London & New Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd: Is It Authority That Directors Can Compete with the Company?

• Author: Dominique Le Miere
• Pages: 98-127

LONDON & NEW MASHONALAND EXPLORATION CO

LTD V NEW MASHONALAND EXPLORATION CO LTD:

IS IT AUTHORITY THAT DIRECTORS CAN COMPETE

WITH THE COMPANY?

DOMINIQUE LE MIERE

There is confusion concerning the ability of directors to compete with the company.

There is uncertainty about whether a different rule or a relaxed application of the

conflict rule is applied to directors competing with the company in contrast to other

fiduciaries, such as trustees personally competing with the trust business. This stems

from a preoccupation with the 1891 decision of New Mashonaland Exploration Co Ltd

v New Mashonaland Exploration Co Ltd (‘New Mashonaland) 1and a

misunderstanding of the conflict rule.Courts and academics have expressed unease

about this decision and uncertainty about the scope and meaning of the ‘New

Mashonaland principle’, which provides that directors can compete with the company.

This article aims to clarify the scope and meaning of the principle. In doing so it will

be argued that the New Mashonaland principle is a limited one which does not answer

whether a director can compete with the company; rather a director competing with

the company is one application of the conflict rule. A proper understanding of the

conflict rule reveals why a director competing with the company will not inevitably

breach the rule. This article suggests a three step approach for applying the conflict

rule that shifts attention away from New Mashonaland and back onto the unique facts

and circumstances, which equitable doctrines and principles must accommodate.

CONTENTS

I Introduction ........................................................................................................ 99

II The New Mashonaland Decision ..................................................................... 100

A Facts of the case ........................................................................................... 100

B What did New Mashonaland decide; did it state any general fiduciary

principle? .............................................................................................................. 101

1 New Mashonaland is not about fiduciary duties but whether an

interlocutory injunction should be ordered..................................................... 101

2 New Mashonaland was decided in a different time .................................. 103

III Is New Mashonaland Good Law In Australia And What For? ........................ 106

IV The Correct Application Of The Conflict Rule To Determine If A Director Can

Compete With The Company ................................................................................... 109

1London & Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd [1891] WN 165.

2017]Can Directors Compete with the Company? 99

A What is the conflict rule? ............................................................................. 109

B What is required to breach the conflict rule; does it require ‘pursuit’ of a

conflict? ................................................................................................................ 111

C Proper application of the conflict rule; determining if a director who

competes with the company breaches the conflict rule ........................................ 114

1 Step one – ascertain the content or scope of the fiduciary duty ............... 115

2 Step two- identify the nature of the fiduciary’s personal interest or duty to a

third party......................................................................................................... 122

3 Step three- is the personal interest or duty to a third party inconsistent with

or in opposition to the director’s undertaking to the company? ...................... 125

V Conclusion ........................................................................................................ 126

I INTRODUCTION

The 1891 decision of London & Mashonaland Exploration Co Ltd v New

Mashonaland Exploration Co Ltd2(‘New Mashonaland’) has been cited as

authority for the rule that it is ‘not impermissible per se for a director o f a company

to be at the same time a director of a competitor or to personally carry on a

competing business’3 (the ‘New Mashonaland principle’). The New Mashonaland

principle has created uncertainty and confusion about the ability of directors to

compete with the company. Courts and academics have expressed reservations

about the New Mashonaland decision and principle.4 In many cases the court has

expressed uncertainty with the New Mashonalandprinciple but found it

unnecessary to decide the issue,5 or assumed its correctness,6 or stated that as a

judge sitting at first instance they must accept it.7 Others have called for a

reconsideration of the New Mashonaland principle labelling it an ‘aberration’ and

‘somewhat difficult to defend.’8 Dal Pont and Ford, Austin and Ramsay suggest

that there would ordinarily be a conflict where a director competes with the

2London & Mashonaland Exploration Co Ltd v New Mashonaland Exploration Co Ltd [1891] WN 165.

3 See, eg GE Dal Pont, Equity and Trusts in Australia (Lawbook, 2015, 6th ed, 2015) 122 [4.115].

4 See eg, Ross Grantham, ‘Can Directors Compete with the Company?’ (2003) 66 (1) Modern Law Review

109, 109 where Ross Grantham described the status of New Mashonaland as ‘a long standing conundrum

of company law’ but one which has ‘stood for over a hundred years’; Plus Group ltd v Pyke [2002] EWCA

Civ 370; [2003] BCC 332, 347 [75] where Brooke LJ referred to the ‘unease with which some modern

text b ook writers have viewed the New Mashonaland case’ before stating that it was ‘unnecessary to

resolve the controversy in the present decision because of its unusual facts; Eastland Technology Australia

Pty Ltd v Whisson (2005) 223 ALR 123, 137 [69] where McLure JA found that while there was

‘uncertainty’ about the ability of directors to compe te with the company, ‘there was authority [New

Mashonaland] in favour of directors being permitted to compete with the company.’ However, her Honour

stated that ‘courts and commentators’ had ‘expressed unease with that view.’4

5Plus Group ltd v Pyke [2002] EWCA Civ 370; [2003] BCC 332, 347 [75] (Brooke LJ); Eastland

Technology Australia Pty Ltd v Whisson (2005) 223 ALR 123, 137 [69]- [70] (McLure JA).

6Mordecai v Mordecai (1988) 12 NSWLR 58, 62-63 (Hope JA).

7Links Golf Tasmania Pty Ltd v Sattler (2012) 213 FCR 1, 190 [562] (Jessup J).

8 Pearlie Koh, ‘The Director’s Fiduciary Obligations- A Fresh Look?’ (2003) 62 (1) The Cambridge Law

Journal 1, 1.