Australia: Directors’ duties and the role of legal counsel

Last Updated: 8 March 2015
Article by Katherine-Anne Waldron and Nicole Hebblewhite (formerly with Holding Redlich)

Most Read Contributor in Australia, August 2019

The recent decision of the Supreme Court of New South Wales in Hart Security v Boucousis [2014] NSWSC 1654, serves as a valuable reminder for Directors of their duty to avoid a conflict of interest.

The decision also suggests that Courts are willing to consider third party advisors liable as an accessory to an offence if they knowingly aid a director in a contravention of their fiduciary duties or those owed under the Corporations Act.

Background

  • Mr Boucousis (Boucousis) was the sole director of Hart Security Australia (HSA). HSA was essentially financially dependent upon its holding company, the Hart Group. In November 2007, HSA began negotiations with Northern Territory Airport Pty Ltd (NTA) for the supply of security services at the Darwin and Alice Springs Airports.
  • Negotiations between HSA and NTA stalled when the Hart Group refused to provide a $1M bank guarantee to ameliorate NTA's concerns regarding HSA's financial capacity.
  • Boucousis became concerned that HSA would lose the opportunity with NTA, which he thought may have resulted in HSA becoming insolvent.
  • Boucousis began to consider alternate funding options and in 2009 he entered into negotiations with ATMAAC, a competitor of HSA, for ATMAAC to acquire a majority shareholding in HSA. If the transaction proceeded, HSA would have sufficient financial backing for them to be in a position to execute the contract with NTA.
  • The key terms of the draft agreement between ATMAAC and HSA included generous remuneration for Boucousis, including an offer of employment and an issue of shares in ATMAAC.
  • The Hart Group refused the initial offer by ATMAAC and despite ongoing attempts by Boucousis, the acquisition did not proceed.
  • NTA ultimately elected not to enter into an agreement with either HSA or ATMAAC, citing the failure to provide a bank guarantee among the reasons for their decision not to engage HSA.

Proceedings against Boucousis

HSA brought proceedings against Boucousis alleging that:

  • Boucousis had breached his statutory and equitable duties as a director by embarking on a course of conduct aimed at diverting the NTA opportunity from HSA for the benefit of ATMAAC and for his own personal benefit; and
  • although Boucousis' efforts did not result in ATMAAC obtaining the NTA contract, nor did it result in any personal benefit for Boucousis, his conduct had caused HSA to lose the NTA opportunity.

Proceedings against Law Firm

HSA also brought proceedings against the law firm advising Boucousis, alleging that they were also liable to pay compensation for loss of the opportunity with NTA. It was alleged by HSA that the law firm's liability was said to arise in two ways:

  1. the law firm knowingly assisting Boucousis' in breaching his fiduciary duty and would therefore be liable under the second limb of Barnes v Addy, which in short provides a cause of action against persons who provide knowing assistance to a trustee or fiduciary who dishonestly and fraudulently breaches its duties; and
  2. the partnership being persons involved in Mr Boucousis' contravention of his statutory duty, such that they too should be liable to pay statutory compensation.

Court's Finding

Darke J found that Boucousis was not in breach of any of his fiduciary or statutory duties. In making this finding, his Honour acknowledged that, in circumstances where the Hart Group had shown itself unwilling to help HSA meet NTA's requirements for a bank guarantee, Boucousis saw the ATMAAC offer as the best and only option for HSA to secure the contract and avoid insolvency. As such, Mr Boucousis was found not to be in breach of his duty to act in good faith and in the interests of HSA as he was not engaged in conduct which he believed was contrary to HSA's interests.

In respect of his duty not to be in a position of conflict, Darke J held that though the ATMAAC proposal undoubtedly held significant personal benefits for Mr Boucousis, the fact that the proposal was the only realistic means of securing the NTA contract meant that the possibility of conflict between Boucousis' personal interests and his obligation to pursue the HSA contract remained theoretical. As his Honour noted 'the existence of his personal interest did not provide any real inducement to not faithfully discharge the duty'.

Because the claim against the law firm was founded in accessory liability, the claim failed as a consequence of Darke J's conclusion in relation to Boucousis.

Implications

Directors

While Boucousis was ultimately found to have acted in accordance with his duties, the matter was made significantly more complicated due to the proposed benefit to Boucousis of the ATMAAC transaction.

Consequently, Hart Security v Boucousis provides a warning to Directors of the need to be conscious not just of the effect of their actions, but also how those actions are perceived by shareholders, especially where it may appear that a personal benefit has been gained by the Director. Defending litigation of this nature not only involves a significant financial burden, but will often involve the public questioning of an individual director's character, qualifications and conduct which can result in irreparable reputational loss as well as financial, health and emotional costs for both the individual and their families.

Professional advisors

Though the case against the law firm advising Boucousis ultimately failed, Darke J's decision in Hart Security v Boucousis is significant insofar as it indicates a willingness on the part of the Court to consider the potential liability of a third party professional adviser. Tellingly, Darke J refused the firm's application for summary dismissal of the case against it, noting that he was not convinced that the evidence was insufficient to support a finding against the firm. His Honour's decision in Boucousis indicates that Courts are very much open to finding professional advisers, whether legal advisors, accountants or others, to be accessorily liable if they are found to have knowingly assisted a director in contravening their duties.

For in-house legal counsel, this case also serves as a reminder that they must be diligent in defining the scope of advice sought from professional advisers when advising Directors on governance issues and, where there is a risk that a Director's interest may not be aligned with those of the Company in-house counsel may wish to encourage that Director to seek independent legal advice.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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