Krupace Holdings Pty Limited v China Hotel Investments Pty Limited & Ors

Claim for Breach of Fiduciary Duties and Negligence

In relation to the claims other than those in respect of the July Notice, it is necessary to draw attention to the pleadings. First in paragraphs 64-68 of the Amended Statement of Claim ("ASOC"), Krupace pleaded a case in negligence. Nothing was said about that case in Krupace's opening or closing submissions, written or oral, save in relation to a question relating to whether a matter relevant to breach of fiduciary duty had been pleaded: see [51] below. No claim for damages is contained in the relief sought. In his submissions, Mr Scruby did touch on the question of negligence but given the complete absence of reference to it in Krupace's submissions beyond a notation in Krupace's opening submissions that the claim has been pleaded, it appears to have been abandoned by Krupace.
The pleading of breach of fiduciary duty is found in paragraphs 55-63 of the ASOC. The receipt of the Termination Fee is described as a windfall benefit to LIHM because it received $3.5 million, whilst entering into the New Management Agreement. Paragraphs 56 and 61 of the ASOC are in the following terms: "56 It would have been in the interests of the Company, and not in the interests of LIHM, for the Management Agreement to have been assigned or novated to the purchasers of the Hotel land and business, rather than being terminated by the Company. … 61 In the premises, through their conduct in causing the Company to terminate the Management Agreement and thereby become liable to pay the Termination Fee to LIHM: (a) each of Doyle, Wan, Sohal, Six Star Capital and Kadina breached their fiduciary duty to Krupace; and (b) each of Doyle, Wan and Sohal breached his fiduciary duty to the Company in equity and his duties to the Company under s 181 and/or 182 of the Corporations Act." (emphasis added)
The case advanced, therefore, was that assignment or novation of the CH Management Agreement would have been in the interests of China Hotel and that the Directors and LIHM had, in breach of their fiduciary duties, terminated the CH Management Agreement and obtained a benefit because China Hotel had not assigned the CH Management Agreement to Cornerstone. Mr Scruby objected to cross-examination of the Defendants' witnesses and the receipt of documents when this seemed to stray into areas that were not pleaded. Mr Giles's answer to that complaint was that he was addressing the Defendants' contention that the Directors, by their declarations, had overcome the conflict of interest problem and that Krupace was seeking to establish that the information disclosed was inadequate.
Subclauses 19.5 - 19.8 of the China Hotel Constitution are in the following terms: 19.5 Directors to declare interest (a) Any Director who has a material personal interest in a matter that relates to the affairs of the Company must give the other Directors notice of the interest, unless the interest is of a type referred to in section 191(2)(a) of the Law, or the conditions referred to in section 191(2)(b), (c) or (d) of the Law are satisfied. (b) The Director must declare the nature and extent of the Director's interest and the relation of the interest to the affairs of the Company at the meeting of the Directors as soon as possible after the Director becomes aware of their interest in the matter. (c) A Director who has an interest in a matter may give a standing notice to the other Director's of the nature and extent of that Director's interest in the matter in accordance with section 192 of the Law. 19.6 Directors to declare potential conflicts Any Director who holds any office or possesses any property which might (whether directly or indirectly) create duties or interests in conflict with that Director's duties or interests as a Director of the Company must declare the fact of the holding and the nature and extent of any conflict at the first meeting of the Directors held after the Director becomes a Director or (if already a Director) at the first meeting of the Directors held after the relevant facts came to the Director's knowledge. 19.7 Secretary to record declarations of Directors The Secretary must record any declarations made or notices given by a Director under this Constitution in the minutes of the meeting. 19.8 Effect of failure to make or record disclosures Failure to make or to record any disclosures will not render voidable or void any contract, transaction or arrangement to which the disclosure relates.
Krupace contends that: 1. there was a clear conflict of interest between the interests of China Hotel and LIHM; 2. the Directors obtained a benefit because of the payment of the Termination Fee to LIHM which also benefited LIHM and the shareholders of LIHM; and 3. the Directors made no attempt to sell the Park Regis Hotel on the basis of an assignment or novation of the CH Management Agreement with the advantage to China Hotel that there would not have been a need to make the payment of the Termination Fee to LIHM and hence did not act in good faith and for a proper purpose in the best interests of China Hotel.
It will be observed that Krupace's pleaded case does not challenge the Directors' decision to proceed with the Cornerstone Sale, or assert that that sale itself involved a breach of fiduciary duty by the Directors.
The Plaintiff called no witnesses in its case. The Defendants called Mr Doyle, Mr Wan and Mr Sohal (i.e. the Directors). It was not suggested that Mr Wan should not be believed on his oath.
Mr Sohal gave very limited evidence and I think that his unwillingness to answer questions about whether the Cornerstone sale was in the interests of LIHM and then his assertion that he paid no regard to the interests of LIHM and that the Cornerstone deal was a bad deal from LIHM's point of view (see T70-76) did not reflect well on him but little turns on this.
Mr Doyle was not only a director of China Hotel and LIHM and the lawyer acting for both but had a principal role in progressing the attempts to sell the Park Regis Hotel and finalising the deals of both China Hotel and LIHM with Cornerstone. He was cross-examined extensively. Although he was taken to task on some of his statements made in correspondence (see, for example, T105 - 106) and the duality of his roles on behalf of China Hotel and LIHM (see T110.14 - 111.41), he was not demonstrated to be an untruthful witness on any point and he made concessions against interest in the course of the cross-examination: see, for example, T95.43 - 96.15, T103.5-17, T105.50 - 106.27, T110.4-9 and T111.40.
Before I set out any further findings of fact or my conclusions on any of those matters, I will set out the matters of agreement and disagreement between the parties on issues of law.
Mr Giles put Krupace's principal case against LIHM as a knowing recipient under the first limb of Barnes v Addy (1874) LR 9 Ch App 244 or as an entity 'involved' in contraventions of the Directors under s 181 and s 182 of the Corporations Act, i.e.: 181 Good faith - civil obligations Good faith - directors and other officers (1) A director or other officer of a corporation must exercise their powers and discharge their duties: (a) in good faith in the best interests of the corporation; and (b) for a proper purpose. Note 1: This subsection is a civil penalty provision (see section 1317E). Note 2: Section 187 deals with the situation of directors of wholly‑owned subsidiaries. (2) A person who is involved in a contravention of subsection (1) contravenes this subsection. Note 1: Section 79 defines involved. Note 2: This subsection is a civil penalty provision (see section 1317E). 182 Use of position - civil obligations Use of position - directors, other officers and employees (1) A director, secretary, other officer or employee of a corporation must not improperly use their position to: (a) gain an advantage for themselves or someone else; or (b) cause detriment to the corporation. Note: This subsection is a civil penalty provision (see section 1317E). (2) A person who is involved in a contravention of subsection (1) contravenes this subsection. Note 1: Section 79 defines involved. Note 2: This subsection is a civil penalty provision (see section 1317E).
