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Module 8 · Conflicts, profits and benefits to related parties

A conflicts issue appeared as a hypothetical in six of the seven papers from 2018 to 2024 (essay-only in 2023), and this module carries three regimes that run in parallel: the equitable conflict and profit rules, the statutory disclosure and misuse provisions, and Ch 2E for public companies. Each regime binds different people, triggers on different facts and cures differently, so the discriminator on past papers is scope: company type, the addressee of each provision, the printed exclusion list. Fix those three before writing a word of analysis.

Cases at a glance

Case	In a line
Boardman	No real sensible possibility of conflict, no profit by reason of and in the course of office
Bell	Extent of interest weighed objectively. A bad enough conflict requires prevention
Chan	No destroying or diverting opportunities. A narrow maybe where no conflict is possible
Agricultural Land Management	The possibility of conflict suffices without any pursuit
ASIC v Adler	HIH's subsidiary paid $10m to Adler's trustee company, undocumented and unsecured, propping the HIH share price. Ch 2E and the duties in full flight
Gemstone Corp of Australia	Neither profit nor loss is required
Farrar	A bare shareholding may not conflict, a controlling adverse stake may (with Bangadilly Pastoral)
Canberra Residential Developments	No intersection with the company's activities, no conflict
Australian Careers Institute	A competing company. The more significant the role, the less room
Grimaldi	Actual functions matter, and expectant and non-pecuniary interests count
Walker	Indirect interests count
Wilson	Merely drawing a salary from the counterparty is too ephemeral
Andrews Advertising	Work diverted to a spouse's company. Breach
Demetriou	Assets transferred to the director personally. Breach
Claremont Petroleum	Equity looks to substance, not form
Pilmer	Good faith, proper purpose, honesty and confidentiality can collide between offices
Transvaal Lands Co	A conflict of duties is impermissible only where actual
Byrnes	Disclose and abstain short of actual conflict. Impropriety is objective
Fitzsimmons	Duties owed to two companies. Disclosure may not discharge the fiduciary, given involvement, gravity and relative knowledge (Owen J) (with Centofanti)
McGee	The director knew the borrower could not repay, disclosure alone failed
Wheeler	Full and frank disclosure, prevention within power, harm made appreciated
Woolworths	Unbiased advice owed, GM consent needed, constitutional words construed narrowly
Cook	Incoming work diverted to the director's new company
Pacifica Shipping	Beat the company to an asset, maturing opportunities protected
Western Areas Exploration	Opportunities the company might reasonably aspire to count (with Edenham)
SEA Food International	The duty and opportunity link judged on the company's operations
Canadian Aero Services	Resignation prompted by the opportunity is no escape
CMS Dolphin	A maturing opportunity is effectively the company's property
Regal	Inability to exploit is no answer, the honest fiduciary who profits still profits (with Warman and Cooley)
Parker	Fairness is no answer, the rule is inflexible (with Ex parte James and Furs)
Peso Silver Mines	A public approach after the company's rejection. Canadian, treat with care
Toms	Short of strict constitutional compliance, equity reintervenes
Australian Growth Resources Corp	A permitted interested vote must still serve the company
Buttonwood Nominees	Ratification needs full knowledge of nature and extent
Angas Law Services	Statutory duties are not ratifiable, shareholder views inform relief
Queensland Mines	Fully informed board consent can cure a taken opportunity in special circumstances (with Paris King Investments)
Gladstone Pacific Nickel	Compare on renouncement of the opportunity
McGellin	An MPI is an interest that could influence the vote (with Hospital Products)
Grand Enterprises	Indirect interests count, such as a benefiting relative
Kriewaldt	Board papers, held on trust for all directors, are no MPI
Camelot Resources	Disclosure must be personal, explicit and detailed on the benefit's scope (with Groeneveld Australia)
Guinness	Informal conversation or committee discussion fails
Doyle	s 195 reaches all meetings, quorate or not
MG Corrosion Consultants	Impropriety judged by what reasonable people expect of the position
Towey	Intention is not the touchstone of impropriety
Howard Smith	Improper purposes qualify as improper uses of position (Module 5)
Green	Information may be obtained by hints or suggestions
McNamara	The information need not be confidential
Somerville	Obtaining read generously, the advantage can be for a company
Hurd	Company IP used to start a rival
Hydrocool	Board information used to secure long-term employment
Vizard	Insider trading on board information
Weaver	The company paid for a personal boat
Donald	The advantage can be the payment of a debt
Cummins	Purpose suffices, a thwarting injunction is no bar
Waters	The exception onus is on the party alleging it
Australian Investors Forum	The arm's length comparator, unrelated, uninfluenced, informed, advised, seeking the best commercial result
Randall	A CEO's package, judged by industry, company and office
Mott	One-off joining incentives unlikely reasonable

