Whitehouse v Carlton Hotel Pty Ltd
Discuss about the Fords Principles Of Corporations Law.
The Corporations Act, 2001 (Cth) is the current legislation which is applicable on the operations and working of the corporations, or as they are otherwise referred to as in the other jurisdictions as companies. This legislation is divided into different parts which cover different segments involved in running the operations of business, and also presents the manner in which the company reaches its end, in terms of being wound up. The provisions of this legislation are very detailed (Austin and Ramsay, 2013).
One of the key aspects of this legislation is imposition of director duties. Even though this legislation and the common law presents that the companies are separate legal entities and that for the acts of the companies, only the company is liable. However, in doing so, the legislations and the common law ensure that the work done in the companies, by the directors, is done properly. Where this does not happen, the law makes the directors liable for their actions and by imposing director duties on them, this is ensured (Mitchell, O’Donnell and Marshall, 2016).
This report is predominantly focused on analysis of the leading case of Whitehouse v Carlton Hotel Pty Ltd [1987] 162 CLR 285. Even though this case is more than ten years old, it continues to be a landmark ruling in the present time. This discussion would not only highlight what exactly happened in this case, but would also show how this case is relevant in the present day.
The case in discussion involved the governing director of Carlton Hotel. His name was Mr. Charles Whitehouse. Mr. Whitehouse held the entire shareholder voting base in the company called Carlton Hotel Proprietary Limited, and these were class A shares. Mrs. Whitehouse, who was the wife of Mr. Whitehouse, did hold shares, but these only came with partial voting rights. These shares were named as class B shares. The children of Mr. Whitehouse and Mrs. Whitehouse also held shares, which were named as class C shares. However, unlike Mr. Whitehouse and Mrs. Whitehouse, these shares did not come with voting rights. After lapse of some years, Mr. Whitehouse and Mrs. Whitehouse were legally separated. The result of this separation was sons of Mr. Whitehouse and Mrs. Whitehouse going to live with Mr. Whitehouse, and the daughters of Mr. Whitehouse and Mrs. Whitehouse went to live with Mrs. Whitehouse (Amazon AWS, 2018).
Duties breached
Mr. Whitehouse, after some time, started to think that if he died at that time, Mrs. Whitehouse would get the control of the company. The reason for this was that his sons held that category of shares which did not have voting powers. And the only share class which held voting power was class B, which Mrs. Whitehouse held. In order to avoid this from happening, he issued the partial voting class of shares to his sons also. This resulted in his sons getting rights of voting as well in the company. Later on, Mr. Whitehouse had fallout with his sons. In anger, he decided that his sons should never have been given the voting rights. This led to him directing that the share register had to be modified/ corrected. All these instances resulted in Mr. Whitehouse being sued by his own sons. During the case, certain question marks were presented in context of the shares which had been allocated. The entire action plan, adopted by Mr. Whitehouse, led to question marks being put, on his fiduciary duty being breached. This was related predominantly to the issuance of new shares to his sons (Amazon AWS, 2018).
Even though the ruling of this case law was given before the present legislation became applicable, there is commonality in the sections of the present legislation and in the case in discussion. Part 2D.1 of the Corporations Act, 2001 covers these sections. Under section 181(1) of this act, the directors are imposed with a duty of conducting their work, in terms of making use of powers and in meeting their obligations, in such a manner which is in the best interest of the company, for proper purpose and in good faith. The theme is to work towards the interests of the company, instead of conducting the business in a manner which does just the opposite. In case the criteria lay down under this section is not fulfilled, civil liabilities are applied. The civil penalty provisions are provided in detail under section 1317E of the Corporations Act. This section allows the court to make declaration of contravention. Once this declaration is made, ASIC gets the option of getting a disqualification order passed from the court under section 206C of the Corporations Act. Apart from this, the ASIC can also apply for penalty provisions which have been put under section 1317G of the Corporations Act.
