Furs Ltd v Tomkies: A Case Summary

Case name & citation: Furs Ltd v Tomkies [1936] HCA 3; (1936) 54 CLR 583

The concerned Court: High Court of Australia
Judgment date: 13 February 1936
The bench of judges: Latham C.J., Rich, Starke, Dixon, Evatt and McTiernan JJ.
Area of law: Fiduciary Duty; Company’s director; conflict of interest

What is the case about?

The case involves issues of fiduciary duty, conflict of interest, and the accountability of a company director for profits derived from actions taken in their fiduciary capacity. Here is a breakdown of the key elements of the case.

Facts (Furs Ltd v Tomkies)

T. was the managing director of the appellant company. T. was authorized by the directors to negotiate the sale of the tanning, dressing, and dyeing part of the company’s business. T. arranged to sell the business to a new company promoted by L. for £8,500.

During these negotiations, L. indicated that the new company would need T.’s services, which T. disclosed to the chairman of the appellant company. The chairman advised T. to make the best terms for himself with the purchaser.

Before finalizing the sale, T. subsequently arranged a contract with the new company, which included receiving shares and £4,000 in addition to an annual salary for disclosing all his knowledge and information about the secret processes of the business. This transaction was not disclosed to the appellant company.

The appellant company sued T., claiming that the shares and money received by T. belonged to the company.

Judgment of the Court

Nicholas J. of the Supreme Court of New South Wales initially found that T. was entitled to secure his own advantage as long as he treated the company fairly and no breach of duty was proved.

However, the High Court reversed the decision, holding that T. derived undisclosed benefits for which he was accountable to the appellant company. It was irrelevant whether or not the appellant company suffered any loss corresponding to T.’s benefits.

Legal principles on which the case was based

Fiduciary Duty:

Directors have a fiduciary duty to act in the best interests of the company and must avoid conflicts between their personal interests and their duty to the company.

Full Disclosure:

Any profit derived by a director from their fiduciary position must be fully disclosed to the company. Failure to do so can lead to the director being held accountable for those profits.

Conflict of Interest:

The inflexible rule is that a director should not profit from their position unless the company, through a resolution by shareholders, approves the profit after full disclosure of the material facts.

Conclusion (Furs Ltd v Tomkies)

The High Court’s decision emphasizes the importance of directors adhering to their fiduciary duties and the necessity of full transparency and disclosure when personal interests may conflict with their duty to the company. Directors must not place their interests above those of the company and must ensure that any personal gain from their fiduciary position is fully disclosed and approved by the shareholders.

Quote from the case

“In our opinion the decision of this appeal is governed by the inflexible rule that, except under the authority of a provision in the articles of association, no director shall obtain for himself a profit by means of a transaction in which he is concerned on behalf of the company unless all the material facts are disclosed to the shareholders and by resolution a general meeting approves of his doing so, or all the shareholders acquiesce. An undisclosed profit which a director so derives from the execution of his fiduciary duties belongs in equity to the company. It is no answer to the application of the rule that the profit is of a kind which the company could not itself have obtained, or that no loss is caused to the company by the gain of the director.”

(Rich, Dixon and Evatt JJ. at 592)

References:

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A Case Summary of Williams v Scholz [2008]

A Case Analysis of Walker v Wimborne [1976]

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A Case Summary of Williams v Scholz [2008]

Case name & citation: Williams v Scholz & Anor [2008] QCA 94

Delivered on: 18 April 2008
Court: Supreme Court of Queensland (Court of Appeal)
Judges: Keane and Muir JJA and Mackenzie AJA
Area of law: Duties of directors; insolvent trading; management and administration of companies

Facts of the case (Williams v Scholz)

The case involves a liquidator trying to recover money from the directors of a company called Scholz Motor Group Pty Ltd. The liquidator claims the company incurred debts while it was insolvent and that the directors should have known this.

As per Section 588G of the Corporations Act 2001 (Cth), directors must ensure that their company can pay its debts when due. If the company is insolvent (unable to pay its debts) and the directors know or should know this, it’s illegal for them to let the company take on new debts. If directors break the law by allowing the company to take on debts while insolvent, they can be sued by the liquidator to recover the losses incurred by creditors (Section 588M).

The company was set up in April 2004 and struggled financially from the start. It accumulated significant losses, amounting to over $3 million by October 2005. Despite increasing its overdraft limit multiple times, the company couldn’t manage its financial problems and frequently bounced cheques. By September 2005, the bank terminated its relationship with the company due to its financial troubles.

Issue that arose

Were the directors responsible for the debts incurred due to the company’s insolvent trading?