Attack plan. Three regimes, run in parallel. 1. Equity. Is there a real sensible possibility of conflict, or a profit made by reason of and in the course of office (a corporate opportunity)? Did the fiduciary do what was required, and does the constitution or a fully informed general meeting cure it? 2. Statute. Disclosure of a material personal interest (s 191), the proprietary replaceable rule (s 194), the public company voting bar (s 195), and improper use of position or information (ss 182, 183). 3. Ch 2E. If a public company or an entity it controls is giving: financial benefit, related party, member approval or exception. The regimes have different targets, see the closing comparison table, so match each person to each regime first.

The fiduciary conflict rule

A fiduciary is a person bound to act loyally in another's interest: here, the director or senior executive to the company. The rule is prophylactic: it removes temptation rather than punishing succumbing.

RULE. compassA director or senior executive must not place themselves in a position where there is a real sensible possibility of conflict between their duty to the company and another interest (Boardman; Bell; Chan). The possibility suffices without any pursuit of the conflict (Agricultural Land Management). Neither profit nor loss is required (Gemstone Corp of Australia).

The assessment is objective, a reasonable person in the director's position (Boardman; Adler), weighing four things.

The extent of the interest: a real or substantial possibility of being swayed (Bell). A bare shareholding may not suffice, but a stake controlling an adverse company in general meeting may (Farrar; Bangadilly Pastoral).
Intersection with the company's activities: no intersection, no conflict (Canberra Residential Developments).
The director's actual functions: the more significant the role, the less room (Australian Careers Institute; Grimaldi).
All interests: expectant, non-pecuniary (Grimaldi; Bell) and indirect (Walker), though merely drawing a salary from the counterparty is too ephemeral (Wilson).
Typical breaches: the competing company (Australian Careers Institute), work diverted to a spouse's company (Andrews Advertising), assets transferred to yourself (Demetriou). Equity looks to substance, not form (Claremont Petroleum).

Conflict of duties

RULE. Where a director owes duties to two companies, trusts or persons, the duties of good faith, proper purpose, honesty and confidentiality can all collide (Pilmer). The threshold is higher because what is impermissible is an actual conflict rather than a mere possibility (Transvaal Lands Co). Even short of that the director must disclose and may need to abstain, because each company is entitled to unbiased judgment (Byrnes).

RULE. compassDisclosure does not always discharge the fiduciary, even under a duty of confidentiality to the other company. Ask how involved the director is, the gravity and commercial reality, and what knowledge they hold relative to the other directors. They may have to do more than abstain (Fitzsimmons; Centofanti).

The response scales from disclosure to positive action: financial difficulty, likely loss, or a conflicted director who is responsible, better informed, day-to-day or personally enriched all push toward action. Disclosure alone fails where the director knows harm could come, a borrower who cannot repay (McGee): was disclosure full and frank, was prevention within power, was the harm made to be appreciated (Wheeler)? A bad enough conflict requires preventing the transaction (Bell), and the company is entitled to unbiased advice (Woolworths).

The profit rule and corporate opportunities

RULE. A fiduciary must not make a profit by reason of and in the course of their office (Boardman). Nor may they destroy or divert an opportunity for the company without authority (Chan). Diverting incoming work to a new company of your own is caught (Cook). So is using information to beat the company to an asset it is moving toward, the maturing opportunity (Pacifica Shipping).