Sections
Section 181(1) has two key aspects, as have been separately put up in the legislation as well. In the first class, the directors are to focus on the good faith and the best interest aspect. And in the second class, the directors are to focus on the work done for proper purpose aspect. If the entire ruling of the present case is analysed, the focus is established on the work done for proper purpose aspect.
The reasons for stating that section 181(1) of the Corporations Act was breached here, stems from the issuance of shares to Mr. Whitehouse’s sons by Mr. Whitehouse has to be analysed. As highlighted in the facts of this case, the reason for issuing these shares was not to bring any benefit to the company. Instead, the focus here was to not let Mrs. Whitehouse get the control over the company, in case Mr. Whitehouse died. The entire transaction was undertaken by Mr. Whitehouse just to give the control of the company from the rightful shareholders, being Mrs. Whitehouse, to his sons, due to the changed circumstances in event of the separation of Mr. Whitehouse and Mrs. Whitehouse. This makes it very clear that the purpose of this transaction was personal. In no way can these be shown to be in the best interest of the company (Australasian Legal Information Institute, 2018).
Essentially there was a lack of proper purpose in this case. Mr. Whitehouse was entirely motivated by not letting his estranged wife get the control over the company in event of his death. Even if Mrs. Whitehouse would have gotten the control over the company, upon the death of Mr. Whitehouse, there is nothing to show that the company would have been put in an unfavourable situation, or that this was against the best interest of the company. If the essence of the present legislation is seen, the focus has to be on giving equalized treatment to each and every shareholder, as is provided under the constitution of the companies. The acts of Mr. Whitehouse were such that only a specific set of shareholders were benefited. Further, this was done at the expense of the other shareholders, where they lost the control of the company, just because the predominant shareholder did not want the other shareholders to have control over the company in event of their death. The purpose for which Mr. Whitehouse undertook the entire share based transaction cannot be deemed to have been undertaken in best interest of the company or even for the proper purpose. This made the acts undertaken by Mr. Whitehouse as against the good faith principle. The decision taken by Mr. Whitehouse was entirely biased and self motivated, which backfired on him later on (Jade, 2018).
Reasons for breach
The court analysed the facts of this case quite thoroughly, as is done with any other case, before giving their verdict on this matter. This analysis led to the court concluding that Mr. Whitehouse had been in breach of his fiduciary duties. The reason given for this was the shares issued to his sons, only to dilute the voting power held by his Mrs. Whitehouse in events of his death. The fiduciary duty owed by Mr. Whitehouse required him to undertake the work for propose purpose, but this was completely ignored by Mr. Whitehouse in view of the court. The matter was initially presented before the trial judge, which had ruled in favour of Mr. Whitehouse. They stated that the acts undertaken by Mr. Whitehouse had taken the best interest of the company in the theme. However, when the matter went to higher court, i.e. to the Full Court, this decision was overturned. The higher court believed that the acts which were undertaken by Mr. Whitehouse were against the theme of the quoted section of the present legislation and against the erstwhile sections in this context amongst the other legislation, along with the common law. When Mr. Whitehouse gave new shares to his sons, he breached the Article 59 (Wolters Kluwer, 2018).
The higher court was able to give this ruling as a result of the appeal made before it from the ruling given by the trial judge. When the higher court analysed the entire scenario of this case, they deemed that the transaction of share allotment had been undertaken for improper purposes. This was due to the theme of the undertaken transaction, which was against the bona fide benefit of the company. In coming to the ruling of this case, the court made reference to Smith Ltd. v. Ampol Petroleum Ltd. (1974) A.C. 821 in terms of considering the powers which were exercised in the case regarding the shares being issued. The court also made reference to the case of Harlowe’s Nominees Pty. Ltd. v. Woodside (Lakes Entrance) Oil Co. N.L. (1968) 121 C.L.R. 483 in consideration of the improper purpose issue beginning with general proposition. This case required director to honestly issue shares in interest of the company, where the actual purpose of undertaking such acts has to be the creation of advantage for the company, or for the general body of shareholders, as against a single shareholder. The application of these cases further clarified the breach of fiduciary duties on part of Mr. Whitehouse, as have been covered under the theme of section 181(1) of the Corporations Act.
