T., while managing director of the appellant company, was authorized by the directors to negotiate for the sale of the tanning, dressing and dyeing part of its business. He eventually arranged with L., who was the promoter of a com- pany to be formed, to sell it to that company for £8,500. Pursuant to this arrangement the plaintiff sold to the defendant F. D. Ltd. T. was an expert in the processes of tanning, dressing and dyeing and was familiar with the secret formulae used by the appellant for these purposes. In the course of the negotia- tions for sale L. told him that the new company would want his services, and he SO informed the appellant's chairman of directors. The chairman, after consultation with some of the other directors, advised him to make the and McTiernan best arrangement for himself that he could with the purchaser. Before the terms of sale were agreed upon T. arranged a contract between himself and the company to be formed in which it was agreed that he should serve that company and in that service disclose all his knowledge and information about the processes of the tanning, dressing and dyeing and should receive shares in the company and £4,000, in addition to an annual salary. This transaction, which if carried out would make its formulae valueless to it, was not disclosed to the appellant. After its incorporation F. D. Ltd. adopted the contract with T., issued the shares to him and gave him promissory notes for the £4,000.

Held that T. while acting for the appellant in a fiduciary capacity had derived undisclosed benefits for himself for which he was accountable to the

54 CLR 584

appellant. If it were a fact that the appellant did not suffer any loss corre- sponding to the benefits derived by T., that fact did not affect the duty of T.

Decision of the Supreme Court of New South Wales (Nicholas J.) reversed.

APPEAL from the Supreme Court of New South Wales.

Furs Ltd., brought a suit in the Supreme Court of New South Wales against Gordon Watson Tomkies, Fur Dressers and Dyers Ltd., Lionel Lumb and Arthur Pratt, claiming (by pars. 1-5 of the prayer in the statement of claim) a declaration that 500 preference shares and 500 ordinary shares held by Tomkies in Fur Dressers and Dyers Ltd. belonged to it and an order that the shares be transferred to it and an order that Tomkies pay and transfer to it all moneys and securities received by him from the other defen- dants or any of them in or to secure payment of a sum of £4,000 payable to him under contracts between him and Pratt and Lumb dated 6th September 1929 and between him and Fur Dressers and…

Grounds of appeal

[14] The appellant contends that the primary judge erred in finding that the respondent had discharged the onus of establishing the matters required under the relevant provision.

[15] It was submitted that his Honour failed to give adequate weight to the evidence of the second witness, and that the findings of fact were not reasonably open on the material before the Court.

[16] The respondent, for its part, submits that no error is disclosed, and that the conclusions reached were well within the range of outcomes available to the primary judge.

Consideration

[17] It is convenient to deal first with the question of construction, as the resolution of that issue informs the remaining grounds advanced by the appellant.

[18] For the reasons that follow, we are of the view that the appeal should be allowed in part and the matter remitted for further determination.

Continue reading Furs Ltd v Tomkies

Details

AGLC: Furs Ltd v Tomkies [1936] HCA 3
Case: [1936] HCA 3
Decision Date: 13 February 1936

CaseChat Overview and Summary

The High Court of Australia heard an appeal from the Supreme Court of New South Wales concerning a dispute between Furs Ltd. (the appellant) and Gordon Watson Tomkies (the respondent). Tomkies, while managing director of Furs Ltd., was authorised to negotiate the sale of the company's tanning, dressing, and dyeing business. He arranged a sale to a newly formed company for £8,500. Crucially, before the sale was finalised, Tomkies independently negotiated a contract with the promoter of the new company to serve it, disclose his knowledge of the company's secret formulae, and receive shares and £4,000 in addition to a salary. This arrangement was not disclosed to Furs Ltd.

The central legal issue before the High Court was whether Tomkies, by entering into this undisclosed agreement for his personal benefit while acting in a fiduciary capacity for Furs Ltd., had breached his duty to the company. Specifically, the court had to determine if the profit he derived from this arrangement belonged in equity to Furs Ltd., irrespective of whether the company suffered a direct financial loss corresponding to his gain.

The High Court, in allowing the appeal, held that Tomkies had breached his fiduciary duty. The court applied the inflexible rule that a director must not profit from a transaction undertaken on behalf of the company unless all material facts are disclosed to and approved by the shareholders. It was reasoned that Tomkies's fiduciary position as managing director, entrusted with negotiating the sale, was the very means by which he secured his personal profit. The court found that the conflict between his duty to secure the best price for the company and his personal interest in securing employment and payment from the purchaser was sufficient to establish liability. The fact that the company's chairman had advised Tomkies to "make the best arrangement for himself" was deemed insufficient to authorise a subordination of the company's interests or a breach of fiduciary duty.

The High Court ordered that Tomkies account to Furs Ltd. for the undisclosed benefits he received, including the shares and promissory notes, or their proceeds. The court found that the profit derived by Tomkies belonged in equity to the company, and it was not a defence that the company might not have suffered a corresponding pecuniary loss or that the profit was of a kind the company could not itself have obtained. Tomkies was ordered to pay the costs of the appeal and the suit.

Orders