Mr Giles cited, as the relevant principles applicable to liability as a knowing recipient, Simmons v New South Wales Trustee and Guardian (2014) 17 BPR 33, 717; [2014] NSWCA 405 at [86] - [91], i.e.: "The elements of the first limb of Barnes v Addy 86 In Farah at [112] the High Court defined the first limb of Barnes v Addy in this way: "Persons who receive trust property become chargeable if it is established that they have received it with notice of the trust." 87 The High Court also accepted, in the absence of any argument to the contrary, that a claim under the first limb of Barnes v Addy may be made against not only a trustee who misapplies trust property, but also a fiduciary who deals with property, in respect of which he or she owes fiduciary obligations, in breach of such obligations: Farah at [113]. 88 The elements of a claim under the first limb of Barnes v Addy may be taken to be: (1) the existence of a trust, or a fiduciary duty, with respect to property (trust property); (2) the misapplication of trust property by the trustee or fiduciary; (3) the receipt of trust property by the third party; (4) knowledge by the third party, at the time he or she received the relevant property, that it was trust property and that it was being misapplied or, in the case of breach by a fiduciary, that the trust property was transferred pursuant to a breach of fiduciary duty. 89 The authorities which may be taken to establish element (4) above, include: Hancock Family Memorial Foundation Ltd v Porteous [1999] WASC 55; 32 ACSR 124 at 142 (Anderson J); Spangaro v Corporate Investment Australia Funds Management Ltd [2003] FCA 1025; 47 ACSR 285 at [55] (Finkelstein J); Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6; 200 FCR 296 at [20], [249]-[254]; Imobilari Pty Ltd v Opes Prime Stockbroking Ltd [2008] FCA 1920 at [15]; and Bell Group Ltd (In Liq) v Westpac Banking Corporation (No 9) (Bell Group (No 9)) [2008] WASC 239; 70 ACSR 1 at [4748] (Owen J). 90 Although Farah did not consider the categories of knowledge sufficient to attract liability under element (4) of the first limb of Barnes v Addy, it may be accepted that the knowledge required is: (1) actual knowledge of the trust, or the existence of the fiduciary duty, and of the misapplication of trust property or transfer pursuant of to a breach of fiduciary duty; or (2) willfully shutting one's eyes to those things; or (3) abstaining in a calculated way from making such inquiries, as an honest and reasonable person would make, about the trust and the application of the trust property; or (4) knowledge of facts which to an honest and reasonable person would indicate the existence of the trust and the fact of misapplication. 91 The authorities which have accepted that the above categories of knowledge are sufficient include: Kalls Enterprises Pty Ltd (in liq) v Balaglow [2007] NSWCA 191; 63 ACSR 557 at [176] (Giles JA; Ipp and Basten JJA agreeing); Hancock Family Memorial Foundation Ltd v Porteous at 142; Grimaldi v Chameleon Mining NL (No 2) at [268]-[270]. See also Westpac Banking Corporation v Bell Group Ltd (In Liq) (No 3) [2012] WASCA 157; 44 WAR 1 at [2130], when approving the view to which Owen J came at first instance in Bell Group Ltd (No 9) at [4748]."
Mr Giles submitted that all that was needed to establish liability was knowledge of facts that, to an honest and reasonable person, would indicate the existence of the fiduciary duty and the fact that property was transferred in breach of that duty. He submitted that the Directors had the requisite knowledge and their knowledge as directors of China Hotel was the knowledge of LIHM and, hence, that LIHM was involved in the breach within the meaning of s 79 of the Corporations Act.
Mr Giles also submitted that the Directors acted to benefit themselves in relation to the Cornerstone Sale in a manner not consistent with the high standard equity expects of fiduciaries.
Mr Scruby did not take issue with the principles outlined in Simmons (supra), nor did he dispute that the Directors' knowledge was that of LIHM, that there was a conflict between the Directors duties to China Hotel and LIHM or that a breach by the Directors would entitle China Hotel to recover from LIHM but he outlined LIHM's (and the Directors') contentions as follows: 1. The China Hotel Constitution recognised the protection for conflict and provided a means of dealing with it with which the Directors complied. 2. The Directors' fiduciary duties are governed by the terms of the China Hotel Constitution. Not only does that govern the issue of whether their conduct infringed the general law, it must also be relevant to the claimed breaches of s 181 and s 182 of the Corporations Act. 3. LIHM (and, hence, the Directors) did not obtain a benefit because of the Termination Fee; the Termination Fee was payable contractually on termination of the CH Management Agreement. The terms of the CH Management Agreement had been negotiated previously with input from Krupace. 4. Even if, contrary to Staywell's submissions, LIHM had obtained a benefit by reason of the Termination Fee as a result of a breach of duty by the Directors, the relief which Krupace seeks, i.e. repayment of the $3.5 million should not be imposed because the Cornerstone Sale could only proceed with termination of the CH Management Agreement, and Krupace is seeking to obtain the benefit of the Cornerstone Sale agreement without paying the price, i.e. the contractually agreed price, resulting from termination of the CH Management Agreement. Krupace, it was contended, was approbating and reprobating. 5. Krupace ratified the Cornerstone Sale and the payment of the Termination Fee.