The prohibition covers opportunities actively pursued and those the company might reasonably be expected to be interested in or aspire to, given its actual or intended business (Pacifica Shipping; Western Areas Exploration; Edenham). The link between fiduciary duty and opportunity is judged on the circumstances and the company's operations (SEA Food International).
Resignation is no escape where prompted or influenced by the wish to acquire the opportunity, or where the position produced it (Canadian Aero Services). A maturing opportunity is effectively the company's property (CMS Dolphin).
Strictness. The company's inability to exploit is no answer: even a perfectly honest fiduciary who profits, profits, and the rule exists to keep fiduciaries careful (Regal; Warman; Cooley). Fairness may equally be no answer: the rule is inflexible (Parker; Ex parte James; Furs). Fairness and inability go instead to relief under ss 1317S, 1318.
The narrow outs. An approach as an ordinary member of the public, on public information, wholly outside the role, after the company rejected the opportunity for good reasons (Peso Silver Mines, Canadian, treat with care), and, maybe, where there is no possible conflict at all and the taking is plainly in the company's interests (Chan). In practice the company must have disclaimed the opportunity by general meeting (Woolworths).

Ratification means the members adopting a past breach. Authorisation is consent in advance.

RULE. The constitution can allow paid offices of profit or relax the disclosure rules, but without such a provision shareholder consent in general meeting is required (Woolworths; Regal). Anything short of strict compliance with the constitutional provision lets equity intervene again (Toms). Even a constitutionally permitted interested vote must still be cast with a view to the company's benefit (Australian Growth Resources Corp).

RULE. twistMembers in general meeting may authorise or ratify breaches of the equitable duties with full knowledge of their nature and extent (Buttonwood Nominees, noting the difficulty of overly detailed notices). They cannot ratify what perpetuates a fraud on the minority or is oppressive or unfairly prejudicial (Module 9). The statutory duties cannot be ratified at all, though shareholder views inform relief under ss 1317S, 1318 (Angas Law Services).

Board ratification is usually insufficient unless the constitution allows it, and general constitutional words will not oust the corporate opportunity doctrine. The particular words matter (Woolworths). Without constitutional authority, board approval likely cannot cure a taken opportunity (Queensland Mines; Paris King Investments; compare Gladstone Pacific Nickel on renouncement).

Statutory disclosure: ss 191, 192, 194, 195

These provisions manage conflict but are not duties: non-compliance is a strict liability offence, no fault element (ss 191(1A), 195(1B)), and evidence for the duty cases, but the act, resolution or transaction stands (ss 191(4), 192(7), 195(5)).

Material personal interest. An interest that could influence the director's vote, giving rise to a real sensible possibility of conflict though not necessarily an actual one (McGellin; Hospital Products). Indirect interests count, a shareholding, a benefiting relative (Grand Enterprises), and potentially duties as well as interests, but not board papers held on trust for all directors, which is the company's interest (Kriewaldt).

RULE. twistA director with a material personal interest in a matter relating to the company's affairs must give the other directors notice (s 191(1)). The exceptions cover interests shared with members generally, remuneration, contracts conditional on member approval, guarantees, insurance, s 199A payments and directing a related body corporate, plus proprietary company colleagues who already know the nature and extent, notice already given and unchanged, and a standing notice under s 192 (s 191(2)). A proprietary company with a sole director is outside the section (s 191(5)).

The notice states the nature and extent of the interest and its relation to the company's affairs, given at a directors' meeting as soon as practicable after awareness, and minuted (s 191(3)). The director discloses personally, in enough detail for the board to understand the scope of the benefit. Suggestion is not enough, prior fiduciary defaults must be revealed, and informal conversation or committee discussion fails (Camelot Resources; Groeneveld Australia; Guinness).
A standing notice (s 192) covers an interest whether or not it yet relates to the company's affairs. It takes effect immediately, and lapses when a new director is appointed without receiving it (anyone may revive it) or the interest materially increases (s 192(2) to (6)).

RULE. For proprietary companies a replaceable rule, meaning a statutory default the constitution can displace, lets the interested director vote, the transaction proceed and the director retain benefits (s 194). The company cannot avoid the transaction merely because of the interest, provided the interest was disclosed under s 191 or was exempt. Retention and protection against avoidance need disclosure before the transaction.

RULE. twistA director of a public company with a disclosable material personal interest must not be present or vote while the matter is considered at any meeting. The bar reaches beyond board meetings and beyond quorate ones (Doyle). It lifts where the directors without the interest resolve that the interest should not disqualify, identifying the director, the interest and its relation to the company's affairs (s 195(1) to (2)), or where ASIC declares under s 196 on a quorum problem plus urgency or another reason to avoid a general meeting.

