A director’s obligations are determined by statute under the Corporations Act 2001 (Cth) and by his or her fiduciary duties under the general law. Amongst these obligations is a duty to avoid conflicts of interest.
It is commonly accepted that a conflict of interest will arise when a director diverts business interests to a third party. Occasionally, however certain conduct will be ‘qualified’ based on established principles of law.
DTM Constructions Pty Ltd trading as QA Developments v Poole [2017] QSC 210 is illustrative in assessing the type of conduct that might constitute a conflict of interest and a diversion of a business opportunity.
The facts
Mr Poole and Mr Hopkins were involved in Arctic Properties Pty Ltd (Arctic) which was retained by DTM Constructions Pty Ltd (trading as QA Developments) (QA) to market and sell its house and land packages.
Mr Poole and Mr Hopkins subsequently became shareholders of QA and, later, officers.
During their time as officers of QA, Mr Poole and Mr Hopkins:
· used their positions at QA to divert various building and construction contracts from QA to another building company, Aspiration Homes Pty Ltd, in which they held interests;
· facilitated the sale of house and land packages through other entities and not for the benefit of QA.
QA alleged that Mr Poole and Mr Hopkins breached their fiduciary and statutory duties under the Corporations Act 2001 (Cth) and claimed damages for loss of profits.
The defendants argued that there was no breach of duty as the circumstances fell within a recognised ‘qualification’ under the general law (that otherwise required company officers to avoid a conflict of interest) which were the following:
· that their actions were ‘authorised by the circumstances of their appointment, or by the effective assent of the person to whom the duty is owed’; and
· that ‘there was no exclusivity attached to the referral arrangement with Arctic’; and
· that QA had given its consent for them to continue referring work to other parties.
Decision
On the facts, the defendants’ arguments were rejected by the Court and the loss established through breach of the defendants’ duties was determined to be in excess of $7million.
In finding that there was no ‘qualification’ to the conflicting conduct as claimed by the defendants, Justice Lyons considered that:
· The defendants were unable to escape a duty to avoid a conflict of interest on the mere basis that there was no specific agreement (as argued) that they would only refer business to QA.
· There was no evidence to support the defendants’ claims that they had obtained authority to refer business or divert opportunities away from QA to other business entities.
· There was no evidence to support the defendants’ claim that they had obtained ‘assent’ from QA (through its builder, and former director Mr Ham) on the basis that he knew of their involvement in other businesses. On the evidence, the defendants had actually concealed such involvement in the other businesses and had provided QA’s confidential information to third parties without consent.
Conclusion
Conflicts of interests may arise when directors pursue opportunities that should otherwise have been available to the company. It does not matter whether the company is in a position to take advantage of such an opportunity.
It is important for directors to be aware of their obligations to the company they represent and to tread carefully when involving themselves with other business interests.