At the core of this case are the following factual matters which are not in dispute: 1. The Directors (who at the time of entry into the Cornerstone Sale were the only directors of China Hotel) were also directors of LIHM and collectively owned, directly or indirectly, all of the shares in LIHM. 2. The CH Management Agreement between China Hotel and LIHM contained a termination clause which required China Hotel to pay to LIHM the Termination Fee if it terminated the CH Management Agreement prior to the end of the specified period of 10 years. 3. The CH Management Agreement had been negotiated well before 2016 and it is not the subject of any attack by Krupace. 4. China Hotel issued to LIHM a notice of termination of the CH Management Agreement on 17 August 2016. By reason of that letter, China Hotel became bound to pay to LIHM the Termination Fee. 5. The amount of the Termination Fee was not known at the time of termination but it had been expected by Mr Doyle to be in the realm of $2.5 million - $4 million (see T93.40) or $3 million - $4 million by Mr Sohal (see T69.14) and had, as at 2012, been estimated at $2.85 million: see Exhibit A3, pp 2816-2818, superseding a 2011 estimate of only $1.2 million on a sale on a vacant possession basis (although the relevant clause in the CH Management Agreement did not refer to vacant possession as a condition for payment of the Termination Fee). 6. The Termination Fee actually paid to LIHM was $3.5 million. 7. The Directors, on 18 July 2016 and 17 August 2016, did make declarations of their interest in LIHM and the potential for a conflict of interest. Whether the declarations met the requirements of clause 19 is in dispute. The declarations are found at Exhibit A1, pp 2705-2707 and pp 2708-2709, respectively. 8. China Hotel, with the agreement of Krupace, had wanted to sell the Park Regis Hotel for some time. 9. China Hotel was offered by Cornerstone an amount ($44 million net of a fee payable at the direction of Cornerstone) that has not been shown to be other than appropriate. 10. Krupace does not contend that the entry by China Hotel into the Cornerstone Sale or the Directors' vote to do so was itself a breach of fiduciary duty.
There are, however, two factual matters which are in dispute, namely: 1. whether China Hotel could have sold the Park Regis Hotel to Cornerstone with an assignment or novation of the CH Management Agreement, thus obviating the need for China Hotel to terminate the CH Management Agreement and pay the Termination Fee; and 2. whether Mr Doyle actually discouraged Cornerstone from considering the assignment option.
There is another theme in the case as it developed at hearing, namely, that the Directors gave no consideration (as directors of China Hotel) to the possibility of LIHM not seeking to enforce the Termination Fee claim if China Hotel assisted LIHM to obtain a new management agreement. There is no doubt that Mr Doyle did seek to promote LIHM's interest in obtaining a new management agreement with Cornerstone: see T110.30-34. Mr Doyle says that he did so on behalf of China Hotel because that ensured that the Cornerstone Sale would proceed.
There were matters that were addressed in cross-examination and submissions that went beyond the pleaded case. The question of whether Mr Doyle should have told Mr Jarnecic that the contract with Cornerstone had already been entered into when he discussed the Cornerstone Sale with him and whether what Mr Wan or Mr Doyle said to the minority shareholders effectively after Cornerstone had entered into the transaction was sufficient or correct is not part of the pleaded case against the Defendants. Similarly, the fact that the Directors did not call for an appointment of an independent person to handle negotiations between China Hotel and LIHM was not a matter pleaded as a ground of breach of fiduciary duty. I therefore exclude these matters from consideration.
The matter raised in [49] is one that was not specifically pleaded. It was a particular to the claim in negligence (see paragraph 66 of the ASOC), but it was not put as a breach of fiduciary duty that the Directors failed to ensure that LIHM waived the fee to which it was, on termination, legally entitled. I raised the question of this way of looking at the matter at T181.16-38, although I noted that I would need to be satisfied that it was part of the pleadings. Given that the promotion of LIHM as a manager for Cornerstone without requiring LIHM to forgo the Termination Fee was not pleaded as a particular of breach of fiduciary duty, it is, in my view, not open to Krupace to rely on this point.
Mr Giles submitted that LIHM obtained a clear benefit by reason of the Directors' conduct which has to be disgorged. He relied on cases such as Regal (Hastings) Ltd v Gulliver and Ors [1967] 2 AC 134; [1942] 1 All ER 378 ("Regal"), Boardman and Anor v Phipps [1967] 2 AC 46; [1966] 3 All ER 721 ("Boardman"), Guinness Plc v Saunders & Anor [1990] 2 AC 663; [1990] 1 All ER 652 ("Guinness") and Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1. The rule is strict and the Company does not need to establish mala fides nor does it matter that the benefit is one that could not have been obtained by the Company: see Regal (supra) at p 137F-G per Viscount Sankey and p 144G per Lord Russell (with whom Lords Macmillan and Porter concurred).
Mr Scruby relies on the China Hotel Constitution to assert that conflict of interest was recognised in the constitution but he also submits that Krupace cannot approbate and reprobate, i.e. have the benefit of the Cornerstone Sale and yet not accept the burden of the Termination Fee, particularly where Krupace did not move to set aside the Cornerstone Sale. I should note that, according to the China Hotel Constitution (see clause 19.8, set out in [35] above), there was no power to set aside the Cornerstone Sale.
Mr Doyle gave evidence that he was told by Mr Gus Moors of Collier's International ("Mr Moors"), the real estate agent who was marketing the Park Regis Hotel, that Cornerstone required guarantees to it by LIHM of a type that were not contained in the CH Management Agreement and that he had also heard that requirement in discussions with Cornerstone (see T101.22-102.9). He had also been told by Mr Moors at an earlier stage, he says, that it would be extremely difficult for the property to be sold as an ongoing business without a guarantee being given. That evidence was not contradicted by any other evidence and it was not put to Mr Doyle that his account of what Mr Moors had said to him was not true nor was there any matter on which Mr Doyle was shown to have given false evidence. I accept that Mr Doyle was told by Mr Moors that Cornerstone required guarantees by LIHM of a type not found in the CH Management Agreement and was told that a guarantee of that kind would be needed for a successful marketing of the property and I find it likely that Mr Moors told him that Cornerstone required a guarantee by LIHM because Mr Moors, as agent for China Hotel, had been informed of that by Cornerstone and similarly that more general performance guarantees would be required because that was Mr Moors' perception of the then current state of the market place. Mr Doyle gave evidence that assignment of the CH Management Agreement was not appropriate because the management terms that Cornerstone wanted were "completely different" to those in the CH Management Agreement: see T103.19-31. I do not need to determine that the new terms were "completely different" but I find that they were sufficiently different to lead to the conclusion, on the balance of probabilities, that Cornerstone would not be satisfied with assignment of the CH Management Agreement, a view reinforced by the absence of any evidence from Cornerstone to the contrary.
It follows that the CH Management Agreement had to come to an end if China Hotel wanted to sell the Park Regis Hotel to Cornerstone. I accept Mr Doyle's evidence that he regarded it as being in China Hotel's interest for LIHM to secure a management agreement with Cornerstone, and I do not think Krupace has established that, even with the requirement to pay the Termination Fee, it was not.
