Howard v Commissioner of Taxation [2014] HCA 21
Relevant facts
Six individuals, including Howard, entered into a joint venture agreement to purchase a golf course, lease it, then on-sell for a "day-one" (quick) profit.Howard and two other members of the joint venture (Donovan and Quinert) were also directors of Disctronics Ltd. Together they decided it would be better for them to have the golf course on-sold to Disctronics. They entered into an agreement to this effect. The agreement, however, also provided that this would only be done if the equity required to purchase the golf course was less than $1,500,000.
The other members of the joint venture did not agree to this course of action and the proposal was rejected. Further, two of them (Edmonds and Cahill) went behind the backs of the others and acquired the golf course for themselves.
Legal action was commenced against Edmonds and Cahill in the Supreme Court of Victoria for breach of their fiduciary duties to the other four members of the joint venture.
Shortly before this though, Howard, Donovan and Quinert executed a litigation agreement with Disctronics that:
- It would pay their legal fees in pursuing the action; and
- That any award of damages made in their favour was assigned to Disctronics.
Income tax
The issues in dispute concerned who had the beneficial interest of Howard's share of the compensation for tax purposes. Though the money from the action was paid to Disctronics by Howard, the Commissioner of taxation assessed Howard's share as forming part of his assessable income. Howard, on the other hand, contended that he was merely a constructive trustee of the funds for Disctronics. Therefore, the money should not have formed part of his income. Alternately, Howard argued the effect of the litigation agreement was to deprive him of any beneficial, and thus assessable, interest in the money.Relevant issue - constructive trustee
It is well-known that a director of a company owes fiduciary duties to it. The two heads under which a director must account for a profit to the company are:
- Where there is a conflict of duty and interest, or duty and duty to another; and,
- Where the director has only come by the opportunity for gain "by reason of or by use" of their directorship: Hayne and Crennan JJ at [62]-[63]; see also, French CJ and Keane J at [33] and Gageler J at [108] citing Deane J in Chan v Zacharia (1984) 154 CLR 178 at 198-199.
Howard contended that his interest in the joint venture, and therefore the compensation payment, was in conflict with his duties as a director of Disctronics. The basis of this argument was the agreement made between himself and the other joint venture members/directors that they would endeavour to have Disctronics be ultimate purchaser of the golf course from the joint venture. The argument followed that Disctronics, as a result, had a "maturing business opportunity" or interest in acquiring the golf course. This interest was sufficient to ground a duty in Howard to account to Disctronics for any money he received in an action against the defaulting joint venture members.
The High Court, in separate judgments (Fench CJ and Keane J; Hayne and Crennan JJ; Gageler J) rejected this argument.
Though stated in differing ways, each of the judgments emphasised the need to carefully examine the scope of the fiduciary duty alleged to have been breached. Fench CJ and Keane J stated (at [34] and [37]),
"[34] The scope of the fiduciary duty generally in relation to conflicts of interest must accommodate itself to the particulars of the underlying relationship which give rise to the duty so that it is consistent with and conforms to the scope and limits of that relationship. It is to be "moulded according to the nature of the relationship and the facts of the case" ... [37] If there is no possible conflict between personal interest and fiduciary duty, and if the gain or benefit is not obtained by use or by reason of the fiduciary position, the fiduciary is not liable to account for the gain or benefit." (see also Hayne and Crennan JJ at [91]; and, Gageler J at [110]).
In this case, the only duty could be one that required Howard to have attempted to persuade the other members of the joint venture to agree to on-sell the golf course to Disctronics. This was a duty he fulfilled: per French CJ and Keane J at [38]; Hayne and Crennan JJ at [93]; Gageler J at [114].
In terms of the "maturing" interest Hayne and Crennan JJ said the following (at [85]),
"So expressed, the argument might be thought to have depended upon the engagement of some novel fiduciary principle about "diversion of opportunity" or some extension of existing principle. But at no point in the argument did the appellant suggest that his case depended upon engaging or developing any new principle. Rather, to the extent to which the appellant's argument depended upon notions of "appropriation" or "diversion", it sought principally to engage the obligation not to obtain unauthorised benefits. To the extent to which it depended upon the notion of Disctronics "actively pursuing" the opportunity, it sought principally to raise questions about conflict of duties or conflict of duty and interest. (Because the obligations intersect in their application, no more categorical statement can be made.)"
Ultimately, the question resolved into the following: did the knowledge or opportunity come to Howard by virtue of his position as director of Disctronics? In the view of the High Court, clearly it did not as, "Their [Howard, Donovan and Quinert) entry into the joint venture did not involve the use of any knowledge or opportunity derived from their positions as directors.": per French CJ and Keane J at [37]; see also Hayne and Crennan JJ at [87]; Gageler J at [113].
"Under the terms of the agreement the appellant, Donovan and Quinert assigned "any award of damages (whether on revenue or capital account), costs or interest made in their favour as a consequence of their participation in the joint venture or arising out of the proceedings and the ultimate outcome thereof". The agreement did not assign the appellant's interest in the joint venture nor in the cause of action arising out of the breach of fiduciary duties by Edmonds and Cahill and asserted in the main proceeding in the Supreme Court. It did not involve an assignment of a chose in action."
Hayne and Crennan JJ (at [101]-[105]) likewise held that, on construction, the litigation agreement considered the assignment of future income, and Gageler J agreed with their reasons: at [107].
