Unfair dismissal cases involving company directors

It is fairly uncommon but not unknown for the Fair Work Commission to deal with an unfair dismissal claim brought by a person who was dismissed as an employee of a company of which he or she was at the material time a director. To what extent do the actions of a company director who is also an employee in that situation affect the laws of unfair dismissal in Australia? The following extract from a recent decision of the Fair Work Commission in such a case illustrates the legal issues involved.

“Conflict of interest

[167] In equity, a person with fiduciary obligations, such as a director in a company, must disclose conflicts of interest or any information that might raise such a conflict.  Similarly, the Corporations Act 2001 (the Corporations Act) also requires directors to disclose material personal interests.

[168] Sections 182 and 183 of the Corporations Act prohibit an employee of a corporation, including a director, from gaining an advantage from their position or information respectively:

“Section 182 – Use of position–civil obligations

Use of position–directors, other officers and employees

(1) A director, secretary, other officer or employee of a corporation must not improperly use their position to:

(a) gain an advantage for themselves or someone else; or

cause detriment to the corporation.

Note: This subsection is a civil penalty provision (see section 1317E).

(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.

Note 1: Section 79 defines involved .

Note 2: This subsection is a civil penalty provision (see section 1317E).”

Section 183 – Use of information–civil obligations

Use of information–directors, other officers and employees

(1) A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:

(a) gain an advantage for themselves or someone else; or

(b) cause detriment to the corporation.

Note 1: This duty continues after the person stops being an officer or employee of the corporation.

Note 2: This subsection is a civil penalty provision (see section 1317E).

(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.

Note 1: Section 79 defines involved .

Note 2: This subsection is a civil penalty provision (see section 1317E).”

[169] Section 191 of the Corporations Act sets out the circumstances in which a director must disclose material personal interest:

“Section 191 – Material personal interest–director’s duty to disclose

Director’s duty to notify other directors of material personal interest when conflict arises

(1) A director of a company who has a material personal interest in a matter that relates to the affairs of the company must give the other directors notice of the interest unless subsection (2) says otherwise.

(1A) For an offence based on subsection (1), strict liability applies to the circumstance, that the director of a company has a material personal interest in a matter that relates to the affairs of the company.

Note: For strict liability , see section 6.1 of the Criminal Code .

(2) The director does not need to give notice of an interest under subsection (1) if:

(a) the interest:

(i) arises because the director is a member of the company and is held in common with the other members of the company; or

(ii) arises in relation to the director’s remuneration as a director of the company; or

(iii) relates to a contract the company is proposing to enter into that is subject to approval by the members and will not impose any obligation on the company if it is not approved by the members; or

(iv) arises merely because the director is a guarantor or has given an indemnity or security for all or part of a loan (or proposed loan) to the company; or

(v) arises merely because the director has a right of subrogation in relation to a guarantee or indemnity referred to in subparagraph (iv); or

(vi) relates to a contract that insures, or would insure, the director against liabilities the director incurs as an officer of the company (but only if the contract does not make the company or a related body corporate the insurer); or

(vii) relates to any payment by the company or a related body corporate in respect of an indemnity permitted under section 199A or any contract relating to such an indemnity; or

(viii) is in a contract, or proposed contract, with, or for the benefit of, or on behalf of, a related body corporate and arises merely because the director is a director of the related body corporate; or

(b) the company is a proprietary company and the other directors are aware of the nature and extent of the interest and its relation to the affairs of the company; or

(c) all the following conditions are satisfied:

(i) the director has already given notice of the nature and extent of the interest and its relation to the affairs of the company under subsection (1);

(ii) if a person who was not a director of the company at the time when the notice under subsection (1) was given is appointed as a director of the company–the notice is given to that person;

(iii) the nature or extent of the interest has not materially increased above that disclosed in the notice; or

(d) the director has given a standing notice of the nature and extent of the interest under section 192 and the notice is still effective in relation to the interest.

Note: Subparagraph (c)(ii)–the notice may be given to the person referred to in this subparagraph by someone other than the director to whose interests it relates (for example, by the secretary).

(3) The notice required by subsection (1) must:

(a) give details of:

(i) the nature and extent of the interest; and

(ii) the relation of the interest to the affairs of the company; and

(b) be given at a directors’ meeting as soon as practicable after the director becomes aware of their interest in the matter.

The details must be recorded in the minutes of the meeting.

