Law of Business Organisations

Abstract

The case involves Spiros acting as a shadow director in two proprietary companies one wholly owned by him and another by one third share. As he has joined the second company without disclosing his interest in his own company, all his transactions on behalf of the second company will not be valid since related vendor Baker failed to take care to verify his actual position in Wearall and since Dimitri, the Company Secretary of Old Co and brother in law of Spiros connived with Spiros in respect sale of his own property to Wearall. Both are tainted as related party transactions.

            Dimitri is the Director and company secretary of Old Co Pty Ltd without owning shares. Spiros is the only shareholder but not its director. Dimitri is brother in law of Spiros and Spiros is using the company as a vehicle for his real estate business. Unaware of his interest in Old Co pty ltd,  John and Paul join Spiros and  start a proprietary limited company Wearall Inn Pty Ltd with two shares each for all the three and Spiros is acting as its company secretary whereas John and Paul act as the company’ s only two directors.

            Spiros’ position

            He is only a shareholder in Old Co Pty Ltd (Old Co) as well as in Wearall Inn Ptd Ltd (Wearall) though in the latter he is a company secretary also. As per section 1.2 of Corporations Act 2001, a share holder is not liable for company’s debts except to the extent of unpaid amount of his share value and except when he happens to be a director of the company under certain conditions.

            The issue here is Spiros enters into contract for sale of land at Tugun owned by Old Co to Wearall for $ 1 million without disclosing his interest as a share holder Old Co and that too at a price higher than the ruling market price with the hope that prices would appreciate. By this conduct, he has personally intended benefit himself by contracting for more than the market price, profit of which will go to Old Co Pty Ltd which he alone is going to enjoy as a lone share holder. Hence he ought to have disclosed his interest to Wearall before making the transaction on their behalf. But in the latter also he is not a director. Hence he can be held liable as Company Secretary or a responsible officer of Wearall for having failed to disclose his interest in Old Co. In order to prove his ultimate ownership of Old Co, the way out is lifting of the corporate veil as established in Salomon v Salomon (1897)

            Section 182(1) of the Corporations Act prohibits a company secretary from improperly using his position to profit himself or some one else or cause loss to the company. (Queensland Government) A company secretary is deemed to be the watch dog of the company affairs and is expected to notify the board and take necessary actions against an erring director.  In fact he is the shield against the corporation law violations. (Maltas 2000) By lifting the corporate veil, it is evident Spiros has attempted to enrich himself through deceptive means by abusing his position as a company secretary of Wear all. He has avoided Directorship in both the companies which itself is evident enough to implicate him for both civil and criminal liabilities for not having disclosed his interest in Old Co with the object of profiting himself in the real estate transaction. Though there are no specific provisions for Company Secretary’s failure to disclose conflicting interest, he is liable as a responsible officer of the company and as defacto director of both the companies. Companies generally have code of conduct for directors as per common law for fiduciary duty, duty of good faith and loyalty and as per sections 181 to 184 of the Corporations Act by which a director or an executive is deemed to act honestly and exercise his power in the best interests of his company. (Ergon Energy)   Hence the penal provisions in Corporations Act 2001 meant for Directors can be invoked against him by the directors of Wearall company. Sections 191 to 195 of the Corporations Act impose a duty to avoid conflict of interest in their day to day functioning. The exceptions under S 191 (2) will not apply in this case. (OAMPS). If Spiros had given notice of interest in Old Co and had been accepted by Wear all co, he could avoided the present situation. Assuming that both companies come under the jurisdiction of  NSW, Spiros as an officer of the body corporate is liable under s 173 and 176 A of  NSW Crimes Act for attempted fraudulent misappropriation and for cheating or defrauding the body corporate respectively.( Corporate Duties below board level)

            In Fitzsimmons V R (1997), there was a common directorship in two companies engaged in a transaction. R who was director in both the companies failed in his duty to act honestly by not disclosing true financial position of another company in which he was a director. The Criminal Court of Appeal ruled that he committed offence since he had knowledge of true financial status of the other company and yet failed to disclose. It also said it would not be sufficient by merely absenting from the board meeting without showing some positive indication about conflict of his interest. (Greenwood 200)

            Spiros could even be considered a shadow director which concept was first introduced in English Company Law from 1917. Shadow director of a company may include   “a person in accordance with whose directions or instructions the directors of the company are accustomed to act”. In Re Unisoft Group Ltd (1994), Harman J stated that a shadow director was the one who acted like a puppet master controlling the actions of the board. In the instant case Spiros by virtue of his experience in real estate business had the two directors of Wearall acting as per his directions and also his own Old Co.

            Spiros in another transaction entered into contract for purchase of a property for Wearall before its incorporation from a related party Baker. Here Spiros acted as a duly authorized agent of Wear all which registers only after the purchase. This contract is to be considered as a pre incorporation contract and for all such contracts, Spiros as a promoter is personally liable. As he has purchased from a related party Baker, this also will be subject to scrutiny of conflict of interest provisions discussed above.

            In the circumstances, Wearall can avoid the both the contracts since the vendors should have taken care to see how Spiros was competent to enter into contract without being a director. Dimitri who is the director of Old co is either connived or failed in his duty to verify before entering into contract of sale.

            Spiros will have to reimburse the contract value collected if any as has acted dishonestly without disclosing is interests i.e from a related a party and another  from his own proprietary company. He is also liable to be dismissed as the Company Secretary of Wearall. His two fully paid shares will have to be used for meeting part of his liability to Wearall if any.

References

Corporate duties below board level Report April 2006 Corporations and Markets            Advisory Committee 2006, accessed 2008-02-01 <www.camac.gov.au>

Ergon Energy “Conflict of interest Guidelines” Ergon Energy Corporation Limited        A.C.N 087 646 062

Fitzsimmons v R (1997) 23 ACSR 355,

Greenwood 8 November 2000 “directors’ duties in the light of clerp and recent legal      developments the four commandments, the four pillars of wisdom and the not so golden silence”

OAMPS Conflict of Interest Policy May 2006

Maltas Douglas John 2000 “The Company Secretary, Good Corporate Governance, and             Operating Management Investment Schemes Investing in Real Property.” The          Real Estate Industry – Volume 2, 2000

Queensland Government Department of the Premier and cabinet “7.8 corporations Act C”         Duties and Responsibilities of Board Members, Accessed 31 Jan             08<http://www.premiers.qld.gov.au/About_the_department/publications/policies/            Governing_Queensland/Welcome_Aboard/duties/

Re Unisoft Group Ltd (No 3) [1994] BCLC 609

Salomon v Salomon (1897) AC 22