Court Decision
In the beginning of this discussion it was clarified that this decision continues to be a leading matter even in the present day. This is because this case clarifies that the directors are to refrain from being indulged in such acts, which are in their personal interest, even when such acts do not necessarily or directly harm the company. This case is also famous for the ‘but for test’ given under it. This test has been successful in eliminating the problems posed through the earlier tests. This is an important guidance to the directors that they have to keep their personal reasons aside and run the company as a separate entity. Where their personal reasons collide with the company, they have to think on behalf of the company, instead of being focused on personal interests. Even though the present day has a lot of cases which clarify on this aspect, this case specifically clarifies on the manner in which the fiduciary duties can be breached by the directors.
This case also clarified the dual aspect as is covered under section 181(1) of the Corporations Act, where the section has to be entirely fulfilled. The emphasis on proper purpose makes this case a point of reference whenever the breach of section 181(1) of the Corporations Act is cited in context of proper purpose. A striking point about this case is that this is not only used in Australia, but has also been cited in the other jurisdictions as well. The example of this is the British courts where the reference was made to the case in discussion, when the ruling of Eclairs Group Ltd and another v JKX Oil and Gas plc and others [2013] EWHC 2631 (Ch); [2014] 1 BCLC 202 was being given (Valsan, 2016).
References
Amazon AWS. (2018) 3002LAW Exam Notes. [Online] Amazon AWS. Available from: https://nexusnotes-media.s3-ap-southeast-2.amazonaws.com/wp-content/uploads/edd/2015/06/Will-Barker-3002LAW-Corporate-Law-Notes23615-copya.pdf [Accessed on 14 May 2018]
Austin, R.P., and Ramsay, I.M. (2013) Ford’s Principles of Corporations Law. Chatswood: LexisNexis Butterworths.
Australasian Legal Information Institute. (2018) Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11; (1987) 162 CLR 285 (7 April 1987). [Online] Australasian Legal Information Institute. Available from: https://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/cth/HCA/1987/11.html?stem=0&synonyms=0&query=title(Whitehouse%20and%20Carlton%20Hotel%20) [Accessed on 14 May 2018]
Corporations Act, 2001 (Cth)
Eclairs Group Ltd and another v JKX Oil and Gas plc and others [2013] EWHC 2631 (Ch); [2014] 1 BCLC 202
Harlowe’s Nominees Pty. Ltd. v. Woodside (Lakes Entrance) Oil Co. N.L. (1968) 121 C.L.R. 483
Jade. (2018) Whitehouse v Carlton Hotel Pty Ltd [1987] 162 CLR 285. [Online] Jade. Available from: https://jade.io/article/67343 [Accessed on 14 May 2018]
Mitchell, R., O’Donnell, A., and Marshall, S. (2016) Law, Corporate Governance and Partnerships at Work: A Study of Australian Regulatory Style and Business Practice. Oxon: Routledge.
Valsan, R. (2016) The exercise of fiduciary powers for mixed purposes: A comment on Eclairs Group Ltd v JKX Oil and Gas plc. [Online] Available from: https://www.ecclblog.law.ed.ac.uk/2016/04/08/the-exercise-of-fiduciary-powers-for-mixed-purposes-a-comment-on-eclairs-group-ltd-v-jkx-oil-and-gas-plc/ [Accessed on 14 May 2018]
Whitehouse v. Carlton Hotel Proprietary Limited (1987) 162 CLR 285
Wolters Kluwer. (2018) Whitehouse & Anor v. Carlton Hotel Pty. Ltd., High Court of Australia, 07 April 1987. [Online] Wolters Kluwer. Available from: https://iknow.cch.com.au/document/atagUio386332sl10537884/whitehouse-anor-v-carlton-hotel-pty-ltd-high-court-of-australia-07-april-1987 [Accessed on 14 May 2018]
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