In this note I comment on two recent decisions of the New South Wales Court of Appeal, dealing with directors’ potential conflicts scenarios.

The two decisions are cases in the New South Wales Court of Appeal viz. Duncan v ICAC [2016] NSWCA 143 (Duncan) and AMP Life Limited v AMP Funds Management Limited [2016] NSWCA 176 (AMP Life). These two cases have highlighted problems that exist in our law where directors in a group of company situation (whether a formal group of companies or a more indefinite set of arrangements), face a potential conflict between their duty to different companies in the groups and their duties to the holding company.

Both the Corporations Act 2001 (Cth) (the Act), and guidance issued by the Australian Securities and Investment Commission (ASIC) and the Australian Prudential Regulatory Authority (APRA), point directors in the right direction to avoid conflicts of duty and interest.

For example, it is common practice that directors of a holding company representing that company in a subsidiary company, will not vote on matters involving the interaction between the holding company and the subsidiary.

AMP Life

The AMP Life case concerned the ability of directors in companies in a complex corporate arrangement involving management investment schemes, namely directors of AMP Life Limited, while sitting as representatives of that company in a related company in the AMP group of companies namely AMP Capital Funds Management (Capital Funds) to involve themselves in the affairs of the relevant company at the heart of the scheme. Section 253E of the Act states: “The responsible entity of a registered scheme and its associates are not entitled to vote their interest on a resolution at a meeting of the scheme’s members if they have an interest in the resolution or matter other than as a member.”

AMP Life Limited, the relevant company was, by definition, an associate of the responsible entity, Capital Funds.

Representatives in AMP Life Limited were interested in voting on two resolutions being considered by the relevant management investment scheme fund organisation (AMP Capital China Growth Fund (the Fund)).

Both AMP Life Limited and Capital Funds were controlled by AMP Limited, the holding company whose shares are listed on the ASX. The proposed resolutions would have resulted in a reduction in the remuneration that the relevant companies would receive as the responsible entity under the relevant arrangements.

Justice Brereton at first instance in Re AMP Capital Funds Management Limited [2016] NSWSC 986 ruled that AMP Life Limited was ineligible to vote on the resolution because of Section 253E of the Act.

In the New South Wales Court of Appeal, Chief Justice Bathurst, Justice of Appeal Meagher and Acting Justice of Appeal Barrett delivered the decision.

It was argued by AMP Life Limited that Acting Justice of Appeal Barrett had erred in ruling that Section 253E of the Act prohibited a member from voting where the member was an associate of the responsible entity because it was the responsible entity (not the member) that had an interest in the resolution.

Prohibition of associates

His Honour relied on the High Court decision in Project Blue Sky Inc. v Australian Broadcasting Authority (1998) 194 CLR 355 which noted, in effect, that the primary object of statutory construction was to construe the relevant provision so that it is consistent with the language and purpose of all of the provisions of the statute.

Acting Justice of Appeal Barrett ruled that the relevant provision must be interpreted “by reference to the language of the instrument viewed as a whole” (see AMP Life at para 20).

He added (relying on Section 601FC(1) of the Act) that: “There is thus a clear statutory preoccupation with the role of the responsible entity as a guardian and protector of the interests and welfare of members and, as necessary, with subordination of any conflicting interest of the responsible entity.”

It was these aspects of the responsible entity’s role, which were at the forefront of thinking when Section 253E was formulated (see AMP Life at para 24).

Acting Justice of Appeal Barrett added that Section 253E of the Act aimed to prevent any potential conflict of interest that might arise involving the responsible entity’s general personal interests and the interests of the members of the scheme.

In dealing with this complex question, Acting Justice of Appeal Barrett made these interesting additional comments: “The reason for extending the prohibition to associates is that it is recognised that associates may act together to procure a result that benefits any one or more of them, notwithstanding that it might not directly benefit the individual associate.

“The disqualification of the responsible entity would achieve nothing, if its associates were at liberty to vote in the manner in which the responsible entity would desire. It is the fact of their association, not their interest, which is critical.

“If any one of a number of associated entities has an extraneous interest, there is a potential for the others to vote by reference to the association rather than by reference to their own independent interests” (see AMP Life at para 13).

He added that the potential mischief addressed by the statutory provision would be to avoid the company at the head of the complex corporate structure AMP Limited, from deciding that it would be in its interests, and the interests of the group, to retain the revenue from the responsible entity and thus exercise its control of AMP Life Limited.

He rejected the argument by AMP Life Limited that it, and its associates, should be treated differently so that an associate would only be disentitled from voting if the associate held what would be regarded as a “non-member interest”.

Duncan

In Duncan, the New South Wales Court of Appeal ruled that the Independent Commission Against Corruption (ICAC) could rely on statutory duties in the Act to prosecute the directors of the Cascade Coal Company (Cascade). They had not disclosed certain information to the directors of White Energy Limited, which wanted to purchase Cascade. The independent directors of White Energy should have been advised of the relationship between the directors of Cascade and the Obeid family in that company.

ICAC argued that it was a breach of the duties of the directors of Cascade to act in good faith and in the best interests of the company in not disclosing that information. Justice McDougall at first instance had ruled that this information was arising from their interests as businessmen and not as directors.

The New South Wales Court of Appeal overturned his decision. Chief Justice Bathurst in particular noted: “The directors believe that if the Obeid involvement was disclosed, the transaction will not proceed.

“It seems to me from those circumstances, this was the case where it was open to [ICAC] to find that the directors did not discharge their obligation to avoid placing themselves in a position of conflict by disclosing their interest in the transaction.

“The conflict inherent in selling effectively a flawed asset to a company to which they owe fiduciary obligations remained and it was open to find that in seeking to proceed with the transaction without disclosing the true position, the directors contravened their obligation to act in good faith in the interests of [the company making the offer]” (see Duncan at para 473). In effect the Court of Appeal ruled that ICAC could rely on this breach of duty.

Should the law make some allowances in situations such as these, where directors are placed literally between a “rock and a hard place”? If they decide to vote on a matter where they know certain things but are disqualified because of conflicts in participating in a formal vote, are they discharging their duties to act with care and diligence? These are matters that deserve careful and serious consideration by lawmakers in Australia.

The absence of organisations such as the Corporations and Markets Advisory Committee means that we have to leave these matters to a range of different organisations to actively pursue sensible corporate reform. It is time for such arrangements to be put firmly in place.