Australia: Directors’ duties: The inflexibility of the conflict rule

On 11 September 2014, the Supreme Court of New South Wales delivered judgment in Allco Funds Management Limited (Receivers and Managers Appointed) (In Liquidation) v Trust Company (RE Services) Limited (in its capacity as responsible entity and trustee of the Australian Wholesale Property Fund) [2014] NSWSC 1251.

The decision reminds directors of the risks associated with their involvement in transactions where they are in a position of conflict.


The proceeding concerned two transactions that occurred in December 2006 between two companies in the Allco group of companies: Allco Funds Management Limited (AFML) and Records Funds Management Limited (RFML). Importantly, Timothy Rich and Christopher West were directors of both companies.

At the time, AFML owned about half of the units in a wholesale property fund, known as Allco Wholesale Property Fund (Fund). AFML was the manager of the Fund and RFML acted as responsible entity.


By mid-December 2006, a stamp duty issue emerged in relation to the Fund which, if left unresolved, exposed the Fund to $1.8m of duty.

Timothy Rich proposed a solution that saw the Fund redeem AFML's units (worth approximately $109 million) and simultaneously create a loan of the same value back to the Fund. The effect was to convert AFML's beneficial equity interest into a loan made repayable in 2 years, with a right to receive interest payments equivalent to the distributions AFML would have received as a unit holder.

This proposal was formalised in a loan agreement dated 15 December 2006 between AFML and RFML (Loan Agreement). The Loan Agreement was executed, on behalf of AFML, by 2 of its directors, Timothy Rich and Andrew Rutherford, and on behalf of RFML, by Tom Lennox (RFML's company secretary) and Christopher West.


Shortly after the conversion from equity to debt, some accounting problems emerged for the Fund. The parties found that the conversion from debt to equity affected the profitability of the Fund because payments made to AFML as interest, although tax deductible, reduced the profits of the Fund. In addition, the conversion had implications for the Fund's unit price.

The parties determined that the accounting problems would be resolved if the Loan Agreement were amended in a way that would allow the loan to be treated as equity for accounting purposes, but so as to preserve its nature as debt for stamp duty purposes. It achieved this by removing the 2 year term and, practically speaking, making the repayment date of the loan entirely at the discretion of the borrower (RFML).

This proposal was formalised in an amending deed to the Loan Agreement (Deed of Amendment) in early February 2007 between AFML and RFML. The Deed of Amendment was executed, on behalf of AFML, by Christopher West and Andrew Rutherford, and on behalf of RFML, by Christopher West and Timothy Rich.

Whilst the Deed of Amendment resolved the accounting and unit price issues of the Fund, it also had the practical effect of stripping AFML of any enforceable rights it had to receive repayment of its loan, which then had a face value of $109m.


In 2008, Allco collapsed and receivers were appointed to AFML. A short while later, the unit holders in the Fund caused the replacement of the responsible entity and the termination of AFML's management agreement. Trust Company (RE Services) Limited (Trust Company) became the new responsible entity of the Fund and, by virtue of s 601 FS(1) of the Corporations Act 2001 (Cth) (Act), RFML's rights, obligations and liabilities became those of Trust Company.

Since its appointment as the responsible entity, Trust Company (on the advice of the Fund's investment manager, Arcadia Funds Management Limited) has reorganised the capital structure of the Fund. That reorganisation has had the effect of denying AFML of any interest on the Loan Agreement while at the same time providing a return to the other unit holders on their investments in the Fund.


Against that background, the receivers and managers of AFML commenced proceedings in 2012 to set aside the Deed of Amendment, or alternatively, to set aside both the Loan Agreement and the Deed of Amendment on the basis that:

  • each was approved by directors of AFML in beach of their fiduciary and statutory duties to AFML. Those duties included a duty to avoid conflicts of interest (in this case, their competing duties to AFML and RFML), and a duty to act in the best interests of AFML and for a proper purpose; and
  • by treating AFML as a bare lender with no unit holder rights, Trust Company had engaged in and continued to engage in unconscionable conduct in contravention of ss 12CA and 12CB of the Australian Securities and Investments Commission Act 2001 (Cth).

Trust Company argued that the transaction was devised to benefit both AFML and the Fund. Both directors who approved the transaction gave evidence that they believed the transaction was in the interests of the Allco Group, including AFML, and that the agreements were not intended to alter the economic outcome for either party.


In his judgment, Justice Hammerschlag agreed with AFML that the directors were in a position of conflict and that the transactions were not bona fide in the best interests of AFML or for a proper purpose.

In coming to his decision, his Honour reiterated that the rule against conflicts is so strictly adhered to that no question as to the fairness or otherwise of any arrangement entered into may be raised.

Immediately prior to the Deed of Amendment, AFML had a legally enforceable right to repayment of the loan within 2 years and RFML had a corresponding legally enforceable obligation. The Deed of Amendment deprived AFML of those rights; it left repayment of principal and payment of interest effectively at the discretion of the borrower.

This amounted to a clear conflict of interest between the two companies and put those who were directors of both companies, Timothy Rich and Christopher West, in a position of conflict.

The evidence of the directors, while accepted, ignored the fundamental nature of a director's obligations to promote the company's (ie. AFML's) best interest. In the context of such breach of directors' duties, the fairness or otherwise of the transaction is irrelevant.

Given his Honour found in favour of AFML in relation to the fiduciary duties owed to it, Hammerschlag J found it unnecessary to deal with the further grounds raised by AFML. Nevertheless, his Honour made certain remarks about those matters.

In relation to the claim for breach of sections 181(1) and 182(1) of the Act, Hammerschlag J held that the actions of Rich and West were in breach of those provisions. His Honour found that neither Rich nor West paid particular attention to the legal and economic interests of AFML, but were more concerned with the broader, more general interests of the Allco Group. The Court concluded that, when attention was focussed on the particular interests of AFML, no reasonable person in the position of Rich and West could reasonably have concluded that the Deed of Amendment was in the best interests of AFML.

In respect of the unconscionability claim, AFML did not succeed on its case as the Court considered it had been pleaded. However, his Honour found that Trust Company had engaged in unconscionable conduct in seeking to maintain its rights under the Loan Agreement and Deed of Amendment in the knowledge that they were entered into by directors in breach of their fiduciary duties and that AFML now seeks rescission of those agreements.


Having found that the directors were in a position of conflict when they entered into the agreements, the Court granted relief allowing AFML to elect to have the Loan Agreement and the Deed of Amendment rescinded ab initio. AFML made that election, the practical effect of which was to restore AFML as a unit holder of the Fund. The Fund is currently understood to have net assets in the order of $190 million. AFML's 47% share has an attribution value of approximately $90 million.


This decision highlights the risks associated with the involvement of directors in transactions in which they are in a position of conflict, particularly where those directors conduct business in the context of a corporate group of companies. It reminds us that where fiduciary duties are concerned, the conflict rule is strictly adhered to. Where a conflict is established, the Court does not inquire into the fairness or otherwise of the transactions. The rule is inflexible.

A contract made in breach of the directors' fiduciary duties will be voidable at the option of the company unless the articles of association of the company provide otherwise, or the director makes a full disclosure of the nature of his or her interest in the contract to the members of the company who must approve the contract by ordinary resolution.

Corrs acted for AFML.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Most awarded firm and Australian deal of the year
Australasian Legal Business Awards
Employer of Choice for Women
Equal Opportunity for Women
in the Workplace (EOWA)

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.