Question: When Does a Litigant Want to be a Fiduciary? Answer: When It Involves Tax Law: Howard v Commissioner of Taxation

By Michael Crawford

Howard v Commissioner of Taxation Case Page

Why would a litigant want to be a fiduciary?
The law reports of all common law jurisdictions are replete with cases in which fiduciaries who have obtained a financial gain furiously deny that the gain constitutes an unauthorised benefit or that it was obtained in circumstances in which their duty to their principal was in conflict with their personal interest. It is somewhat of a novelty, however, to come across a case in which a fiduciary implores a court to find that he has obtained a benefit in breach of his obligations and that the fruit of his wrongdoing should thus be held on constructive trust for the benefit of his principal. Yet Howard v Commission of Taxation [2014] HCA 21 is just such a case. And why, one might ask, would a fiduciary urge upon a court such an apparently perverse submission? The answer, perhaps unsurprisingly, is tax law.

The appellant was one of six people who entered into a fiduciary joint venture, the purpose of which was to exploit the investment potential of an underperforming golf course in Victoria. The plan agreed upon was to purchase the course, find a long-term tenant to operate it and then sell the reversion to a third party for a profit. The profit realised from the sale would then be divided six ways. The benefit of this strategy was that it would yield a more or less immediate profit, referred to as a ‘day one’ profit, for the participants.

However, it was not long before the participants encountered what was to become an irreconcilable difference of opinion. The appellant and two other members of the joint venture were directors of a company called Disctronics. They regarded the golf course as a sound long-term investment for the company and proposed that the reversion be sold to it. However, the limitation on Disctronics’ participation in the investment was that it could not contribute any more than $1.5 million in equity capital towards the purchase of the reversion. Edmonds and Cahill, two joint venture participants who were not directors of Disctronics, objected to the proposal on the basis that such a sale would reduce the potential purchase price which the joint venture could attract for the sale of the golf course. The matter was put succinctly by Jessup J at first instance in the Federal Court who observed that, ‘[i]f the transaction were to be considered as a speculation for 6 individuals, the higher the purchase price, the better. But, if the transaction were to be considered as an investment for Disctronics, the lower the purchase price, the better’ (at [10]). Edmonds and Cahill subsequently, and without the prior knowledge or consent of their fellow joint venture participants, purchased the golf course for themselves.

The appellant and the other joint venture partners sued Edmonds and Cahill in the Victorian Supreme Court for breach of their fiduciary duties and were awarded equitable compensation which, perhaps curiously, was calculated on the basis of the gain which Edmonds and Cahill had made from the acquisition and subsequent sale of the golf course. The appellant’s one-sixth share of this award amounted to $861,853.35. This amount was declared as taxable income of Disctronics but not of the appellant personally. One can only speculate that the appellant was, by this step, attempting to take advantage of what was presumably the lower corporate tax rate. In any case, the Federal Commissioner of Taxation took a dim view of the appellant’s actions and the matter eventually ended up in the High Court.

What does fiduciary law have to do with tax law in this case?
The appellant’s primary argument was that, by the time the directors decided to attempt to bring Disctronics in as purchaser, he had placed himself in a position in which his duties as director of Disctronics were in conflict with his personal interest as a participant in the joint venture. Any gain he received would thus have been made in breach of his fiduciary obligations to the company. As a consequence, the appellant argued that he did not receive the award of equitable compensation beneficially but instead as constructive trustee for Disctronics. Because, he argued, the money actually belong to Disctronics and not to him, he was not liable to income tax upon it.

No member of the High Court was particularly impressed by the appellant’s argument. As the judgment of French CJ and Keane J noted, the submission (at [29]):

rested upon a broadly stated fiduciary obligation. In making it, the appellant had to confront the difficulty that the golf course project was at all relevant times a joint venture between himself and five others, who owed fiduciary duties to each other in relation to the joint venture. It was neither conceived nor pursued by the appellant or the other Disctronics directors in their capacity as directors. Nor was there any apparent conflict between the interest of the appellant as a member of the joint venture, and his fiduciary duties as a director of Disctronics.

The Court unanimously found (though it required three separate judgments to do so) that the appellant had neither made an unauthorised profit in his capacity as a company director nor placed himself in a position in which there was a real or substantial possibility of conflict between his personal interest in the golf course investment and his duties to Disctronics. It is worth mentioning, in passing, that the appellant’s submissions were confined to breach of the ‘conflict’ rule (at [110] per Gageler J). This was because it was conceded by the appellant that he did not obtain the opportunity to participate in the golf course investment by virtue of, or in his capacity as, a director of Disctronics. Despite this, both the joint judgment of French CJ and Keane J and that of Hayne and Crennan JJ considered both of the so-called ‘proscriptive duties’. That they did so probably highlights that, whether these duties are truly distinct or are merely two manifestation of the one principle (a point discussed but not resolved by Hayne and Crennan JJ at [57]), is an issue of little moment. The degree of overlap between them means that in the vast majority of cases analysing each of the duties in perfect isolation will be a largely artificial exercise.

What are the broader implications for fiduciary law?
More generally, this case serves as a useful reminder of the broader point that one cannot breach a right unless one owes a correlative duty. Though certain positions, including company directors, are ‘presumptively fiduciary’, this does not mean that all conduct in which the fiduciary engages is subject to fiduciary obligations. As French CJ and Keane J stated, ‘[d]espite their broad judicial formulations fiduciary duties are not infinitely extensible’ (at [34]). It is, as Hayne and Crennan JJ stressed, still necessary to define the subject matter over which the fiduciary obligations extend (at [91]).

