Fiduciary Duties and Secret Profits: Understanding the Profits Rule, Exams of Finance

Download Fiduciary Duties and Secret Profits: Understanding the Profits Rule and more Exams Finance in PDF only on Docsity! 19 Profits Rule A fiduciary must not make secret or unauthorised profits from their role as a fiduciary (Chan). It should be noted that this a strict rule and intentions or good faith are irrelevant, only the nexus between the fiduciary’s secret profits and the position is relevant (Regal Hastings). Chan v Zacharia (1984) 154 CLR 178 Red flag: one partner’s diversion of opportunities from another partner (D received benefit of a lease). United Dominions Corporations Ltd v Brian Pty Ltd (1985) 157 CLR 1 Red flag: Income paid to company through secret contract arrangement. A joint venturer’s acquisition of benefits not disclosed to the another. Regal (Hastings) Ltd v Gulliver [1942] 1 All ER 378 • Regal owned a cinema and wanted to acquire a lease over two further cinemas o Regal formed a subsidiary company, Hastings Amalgamated Cinemas Ltd (Amalgamated). Capital of Amalgamated was 5,000 £1 shares o Regal could not raise sufficient finance to subscribe for all of the shares in Amalgamated • The company directors and secretary purchased the remaining shares, and a lease of the two cinemas was executed in favour of Amalgamated • A purchaser offered to buy Regal’s cinema and the lease of the other cinemas o For tax reasons, all of the shares in Regal and Amalgamated were purchased instead o The new board of directors of Regal then sued the former directors, claiming the former directors had used their position to obtain a personal profit. Red flag: exploitation of knowledge or opportunity acquired in a fiduciary capacity Lord Russell: The profiteer, however honest and well intentioned, cannot escape the risk of being called upon to account. Does not arise from: • Fraud • Absence of bona fides • Questions as whether the profit would or should otherwise have gone to the plaintiff • Profiteer under a duty to obtain the source of the profit for the plaintiff • Whether profiteer took a risk or acted as he did for the benefit of the plaintiff • Whether the plaintiff has in fact been damaged or benefited by his action Lord Macmillan: The plaintiff company has to establish two things: (i) that what the directors did was so related to the affairs of the company that it can properly be said to have been done in the course of their management and in utilisation of their opportunities and special knowledge as directors; and (ii) that what they did resulted in a profit to themselves. 20 Boardman v Phipps [1967] 2 AC 46 Red flag: exploitation of knowledge or opportunity acquired in a fiduciary capacity. Attorney-General for Hong Kong v Reid [1994] 1 AC 324 • Reid was a New Zealand national who had served as a Crown prosecutor in Hong Kong o He accepted bribes as inducements for the abuse of his position, in breach of the fiduciary duty he owed as a servant of the Crown o He was ultimately arrested and convicted of a number of criminal offences for which he was sentenced to imprisonment and ordered to pay the Crown HK$12.4 million, representing the value of assets then controlled by him that could only have been derived from bribes • All of that sum remaining unpaid, the Attorney-General placed caveats on three freehold properties in New Zealand, which the Attorney alleged had been acquired by Reid with the proceeds of the bribes, before being conveyed to Reid’s wife and solicitor • Upon application to renew the caveats the Attorney-General argued that they supported the Crown’s equitable interest under a constructive trust in the proceeds of the bribes Red flag: taking bribes and secret commissions • The bribes had been obtained by Reid in breach of fiduciary duties owed to the Crown, which was entitled to place the caveats to support its beneficial title to the properties under a constructive trust. Lord Templeman: When a bribe is offered and accepted in money or in kind, the money or property constituting the bribe belongs in law to the recipient. Money paid to the false fiduciary belongs to him. … Equity, however, which acts in personam, insists that it is unconscionable for a fiduciary to obtain and retain a benefit in breach of duty. As soon as the bribe was received, whether in cash or in kind, the false fiduciary held the bribe on a constructive trust for the person injured. … When a bribe is accepted by a fiduciary in breach of his duty then he holds that bribe in trust for the person to whom the duty was owed. If the property representing the bribe decreases in value the fiduciary must pay the difference between that value and the initial amount of the bribe because he should not have accepted the bribe or incurred the risk of loss. If the property increases in value, the fiduciary is not entitled to any surplus in excess of the initial value of the bribe because he is not allowed by any means to make a profit out of a breach of duty. Defences A person to whom fiduciary duties are owned, may consent, excuse or ratify a breach after material facts have been sufficiently disclosed (Boardman). Full disclosure – see Queensland Mines; Boardman Genuine agreement – see Boardman; Regal; Queensland Mines § Note that if the directors are the only shareholders, then they can consent to their breach (Queensland Mines) o Principal may consent to the breach by way of acquiescence i.e. there can be consent after the breach has occurred (Queensland Mines)