Krupace contends that any disclosure on the 17 August 2016 was at a time after execution of the contract with Cornerstone and submits that it is irrelevant. The contract with Cornerstone was signed on 17 August 2016 but at what time exactly has not been made clear. Given that the disclosure on 17 August 2016 in any event refers back to the earlier disclosure I shall focus on the disclosure of 18 July 2016 ("the July Disclosure"). The July Disclosure had these elements: 1. Disclosure that LIHM is owned and controlled by the Directors (and their companies). 2. Disclosure that the Directors may receive an economic benefit if Cornerstone's offer was accepted. 3. Disclosure that the benefit would be in two or potentially three forms; the first was common to all shareholders, but the second would be that LIHM would receive a Termination Fee as a result of the CH Management Agreement being terminated, and the third that LIHM would potentially obtain benefits through the grant of the New Management Agreement.
The statements in the July Disclosure under attack are as follows: 1. The assertion that the Cornerstone Sale was conditional on the buyer entering into a New Management Agreement with LIHM, which required China Hotel to terminate the CH Management Agreement (Exhibit A1, p 2706). 2. The assertion that the terms of the New Management Agreement were "significantly less favourable to LIHM" than the CH Management Agreement, that it involved lower fees to LIHM and required that LIHM provide a guarantee of income for a period of 5 years because the statement did not disclose that: 1. the New Management Agreement was for 15 years (whereas the CH Management Agreement had only 10.5 years to run); 2. the CH Management Agreement involved guarantees that had been given by the Directors to lending institutions, and from which they were to be released; 3. Mr Sohal wanted to recover his investment from China Hotel for other purposes; and 4. the amount of the Termination Fee could not be precisely determined. 1. The Directors failed to disclose that they had brought about the position that a New Management Agreement had to be entered into because Cornerstone was told there was no management agreement in place or because it had not been made clear to Cornerstone that the CH Management Agreement was in place.
Given that the Directors were directors of both China Hotel and LIHM and that China Hotel and LIHM were in a contractual relationship, of which China Hotel, by its directors and all the shareholders in China Hotel, were fully aware and in respect of which contract Krupace makes no complaint, either as to its existence or its terms, the case is a somewhat unusual one. The Termination Fee was payable if China Hotel terminated the CH Management Agreement. LIHM had an interest in securing that fee. China Hotel had an interest in not paying that fee.
There was undoubtedly a stark conflict between the interests of China Hotel and the interests of LIHM and, hence, the Directors as directors and shareholders of LIHM. Even if the interests of both China Hotel and LIHM could coalesce because, for example, Cornerstone would not agree to purchase the Park Regis Hotel without the New Management Agreement and it was in China Hotel's interest to ensure that LIHM negotiated terms acceptable to Cornerstone, there nevertheless was scope for the conflict of interest I have identified because payment of the Termination Fee was worth more to the shareholders that the Directors represented than LIHM not receiving the fee.
As I have mentioned Staywell contends that there was no breach of fiduciary duty by reason of the disclosures made and I shall return to that below, but first I will address the question of remedies for breach of fiduciary duty and Staywell's contention that Krupace was approbating and reprobating.
In Furs Limited v Tomkies and Ors (1936) 54 CLR 583 ("Tomkies"), Rich, Dixon and Evatt JJ (at pp 592-593) referred to: "…the inflexible rule that, except under the authority of a provision in the articles of association, no director shall obtain for himself a profit by means of a transaction in which he is concerned on behalf of the company unless all the material facts are disclosed to the shareholders and by resolution a general meeting approves of his doing so, or all the shareholders acquiesce. An undisclosed profit which a director so derives from the execution of his fiduciary duties belongs in equity to the company. It is no answer to the application of the rule that the profit is of a kind which the company could not itself have obtained, or that no loss is caused to the company by the gain of the director. It is a principle resting upon the impossibility of allowing the conflict of duty and interest which is involved in the pursuit of private advantage in the course of dealing in a fiduciary capacity with the affairs of the company. If, when it is his duty to safeguard and further the interests of the company, he uses the occasion as a means of profit to himself, he raises an opposition between the duty he has undertaken and his own self interest, beyond which it is neither wise nor practicable for the law to look for a criterion of liability. The consequences of such a conflict are not discoverable. Both justice and policy are against their investigation. With reference to a transaction arising out of another relation of confidence, Lord Eldon said: "The general interests of justice" require "it to be destroyed in every instance; as no Court is equal to the examination and ascertainment of the truth in much the greater number of cases" (Ex parte James [(1803) 8 Ves. 337, at p. 345; 32 E.R. 385, at p. 388]). His language has been applied to, and illustrated by, the case of a fiduciary agent making undisclosed profits (Panama and South Pacific Telegraph Co. v. India Rubber Gutta Percha and Telegraph Works Co. [(1875) L.R. 10 Ch. 515, at pp. 523, 527])" (emphasis added).
This rule was applied in Regal (supra), in which directors who had bought shares in another company at the request of the board of Regal and who had made a profit on the sale of those shares were required to account to Regal for the profit. It was also applied in Tomkies, Boardman and Guinness (supra).
It will be seen that a director must disgorge a profit or benefit even if the profit or benefit would not or could not have been earned or obtained by the company or that the director has carried out work or actions that has led to the company benefiting: see Regal and Guinness (supra).
The authorities to which I have referred also establish that, if a director has breached a duty owed to the company, the fact that the underlying contract which has led to a profit or benefit to the director has not been set aside is not an answer to the claim. In Regal (supra), the contract for the sale of Regal's business was not set aside and Regal was held entitled to recover the profit made by the directors who had purchased shares in Amalgamated Cinemas Ltd. In Tomkies (supra), the sale of the business was not set aside. In New Augarita (supra), the settlement which had been reached with the director was not set aside: see pp 14-15, 17. The authorities make clear that absence of loss to the principal, or even profit to the principal, is not a reason not to require the fiduciary to disgorge the benefit obtained by the fiduciary, as a result of a breach of fiduciary duty. Mr Scruby contended that the receipt of the Termination Fee was not a benefit to LIHM but I am unable to accept that contention. It was to be paid if the CH Management Agreement was terminated early and was advantageous to LIHM because without it China Hotel had no obligation to pay such a fee to LIHM.