This point was perhaps most clearly articulated in the decision of Gageler J. Quoting with approval the judgment of the Full Court of the Federal Court in Grimaldi v Chameleon Mining NL [No 2] [2012] FCAFC 6, his Honour stressed that before determining whether a fiduciary had made a gain in circumstances that amounted to a conflict between his duty and his interest, it is first necessary to determine what the fiduciary’s duty actually requires of him (at [110]–[111]). In the circumstances, describing the golf course venture as a ‘maturing business opportunity’ was insufficient to engage the appellant’s duty to the company (Gageler J at [112]). Indeed, one would imagine that it would come as a nasty to surprise to those in business if their role as a director of a company whose only assets was insurance bonds were prevented by their fiduciary obligations from pursuing, in a purely personal capacity, an investment in a golf course.

Perhaps the most remarkable aspect of the appellant’s primary submission in Howard is not only that it should have made it to the High Court but that its resolution should have required three separate judgments. The question presented to the Court was easily resolved by reference to unquestioned principles of equity which can trace their origins, at least, to the decision of Keech v Sandford [1726] EWHC Ch J76 in 1726. This case was not, as the Court made clear, like Regal (Hastings) Ltd v Gulliver [1942] UKHL 1 (see Hayne and Crennan JJ at [87]) in which a fiduciary exploited information received in his capacity as fiduciary. Nor was it a case in which a fiduciary was placed in a position of conflict by exploiting an opportunity which properly belonged to his principal. As Hayne and Crennan JJ (at [94]) and Gageler J (at [113]–[114]) remarked, the situation might have been different if the venture had not been derailed by the actions of the rogue joint venture partners and Distronics had been accepted as the appropriate party to purchase the reversion of the tenanted golf course. However, as Gageler J noted (at [113]–[114]), this could only have happened if the equity contribution required of Disctronics did not exceed $1.5 million and, most importantly, if all six of the joint venture partners agreed to it. That neither of these contingencies were fulfilled could not be regarded as the fault of the appellant.

Arguably, in the circumstances, the most striking element of the investment structure, at least as it was proposed by the appellant, was the apparent conflict between the appellant’s duty to his joint venture partners to help secure the greatest profit from the venture and his interest in securing a long term investment for a company of which he was a director and a shareholder. As French CJ and Keane J noted (at [37]), the likely effect of proposing Disctronics as purchaser was to reduce the ‘day-one’ profit by accepting a purchase price which was potentially less than that which could have been extracted from an arms-length purchaser. In the circumstances, it is not at all surprising that the joint venture ended acrimoniously.

Certainly the result in the case accords with modern understandings of the purpose of fiduciary obligations. As Conaglen has convincingly argued, fiduciary obligations are instrumental rules which serve a prophylactic function (see M Conaglen, ‘The Nature and Function of Fiduciary Loyalty’ (2005) 121 Law Quarterly Review 452). Their purpose is not to enforce ethical standards for propriety’s sake. Rather, by removing any temptation to act in one’s own interests, they function to maximise the chances that fiduciaries will perform their core functions to the best of their abilities. So, when courts talk about a conflict between a director’s interests and his ‘fiduciary duties’ as a director, they are in fact engaging in a form of question-begging (for example French CJ and Keane J at [29]). The conflict that constitutes the breach of the purely negative fiduciary obligation is the conflict between the fiduciary’s personal financial interest and his positive obligation to the company to, inter alia, provide sound advice about its financial affairs. Whilst the performance of this positive duty is safeguarded by the fiduciary overlay, it is not itself a fiduciary duty. The fiduciary obligations are, as French CJ and Keane J confirmed, those purely proscriptive duties which prevent a fiduciary from obtaining an unauthorised benefit and from placing himself in a position of conflict (at [31]). In accordance with this rationale, it would certainly stretch the bounds of plausibility to argue that a director of a company whose only assets were insurance bonds compromised his ability to act in the best interest of that company by proposing to invest, in a private capacity, in a golf course. Plausibility aside, the consequences of accepting such an argument would be extreme and, in practice, probably unworkable.

In any case, Howard serves as a useful reminder that when determining, in circumstances such as these, whether someone must account for a gain, asking whether or not they are a ‘fiduciary’ is only ever a starting point. We must also always ask, ‘to what particular conduct of the fiduciary does the duty actually apply?’ This question of scope is all-importance for, as Hohfeld has reminded us, where there is no duty there is no right.

AGLC3 Citation: Michael Crawford, ‘Question: When Does a Litigant Want to be a Fiduciary? Answer: When It Involves Tax Law: Howard v Commissioner of Taxation’ on Opinions on High (23 June 2014) <>.

Michael Crawford is a sessional academic and PhD Student at Melbourne Law School.

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About Michael Crawford

Michael holds a BA/LLB (Hons) and a Graduate Diploma in Taxation Law from the University of Melbourne and a Bachelor of Civil Law (BCL) from the University of Oxford. He has previously worked as a solicitor in the Dispute Resolution group at what was then known as Mallesons Stephen Jaques and has taught in trusts, property, equity and remedies at the University of Melbourne and the University of New South Wales. Michael is presently undertaking a PhD in law at the University of Melbourne. His topic is the interaction between rights and remedies in the common law of property.