Effect of contravention by director

(4) A contravention of this section by a director does not affect the validity of any act, transaction, agreement, instrument, resolution or other thing.

Section does not apply to single director proprietary company

(5) This section does not apply to a proprietary company that has only 1 director.”

[170] Directors are not required to give notice where they have given standing notice of a material interest. Section 192 provides circumstances where a director may give such standing notice and how it must be given:

“Section 192 – Director may give other directors standing notice about an interest

Power to give notice

(1) A director of a company who has an interest in a matter may give the other directors standing notice of the nature and extent of the interest in the matter in accordance with subsection (2). The notice may be given at any time and whether or not the matter relates to the affairs of the company at the time the notice is given.

Note: The standing notice may be given to the other directors before the interest becomes a material personal interest.

(2) The notice under subsection (1) must:

(a) give details of the nature and extent of the interest; and

(b) be given:

(i) at a directors’ meeting (either orally or in writing); or

(ii) to the other directors individually in writing.

The standing notice is given under subparagraph (b)(ii) when it has been given to every director.

Standing notice must be tabled at meeting if given to directors individually

(3) If the standing notice is given to the other directors individually in writing, it must be tabled at the next directors’ meeting after it is given.

Nature and extent of interest must be recorded in minutes

(4) The director must ensure that the nature and extent of the interest disclosed in the standing notice is recorded in the minutes of the meeting at which the standing notice is given or tabled.

Dates of effect and expiry of standing notice

(5) The standing notice:

(a) takes effect as soon as it is given; and

(b) ceases to have effect if a person who was not a director of the company at the time when the notice was given is appointed as a director of the company.

A standing notice that ceases to have effect under paragraph (b) commences to have effect again if it is given to the person referred to in that paragraph.

Note: The notice may be given to the person referred to in paragraph (b) by someone other than the director to whose interests it relates (for example, by the secretary).

Effect of material increase in nature or extent of interest

(6) The standing notice ceases to have effect in relation to a particular interest if the nature or extent of the interest materially increases above that disclosed in the notice.

Effect of contravention by director

(7) A contravention of this section by a director does not affect the validity of any act, transaction, agreement, instrument, resolution or other thing.”

[171] Whether an interest is material is a question of substance and judgment. A key determinant is whether the interest has the capacity to affect a director’s ability to discharge their fiduciary duty.

[172] While Mr Elder’s familial relationship with Mr Johns appears to have been known to Mr Biggar, and potentially to other directors, Mr Johns arguably made use of his knowledge that Zone was looking for a supplier and his position as a director of the company to gain a benefit for Mr Elder, that benefit being the supplier contract.

[173] More definitive is Mr Johns’ individual financial benefit from his position as shareholder for Planum. Mr Johns does not deny he was a 50% shareholder of Planum, and thus has a substantial material interest. Mr Johns would benefit if Planum is profitable as a company. Securing a contract with Zone is obviously a financial benefit for Planum, and therefore Mr Johns.

[174] Mr Johns does not appear to have given notice as required under s.191 or s.192 of the Act. While it appeared to be argued by Mr Johns that he gave standing notice in that Mr Biggar was aware of the familial relationship between Mr Elder and Mr Johns, it appears clear that neither Mr Biggar or any of the other directors were given notice that Mr Johns had become a 50% shareholder in Planum until after the initial invoice for work completed. No notice was given in a director’s meeting or recorded in minutes.

[175] Section 192(6) provides that if there is a substantial increase of an interest, notice must again be given at a director’s meeting and recorded in the minutes. Gaining a shareholding of 50% in a company that had been engaged to provide substantial services for Zone would constitute a substantial increase in Mr Johns’ interest in relation to Mr Elder, and would likely represent a new interest in a separate company.

[176] Mr Johns should have provided notice, either at a director’s meeting or in writing as set out under s.191 of the Corporations Act. It is not uncommon for family friends or relatives to provide services for companies, but the fiduciary duty of directors is to ensure that all other directors are aware of any material interest so that any such decision is made with all information available to all directors. Mr Johns did not do so.

Breach of Code of Conduct

[177] Mr Johns signed the Code of Conduct on 10 March 2017. Mr Johns did not deny signing the Code of Conduct but denied having the Code of Conduct put to him at the time of the investigation into his conduct, nor was it referred to.