Trial’s decision and Appeal court

The trial judge agreed with the liquidator and decided the directors should pay $3,101,145.78. This amount represented the debts incurred after the company was insolvent (i.e., from 1^st July 2005).

The judge concluded that there were clear signs of insolvency that the directors should have noticed. This included frequent overdraft limit breaches and dishonoured cheques. The directors were informed of these issues through bank statements and communications, making it unreasonable for them to claim they were unaware of the company’s financial troubles.

On 4 October 2007, it was ordered that the directors pay to the respondent (the liquidator) $3,422,900.27, including interest of $321,754.49.

The appeal court confirmed that the trial judge’s decision was well-founded based on the evidence of insolvency. The directors should have wound up the company instead of allowing it to incur the debts, while it was insolvent.

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A Case Analysis of Walker v Wimborne [1976]

Case name & citation: Walker v Wimborne [1976] HCA 7; (1976) 137 CLR 1

Court: High Court of Australia
The bench of judges: Barwick C.J., Mason and Jacobs JJ.
Decision date: 03 March 1976
Area of law: Company Liquidation; Duties of directors; General policy for movement of funds between companies

Facts of the case

The case involves an appeal by the liquidator of Asiatic Electric Co. Pty. Ltd. against the dismissal of a misfeasance summons. The summons was filed under Section 367B of the Companies Act, 1961 (N.S.W.) against former directors of the company. They were also directors of other companies administered as a group with Asiatic.

The company’s financial troubles stemmed from a contract with Chevron Sydney Ltd. for some work related to a hotel. Asiatic was owed over $100,000 by Chevron and it could not pay most of this debt. This caused a cash shortage within the group of companies, leading to a practice to transfer funds between the companies to address immediate financial needs.

The liquidator’s case included four separate claims:

$10,000 paid by Asiatic to Australian Sound and Communications Pty. Ltd. on December 14, 1967.

$40,523.82 paid to Starkstrom Control Gear (Australia) Pty. Ltd. in March 1967.

$17,960.93 paid as salaries and wages between March 18, 1967, and January 2, 1968.

$15,400 paid to A.B. Wimborne between 1961 and 1966, either as wages or pension.

The liquidator argued that these payments were not made bona fide in the company’s interest and represented a misapplication of funds.

Court’s Findings

Asiatic did not receive any benefit or advantage from the $10,000 payment to Australian Sound. The only consideration was the implied promise of repayment on demand. No security or promise of interest was obtained from Australian Sound. The directors likely failed to recognize that each company was a separate legal entity and that each transaction needed to be evaluated based on the interests of the individual companies involved. The transaction was not only disadvantageous to Asiatic but also likely to result in loss. Australian Sound was in financial trouble at the time and lacked the funds to repay the loan. Further, at the time of the $10,000 payment to Australian Sound, Asiatic was itself insolvent. Thus, it was deemed a misapplication of Asiatic’s funds, thereby constituting misfeasance.

The Court emphasized the essential legal principle that each company within a group is a separate and independent legal entity. It said:

“………the fundamental principles that each of the companies was a separate and independent legal entity, and that it was the duty of the directors of Asiatic to consult its interests and its interests alone in deciding whether payments should be made to other companies. In this respect it should be emphasized that the directors of a company in discharging their duty to the company must take account of the interest of its shareholders and its creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the company as well as for them.”

The remaining payments also followed the same layout. They suggested a misapplication of company funds, driven by the directors’ neglect and disregard for their duty to act in the best interests of Asiatic.

Decision in Walker v Wimborne

Chief Justice Barwick concurred with Justice Mason’s reasons. Barwick agreed that the payments of $10,000, $40,523.82, and $17,960.93 were unjustifiable from the company’s funds. The directors were ordered to compensate the liquidator for the loss suffered by Asiatic due to these transactions. However, though with some doubt, he concluded that the appellant should not succeed in respect of the payment of $15,400.

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A Case Summary of Cook v Deeks [1916]

Cook v Deeks [1916] is a Canadian case that raised ethical and legal concerns over the actions taken by directors in a company.

Case name & citation: A. B. Cook v George S. Deeks and others [1916] 1 AC 554; [1916] UKPC 10

The concerned Court: Judicial Committee of the Privy Council
Decided on: 23 February 1916
Area of law: Duties of directors; Corporate opportunity

What happened in Cook v Deeks?

Given below is a summary of the case in points.

1. Formation of new company

There were four directors each holding a 25% share in Toronto Construction Co. Three of them wanted to part ways with the fourth director. The three directors made arrangements in their own name to procure a lucrative contract with Canadian Pacific Railway Company that was similar to the ones previously executed by the jointly owned company. They then formed a new company to divert this opportunity and carry out the contract.