It follows that, if Krupace establishes a breach of fiduciary duty by the Directors, it can require them and LIHM to disgorge the benefit, even if the Cornerstone Sale is not set aside or even impugned, and even if China Hotel benefited by the sale. Although I accept that the present situation is not precisely the same as that in Regal or Tomkies and it seems somewhat anomalous that China Hotel could claim the return of the Termination Fee whilst accepting that the CH Management Agreement is not on foot, but the China Hotel Constitution precludes China Hotel from seeking to set aside the termination and the authorities seem to indicate that there is no room for the approbation/ reprobation principle in this context.
It will be observed that, in Tomkies (supra), the High Court accepted that the constitution of a company might permit a director to profit by means of a transaction in which he is concerned. The Directors here rely on clause 19.5 of the China Hotel Constitution (set out at [35] above).
On the question of whether the CH Management Agreement had to be terminated, there are these items of evidence: 1. Mr Doyle said he was told by Mr Moors that Cornerstone would insist on guarantees and that without an income guarantee by Staywell, the sale price to be obtained by China Hotel would be considerably lower. There was no evidence to contradict that assertion and there is some evidence that Mr Adams asked to speak with Mr Moors who confirmed that was correct. Krupace did not call any evidence from Mr Moors or from Cornerstone to say otherwise. Mr Doyle also said that other agents had told him the same thing (see T110.30-34), and that was not challenged either. 2. The CH Management Agreement required, on assignment, the purchaser (as assignee) to adopt all of China Hotel's obligations and privileges under the CH Management Agreement, making assignment inappropriate if Cornerstone was requiring new obligations from LIHM: see clause 19.1 of the CH Management Agreement. This was also Mr Wan's view (see T160.44-47), and I think it was a reasonable one. 3. Mr Giles submitted that Mr Doyle had instructed Mr Moors to tell purchasers that there was no management agreement between China Hotel and LIHM but this proposition was not put to Mr Doyle in cross-examination, and Mr Doyle said that, although he found out later that Mr Moors had told prospective purchasers that there was no management agreement in place, he had told Mr Moors there was one in place and that the agency agreement with Collier's International stated that the property was being sold subject to management: see T107.13. Neither assertion was challenged.
Mr Scruby contended that it would be inconceivable that a purchaser embarking on a process of due diligence would not learn, on examining the records of the business, that China Hotel had a management agreement with LIHM. Neither Mr Moors nor Mr Doyle, Mr Scruby submitted, would have had a motive to mislead Cornerstone about this, and that was even less likely given that a schedule to the draft Cornerstone Sale contract referred to the "Current Management Agreement" (see Exhibit A4, Tab 8), and Mr Doyle's comment of "can discuss but this is an internal document that is not relevant to the current deal" in response to Cornerstone's request for a copy. Mr Doyle was cross-examined on the basis that the CH Management Agreement was not an "internal document" and he accepted that strictly it was not. He also agreed that he had not wanted Cornerstone to see that agreement but that seems rather removed from the claim that the Directors failed to disclose the conflict of interest and its details.
The New Management Agreement was in quite different terms to the CH Management Agreement: see Exhibit A2, Tab 6, in which the differences are highlighted. One of the new clauses related to a promise by Cornerstone to expend $1 million in refurbishment of the Park Regis Hotel, a guarantee by LIHM that that amount would be sufficient and its promise to complete the works if it was not. By clause 24 of the New Management Agreement, LIHM guaranteed the net earnings before tax would be not less than $3 million each year, and Staywell guaranteed LIHM's performance of the New Management Agreement. Staywell was not a party to the CH Management Agreement.
The July Disclosure may have been phrased in such a way as to make the fact that LIHM would obtain a Termination Fee appear as anodyne as possible. This fits in with Mr Sohal's unconvincing claim that the New Management Agreement was not a good deal for LIHM, whose interests he claimed he did not consider at all, evidence which I am unable to accept. I do not accept, however, that it has been established on the balance of probabilities that the sale to Cornerstone could have been achieved without Cornerstone having a new management agreement (on the terms contained in the New Management Agreement) with LIHM or with some other contracting party, and hence without termination of the CH Management Agreement.
In relation to 57(b) and (c), I do not think these were matters that needed to be disclosed, the first because the terms of the CH Management Agreement were known not only to all of the Directors but to Krupace (see Exhibit A3, pp 1188 - 1189) and the second because I do not think that Mr Sohal's personal motives for wanting to see the sale of the Park Regis Hotel are relevant. This leaves the following matters which were not contained in the July Disclosure: 1. The fact that the New Management Agreement was for a period of 15 years. 2. The fact that the Termination Fee could not as at July 2016 be precisely calculated. 3. The fact that the sale of the Park Regis Hotel would mean that the Directors were no longer personally liable for the loans made to China Hotel.
Before expressing my view on these remaining issues, I think that attention needs to be drawn to the following further matters: 1. The disclosure that was required by the China Hotel Constitution was to its board which meant disclosure by each of the Directors to the other directors. 2. Clause 4.13(a) of the Shareholders Deed provides (see Exhibit A2, p 2764) that: "a Director may represent the interests of, and act on the wishes of, the Shareholder which appointed that Director." 1. Krupace was well aware of the conflict of interests between China Hotel and LIHM, including the fact that the Directors were directors of LIHM and China Hotel as well as shareholders in those companies. 2. In 2011, Mr Jarnecic, a director and principal shareholder of Krupace, and Mr Moore gave consideration to the terms of the CH Management Agreement (see Exhibit A3, pp 1188-1190) in the context of changes to the existing shareholding structure. 3. In August 2012, when attempts were made to sell the Park Regis Hotel and a specific offer was being considered, Mr Doyle provided calculations of the prospective return to the China Hotel shareholders which included a clear indication that LIHM would receive a Termination Fee and that fee was estimated at $2.85 million: see Exhibit A3, Tab 5, pp 2816-2818. 4. In August 2012, Mr Jarnecic, on behalf of Krupace, indicated his support for the proposed sale, including the $2.85 million Termination Fee: see Exhibit A3, Tab 5, p 2819. 5. There is not such a significant difference between the $2.85 million Termination Fee and the $3.5 million Termination Fee four years later, in the context of a continuing effort to sell the Park Regis Hotel. 6. First proposed in 2012, and continuing into 2016, it was not hidden from Krupace that, if the Park Regis Hotel were sold, LIHM would be involved in a new management agreement with the purchaser and yet receive a Termination Fee, and that is what occurred in 2016. 7. In an email from Mr Doyle to Mr Jarnecic (and Mr Yip) of 28 July 2016 (Exhibit A3, Tab 27, p 2119), Mr Doyle wrote concerning the various offers that had been received: "We believe the current offer to be attractive having regard to the current market and the last valuation obtained from Jones Lang LaSalle in May 2015 ($36.6 million). All of these offers have been made on the condition that the existing management agreement be terminated and that StayWell underwrite the earnings of the property for a substantial period following completion. The guarantee period under the current offer is 5 years and the level of guarantee is $3 million per annum which exceeds the current earnings of the property." 1. Krupace was informed that the Cornerstone Sale involved a guarantee by LIHM of earnings and a guarantee by Staywell of all of LIHM's obligations under the proposed New Management Agreement: see the July Disclosure at Exhibit A1, p 2706. 2. At the time that China Hotel was negotiating with Cornerstone in mid-2016, Krupace had not consented to a sale of the Park Regis Hotel and had expressed a preference that it not be sold: see Exhibit A3, p 2465.
