The recent case of Cornerstone Property & Development Pty Ltd v Suellen Properties Pty Ltd [2014] QSC 265 looked at the liability of a director for breach of fiduciary duties in circumstances where there had been a relationship breakdown.

This case provides an insight into the courts’ key considerations in deciding whether a breach of fiduciary duty exists, as well as whether a third party is liable. The nature of the relationship, more specifically its breakdown, had a significant impact on the Court’s decision.

Background Facts

Cornerstone Property & Development Pty Ltd (Cornerstone) had 3 directors: Mr and Mrs Chalmers and Ms Rushbrook. In November 2011 Cornerstone entered into a conditional contract to purchase a property development project of land (Lot 7). However, by Christmas 2011 the Chalmers and Ms Rushbrook had fallen out and the Chalmers informed Ms Rushbrook that she could proceed alone with the purchase.

The Chalmers later resigned as directors of Cornerstone and informed Ms Rushbrook that the contract was not proceeding. On 12 March 2012 they repeated to Ms Rushbrook their earlier statement to her that she was free to proceed without them on the Lot 7 project, also saying that their business relationship and dealings with her were at an end. Ms Rushbrook remained sole director of Cornerstone.

Ms Rushbrook was also the sole director and shareholder of another company, Suellen Properties Pty Ltd (Suellen Properties). In April 2012 Ms Rushbrook caused Suellen Properties to enter into a contract to purchase Lot 7. She had obtained a new investor for the project, whom she sold her shares to, and resigned as director of Suellen Properties, prior to the settlement of the contract.

Claim against Ms Rushbrook

The Chalmers, commencing representative proceedings under Cornerstone’s name, alleged that Ms Rushbrook had breached her fiduciary duties to Cornerstone and/or her duties as a director under sections 181(1) or 182(1) of the Corporations Act.

It was noted that, unlike the Chalmers, Ms Rushbrook failed to resign as director of Cornerstone so as to relieve herself of her director’s duties.

Scope of the “trust and agency”

The Court first considered whether Ms Rushbrook’s “trust and agency” were limited in scope due to the circumstances. The Court noted that the Chalmers had forcefully intimated to her she could proceed without them, and concluded that the Chalmers had no intention that Cornerstone would proceed in purchasing Lot 7. In these

circumstances it was the view of the Court that Ms Rushbrook’s “trust and agency” as director was reduced, so that her conduct in pursuing the Lot 7 project on behalf of Suellen Properties was outside that scope.

This finding also meant that s 182(1) was not breached as this required Ms Rushbrook to improperly use her position to gain an advantage for herself or someone else. As Ms Rushbrook’s conduct was outside the scope of her duties it could not be considered ‘improper’. There was also no contravention of s 181(1) for similar reasons.

Disclosure and informed consent

The Court also considered that disclosure and informed consent operate as a defence and examined whether this was applicable in this case. The Court noted that whether there has been fully informed consent is “a question of fact in all the circumstances of the case”.

Ms Rushbrook did not disclose to the Chalmers that she was proposing to proceed for the benefit of Suellen Properties, or her own benefit. She had informed them, before the Chalmers said they did not want to continue the relationship, that she intended for Cornerstone to proceed in purchasing Lot 7. The Chalmers subsequently told her that they no longer wanted to proceed, but she could do so without them.

However, after the total breakdown in the relationship between the Chalmers and Ms Rushbrook, Cornerstone could not proceed, as it had no assets or financial backer.

In considering all this, the Court decided there was informed consent, inferring it from the circumstances. It was specifically stated that it is rare for informed consent to be inferred.

The Court found that Ms Rushbrook did not act in breach of her fiduciary duty nor in breach of her duties under the Corporations Act.

Claim against Suellen Properties as third party

It was claimed that Suellen Properties was liable as a third party, under what is known as Barnes v Addy liability. This argument was considered in the event that the Court’s finding that Ms Rushbrook had not breached her duties was incorrect.

Barnes v Addy liability has two limbs.

First limb: “knowing receipt”

This limb requires that Suellen Properties knowingly received/purchased trust property. The Court noted that Lot 7 was never actually the property of Cornerstone.

The Court then considered whether the opportunity to enter into a contract to buy Lot 7 was trust property of Cornerstone. The Court concluded it was not, stating that where the property itself was not pre-existing trust property, the acquisition of the property will not fall under the first limb.

Second limb: “dishonest and fraudulent design”

This limb requires that Suellen Properties had knowledge of a “dishonest and fraudulent” design by Ms Rushbrook. The Court stated that if Ms Rushbrook had breached her fiduciary duty, there was still no dishonest or fraudulent design by her. Thus the second limb also failed.

Conclusion

The Court found that, even if Ms Rushbrook was liable, there was no third party liability made out in regards to Suellen Properties.

Key Lessons

This case demonstrates that it is not simple enough to allege a misuse of information by a director without showing it fell within the scope of the “trust and agency”. Communications and circumstances of the relationship could, like in this case, impact on the scope of what is expected of a director.

Businesses should also note that, whilst rare, the circumstances of a relationship can lead to an inference of informed consent, which acts as a defence to an allegation of breach of duty.