869) 

Permanent Building Society (in liq) v Wheeler (1994) 14 ACSR 109

Smith v Chadwick (1884) 9 AC 187

State of South Australia v Clark (1996) 19 ACSR 606

Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177

Whitlam v Australian Securities and Investments Commission (2003) 57 NSWLR 559.

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