Streeter V Western Areas Exploration

Streeter v Western Areas Exploration Pty

The general company laws and earlier judgments have all concurred and pointed out the results reached in the Streeter case. The case has a greater bearing in law because the case shows the application of the corporate opportunity principle which is still based on the obligation that the individual has to the company. Therefore primarily it must be determined as to the individual's obligation to the company. The obligations of the director may be statutory, general law and fiduciary and these determine the course of action for the director once they have taken notice of an opportunity. It can be safely argued that if they are obliged or not, a director cannot divert an opportunity already being pursued or under consideration by the company. (Goss; Hodgekinson, 2007)

In the event the director pursues the particular opportunity for another party, while continuing as the director of the company that seeks to exploit the opportunity it can be a situation where the diversion of the opportunity occurs, no matter what the role of the director is in both places. The decision in Streeter v Western Areas Exploration Pty Ltd. [No 2] [2011] WASCA (20 January 2011) has clarified the law in relation to the notion of a claim arising from a 'diversion of corporate opportunity', to a limited extent. In the final appeal the appellants, Mr. T Streeter, Mr. D Cooper and Jungle Creek Gold Mines Pty Ltd. -- a company controlled by Mr. Streeter, appeal against orders made by EM Heenan J. imposing in favor of the respondent, Western Areas Exploration Pty Ltd. -- WAE, a constructive trust over 11,075,000 shares held by the Streeter and Cooper interests in Western Areas NL -- WANL, the initial shares. (Austlii, 2011b) This is also a case that deals with diverted opportunity. In the judgment their Lordships have referred to the two types of rules that govern company actions. According to them the conflict rule and the profit rule are primary. In this case the respondent did not rely on any 'business opportunity rule' that is wider in scope than the conflict and profit rules [50]." (Baxt, 2010)

In para 66 the court expounds the conflict rule. A person with a financial obligation to the company bound not to promote their own personal interest by pursuing a gain or benefit under the circumstances where there could be a conflict between the personal interest and the company he serves. The case of Hospital Products Ltd. v United States Surgical Corporation [1984] HCA 64; (1984) 156 CLR 41, 103; Pilmer v The Duke Group Ltd. (in liq) [2001] HCA 31; (2001) 207 CLR 165 [78] were also cited in this context. (Austlii, 2011b)

In the same case the honorable judges expounded that every director has a positive duty to pursue the gains of the company and help it in getting the benefits the company seeks. The benefits or property may also be suitable for his private purposes, and in this instance there will be a conflict of interest. In all such cases the positive duty is to see that personal interests are subdued to the interests of the company in deciding the conflict rule. In many companies this rule is not strictly applied. In cases where the opportunity available to the company can be used in determining whether a company has an 'interest' which conflicts with that of the director would fall under the business opportunity rule [Para78]. Hence the judgment actually consolidates and spells out what was said in other judgments earlier and can be seen as the future focal point in deciding the corporate governance and opportunities, more particularly the behavior of the directors and managers. (Austlii, 2011b)

Arguments:

The legal position on the responsibilities of the directors and managers and all those who have a fiduciary relation with a company has been the subject of analysis in many judgments and legal arguments. However the responsibilities that have been cast on the directors of the company stand in a different footing. Because of their ability to influence the decisions and because they are privy to information and opportunities that may be used both for the company and as well as for their individual aggrandizement, the directors have duties that are cast to make the directors forego personal interests in the favor of the company. This existed long before the Streeter case, for example the Corporations Act 2001 says that the directors of a company must not use information for personal gain and such act causing harm to the company's interest. It can be stated that a statutory duty cannot be waived, the shareholders if are agreeable can change the law as applicable to such an extent that "proper" use of position or information by the director can be defined by them. The shareholder approval thus forms the basis of ratification of actions in common law. Such an approval would also matter in the cases wherein cognizance of the court under section 1318(1) of the Act has been taken. (Goss; Hodgekinson, 2007)

The directors of the private companies and some proprietary companies do not have a clear set of duties assigned to them either by law or by the companies. The directors' duties are limited as compared to the role of directors in public companies. Laws are being amended to see that the directors in their capacity as directors and shareholders in a smaller company and in a minority position can seek judicial relief in cases of disputes. In many cases the disputes often end in the liquidation of the company. Looking at the decision in Vadori v AAV Plumbing [2010] NSWSC 274, 77 ACSR 616 that dealt with section 232 of the Corporations Act 2001 and the fiduciary duties of directors and the role of directors in using the section 237 to control the company, we can understand that the judgment while acknowledging the rights of directors put forth some principles that need be considered in such conflicts. (Baxt, 2010)