In circumstances where no evidence was called from anyone on behalf of Krupace and in light of the material to which I have referred in [72], I do not think it can be accepted that Mr Jarnecic, in mid-2017, was unaware that the sale of the Park Regis Hotel would very likely involve: 1. entry by the purchaser into a new management agreement with LIHM, with active support by China Hotel of LIHM being the new manager; 2. a new management agreement between LIHM and a purchaser with terms which would have features that were different to the CH Management Agreement; 3. termination of the CH Management Agreement; and 4. payment of a Termination Fee in the order of $3 million (given the 2012 figure).
Krupace contends that it was not correct for Mr Doyle to have said that all of the offers made (including Cornerstone's offer) had been made on condition that the CH Management Agreement be terminated. Cornerstone's offer does not expressly state that the CH Management Agreement was to be terminated: see Exhibit A3 pp 2120-2124. Whilst, as Mr Doyle conceded, it does not expressly state that, I think it is implicit in the terms of the proposed contract relating to the New Management Agreement that the CH Management Agreement could not, consistently with what Cornerstone wanted, be assigned. Mr Hochroth, in cross-examination of Mr Wan, did refer to the possibility of new terms being added to the CH Management Agreement to reflect what Cornerstone wanted (see T161.40 - 48) but this would not have been an assignment in terms of clause 19.1, would have required LIHM's agreement and would not have involved Staywell guaranteeing LIHM's obligations as Cornerstone required. It is possible that Cornerstone understood that China Hotel was not intending to assign the CH Management Agreement and I think that assumption would have been correct but, if Cornerstone wanted the terms it said it did, I think it is reasonable to conclude on the balance of probabilities that assignment of the CH Management Agreement would have been unacceptable to Cornerstone. Novation is mentioned in the pleading but novation of the CH Management Agreement (i.e. the discharge of an existing agreement and entry into a new agreement, usually on the same terms but with a new party, see Butterworths Australian Legal Dictionary (Nygh and Butt (eds), Butterworths, 1997, p 803) is not equivalent to assignment in accordance with clause 19.1 of the CH Management Agreement. The suggestion that China Hotel did not itself offer a guarantee was explored in cross-examination (see T135), but it was not part of Krupace's pleaded case that the Directors failed to have China Hotel do so, and such a guarantee would have had an impact on the value of the Cornerstone offer to China Hotel.
Also relevant in this context is a comment made about another of the bids received. Mr Giles described what Mr Doyle had said in his email of 28 July 2016 (see 72 above) concerning four bidders all requiring termination of the CH Management Agreement as "fairly inaccurate" (see T184.28). Mr Giles points to Exhibit A3 (Tabs 9 and 11) to show that one of the other bidders did not require termination as a condition. It contained the following amendment relating to the CH Management Agreement: "4. The existing management agreement for the property being amended so that: a. The manager provides an underwrite of the Property's EBITDA of A$3 million per annum during the first 3 years following completion of the acquisition; b. The term of the existing management agreement being amended to 15 years from completion of the acquisition (with any right to renew being by mutual consent of both parties); and c. The other terms of the management agreement being satisfactory to us."
Mr Doyle agreed that the offer then under consideration did speak of amendment of the existing management agreement (i.e. the CH Management Agreement) rather than termination (see T146.34) but the amendments were not insignificant and the offer does not, in my view, amount to a prospective acceptance by that bidder of an assignment of the CH Management Agreement within the terms of clause 19.1.
Krupace, perhaps conscious of the fact that the Directors could not know the precise amount of the Termination Fee as at July 2016, asserts that the Directors should have disclosed that they could not state the quantum of the Termination Fee. This is in the context that the Directors did have in mind a range for the Termination Fee of between $2.5 million and $4 million: see T93.39-46.
There was no dispute that the onus was on the Directors to establish adequate disclosure: see also New Augarita (supra) at p 14.
The authorities make clear that for disclosure of interest to be meaningful it must include the nature and extent of the interest: see New Augarita (supra), the discussion in Short v Crawley (No. 30) [2007] NSWSC 1322 at [997] - [1004] and Re Abbott and Australian Prudential Regulation Authority (2008) 108 ALD 420; [2008] AATA 641 [22] - [35], but as was said in New Augarita at p 14 per Lord Radcliffe: "The amount of detail required must depend in each case upon the nature of the contract or arrangement proposed and the context in which it arises." and see Abbott at [30]. The Directors were all aware of the potential cost to China Hotel of the Termination Fee and, in my view, there was no requirement to formally state that they could not determine the precise amount of the Termination Fee for the purpose of the disclosure requirement. It may well be that the Directors should have passed on to Krupace the estimate of the projected fee that they had in mind (although it was not put to them that they should have) but I am not satisfied that their failure to do so produces the consequence that the Directors breached their fiduciary duty to China Hotel because they did not, not only because the duty of disclosure was one owed to China Hotel but also because, as I have said earlier, Krupace was aware of the order of the prospective Termination Fee.
It should be noted that the CH Management Agreement had been extended earlier in 2016, providing for another 10 years of operation. No attack was made on that decision by the Directors on behalf of China Hotel presumably because China Hotel and Krupace thought it was in China Hotel's interest to continue the CH Management Agreement.
