Severe Consequences For Knowingly Assisting In Breach Of Fiduciary Duty

By Georgie Cape and Benjamin Caddaye, Law Clerks and Alicia Hill, Principal, MST Lawyers

Introduction

The duties that arise out of a fiduciary relationship, such as those owed by a trustee to a beneficiary, are some of the most stringent the law imposes. The recent case of Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd [2018] HCA 43 demonstrates the serious repercussions for a third party who, while not a fiduciary themselves, knowingly assists a fiduciary in their dishonest and fraudulent conduct. The case demonstrates that the Court is willing to order such a third party to account for their profits, including potential future profits for an unrestricted time frame.

Background

Mr Woff and Mr Corby were senior employees of Lifeplan Australia Society Ltd (Lifeplan), whose business was providing funeral insurance products. These products were retail investment contracts, where money provided to Lifeplan was then invested as a guaranteed capital amount to be paid out to cover a prearranged funeral upon the death of the contract holder.

Mr Woff was a Senior Manager, and Mr Corby was the National Sales Manager at Funeral Plan Management Pty Ltd (FPM), the relevant subsidiary of Lifeplan.

In 2010, Mr Woff and Mr Corby approached a smaller competitor of FPM, Ancient Order of Foresters in Victorian Friendly Society Ltd (Foresters) and proposed to them a plan whereby they would be able to capture the business of FPM through a systematic course of winning the business of funeral directors. This was detailed in a 5-year business concept plan. A new entity called Funeral Planning Australia Pty Ltd (FPA) was to be incorporated and would manage the marketing of Foresters to the funeral directors.

The business concept plan made use of the historical sales figures of FPM. It listed the funeral directors that would be targeted alongside the revenue that had been generated from them in the past as well as the projected revenue for the new entity over the next five years as Foresters progressively won over the funeral directors. The board of Foresters approved the proposal in September 2010, and Mr Woff and Mr Corby left FPM before the end of the year.

As the plan was implemented, the increase in Foresters sales was dramatic, alongside a corresponding decline for FPM.

In September 2011, the parent company of Lifeplan wrote to Foresters complaining of the serious breaches of law and equity committed by Mr Woff and Mr Corby. Foresters took steps after receiving the complaint, notifying funeral directors and issuing replacement documents during September and October 2013.

Foresters terminated the agreement with FPA in March 2013, and FPA was placed into liquidation in June 2013.

At First Instance

Lifeplan and FPM initiated proceedings against Mr Woff, Mr Corby, FPA and Foresters in the case of Lifeplan Australia Friendly Society Limited v Woff 259 IR 384.

The judge at first instance held that in addition to breaching obligations of confidence, Mr Woff and Mr Corby had engaged in breaches of their fiduciary duties.

The judge also found that Foresters had knowingly participated in some, but not all, of those breaches. Those breaches were as follows

(a)   the breach by Mr Woff and Mr Corby whereby they took, used and disclosed to Foresters and retained Lifeplan’s and FPM’s confidential and valuable information to prepare and advance their business plan

(b)   the breach whereby while still employees of Lifeplan, Mr Woff and Mr Corby approached funeral directors for the purpose of soliciting their business; and

(c)   the breach whereby Mr Woff and Mr Corby were involved in changes to the rules governing Foresters Funeral Fund and the preparation of their product disclosure statements.

The primary judge ordered an account of profits against Mr Woff and Mr Corby. However, he declined to make an order for account against Foresters.

His Honour stated that, while the breaches in which Foresters participated might have lead to FPA and Foresters being able to establish the proposed business earlier than might have been the case if there had been no breaches, those breaches did not amount to a causal connection to the profits earned by Forester’s Funeral Fund.

Appeal To The Full Federal Court

Lifeplan appealed this decision, on the grounds that the formulation of the causal connection between fiduciary duty and the benefit obtained by a person who knowingly participated was unduly narrow.

This was the matter of Lifeplan Australia Friendly Society Limited v Ancient Order of Foresters in Victoria Friendly Society Ltd (2017) 250 FCR 1.

The Full Court allowed the appeal, holding that without the information and breaches by Mr Woff and Mr Corby, Foresters would not have expanded the business and consequently would not have made the profits it did from the business written in the venture.The Court noted that the breaches did not result in a direct generation of profit, as the profits were made by the investment of those funds by Foresters. Nevertheless, the Court ordered that Foresters account to Lifeplan for the net present value of the profits made and projected to be made on contracts entered into by Foresters between the beginning of February 2011 and the end of June 2015, with a modest deduction of six months, in the amount of $6,558,495.

On Appeal To The High Court

Foresters appealed to the High Court of Australia, with special leave being granted to continue the appeal to a full hearing on two grounds. These grounds involved two discrete areas of knowing participation and account of profits, namely causation and quantification.

Causation: The first ground was that the Full Court erred in concluding that there was a sufficient causal connection between the profits made by Foresters and the conduct that constituted its knowing participation in breaches the equity of fiduciary duty.

Quantification: The second ground was that the Full Court erred in ordering the account of profits based on the contract entered into by the Foresters in its funeral products business for the period 2010 to the end of June 2015. No profits were made by Foresters from the contract during that period and calculations were made on the basis of the new present value of future potential profits, which may or may not be made by Foresters for the contract.

Lifeplan cross-appealed, with the Court only considering Grounds One and Two which asserted an error on the part of the Full Court in failing to order Foresters to account for the entire capital value of Foresters funeral products business.

Foresters appeal was dismissed. Lifeplan was granted special leave to appeal limited to the first two grounds which is allowed.

High Court’s Findings

The Full Court’s orders for an account of profits were set aside.

The High Court held, in a 4:1 majority, that Foresters account to Lifeplan and FPM in equity for the total capital value of the business in the sum of $14,838,063.

The majority held that whether a benefit can be said to have been obtained as a result of a breach is a question of causation and it depends on the facts of the case, including the nature of the conduct. It was found that it is sufficient to show the amount of profit would not have been achieved if it was not for the dishonest conduct.

Once causation has been established, the onus then shifts to the participant to demonstrate they should not account for the full value of the profits. The Foresters failed to show that its increased profitability was generated by matters other than the business connections with Lifeplan and FPM.

Practical Tips

This decision warns of the severe consequences a person may face when knowingly participating in a breach of fiduciary duty. A person may be liable to account for the profits caused by the breach of fiduciary duty and even account for potential future profits not yet derived.

Businesses need to remain vigilant in their dealings and avoid any participation in breaches of fiduciary duties.

If you would like to discuss any aspect of this article further, please do not hesitate to email Alicia Hill or phone +61 3 8540 0200.