This case provides a useful discussion on the duties of a person who is in the position of a director of both the vendor and the purchaser under a contract. In particular, the case highlights the fact that the duty to avoid conflicts can be breached even where the director does not actually prefer the interests of themselves or another associated entity but there is a potential for preference or a potential breach of duty. The case also provides some guidance on when a person will be ‘knowingly concerned’ in a contravention of the Corporations Act 2001 (Cth) by another person, namely where there is a ‘practical connection’ between the person’s acts or omissions and at least one of the essential elements of the contravention.
Mr Jackson and Mr Goff were directors of both Agricultural Land Management Ltd (Agricultural) (which was the responsible entity and trustee of Kalgoorlie Apartment Hotel Syndicate and the Agricultural Land Trust (together the Kalgoorlie Scheme)) and Bunbury Centro Pty Ltd (Bunbury). Agricultural and Bunbury were also related parties pursuant to section 208 of the Corporations Act 2001 (Cth) (Act) (as modified by section 601CA). Mr Jackson and Mr Goff signed a contract (Contract) for Agricultural (as purchaser) and for Bunbury (as vendor) in relation to some property in Kalgoorlie (Kalgoorlie Property). Following the failure of the development of the Kalgoorlie Property, Bunbury alleged numerous breaches of duty by Mr Jackson and Mr Goff.
Edelman J in the Supreme Court of Western Australia made the following findings:
- In failing to take all reasonable steps that a reasonable person would take if in their position to ensure that Agricultural complied with the Kalgoorlie Scheme compliance plan and the related party provisions in the Act, Mr Jackson and Mr Goff breached their duty of care and diligence under section 180 and their duties under sections 601FD(1)(f)(i) and 601FD(1)(f)(iv) of the Act. In this regard, Mr Jackson and Mr Goff admitted that they breached the related party provisions in not obtaining the approval of the members of the Kalgoorlie Scheme and that they failed to comply with the obligations in the Kalgoorlie Scheme compliance plan to table the proposal to purchase the Kalgoorlie Property at a meeting of the directors of Agricultural (together with a due diligence report) and to obtain the compliance committee’s sign off for the proposed transaction with Bunbury as a related party;
- Mr Jackson and Mr Goff breached their fiduciary duties to Agricultural to avoid placing themselves in a position in which their duties to Agricultural conflicted with their duties to Bunbury as another principal. While the evidence in this case did not show that Mr Jackson and Mr Goff actually preferred their own interests or the interests of Bunbury to the interests of Agricultural, Edelman J held that the conflict rule itself is not limited to situations in which a fiduciary actually prefers their own interest or the interests of associated parties. Rather, it also extends to situations involving a potential for preference or a potential for breach of duty where conflicting duties are owed to different principals;
- Mr Jackson and Mr Goff’s fiduciary duties were not excluded by the Kalgoorlie Scheme constitution which provided that the law applying to trustees at common law did not apply to Agricultural as responsible entity, except as expressly provided in the Constitution of the Act. Leaving aside the issue of whether such clause could even succeed as an attempt to exclude the usual implication of the conflict duty, the relevant clause in the constitution is subject to the Act which imposes the conflict duty on Agricultural as a statutory trustee; and
- Bunbury was “knowingly concerned” within section 79(c) of the Act in the breaches by Mr Jackson and Mr Goff of section 601FD(3) of the Act. A person has a ‘concern in’ the contravention if there is a ‘practical connection’ between that person’s act or omission and at least one of the essential elements of the contravention. In this case:
- Bunbury’s entry into and execution of the Contract was an essential requirement for there to be a related party transaction; and
- Bunbury, through its directors My Jackson and Mr Goff, had the relevant ‘knowledge’ that entry into the Contract would result in breaches of the compliance plan and the related party provisions.
See the case.