The New Management Agreement was set to run for 15 years (compared to the remaining 10.5 years of the CH Management Agreement) and the "reservation fee" to be paid by Cornerstone was 3% rather than 1.5%. There was a potential exposure of up to $3 million under LIHM's guarantee to Cornerstone but Mr Doyle said that realistically it was more likely to be an exposure of $250,000 per annum for 5 years, i.e. $1.25 million. Mr Doyle pointed out that the increase of the reservation fee from 1.5% to 3% in the New Management Agreement was worth between $5000 and $7000: T133.40. I have earlier referred to the refurbishment guarantee. The benefits and burdens of the New Management Agreement of which all of the Directors were aware were far less significant to China Hotel than the fact that termination of the CH Management Agreement would lead to liability to pay the Termination Fee, and also than the degree to which an acceptable New Management Agreement between Cornerstone and LIHM would cement the prospect of the Cornerstone Sale proceeding. If, contrary to what I have said in [51] above, it were relevant that LIHM was to enter into a new management agreement as part of the Cornerstone Sale and yet still be entitled to the Termination Fee because the CH Management Agreement had to be terminated, this was known to all of the Directors.
Krupace draws attention to the fact that the Directors had given personal guarantees in support of loans made to China Hotel, and that on sale they would be discharged. It is the Cornerstone Sale (and repayment of bank loans) that discharges the liabilities and not the termination of the CH Management Agreement. Since no attack is made on the Cornerstone Sale, I do not see this matter as being one that was required to be disclosed and, in any event, all of the Directors and China Hotel would have been aware of that fact.
There was a suggestion in Krupace's submissions (at T252.1-13) that Mr Sohal and Mr Wan did not know that Mr Doyle had made a new management agreement a condition of the Cornerstone Sale. There is no doubt that Mr Doyle was proceeding on the basis that Cornerstone wanted a new management agreement and Mr Wan understood that it did: T160.20 - 47: see [54], [68]-[70] above. I do not think that it has been established that Mr Doyle made a new management agreement a condition of the Cornerstone Sale; rather, he understood that Cornerstone wanted terms different to the CH Management Agreement and concluded that assignment of the CH Management Agreement was not feasible: see [55] above.
Mr Giles and Mr Scruby both referred to Woolworths Ltd v Kelly (1991) 22 NSWLR 189; (1991) 9 ACLC 539. The case concerned a pension which Woolworths, by contract, had agreed to pay to Sir Theo Kelly, a director of the company. There were issues in relation to consideration which do not have any present relevance but the Court of Appeal was divided on the issue of disclosure of the terms of the contract between Sir Theo and the company. Sir Theo had not voted on the motion but the Woolworths constitution contained a requirement that the director "declare the nature of his interest at a meeting of the directors of the company", by a clause incorporating what was s 123 of the Companies Act 1961 (NSW). That section required the secretary of the company to record every declaration under that section in the minutes of the directors meeting. The majority (Samuels and Mahoney JJA), held that, notwithstanding that there was no declaration recorded in the minutes and no evidence of any formal declaration having been made by Sir Theo, the requirements of s 123, and hence the Woolworths constitution, were met. In his judgment, Samuels JA, at p 207D-G and at p 212D - p 213A, said: "Unless the articles of the company otherwise provide, a contract made in breach of this fiduciary duty will be voidable at the option of the company unless the director makes a full disclosure of the nature of his interest in the contract to the members of the company in general meeting, who must approve the contract by ordinary resolution: George A Bond & Co Ltd v Bond (1929) 30 SR (NSW) 15 at 19; 46 WN (NSW) 199 at 201; Furs Ltd v Tomkies (1936) 54 CLR 583 at 592; Re James; Bagot's Executor & Trustee Co Ltd v McGregor [1949] SASR 143 at 145 and Regal (at 150). Disclosure to the company's directors, even if the interested director does not attend the board meeting or vote on the contract, will be ineffective to validate the contract at general law since the company has a right to the unbiased views and advice of all its directors: Benson v Heathorn (1842) 1 Y & C CC 326 at 341-342; 62 ER 909 at 916, per Knight-Bruce V-C and Imperial Mercantile Credit Association v Coleman (1871) LR 6 Ch App 558 at 567-568 per Hatherley LC (CA). A provision in the articles may validate a contract which would otherwise be voidable under the general law, but to obtain its protection the director must strictly comply with any conditions laid down in the provision: Imperial Mercantile Credit Association (Liquidators) v J Coleman (1873) LR 6 HL 189 at 205 per Lord Cairns (on appeal to the House of Lords); Toms v Cinema Trust Co, Ltd [1915] WN 29. The director bears the onus of proving that he has complied with the provision: Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1 at 14. … It is true, of course, that s 123 does not merely provide for disclosure but requires the interested director to "declare the nature of his interest"; and, as I have pointed out, subs (7) provides that the secretary of the Company "shall record every declaration under this section in the minutes of the meeting at which it was made". However, notwithstanding that this language contemplates some formality, I do not think it has the effect of requiring disclosure of facts to those who are plainly wholly aware of them. The obligation to record what must be declared cannot determine the contents of the required declaration. Take this case. The original scheme under which the respondent first took a benefit was established by a resolution of directors who must have been entirely aware of the nature and extent of the advantage which it would confer on the respondent. They likewise remained aware of his interest throughout. They apparently wished to reward a notable servant of the Company who was their close associate. At no time was any aspect of the respondent's personal interest in the scheme undisclosed or unknown to the board. It was impossible that it could have been. In Chan, Deane J (at 205), sounded a warning that the over-enthusiastic and unnecessary statement of broad general principles of equity in terms of inflexibility: "… may destroy the vigour which it is intended to promote in that it will exclude the ordinary interplay of the doctrines of equity and the adjustment of general principles to particular facts and changing circumstances and convert equity into an instrument of hardship and injustice in individual cases … There is 'no better mode of undermining the sound doctrines of equity than to make unreasonable and inequitable applications of them': per Lord Selborne LC, Barnes v Addy (1874) LR 9 Ch App 244, at p 251."" (emphasis added)
Mahoney JA, at p 234D-G, held that there had been compliance with s 123, and hence the constitution of Woolworths, saying: "Section 123 and similar sections are not to be read down. They are directed to the protection of the assets of a company in circumstances where the control of them is given to those who may have little or no proprietary interest in them. And such sections deal not only with the substance but also with the form in which the interests of those in question are to be declared and recorded. But s 123(1) does not require that, for its compliance, there must be an act which is in form: "I hereby declare ..." The dictionary meaning of the term includes: "to make clear or plain; to make known; to state in detail ..." That, in my opinion, accords with the intention of the provision. The section requires more than the declaration of the existence of the interest: it requires that the nature of it be declared: see, eg, Costa Rica Railway Co, Ltd v Forwood [1901] 1 Ch 746 and Gray v New Augarita Porcupine Mines Ltd (1952) 3 DLR 1 at 14 per Lord Radcliffe. Provided that what is done at the relevant meeting involves, as in this case, the making known of the existence of that interest and the nature of it, in such a form that it may be recorded, the section is, in this regard, satisfied: see generally as to the history of such provisions, Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549 at 589 per Lord Wilberforce. The details of the original pension scheme had been before the board. The variations to be effected were detailed and the justification of them, in money terms, was discussed and these matters were, I think, sufficiently recorded in the papers which the board members had. Whatever be the degree of particularity of disclosure required by the section, it was in my opinion complied with in this case."
