Unlike more modern corporations laws, Fiji’s Companies Act [Cap 247] does not set out any specific statutory duties for company directors. Contrast this to sections 180 to 187 of the Corporations Act 2000 (Cth) in Australia, and sections 131 to 138 of the Companies Act 1993 in New Zealand. Further overseas companies with wholly owned subsidiaries in Fiji require a resident Fiji director for the local subsidiary under Fiji’s Companies Act [Cap 247].

The issue then becomes “what do you do if a Fiji resident director goes rogue”? An overseas parent would have to rely on, among other things, an action based on the common law and equitable remedies for breach of fiduciary duties given the absence of specific statutory provisions, when the parent seeks to initiate proceedings in Fiji against one of its errand company directors. There is established case law in Fiji that company directors owe fiduciary duties to the company through the common law and the law of equity in that jurisdiction. 

The leading case in Fiji involved an action by shareholders against the directors of a company where the directors acted in their self interest or even fraudulently, as opposed to in the interests of the company is Skerlec v Tompkins (1).

Fatiaki J (as he was then) considered the issue of the shareholders alleging that the company’s directors owed the shareholders among other things, fiduciary responsibilities and or a general duty of care not to do or omit to do anything which was likely to affect adversely their interests (2).

Fatiaki J had, among other things, considered the issue of whether a company director (Stinson) who had a personal interest that conflicted with the company’s was required to act in the company’s interest.

The power to control the management of a company, its property and affairs is typically vested by the company’s articles in the board of directors. Typical articles of association would state among other things, that the management and control of the business vests in the directors with a similar worded provision:

            The management and control of the business and affairs of the Company shall be vested in the Directors.

Shareholders (or members) who entrust their property or affairs to another person are at risk of suffering loss by another person’s wrongdoing. The law responds to a director’s position of temptation and the vulnerability of shareholders by subjecting the directors to strict fiduciary and statutory duties. It is commonly accepted that the relationship between director and company is a fiduciary relationship (3). That being so, a high standard of loyalty is demanded from directors by principles of equity. There are both positive and negative duties.

Generally, these duties are (4):

1. to act honestly;
2. to act in good faith for the benefit of the company as a whole;
3. to give adequate consideration to matters for decision, and to keep discretions unfettered;
4. to exercise powers for only proper corporate purposes;
5. the duty of loyalty to the company; and
6. a duty of care to the company (started out as an equitable duty but now appears that there is a common law duty of care as well).

The duty imposed upon the fiduciary is strict. The only way a fiduciary is able to escape liability for conduct that amounts to a breach of fiduciary duty is if the conduct was undertaken with the fully informed consent of the person to whom the fiduciary obligations are owed: per New Zealand Netherlands (5).

Directors owe their fiduciary duties to the companies to which they are appointed directors. Where a director breaches their fiduciary duty, the company usually suffers loss and the director may gain, hence the company may seek to recover its loss by initiating proceedings. The liability of the fiduciary however does not depend on establishing that the person to whom fiduciary duties are owed suffered loss or injury: per Britchnell v Equity Trustees (6). 

In Skerlec the Court also applied the rule of equity as stated by Lord Russell of Kilowen in Regal (Hastings) Ltd. v. Gulliver (7):

         The rule of equity which insists on those, who by use of a fiduciary position make a profit, being liable to account for that profit, in no way depends on fraud or absence of bona fides; or upon such considerations as to, ... whether he took a risk or acted as he did for the benefit of the plaintiff, or whether the plaintiff has in fact been damaged or benefited by his action. The liability arises from the mere fact of a profit having, in the stated circumstances, been made. The profiteer, however, honest and well-intentional, cannot escape the risk of being called upon to account.

Further, where a director of a company has an interest as a shareholder in another company which is proposing to enter into engagements with the company of which he is a director, he falls within the above rule per: Transvaal Land Company v. New Belgium (Transvaal) Land and Development Company (8).

The question of whether the company should begin proceedings is usually committed to the board of directors by the general management provision in the articles. But what if the directors choose not to initiate proceedings, say if there is a deadlock among the directors. The issue then becomes whether the company’s member(s) can resolve so that the company initiates proceedings.

There is common law authority that if the board decides otherwise, the company in general meeting can decide that it should sue as per Marshall’s Valve Gear Co. V Manning Wardle & Co Ltd [1909] 1 Ch 267 (9). A member’s resolution needs to be procured and then proceedings are initiated arguing the rule from Marshall’s.

If the Marshall’s rule does not apply in Fiji then the member will need to ascertain whether it fits within the exceptions to the ‘proper plaintiff rule’ articulated in Foss v Harbottle (10):

          ...a company is the proper plaintiff to bring an action in respect of a wrong done to it, and consequently an individual member has no standing to bring proceedings complaining of a wrong done to the company.

The Courts in Fiji have applied the Foss v Harbottle rule in Skerlec. Further, the analysis by Jenkins LJ in Edwards v Halliwell (11) typically identifies four exceptions to the proper plaintiff rule as where:

1. it is alleged that somebody in the company is taking it, or has taken it, into a transaction ultra vires the company;
2. action is taken on a matter outside the articles and the articles require a resolution of a general meeting of a higher status than an ordinary resolution to authorise the action;
3. an individual or personal right of a member has been, or is being, infringed and the irregularity is not one that can be condoned by the company in general meeting; and
4. condonation by the general meeting would be a fraud on the company and the wrongdoers themselves in the control of the company.

Edwards v Halliwell was also applied in Skerlec. The two principal ingredients of a derivative action are that the actions amount to fraud and the wrongdoers control the company.

So it is clear that unless one of the exceptions is made, a company’s member will be prevented from commencing a derivative action.

What to do?

Overseas companies with Fiji subsidiaries should ensure they get good advice when establishing their subsidiaries in Fiji. Not only does the choice of a Fiji resident director become all important, but also the documentation making the appointment. Perhaps it is time these overseas companies undertake a comprehensive legal audit of their Fiji subsidiaries.

September 2009
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Footnotes

(1) Skerlec v Tompkins [1999] FJHC 134, Hbc 0052j.94S (19 May 1999)
(2) See above no. 1, paragraph 8
(3) Ford and Austin's Principles of Corporations Law, 7th Edition, Butterworths Australia, at 8.010
(4) See no. 3 above at 8.010
(5) New Zealand Netherlands Society 'Oranje' Inc v Kuys NZLR 163 at 166; [1973] 2 All ER 1222  at 1225, per Lord Wilberforce
(6) Bricthnell v Equity Trustees, Executors and Agency Co Ltd (1929) 42 CLR 384 at 408-9, per Dixon J
(7) Regal (Hastings) Ltd v. Gulliver (1967) 2 A.C. 134 at pp. 144/45
(8) Transvaal Land Company v. New Belgium (Transvaal) Land and Development Company (1914) 2 Ch. D 488 at p.503 as cited in Skerlec.
(9) Marshall's Valve Gear Co. V Manning Wardle & Co Ltd [1909] 1 Ch 267: this case stands for the proposition that if the board of a company decides that the company should not sue, the company in general meeting can decide that it should sue - see no. 3 above at 11.240.
(10) Foxx v Harbottle (1843) 2 Hare 461; 67 ER 189
(11) Edwards v Halliwell [1950] 2 All ER 1064

This article has been prepared for the general information of clients and contacts of PLN Lawyers Sydney and the affiliated firms of the Pacific Legal Network. While it deals with and comments on the law in specific areas it is not intended nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.