2. Ratification

The three directors, by using their majority votes in a general meeting, passed a resolution to approve the sale of part of the assets belonging to their jointly owned company to the newly formed company. In addition, they also obtained a declaration that the jointly owned company had no interest in the contract procured by the directors.

3. Claim

The fourth director (i.e., the minority shareholder) claimed that the ratification was invalid and that the contract belonged to Toronto Construction Co.

4. Duties of directors

The three directors were found to have breached their fiduciary duties to the original company. Through the exercise of their controlling power, they procured the ratification at the general meeting of their breach of duty. They diverted to themselves property transactions and assets of the company.

5. Lack of transparency

Hence, it was noticed that there was a lack of honesty and transparency both in the transaction as well as the subsequent process of ratification.

6. Invalidation

The directors had misused their voting powers. The contract should have belonged to the company. Effectively, they misappropriated a business opportunity that was available to the company.

The Privy Council declared the ratification invalid and held that the three directors were liable as constructive trustees of the company for the profits they had improperly gained through these actions. They were liable to surrender the profits to the company.

7. Fraud

The misappropriation was considered a fraud on the minority.

8. Key Takeaway

The above case of Cook v Deeks suggests a fair view. To authorize a director to take a corporate opportunity, it must only be the disinterested shareholders who must take the decision. The director who is seeking authorization must not be allowed to vote his or her own shares in this context.

Quotes from the case

Lord Buckmaster said as under:

“The three directors had deliberately designed to exclude and used their influence and position to exclude, the company whose interest it was their first duty to protect.

It appears quite certain that directors holding a majority of votes would not be permitted to make a present to themselves. This would be to allow a majority to oppress the minority …. If the directors have acquired for themselves property or rights which they must be regarded as holding on behalf of the company, a resolution that the rights of the company should be disregarded in the matter would amount to forfeiting the interest and property of the minority of shareholders in favour of the majority, and that by the votes of those who are interested in securing the property for themselves. Such use of voting power has never been sanctioned by the Courts.”

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A Case Study of ASIC v Vizard [2005]

The case of ASIC v Vizard concerns a corporate offense committed by a director of a company.

Case name & citation:	Australian Securities and Investments Commission v Vizard [2005] FCA 1037; (2005) 145 FCR 57
Court:	Federal Court of Australia
Decided on:	28 July 2005
The learned judge:	Finkelstein J
Area of law:	Director’s duty; Misuse of information

Facts of the case (ASIC v Vizard)

In the given case, Stephen William Vizard who was a director of Telstra at the time, admitted to engaging in share dealings for his own gain.

Vizard was appointed as a non-executive director of Telstra Corporation in 1996. As part of his role on the management board, he had access to market-sensitive information about the company before that information was made public. He took advantage of his position to access confidential information, which he then used to make decisions about the purchase and sale of shares for his own gain and/or others.

Matters of breach of director’s duty

On three different occasions, Vizard was found to misuse the information that he obtained as a director of Telstra. These were:

1. He used his information of a potential merger between Telstra and a company named Sausage Software to acquire Sausage Software’s shares just before the merger news was made public to benefit from the rise in the value of those shares post-merger.

2. Secondly, he became aware that Telstra was going to sell a significant shareholding in a company named Computershare Limited. Based on this confidential information, he sold his own Computershare shares before the divestment news of Telstra became public and dropped the value of those shares.

3. He utilized his knowledge of an impending merger between Telstra and a company named Keycorp to purchase Keycorp shares before the merger was officially announced. This allowed him to benefit from the subsequent rise in Keycorp’s share price.

When these matters of corporate misconduct came to the attention of ASIC (Australian Securities and Investments Commission), they undertook an investigation into the matter. On July 4, 2005, ASIC announced that they had commenced civil penalty proceedings against Mr. Vizard under s183(1) of the Corporations Act.

Judgment of the Court

Finkelstein J of the Federal Court of Australia delivered the judgment on July 28, 2005.

The Court imposed the following penalties on Vizard:

Disqualification for 10 years from managing a corporation.
Ordered to pay a penalty totaling $390,000.

The judge agreed with ASIC’s recommendation to impose a penalty of $130,000 each for all the breaches of the director’s duty (i.e., a total sum of $390,000). However, the judge doubled ASIC’s recommendation regarding the banning order. Instead of a banning order of 5 years as suggested by ASIC, the judge imposed a stricter banning order of 10 years to disqualify Vizard from being involved in the management of any corporation for 10 years.

Finkelstein J expressed the following remarks:

Left uninstructed I would have imposed a higher penalty, but not substantially different from that suggested. …. It is my view that a disqualification for five years is not sufficient …. A message must be sent to the business community that for white collar crime “the game is not worth the candle” ….

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