Whitehouse v Carlton Hotel PtyLtd (7th April 1987) · Case Introduction Carlton Hotelwas a family company owned by Mr Charles MacDonald Whitehouse and by his formerwife who is now deceased. They had 2 sons and 4 daughters.
There were threeshare classes in the company ‘A’ ‘B’ ‘C’. Two Class A (with unrestricted votingrights) share was withheld by Mr Whitehouse himself. Two Class B share (withfull voting rights after the death of Mr Whitehouse or strictly transferred toby him) in the company was given to Mrs Whitehouse. 6400 C class shares (rights to profit andshare in capital but no voting power) were issued which was beneficially ownedby the sons by 1200 each and 1000 each by his daughters. At the time of thisalleged allocation, Mr Whitehouse and Mrs Whitehouse, who was still alive atthe time, were divorced. The two sons of the marriage had affiliated themselveswith their father and the daughters with the mother. After the death of Mrs Whitehouse,the B class shares was transferred to the two sons Alexander and WilsonWhitehouse by Mr Whitehouse.
He then was taken to court by his own sons whenthey had a falling out due to some long-running family hostilities.The main issuewith this case is weather the action done by Mr Whitehouse i.e. transferringthe B class shares of his now deceased to his two sons was a lawful use of thepowers and discretion bestowed in him by art.
127 of the articles ofassociation of the company (which basically states that all the power ofdirectors goes to Mr Whitehouse while he remains primary governing directorwhich he has been at relevant times). Mr Whitehouse explained in the court thathe transferred the shares to his sons as an improper purpose (A person or bodyupon whom a statutory power is conferred can lawfully exercise that power onlyfor the purpose for which it was conferred, example a governing director). Hisexplanation was that he wanted to ensure the daughters and their husbands oranyone else for the matter would not gain practical control over the company onhis death through the voting power which might then attach to the B classshares held by Mrs Whitehouse and with the shares in the son’s names thatcompany stays in the family.To start offthis case study the various duties of Mr Whitehouse is laid out in the nextpage. After that a quick look at his reasons will be explained. Furthermore, adetailed view of the consequences faced by a director in this situation will belooked over and then we will get to the decision by the court and a conclusionof this case study with a few possible and applicable impact on the Australianlaw and the corporations law including a suggestions for changes in thecorporations act. · Duties of Directors explained and appliedin the case TheCorporations Act 2001 specifies four main duties of directors. 1.
Careand Diligence- This duty requires a director to act with the degree of care anddiligence that a reasonable person might be expected to show in the role (Section180).2. GoodFaith- This duty requires a director to act in good faith in the best interestsof the company and for a proper purpose (Section 181),including to avoid conflicts of interest, and to reveal and manage conflicts ifthey arise.3. Notto improperly use position – This duty requires directors to not improperly usetheir position to gain an advantage for themselves or someone else, or to thedetriment to the company (s 182).4. Notto improperly use information – This duty requires directors to not improperly usethe information they gain during their director duties to gain an advantage forthemselves or someone else, or to the detriment to the company (Section 183).
In addition,some other duties of directors are1. Insolventtrading – Directors have a duty to ensure that a company does not trade whilstinsolvent or where they suspect it might be insolvent (Section 588G). 2. Financialinformation – Directors should take reasonable steps to ensure that a companycomplies with its obligations in the Corporations Act 2001 related to thekeeping of financial records and financial reporting (Section 344). 3.
Disclosingdirectors’ interests – Directors should disclose matters relating to theaffairs of the company in which he/she has a material personal interest (Section191),particularly in the context of the requirement that public companies obtainshareholder approval for related party transactions (Section 208), anddisclosure of director’s interests to the market (Section 205G). 4. Lodging information with ASIC (Section188). 5.
Continuousdisclosure – For listed companies, continuous disclosure to the market ofinformation which is not generally available, and which may affectthe company’s share price (Section 674).Looking at thecase Whitehouse vs Carlton Hotel Pty Ltd there are some significant reasons tobelieve that a few of the directors’ duties have been breached whilst one couldargue that some of these duties have been met is open to interpretation. Theimproper purpose while is a legal term which was followed by Mr Whitehousedirectly overtakes the 3rd main duty of a director which is to notimproperly use position to gain an advantage.
While losing the company which hehas been the general director and owner might seem a bit punitive, theresponsibilities that he has as a director to follow the Corporations Act hasbeen directly overlooked by him which makes it difficult to explain in thecourt of law. One could arguethat the 2nd duty of a director has been met by Mr Whitehouse whichis Good Faith generally stating that a director is required to act in the bestinterests of the company and for a proper purpose (Section 181), including toavoid conflicts of interest, and to reveal and manage conflicts if they ariseit directly breaches the first duty of a director which is by using improperpurpose he directly did not care about the company being following thecorporations act and losing the company control is not reason enough to breachthis duty. Another dutythat was breached by Mr Whitehouse was Section 191 under disclosing directorsinterest, because he had a personal interest in the matter of the shares in thecompany, and since company is counted as an individual not property he did notdisclose the real reason until taken to court on why he transferred the Class Bshare to his sons from his late wife to anyone including the shareholders. Explanation onwhy these duties were breached is a simple one. He has his late wife’s B classshares transferred to his sons so that he would not lose control of thecompany. But the scheme that has been put in place by him i.e.
using improperpurpose to give those shares to his sons is a selfish one and this in fact hasbreached the duties of a director which has contributed in Mr Whitehousebreaking the law. The consequences of this has been laid out in the next pageof this case study. · Analysis of Consequences of BreachingLaws and Court Decision There are somesevere consequences to breaching the directors’ duties. They are mentionedbelow.
1. Criminalsanctions – There can be very severe penalties for failure to comply withduties under the Corporations Act 2001 or other laws governing a company’sactivities. For example, ‘cartel conduct’ under competition law can leadto imprisonment for 10 years or significant personal fines. It is also illegalfor a corporation to indemnify its officers against legal costs and anyfinancial penalty for this behaviour. Under the Corporations Act 2001,contraventions of the duty of good faith or improper use of informationor position, if they involve dishonesty or recklessness, can bepunished by imprisonment for five years (Section184).
2. Civil sanctions – A contravention of theduties under the Corporations Act 2001 can make a director liable to asubstantial fine. Shareholders or others (for example, creditors) may also actagainst directors who have failed to comply with their duties. 3. Disqualification– Both the Australian Securities and Investments Commission (ASIC) and thecourts have the power to disqualify directors for long periods of time forfailure to comply with their duties under the Corporations Act 2001 (Part2D.6).
4. Commercialconsequences – The most serious consequences of breaching directors’ duties areoften not the legal ones but the commercial ones. A corporation’s most importantasset is its reputation. The company will likely be subjected to much greaterscrutiny, both by investors and regulators, where directors breach duties.At worst, market reaction may mean the company will cease to exist.