EDENHAM PTY LTD -v- MEARES [2016] WASC 301 (22 September 2016)

EDENHAM PTY LTD -v- MEARES [2016] WASC 301 (22 September 2016) - WASC 2016 case summary — Zoe

[3]

3 The defendants deny the plaintiff's claims. First, they say there was never any conflict between the duties which Alex and Kerry owed to the plaintiff by virtue of their positions as directors of Edenham and their positions as directors of Premier Holdings because there was no competition between the business conducted by Edenham and the business conducted by Premier Holdings. Secondly, if there was a conflict the plaintiff consented to that conflict because at the establishment of its business the only directors of Edenham were Alex and Kerry and they consented to Premier Holdings undertaking the business conducted by it. Thirdly, in respect of breaches of fiduciary duty by Alex and Kerry the defendants say the claims are time barred in equity by analogy with s 1317 of the Corporations Act, by laches or by s 13 of the Limitation Act 2005 (WA). Fourthly, the defendants say that s 191 of the Corporations Act does not give rise to a duty owed by Alex and Kerry as directors of Edenham. Fifthly, the defendants say that any breaches of duty under the Corporations Act are time barred by s 1317K of the Corporations Act. Sixthly, the defendants say that any breaches of duty under the Corporations Act by Alex and Kerry as directors of Edenham should be excused under s 1318(1) of the Corporations Act. Sixthly, the defendants claim to be entitled to setoff in equity against any equitable compensation or account of profits awarded in favour of Edenham, the sum of $237,164.69 plus interest, which Edenham owes Premier Holdings under an agreement of 20 April 2010 entitled 'Commercial Loan Agreement'. Seventhly, the defendants say that the Court should decline to grant Edenham any equitable relief because of conduct which constitutes unclean hands. Eighthly, Edenham carries on its business as trustee of the Osprey Unit Trust and the defendants say that the Advisory Committee of the Trust passed a resolution which called on Edenham as trustee of the Osprey Unit Trust to discontinue this action and accordingly Edenham is not authorised to maintain the action.

[38]

29 The principles concerning the diversion of business opportunities was considered by the Court of Appeal of Western Australia in Streeter v Western Areas Exploration Pty Ltd [No 2]. The case is summarised by the authors of Ford, Austin & Ramsay's Principles of Corporations Law (online ed), as follows. The plaintiff company, Western Areas Exploration NL (WAE) was a mining exploration company. The objective of those associated with WAE was to list the company on ASX and conduct an initial public offering to raise sufficient funds to undertake an exploration program primarily for nickel, but also for gold, upon mining tenements which the company had obtained or which it might obtain. The defendants included two directors of WAE. A group of geologists calling themselves the Australian Nickel Project Consultants (ANPC) contacted the chairman of WAE with the idea of raising capital to promote the formation or acquisition of a public company listed on ASX to undertake testing and, if appropriate, the development of mining tenements for gold and nickel which ANPC had assembled. The trial judge found that the chairman of WAE referred ANPC to one of the two defendant directors to explore this opportunity on behalf of WAE, and the knowledge of the ANPC proposal by the defendants and the opportunity to promote it was a result of the referral of the ANPC personnel to one of the defendants. However, the defendants then proceeded to participate in a new arrangement whereby a new company, Western Areas NL (WANL) was incorporated, the ANPC tenements were transferred to WANL, seed capital for WANL was provided by one of the defendants, the two defendants became directors and shareholders of WANL, and an IPO was undertaken to raise capital for an exploration and development program by WANL. This new arrangement was not disclosed to WAE or its chairman until the new arrangements were a fait accompli. WANL was a very successful company and went from being a small exploration company with a total capital of $7 million to a major producer of high grade nickel sulphide concentrate with a market capitalisation of more than $900 million. The trial judge held that the objective of ANPC was, for all practical purposes, the same objective which the directors and shareholders of WAE were seeking to pursue and therefore any proposal from ANPC along the lines of that being promoted would have been of interest to WAE. The trial judge held that both defendant directors were in breach of duty in that they 'took an opportunity which they knew was of the kind being sought by the plaintiff through WANL in a manner which secured for themselves major collateral benefits, and thereafter, abandoned any thought of pursuing the same or similar projects by the plaintiff': Western Areas Exploration Pty Ltd v Streeter [No 3] [2009] WASC 213; (2009) 234 FLR 265 [315]. The defendant directors were in a position of 'the clearest conflict': [316].

[39]

30 The Court of Appeal of Western Australia upheld the appeals of the defendant directors. The majority, McLure P and Buss JA, made a number of crucial findings. First, the evidence did not support the finding of the trial judge that the ANPC personnel approached the chairman of WAE because he was chairman of WAE. Instead, he was approached because he was a stockbroker and the ANPC personnel were seeking seed capital and a stockbroker to assist with the development of the ANPC proposal. Therefore, the chairman of WAE obtained information about the ANPC proposal not in his capacity as a director of WAE but in his capacity as a stockbroker. Secondly, the evidence did not support the finding of the trial judge that the chairman of WAE referred ANPC to one of the two defendant directors to explore this opportunity on behalf of WAE. The ANPC personnel did not approach this defendant director in his capacity as a director of WAE but as a potential provider of seed capital. Thirdly, WAE was not acceptable to ANPC as the corporate vehicle for the ANPC proposal and this was based on sound commercial reasons. Fourthly, the trial judge appeared to regard the corporate opportunity diverted by the two defendant directors as one for WAE to be the seed capitalist for WANL or for WAE shareholders to become foundation shareholders on equal terms with the two defendant directors. However, neither was a relevant opportunity for WAE. The first (the provision of seed capital by WAE to facilitate a capital raising by, and listing of, another company) was outside WAE's actual or intended business and the second was an opportunity for the shareholders and not WAE. Fifthly, the defendant directors were not in a position of conflict by investing in, and becoming directors of, other mining companies in Western Australia, including a start-up mining company in the market for capital with the object of listing. Sixthly, because the defendant directors did not have a duty to acquire the ANPC proposal for WAE and there was no opportunity for WAE to be the corporate vehicle, there was no conflict between the interests of the defendants the interests of WAE.

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Cases Cited (6)