Wearing two hats at the top table

When is a chairman of a company not a director? – hardly ever it appearsThe litigation involving Nick Whitlam, former president of NRMA Limited resulting in civil penalties against him, has received wide coverage in the media.

One aspect of the case of particular interest to company directors concerns the issue of when, or, if it is appropriate to say that a chairperson of a meeting is no longer acting in his or her capacity as a director of a company. Justice Gzell, in the Supreme Court of NSW, reported in (Australian Securities and Investments Commission v Whitlam (No 2) (2002) 20 ACLC 1333), made some interesting comments about that particular issue. In brief the ASIC alleged that Whitlam had breached his duty to act with appropriate honesty under the Corporations Law (as it then was) (section 232). It was argued that Whitlam, appointed a proxy by a number of shareholders in relation to a resolution to be voted on at the 1998 annual general meeting of the NRMA, failed to exercise his duties as a director in voting the proxies as instructed by those who had appointed him. Under the NRMA rules a power was conferred upon the president of the organisation to take the chair at each meeting of members. As president Whitlam took the chair at the relevant meeting.

The issue was whether Whitlam had exercised his duties properly by not signing the relevant poll paper in relation to the proxies given to him. It was alleged further that he had intended to disenfranchise certain members who had appointed him proxy and who required him to vote against a particular resolution. ASIC put to the court that Whitlam had deliberately intended to override the intention of the members in behaving in this way. Whitlam countered that he had not breached his duty and in particular the Corporations Law drew a distinction between a breach of the obligations of a director and the breach of the responsibilities of a chairperson of a meeting. Section 250A, as it then was, contained its own penalty for breach of a chairperson's obligations to vote as proxy in accordance with the instructions of the members. It was argued that his conduct was therefore not covered by S.232 which required him to act with appropriate honesty. His Honour found that Whitlam had breached his duties and had not acted in accordance with the requirements imposed upon him by the legislation and the common law.

Whitlam has been disqualified as a director for five years. He has appealed against the decision. The arguments for Whitlam's position, that duties of a director differed from the duties of a chairman (who was also a director), were summed in Justice Gzell's judgment. "It was submitted that a proxy is an agent of the member and must vote in accordance with the member's instructions. If a chairman/director was of the opinion that the directed vote was not in the best interests of the company, an intolerable position would arise if his duties as director intruded upon his duties as agent to comply with the [direction given to him by his principal]." Justice Gzell went on to describe the arguments put in these words: "It was submitted that the defendant assumed the chair as president and acted [in that position and not as director] and that the allegations of breach of a director's duty based on the failure to sign the poll paper are not sustainable. ... It was further submitted that the Corporations Law ... drew a distinction between a breach of the obligations of a director and a breach of responsibilities as chairman because section 250A contains its own penalty for breach of the chairman's obligations to vote as proxy in accordance with a member's direction.

Clearly, a chairman of a meeting owes duties which are distinct from duties owed by a director. That does not mean, however, that the duties are mutually exclusive or that a breach of the Corporations Law section 250A cannot constitute a breach of section 232 ... None of the authorities and texts to which reference is made above compel a contrary conclusion." He gave an interesting example of how this would work. A chairman, who is also a director, of a general meeting who refrains from demanding a poll when he has been appointed proxy to vote against a resolution approving the sale of company property to his wife at an undervalue, would be in breach of his duty as chairman and also in breach of his duty as a director to act in good faith and in the best interests of the company. To vote in favour of the resolution would in fact mean that the property was being sold at an undervalue and would cause detriment to the company. Similarly, if a poll was demanded and a director refused to exercise his powers in that context he would be in breach of the duty to act honestly.

These issues are important issues and will be tested in the NSW Court of Appeal. Until the Court of Appeal rules otherwise on this particular issue, the obligations on a director who is also the chairperson of the company cannot be split in the way suggested by Whitlam.

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