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SUPREME COURT OF QUEENSLAND

Held at Brisbane

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Parties: Maude Brown (hereinafter referred to as “the Plaintiff”) and Connor Wallace and Katie Wallace (hereinafter referred to as “the Defendants”).

 

  1. Summary of the Facts
  2. The Defendants are the directors as well as shareholders of Food Fletchers Pty Ltd (hereinafter referred to as “the Company”) and they hold 70% of the shares of the Company.
  3. Recently, the Plaintiff, which is an employee in the Company became the owner of 30% of the shares at the Company; a shareholder.
  4. The company paid bonuses to the directors of the Company which in this case were the Defendants, however it was not in a position to pay dividends to the shareholders.
  5. The Plaintiff was diagnosed with chronic fatigue and started to miss a lot of work which resulted in her termination.
  6. However, the Plaintiff maintained her status as a shareholder as the Defendants could not “buy her out” due to financial difficulties.
  7. A solicitor advised the Plaintiff to bring a statutory derivative action under sections 236 and 237 of the Corporations Act 2001 (as amended) suing the Defendants for the breach of fiduciary duty relating to payment of directors’ bonuses.

 

  1. Defendant’s Submissions
  2. In accordance with articles 181, 182, 183, 184, of the Corporations Act 2001, the Defendants have shown good faith, have used information properly and have not gained advantage for themselves, have not been intentionally dishonest, and have not breached any duty as directors of the Company. In accordance with the articles mentioned above, the directors couldn’t have predicted, by using the reasonable person standard, that the Company would not be in a position to pay dividends to shareholders as it is the first time this has happened in a period of ten years. The four basic directors’ duties are: Care and diligence, good faith, proper use of position, and proper use of information.
  3. Moreover, in accordance with the Corporations Act 2001, there aren’t any articles that indicate that directors must not obtain a bonus to ensure that all shareholders can be paid the dividends to shareholders. In accordance with part 1.5 (Small Business Guide), Section 9.1 and section 254T, “Dividends”, dividends are only paid to shareholders in case the company’s assets are sufficiently in excess of its liabilities immediately before the dividend is declares and the payment of the dividend is fair and reasonable to the company’s shareholders as a whole and does not materially prejudice the company’s ability to pay its creditors. In accordance with this article and section, there isn’t a relation between the directors’ bonuses and the dividends to pay paid to shareholders.
  4. In accordance with this case the Defendants as shareholders were as well not paid dividends despite having 70% of the shares of the Company. This statement indicates that there was not an unfair treatment between shareholders and directors. The directors were paid their bonus due to their status in the Company as directors. The bonus of directors is irrelevant to the dividends that may be paid to shareholders of the Company.
  5. In accordance with Peskin v Anderson [2000] EWCA Civ 326, directors do not have a duty to shareholders. Basically, the fiduciary duty that the directors owe is relative to the Company as a whole and not individually to each shareholder. In this case the Plaintiff is suing on the grounds that the Defendants obtained their bonuses which resulted in not having payment for dividends. These two cases are strictly contradicting and detached from one another.
  6. For a Plaintiff to claim remedies for the breach of fiduciary duty, in accordance with the Corporations Act 2001, there must be certain elements present to indicate that a director has breached his or her fiduciary duties and the elements are the following: The director must have failed to make a business judgement in good faith or proper use, must have placed a material personal interest in the subject matter ahead of the company’s interest, must have reasonable grounds to believe that the business judgment is not in the best interests of their company, must deceitfully and intentionally fail to exercise their powers and discharge their duties in good faith either in the best interest of the company or for a proper purpose, dishonestly and intentionally commit an offence by using their position so as to gain an advantage for themselves or someone else, either directly or indirectly, thereby causing harm to the company, must obtain information with intentional dishonesty and use the information to the detriment of the company to gain an advantage, directly or indirectly, either for themselves or for someone else, and must fail to prevent the company from trading in a dishonest manner while being insolvent. In this case none of the elements presented were proved, therefore the Defendants should not be held guilty.
  7. Moreover, in case the Plaintiff was a director, she would have been paid the directors’ bonus as well.
  8. Another factor is important and it is the fact that the Plaintiff’s contract has been terminated and she no longer commences work with the Company due to chronic fatigue illness issues. Furthermore, evidence has shown that the Defendants have tried to buy the Plaintiff out but had insufficient monetary values to do so and that was as well one of the reasons that the Plaintiff’s contract was terminated. Fiduciary duty is only present when there is a connection or a relation between the directors and the shareholders and in this case since the Plaintiff was only a shareholder and has not been working or commencing work at the Company, there was no connection between her and the Defendants. Therefore, the Defendants should not be considered as guilty.

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