[178] Zone submitted that Mr Johns appears to submit that incorporating a company with the intention of making a profit using knowledge gained whilst an employee of Zone was justified because Mr Biggar also had alternative business interests.

[179] I have been satisfied that a substantial part of Mr Biggar’s other interests were formulated before the existence of Zone, and therefore they are different circumstances to that of Mr Johns. It also appears to be the case from the evidence that the other shareholders of Zone had knowledge of Mr Biggar’s other prior interests and still decided to invest in Zone. In relation to the allegation that Mr Biggar was conflicted over his interest in Cure Composites and its relationship with Link Composites, Mr Biggar gave evidence it was his view it was not in Zones interests to manufacture the panels relevant to the issue and the matter had been the subject of consideration. While there was some dispute around this, the evidence concerning Mr Johns’ allegation in regard to this issue is insufficient for it be made out.

[180] I have also not been persuaded on the evidence that the allegations concerning Mr Biggar’s involvement in exploring innovative house or aeroplane construction ideas (which appear not to have been commercialised) are directly comparable to Mr Johns’ involvement with Planum.

[181] It appears disclosure by Mr Biggar was not formal however the facts concerning his position are distinguishable from that of Mr Johns.

[182] Mr Johns has submitted that the manner in which the Special Shareholders meeting was conducted was in breach of the Corporations Act as he was not afforded 21 days’ notice. It appears that requirement does not apply in this case for reasons addressed in the evidence, however it must be remembered this matter pertains to the employment relation.

[183] I accept that Mr Johns breached his obligations to promote and protect the best interests of Zone, and as a shareholder and director he should have been aware of his obligations to disclose his other interests. I am also inclined to accept Zones argument that trust and confidence was damaged by Mr Johns’ reluctance to concede his conflict of interest from 13 February when first confronted about the issue up to an including the discussions on 28 February. I am inclined to accept the evidence of Mr Bailey that Mr Johns continued to resist making concessions and continued to seek to justify his actions based on his perception that Mr Biggar had engaged in similar conduct.

[184] I have not ignored the argument as put by Mr Johns that he had proposed selling his interests in Planum as a basis to resolve the dispute on 28 February, and his email of 2 March for the first time acknowledges wrongdoing and a conflict of interest.

[185] I have also been persuaded by Mr Johns that to his mind he did not believe at the relevant times that what he was doing was wrong. That however does not excuse his failure to appreciate the seriousness of the issue until the last moment. I am inclined to accept that Mr Johns believed that he had made an attempt to declare his involvement with Planum at the meeting on 10 January, however two significant difficulties remain despite that. Even on Mr Johns’ evidence he was not explicit about his intended role as a director and shareholder of Planum. I have been satisfied from the evidence of Mr Bell that he did not understand what Mr Johns claims he was saying about his involvement in Planum, and continued to believe, not unreasonably in my view, that Mr Johns was in attendance at the meeting in his role as a representative of Zone. Further, the attendees at the meeting were employees and not shareholders.

[186] I do not accept Mr Johns’ claim that because he was required to travel to regional locations in Victoria from 15 February to 24 February, he could not have been expected to address the issue Mr Biggar had asked him to address with the other shareholders on 13 February. It was plain from the evidence Mr Biggar was making clear how seriously he was treating the issue, and justifiably so.

[187] Given the seniority of Mr Johns’ role as director, shareholder and employee manager the expectation of him is higher than might be for the case for a lower level employee without the same breadth of seniority and roles in the company. Having weighed all of the evidence I am satisfied that despite Mr Johns’ last minute concession, significant damage had been done by that stage to the level of trust between the parties because of Mr Johns’ failure to acknowledge the seriousness of his conduct for the weeks leading up to the Special shareholders meeting and given all of the circumstances Zone had a valid reason for termination of Mr Johns’ employment.

(b) whether the person was notified of that reason

[188] Notification of a valid reason for termination must be given to an employee protected from unfair dismissal before the decision is made to terminate their employment, 8 and in explicit9 and plain and clear terms.10

[189] Zone said it gave Mr Johns from 13 February 2020 to 28 February 2020 to disclose his conduct to the other shareholders and concede his actions were improper, which Mr Johns failed to do. After the meeting on 28 February, Mr Johns was ultimately terminated on 2 March as set out above.