Statutory misuse of position and information: ss 182, 183

RULE. A director, secretary, other officer or employee must not improperly use their position to gain an advantage for themselves or someone else, or to cause detriment to the corporation (s 182(1)). A person who obtains information because they are or have been a director, officer or employee must not improperly use the information to the same ends (s 183(1)). Involvement within s 79 is itself a contravention, and s 183 continues after the office ends.

Impropriety is objective. Is the use proper, judged by the standards of conduct expected by reasonable people with knowledge of the position and the circumstances (Byrnes; MG Corrosion Consultants)? Conflicts and unauthorised uses can suffice, and an honest mistake for the company's benefit might not (Byrnes). Intention is not the touchstone (Towey), and improper uses need not be conflicts at all: improper purposes qualify (Howard Smith, Module 5).
"Obtaining" information is broad. Hints or suggestions (Green), non-confidential information (McNamara), read generously (Somerville). Illustrations: using IP to start a rival (Hurd), board information used to secure long-term employment (Hydrocool), insider trading (Vizard), the company paying for a personal boat (Weaver).
The advantage can be for a company (Somerville) or the payment of a debt (Donald). Purpose, not causation, must be shown, so a thwarting injunction does not prevent breach (Cummins). It is no defence to criminality that the use aimed at, or produced, a corporate advantage (ss 184(2A), (4)).

Chapter 2E: financial benefits to related parties of public companies

Chapter 2E requires member approval before a public company gives a financial benefit to a related party. Its interpretive purpose is protecting the members' interests (s 207), and approval or exception leaves every other statutory and fiduciary duty standing (s 230).

Ch 2E decision path. 1. The giver. Is it a public company, or an entity it controls (s 50AA: capacity to determine the outcome of decisions about financial and operating policies, judged by practical influence and patterns of behaviour)? If proprietary, stop. 2. A financial benefit (s 229): interpret broadly, economic and commercial substance over legal form, disregarding any consideration even if adequate. Indirect, informal and non-cash benefits all count. 3. A related party (s 228): the controlling entity, directors of the company or its controller, their spouses, parents and children of any of those, entities any of them control, anyone in those categories within the past six months or believing they will join them, and anyone acting in concert with a related party on the understanding the benefit flows through. 4. Approval. Did members approve under ss 217 to 227, the benefit given within 15 months (s 208(1))? 5. Exception. If not, an exception (ss 210 to 216), with the onus on the party alleging it (Waters)? 6. Consequences if neither (s 209), plus the duties (the Adler pattern) and possibly a s 1324 injunction.

The arm's length exception: s 210

RULE. compassApproval is unnecessary where the terms would be reasonable in the circumstances if the parties were dealing at arm's length on market or commercial rates, or where the terms are less favourable to the related party (s 210). The comparator is an unrelated company, free from undue influence, with sufficient knowledge, experience and advice to form a sound judgment, concerned only to achieve the best commercial result (Australian Investors Forum). Relevant factors include alternative transactions with unrelated parties, prevailing conditions, any special value, conflict management processes and expert advice (RG 76). Loans and guarantees within a group usually fail. Undocumented, unsecured lending was not remotely arm's length in Adler.

The other exceptions: ss 211 to 216

Reasonable remuneration or expense reimbursement for an officer or employee, judged by the industry, company and office (s 211; a CEO's package in Randall, one-off joining incentives unlikely, Mott).
Reasonable indemnities, premiums and defence costs consistent with s 199A (s 212).
Benefits under $5,000 a year, counting controlled entities (s 213).
Closely-held subsidiaries (s 214).
Non-discriminatory benefits to members as members (s 215).
Court order (s 216).
ss 191 and 195 still apply to remuneration decisions.

The approval procedure: ss 217 to 227

Lodge with ASIC, at least 14 days before notice is given, the proposed notice, resolution text and explanatory statement (s 218): the statement identifying the related parties, the benefits, each director's recommendation with reasons, directors' interests and everything else members reasonably require (s 219). ASIC may comment, but not on the merits (s 220). The meeting notice must match the lodged material and carry nothing else (ss 221 to 223). Related parties and their associates (ss 11 to 16) must not vote (s 224(1)). A contravening vote contravenes even if it changes nothing, though the resolution stands if it would have passed anyway (ss 224(5), 225(1)). Records are kept, the passed text is lodged, and substantial compliance can be declared sufficient (ss 225 to 227).