In dissent, Kirby P held that the absence of a formal declaration meant that the transaction was in breach of s 123, and hence Woolworths' constitution, and the contract was voidable at the company's option.
Woolworths v Kelly has been seen as authority for the proposition that formal disclosure of an interest in a transaction is not required under an attenuation clause if what is to be disclosed is already known to other directors: see In the matter of Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 789 at [362] per Black J and see also Hodgson v Amcor Limited; Amcor Limited and Ors v Barnes (2012) 264 FLR 1 at [1372] per Vickery J, who held that consent may be given expressly or be implied from all the circumstances, citing at footnote 167, Woolworths v Kelly at p 212 per Samuels JA and at p 234 per Mahoney JA, Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (No 4) (2007) 160 FCR 35; [2007] FCA 963 at [295] per Jacobson J and Our Lady's Mount Pty Ltd (as trustee) v Magnificat Meal Movement International Inc (1999) 33 ACSR 163 at [128] per Muir J.
Reference was made to Short v Crawley (supra). White J (as his Honour then was), after referring to cases dealing with attenuation clauses, said at [1004]: "1004 These arguments were not developed in the course of submissions. In my view, notwithstanding the force of these considerations, the better construction of the articles is that they apply according to their terms. There is no question that, subject to statute, the extent of a director's fiduciary obligations to his or her company can be modified by the articles. In my view, where the conditions of the articles are complied with, the transaction in which the directors are interested is not invalidated even if all of the directors have a personal interest in the transaction, provided that the directors comply with their obligations to act with due diligence, in good faith in the best interests of the company, and for proper purposes. The articles do not modify those obligations. Rather, when the conditions in the articles are satisfied, they exclude the principle in Aberdeen Railway Co v Blaikie Bros quoted at para [980] above. The requirement for disclosure of a director's personal interests in the way contemplated by s 123 of the Companies Act or s 228 of the Companies (NSW) Code, is not otiose, even if all of the directors have the same or similar interests in the transaction. As Kirby P said in Woolworths Ltd v Kelly (at 197-198) such declarations of interest provide a signal to the directors to consider, independently of their colleagues, whether the transaction is in the interests of the company and its shareholders."
There was evidence in that case from Mrs Crawley (who was also a director) that indicated that she had not been provided with all relevant information and his Honour held that the onus lay on the directors to establish that there had been disclosures and found that the directors had therefore not given informed consent to the transaction: see [1013].
Mr Scruby drew attention to the fact that s 191(2)(b) of the Corporations Act provides that a director of a proprietary company does not need to disclose notice of interest if "the other directors are aware of the nature and extent of the interest and its relation to the affairs of the company", which is wholly concordant with the approach taken by Samuels JA in Woolworths v Kelly (supra). Further, clause 19.5 of the China Hotel Constitution incorporates s 191(2)(b) of the Corporations Act.
Mr Giles also made reference in his submissions to Doyle v Australian Securities and Investments Commission (2005) 227 CLR 18; [2005] HCA 78 and Short v Crawley (supra). In Doyle, a case involving a public company, Mr Doyle had, as a director of a company, voted to return money received by the company for an allotment of shares to a company with which he was closely connected. There were two statutory provisions under consideration: s 232(6) of the Corporations Law (Cth), which provided that an officer must not make improper use of his or her position as an officer to gain, directly or indirectly, an advantage for himself or any other person and s 232A(1) of that same Act, which provided that a director of a public company who has a material personal interest in a matter being considered must not vote and must not be present whilst the matter is being considered. It had been held that Mr Doyle had breached both of these provisions. Mr Doyle contended that he had disclosed the conflict to the other directors and they were aware of it. The High Court said: "[39] The difficulty with that submission lies in the particular circumstances of the case. The disclosure of the interest of Mr Doyle could provide no answer in the situation where those to whom he made the disclosure were his confederates in the activity generating the interest. Those shareholders who were unhappy with the Carrizal Alto mining project and whose dissatisfaction had been apparent at the October EGM lacked any voice on the board on 21 and 22 November."
As Mr Scruby pointed out, Doyle is dealing with a case where the articles of the company contained an express prohibition against directors voting where there was a conflict. There was no attenuation clause under consideration in that case. The company was a public company and the Court was concerned with a decision by the board that was clearly not to the advantage of the company. I think that what was said by White J in Short v Crawley in the passage cited above picks up the notion articulated in Doyle that absence of good faith and failure to act for proper purposes will not be neutralised by disclosure in accordance with the Company's Constitution, but in this case it has not been established that the Cornerstone Sale, even with the consequential requirement of termination of the CH Management Agreement, was not to the advantage or not in the interests of China Hotel, or that the transaction was not for a proper purpose or not arrived at after due diligence.
Here, unlike in Woolworths v Kelly, there is a formal declaration recorded in the minutes but it is of relevance that all three directors (the only directors of the company) had knowledge of all of the matters which Krupace says should have been disclosed by the Directors.
Therefore, taking into account: 1. the terms of the China Hotel Constitution, and in particular, clause 19.5; 2. the contents of the July Disclosure; 3. the fact that all of the directors of China Hotel were well aware of the clear conflict of interest; 4. that Krupace itself was aware from earlier correspondence that the sale of the Park Regis Hotel would very likely lead to a Termination Fee being payable to LIHM and that LIHM would become the manager for the purchaser; and 5. the fact that the Directors' evidence that they believed that the Cornerstone Sale, with the requirement to pay to LIHM a Termination Fee, was very much in the interest of China Hotel was not challenged or established to be incorrect, I am not persuaded that any of the Directors breached their fiduciary duty to China Hotel.

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