To become maintainable under section 237 of the Corporations Act, the plaintiff has to show that they are acting in good faith. Justice Ward noted in this case that the plaintiff was primarily concerned with a breach of duty by the directors. Thus in a suit for a remedy based on oppression the fundamental fact that is looked into is to see if there was an improper diversion of a business. In the case of the AAV Plumbing to the new company was held as a breach of duty on the part of the directors. While the actual motive in acting in a particular manner has no bearing on the issue of oppression Justice Ward held the transactions in Vadori v AAV Plumbing as a case of a diversion of a corporate opportunity from AAV Plumbing to the newly created company. (Baxt, 2010)

These decisions will cause a lot of responsibility being cast on the directors of the company and the diversion of corporate assets with the concurrence of the majority cannot be done with impunity because of the relief available to directors who suspect that there is a diversion of resources from the company. There are obligations cast on them to see that the company is run above board. The obligations cast on the company directors, whether in public or private companies is very serious now. (Baxt, 2010)

To become maintainable under the section 237 of the Corporations Act, the plaintiff has to show that they are acting in good faith. Justice Ward noted in this case that the plaintiff was primarily concerned with a breach of duty by the directors. Thus in a suit for a remedy based on oppression the fundamental fact that is looked into is to see if there was an improper diversion of a business. In the case of the AAV Plumbing to the new company was held as a breach of duty on the part of the directors. While the actual motive of acting in a particular manner has no bearing on the issue of oppression, Justice Ward held the transactions in Vadori v AAV Plumbing as a case of a diversion of a corporate opportunity from AAV Plumbing to the newly created company. These decisions will cause a lot of responsibility being cast on the directors of the company and the diversion of corporate assets with the concurrence of the majority. This cannot be done with impunity because of the relief available to directors who suspect that there is a diversion of resources from the company. There are obligations cast on them to see that the company is run above board. The obligations cast on the company directors, whether in public or private companies is very serious now. (Baxt, 2010)

In any case it can be seen that the laws and the rulings before Streeter case tended to the same conclusion regarding diversion of opportunities. The importance of the Streeter case is that it has concisely spelled out the boundaries of what constitutes the diversion of opportunities and the limitations of the directors with such opportunities available.

The leading case in the issue was the House of Lords decision in Regal (Hastings) VS Gulliver. The court examined the relation between the directors of the company -- the fiducially relationship and the liability of the director, with the court emphasizing on a construction of strict liability. (Lowry; Edmunds, 2003, p. 521) There has been the issue considered in the chancery courts, and in England and other countries where the view is also seen to be identical. For example in the case of CMS Dolphin Limited V/S Paul Maurice Simonet & Blue --Gb Limited - In The High Court Of Justice Chancery Division Royal Courts (UCC, 2001) the question of a director diverting to another company a business opportunity of his company was discussed with the relevant question of what will be the effect after resignation where the reason for the resignation is to appropriate the opportunity for the person from the company.

The implications of the judgment on secured transactions

The fallout of this case was seen in the Australian Securities and Investments Commission v Fortescue Metals Group Ltd. [2011] FCAFC 19, where the judgment showed that the important objectives of "Chapter 6CA (where'd 674 is to be found) is to ensure that there is a fully informed and therefore efficient market for listed securities." (Austlii, 2011a) Thus there has been misinformation of the trading of securities and those trading in securities had been misinformed about the affairs of the company. The court however noted that there must be a complaint that a share trader had suffered loss and even assuming that the gain or loss cannot be an issue the corporation can side step the continuance disclosure obligations and in that way the directives of the Streeter case can affect the stock holders and secured transactions.

The general law regarding corporate opportunity and the corporate opportunity principle are more applicable to the directors, and the managers of the company who will have the first hand information of the opportunities available to the company. Thus where there exists a fiduciary relationship between directors and the company, the director undertakes to act in good faith always on behalf of, and having the interests of the company uppermost in the exercise of the director's power. It also implies that the directors shall not allow their personal interests conflict with the interests of the company. The provisions are clear. The directors are accountable to his or her company for profits or benefits that may accrue from the company or elsewhere in the process of the exercise of the directorship. The only saving provision being that the shareholders of the company may ratify any action by a director even if it violates the doctrine of good faith. (Goss, Hodgekinson, 2007)

Structuring of Corporate Groups or Enterprises

The laws do not require a board of directors to be present. Directors of the company do not often participate in the process. The corporate structure thus would in future undergo a change with the disclosures that need be made in the case of not only directors but the corporate affairs. Thus the question becomes if these developments affect the future course of company laws and the way the board sees opportunities. Certainly if the board members cannot use the opportunity for their private gain they must consequent not only because of the obligatory duty cast on them but also on account of self-interest seeking to see that the company does not lose the opportunity.