[190] It is evident Mr Johns was informed of the alleged misconduct several times in relation to the conflict of interest issue. Mr Johns disputes he was told about the breach of the Code of Conduct and disputes having the Code put to him in investigation meetings. He signed the Code so was aware of it but it should have been put to him. I accept this was a deficiency in the process followed by Zone in effecting the dismissal.

[191] There is some confusion around the reasons given for dismissal in the submissions, Zone argue it was for breach of the Code, as well as the Corporations Act. The Corporations Act breaches are not spelled out in the termination letter and there is no evidence these were put to Mr Johns. Again, this points to a deficiency in the process followed by Zone in effecting the dismissal.

(c) whether the person was given an opportunity to respond to any reason related to the capacity or conduct of the person

[192] Several meetings occurred with Mr Johns where alleged misconduct was discussed with him by Mr Biggar, and later Mr Bailey. It appears Mr Johns wasn’t given an opportunity to respond at the time of dismissal, the shareholder vote succeeded, ousting him as director, and he was provided a termination letter that day.

[193] I am satisfied Mr Johns was given a reasonable opportunity to respond to the central allegation against him on a number of occasions in February 2020, however note that the Zone did not take proper steps to identify to Mr Johns the specific breaches it later relied upon as set out above.

(d) any unreasonable refusal by the employer to allow the person to have a support person present to assist at any discussions relating to dismissal

[194] Where an employee protected from unfair dismissal has requested a support person be present to assist in discussions relating to the dismissal, an employer should not unreasonably refuse that person being present. This does not mean there is a requirement for an employee to be offered a support person by an employer – rather, there cannot be an unreasonable refusal where an employee requests a support person.

[195] Mr Johns said he was not given an opportunity to have a support person present at meetings and did not formally request a support person at the meeting on 28 February 2020 because Zone misrepresented the meeting as a mediation. He said the other meetings were casual conversations that were impromptu or ‘ambushes’ and did not have meeting invitations or agendas with no set outcomes. Mr Johns said he was not informed of the nature of the allegations, and if he was, he would have requested a support person.

[196] Zone submitted that Mr Johns was a Director and Shareholder and therefore there was no imbalance of power during the meetings between Mr Johns and Mr Biggar. Zone said Mr Johns did not request to have a support person attend the meeting of 28 February 2020. Zone said that after the Shareholders’ Special Resolution on 2 March 2020, Mr Johns approached Mr Biggar to enquire what would happen next and Mr Biggar advised that his employment would be terminated.

[197] As noted, the Act contemplates whether there was an unreasonable refusal of a support person. In this case, Mr Johns did not ask for a support person, and as such Zone could not have unreasonably refused.

(e) if the dismissal related to unsatisfactory performance by the person—whether the person had been warned about that unsatisfactory performance before the dismissal

[198] In this case, the decision of Zone to terminate Mr Johns’ related to the Mr Johns’ conduct, rather than unsatisfactory performance. This consideration does not arise.

(f) the degree to which the size of the employer’s enterprise would be likely to impact on the procedures followed in effecting the dismissal

[199] Zone employs approximately 90 staff. Zone did not make any specific submissions on this point but indicated they did not believe the size of their enterprise impacted on the procedures followed in effecting the dismissal.

[200] I am satisfied given the size of the business that there was likely no impact on the procedures followed in effecting the dismissal.

(g) the degree to which the absence of dedicated human resource management specialists or expertise in the enterprise would be likely to impact on the procedures followed in effecting the dismissal

[201] Zone submitted the circumstances in this instance were unique as Mr Johns was also a shareholder and Director. Zone said that due to the nature of the relationship and status of Mr Johns, Zone was of the view that there was no option but to terminate his employment once the shareholders made the decision to remove him as a Director.

(h) any other matters that the FWC considers relevant

[202] Mr Johns said he spent five years in control of the company’s finances and there appeared to be no issue about his propriety in that regard. Mr Johns is also a father of young children. He gave evidence that he has obtained other employment since his termination.

CONCLUSION

[203] I have taken into account each of the matters that are relevant to this matter as set out in section 387 of the Fair Work Act 2009. Having weighed those findings in totality, including that Zone had a valid reason for termination, however also made some procedural flaws in arriving at the decision to terminate, I am satisfied that the dismissal was not harsh, unjust or unreasonable. On that basis the application is dismissed.”

Johns v Zone RV Pty Ltd (2020) FWC 5049 delivered 18 September 2020 per Simpson C