Consequences: s 209

RULE. The public company itself is not guilty, and the contravention does not affect the validity of any connected contract or transaction (s 209(1)). Any person involved contravenes the civil penalty provision (s 79; s 209(2)). Dishonest involvement is criminal (s 209(3)), and an injunction may restrain the giving (s 1324). A Ch 2E breach usually travels with duty breaches, care especially and good faith (Adler, where Adler had HIH's subsidiary pay $10 million to his own trustee company without board or investment committee approval, then used it to prop up the HIH share price and buy his own failing investments, on undocumented, unsecured terms).

The regimes compared

	Equitable conflict and profit rules	ss 182, 183	Disclosure (ss 191 to 195)	Ch 2E
Who is bound	directors, senior executives	directors, officers, employees, involved persons	directors only	public companies' insiders, involved persons liable
Trigger	real sensible possibility of conflict, or profit from office	improper use for gain or detriment	material personal interest	financial benefit to related party
Benefit needed	no	yes: sought gain or detriment	no	yes
Cure	constitution, fully informed GM	none: relief under ss 1317S, 1318 only	disclosure is the obligation	member approval or exception
Consequence	equitable remedies (rescission, account)	civil penalty, criminal if dishonest (s 184)	strict liability offence, transaction stands	civil penalty for involvement, transaction stands

Critical pitfalls and counter-arguments

Trap. The s 195 mechanics bite twice. The conflicted director has a material personal interest in the s 195(2) resolution itself, so cannot be present for it. If the exclusions destroy the quorum, any director may call a general meeting (s 195(4)), and in practice only the s 191(2)(a) exceptions avoid s 195. 2024 Q3 made this live: Bram was "the managing director of EGL", a public company, and the exclusion list ("does not want advice on sections 180 to 184") pointedly does not exclude 191 or 195. Where the paper leaves them open and a public company director is dealing, run both.

Trap. s 191 binds directors only. Felicia was company secretary, an officer under s 9AD but not a director, and the report was blunt: "There was no need to address s 191 because Felicia was not a director." The question's sweep ("sections 179 to 198G") baited a tour through every provision. Fix the addressee first (Module 4): s 191 binds directors, while ss 182 and 183 reach officers and employees too.

Trap. Ch 2E does not apply to proprietary companies. A proprietary director dealing with family is a fiduciary and ss 182, 191, 194 problem instead.

Trap. Watch for a planted price differential: read the evidentiary fine print. Axel's card swap came with apparent market support: "Axel draws Bram's attention to websites that display prices for the same action figures", "But these prices are for unopened action figures, sealed in their original packaging, which is not the case with Axel's action figures", whose "paint … has begun to fade." The comparator was disqualified. Corveena's lease quantified the failure: "$1,000.00 per month … less than half the market rental", on a five-year term where lounges are "typically, only rented for the short-term". Bram's publicity rationale (the "buzz") baited an arm's length conclusion the numbers refute. Both were related parties reached through passing narrative clauses: "Bram's father, Axel" (s 228(3)) and Corveena, "whom he is engaged to marry". Argue the spouse boundary rather than assuming it.

Exam calibration. The discriminator is scope: company type, the addressee of each provision, the exclusion list. Fix those three, then spend the words on the arm's length evidence and the strictness of the profit rule.

Take it to the practice bank

This module is drilled in the Corporations Law practice bank. Every problem there carries a realistic Pass answer, an H1 model answer, and an examiner's comment explaining the decisive fact and where the marks are lost.

Practice prompts

Take any past-paper insider and match them to each regime using the closing table: who is bound, what triggers it, and what cures it.
Run the Ch 2E decision path on a benefit to a director's parent, from company type through s 229, s 228, member approval within 15 months and the exceptions, to the consequences under s 209.
Write an arm's length paragraph that tests planted price evidence against the Australian Investors Forum comparator, and disqualify the comparator where the fine print allows.
Draft the s 191 notice and the s 195(2) resolution for a conflicted public company director, and say who may be present when each is considered.
Take a diverted opportunity and test every cure in turn, constitution, board approval and general meeting, saying which fails and why (Woolworths; Queensland Mines).

Check your understanding

Auto-marked drills. Answer, then see the authority in the feedback.