"Overbroad assertions of fiduciary duties, uninformed by a close consideration of the facts and circumstances of the particular case, are sometimes made for reasons which have nothing to do with the protective rationale of those duties. The plurality in Maguire v Makaronis referred to: "attempts to throw a fiduciary mantle over commercial and personal relationships and dealings which might not have been thought previously to contain a fiduciary element." The forensic purposes of such attempts may include the availability of advantageous equitable remedies and the avoidance of stringent time limits. The appellant attempted to stretch the fiduciary mantle attaching to his position as director to his membership of the joint venture. He did so in order to defeat a claim that he was liable to pay income tax on the amount of equitable compensation awarded to him in the Supreme Court of Victoria. His purpose had nothing to do with the vindication or protection of Disctronics' interests."
The other point raised by Gageler J (at [113]) was that the whole concept of a business opportunity is far too broad and imprecise to be a useful measure against which to judge a conflict of interest or duty. Not least because the ambit of that duty is a question of fact: at [110].
What we see then is a strong affirmation of the current law, together with a warning that any extension, or application, of it will only occur in line with equitable principles. In other words, equity will look to who and what is to be protected (is owed the fiduciary duty), and not to those who would exploit it for their own gain.
Though stated in differing ways, each of the judgments emphasised the need to carefully examine the scope of the fiduciary duty alleged to have been breached. Fench CJ and Keane J stated (at [34] and [37]),
"[34] The scope of the fiduciary duty generally in relation to conflicts of interest must accommodate itself to the particulars of the underlying relationship which give rise to the duty so that it is consistent with and conforms to the scope and limits of that relationship. It is to be "moulded according to the nature of the relationship and the facts of the case" ... [37] If there is no possible conflict between personal interest and fiduciary duty, and if the gain or benefit is not obtained by use or by reason of the fiduciary position, the fiduciary is not liable to account for the gain or benefit." (see also Hayne and Crennan JJ at [91]; and, Gageler J at [110]).
In this case, the only duty could be one that required Howard to have attempted to persuade the other members of the joint venture to agree to on-sell the golf course to Disctronics. This was a duty he fulfilled: per French CJ and Keane J at [38]; Hayne and Crennan JJ at [93]; Gageler J at [114].
In terms of the "maturing" interest Hayne and Crennan JJ said the following (at [85]),
"So expressed, the argument might be thought to have depended upon the engagement of some novel fiduciary principle about "diversion of opportunity" or some extension of existing principle. But at no point in the argument did the appellant suggest that his case depended upon engaging or developing any new principle. Rather, to the extent to which the appellant's argument depended upon notions of "appropriation" or "diversion", it sought principally to engage the obligation not to obtain unauthorised benefits. To the extent to which it depended upon the notion of Disctronics "actively pursuing" the opportunity, it sought principally to raise questions about conflict of duties or conflict of duty and interest. (Because the obligations intersect in their application, no more categorical statement can be made.)"
Ultimately, the question resolved into the following: did the knowledge or opportunity come to Howard by virtue of his position as director of Disctronics? In the view of the High Court, clearly it did not as, "Their [Howard, Donovan and Quinert) entry into the joint venture did not involve the use of any knowledge or opportunity derived from their positions as directors.": per French CJ and Keane J at [37]; see also Hayne and Crennan JJ at [87]; Gageler J at [113].
Relevant issue - litigation agreement
The question regarding the litigation agreement was whether it was an agreement to assign a chose in action (being the right to sue Edmonds and Cahill) or simply the proceeds arising from it. If it was the latter, then it would still be assessable income. The judgments dealt with this matter with short shrift. Simply put, this was a matter of construction of the litigation agreement. French CJ and Keane J stated (at [40]),"Under the terms of the agreement the appellant, Donovan and Quinert assigned "any award of damages (whether on revenue or capital account), costs or interest made in their favour as a consequence of their participation in the joint venture or arising out of the proceedings and the ultimate outcome thereof". The agreement did not assign the appellant's interest in the joint venture nor in the cause of action arising out of the breach of fiduciary duties by Edmonds and Cahill and asserted in the main proceeding in the Supreme Court. It did not involve an assignment of a chose in action."
Hayne and Crennan JJ (at [101]-[105]) likewise held that, on construction, the litigation agreement considered the assignment of future income, and Gageler J agreed with their reasons: at [107].
Conclusions
The judgments largely draw on the already well-established law of conflicts of interest stated in decisions such as Chan v Zacharia (1984) 154 CLR 178 and Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41. In this sense they do not add much. But it is in the rejection of the idea that somehow conflicts can be extended to situations were a company is merely interested in something that is most important. In this case, Howard's purpose was clearly judged to not be one advancing the interests of Disctronics, but his own in avoiding taxation. As French CJ and Keane J stated (at [35]),"Overbroad assertions of fiduciary duties, uninformed by a close consideration of the facts and circumstances of the particular case, are sometimes made for reasons which have nothing to do with the protective rationale of those duties. The plurality in Maguire v Makaronis referred to: "attempts to throw a fiduciary mantle over commercial and personal relationships and dealings which might not have been thought previously to contain a fiduciary element." The forensic purposes of such attempts may include the availability of advantageous equitable remedies and the avoidance of stringent time limits. The appellant attempted to stretch the fiduciary mantle attaching to his position as director to his membership of the joint venture. He did so in order to defeat a claim that he was liable to pay income tax on the amount of equitable compensation awarded to him in the Supreme Court of Victoria. His purpose had nothing to do with the vindication or protection of Disctronics' interests."
The other point raised by Gageler J (at [113]) was that the whole concept of a business opportunity is far too broad and imprecise to be a useful measure against which to judge a conflict of interest or duty. Not least because the ambit of that duty is a question of fact: at [110].
What we see then is a strong affirmation of the current law, together with a warning that any extension, or application, of it will only occur in line with equitable principles. In other words, equity will look to who and what is to be protected (is owed the fiduciary duty), and not to those who would exploit it for their own gain.
