Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd [2013] VSC 543 (the Rowley Case) is a stark reminder that directors owe their duties to the company, and those duties cannot be superseded by the commercial interests of the broader corporate group.
This LegalTalk Alert briefly examines the key facts in the Rowley Case and highlights, in this context, how directors of closely-held corporate groups can reduce the risk of breaching their fiduciary duties owed to the company.
Background
- Steven Rowley (Rowley) was the sole director of Australasian Annuities Pty Ltd (the Company) and a director of the Rowley Super Fund Pty Ltd (RSF), along with his wife, and his two sons.
- At all material times, the Company was the trustee for the ‘Rowley Family Trust’ (the Family Trust).
- In its capacity as trustee for the Family Trust, the Company provided management, administration and other services to London Partner Pty Ltd (London Partners). The Company’s primary source of income was the yearly service fee it received from London Partners.
- At all material times, RSF was the trustee for the ‘Rowley Superannuation Fund’ (the Super Fund).
- At the time the Company was trustee for the Family Trust, Rowley caused the Company to:
- take out loans, which were then paid to the Super Fund
- make ‘eligible termination payments’ to the Super Fund in his own name and that of his wife, and
- make substantial employee contributions to the Super Fund for his own benefit and that of his wife (the Relevant Transactions).
- When the Company went into liquidation, the receivers and managers of the Company brought an action in the Company’s name against Rowley to recover amounts allegedly diverted from the Company in breach of Rowley’s fiduciary duties, and against RSF for knowingly receiving trust property.
Directors’ duties
Directors’ duties are prescribed under the Corporations Act 2001 (Cth) (the Corporations Act) and at general law. Directors’ duties fall broadly into two categories: the duty to act with loyalty and in good faith, and the duty to act with care and diligence.
The duty to act with loyalty and in good faith includes:
- the duty to avoid conflicts of interest
- the duty to act in good faith in the interest of the company
- the duty to use powers for a proper purpose, and
- the duty to retain discretion.
- The duty to act with care and diligence includes:
- the duty to act with reasonable care and diligence, and
- the duty to prevent insolvent trading.
Often, the individual interests of directors may diverge from those of the company or its members. In some instances, the distinction between these interests is obvious, although as seen in the Rowley Case, there are circumstances where directors and members of a company are one and the same, and consequently the distinction becomes less apparent.
In the Rowley Case, the Company alleged that by causing the Company to give effect to the Relevant Transactions, Rowley: (a) did not act in the interests of the Company, (b) exercised his power for an improper purpose, and (c) failed to avoid a conflict between his personal interests and the interests of the Company.
- Acting in the best interests of the company
RSF contended that, in the particular context, the interests of the shareholders were the interests of the Company, and that acting in the best interests of the shareholders was sufficient to discharge Rowley’s duties owed to the Company.
In this regard the Court disagreed, noting that:
- Rowley failed to pay proper regard to the Company’s separate interests and embarked on a deliberate strategy to cause the Company to incur obligations so that it was in a position to provide substantial personal benefits to himself and certain members of his family.
- Since the Company was acting in a trustee capacity, Rowley was required to consider the legitimate interests of the other beneficiaries of the Family Trust, which he failed to do.
- The Relevant Transactions constituted a breach of Rowley’s fiduciary duty, which he owed to the Company as a separate legal entity, and which was in turn owed to the other beneficiaries of the Family Trust. By failing to consider the interests of the Company and the beneficiaries of the Family Trust as a whole, Rowley was found to have breached his duty to act in the best interests of the Company.
- Exercising power for an improper purpose
The Court found that Rowley, as a sole director, exercised his powers and duties for the collateral and improper purpose of obtaining substantial and direct personal benefits in the form of superannuation contributions, by causing the Company to give effect to the Relevant Transactions. It was noted that the amount paid to Rowley as eligible termination payments by the Company was nearly four times the annual commercial salary of a person in Rowley’s position.
- Avoiding conflicts of interest
RSF submitted to the Court that, where the directors and shareholders are one and the same, the concept of any conflict between the interests of a director and the interests of the shareholder is ‘much less acute’.
The Court countered that, in the case of Rowley, the directors and shareholders were not identical, since Rowley’s wife held a share in the Company. Further, because the Company was the trustee of the Family Trust, there were also numerous beneficiaries to consider.
The Court found that Rowley had promoted his own personal interests by advancing his personal circumstances and those of his family at the expense of the Company and the other beneficiaries of the Family Trust. The Court also found that there was an actual or real and substantial possibility that a conflict of interest existed and the mere existence of several competing interests was enough to satisfy this test.
Accordingly, Rowley was also found to be in breach of his duty to avoid conflicts for causing the Company to give effect to the Relevant Transactions.
The Court did not find RSF to have knowingly received trust property.
Ensuring compliance
The Rowley Case highlights some of the dangers for directors in closely-held corporate groups, where the focus might be on the broader interests of the group (or certain members or beneficiaries) over the interests of the particular company to which they have been appointed as director.
In the case of wholly-owned subsidiaries, for instance, those directors owe the same directors duties (set out above) as their counterparts do when acting as a director of any other company. Section 187 of the Corporations Act provides a concession to those directors of wholly-owned subsidiaries, by permitting them to act in the interests of their holding company (and not necessarily in the interests of that particular company).
Section 187 of the Corporations Act reads as follows:
A director of a corporation that is a wholly-owned subsidiary of a body corporate is taken to act in good faith in the best interests of the subsidiary if:
(a) the constitution of the subsidiary expressly authorises the director to act in the best interests of the holding company; and
(b) the director acts in good faith in the best interests of the holding company; and
(c) the subsidiary is not insolvent at the time the director acts and does not become insolvent because of the director's act.
It is important to note that each of the three tests under section 187 of the Corporations Act must be satisfied for the director(s) to be able to rely on that section. It may therefore be necessary in order to rely on the provisions of section 187 of the Corporations Act, to amend the constitution of the subsidiary company to insert an express provision which grants the director(s) of the subsidiary the authority to act in the best interests of the holding company.
Subsidiaries that are not wholly-owned are unable to rely on section 187 of the Corporations Act; they can however rely on a limited concession under general law. At general law, subsidiary companies that are part of a corporate group are permitted to consider the broader interests of the group when considering the interests of the company for which they are acting, provided they give appropriate weight to the interests of minority shareholders of the company and, where a transaction is likely to prejudice creditors, the interests of creditors of the company.
