Opinion Number. 1809

Subject

ELECTIONS: DISQUALIFICATION FROM SITTING AS SENATORACCEPTANCE BY SENATOR OF SEAT ON BOARD OF DIRECTORS OF A HOLDING COMPANY: WHETHER SENATOR WOULD HAVE A DIRECT OR INDIRECT PECUNIARY INTEREST IN AGREEMENT WITH PUBLIC SERVICE OF COMMONWEALTH IF SUBSIDIARY OF HOLDING COMPANY SELLS GOODS TO COMMONWEALTH

Key Legislation

CONSTITUTION ss 44, 45: LOCAL GOVERNMENT ACT 1906 (NSW) s 70

Date

I refer to your letter of 5th June, 1947, requesting my advice on the question of whether the acceptance by you of a seat on the Board of Directors of a certain company would endanger your qualification to remain a member of the Senate. It is noted that the company is in the nature of a holding company, holding the controlling interest in four trading companies, one of which will probably supply, among other customers, Government Departments with some electrical goods.

Whilst I am most willing to assist you in the matter, I should point out that any views which I may express will be in no way authoritative and are departmental views only. The following observations may, however, be of some assistance.

Sections 44 and 45 of the Constitution, so far as they are material, are as follows:

44. Any person who—

(v) Has any direct or indirect pecuniary interest in any agreement with the Public Service of the Commonwealth otherwise than as a member and in common with the other members of an incorporated company consisting of more than twenty-five persons:

shall be incapable of being chosen or of sitting as a senator or a member of the House of Representatives.

45. If a senator or member of the House of Representatives—

(i)  Becomes subject to any of the disabilities mentioned in the last preceding section:

his place shall thereupon become vacant.

I am not aware of any decision of the Courts on this particular provision. There are, however, somewhat similar, but not identical, provisions contained in English legislation and in the Constitutions of the States and in local government legislation, but none of the decisions which appear in the Law Reports concerning the meaning of these corresponding provisions has very much relevance to the question raised by you except, perhaps, the decision of the High Court in the case of Ford v. Andrews ((1916) 21 C.L.R. 317).

This case arose under Section 70 of the Local Government Act, 1906 of New South Wales. Section 70 provided that a person was to be disqualified for the office of alderman if ‘he is directly or indirectly by himself, or any partner, engaged or interested (other than as a shareholder in an incorporated company, associated or partnership consisting of more than twenty members) in any contract, agreement or employment with, by, or on behalf of the Council’.

The alderman in question was a director of a company, the articles of which authorized the directors to give any director a commission on the profits of any particular business transaction or share in the general profits of the company. A subordinate officer of the company agreed on behalf of the company to sell to the Council a quantity of bricks. The High Court, by a majority, held that the alderman was not disqualified. Mr. Justice Isaacs, as he then was, strongly dissented from the majority.

The section considered by the Court in this case was not in exactly the same terms as section 44 of the Commonwealth Constitution. It is, however, relevant to note that Griffith C.J., Barton J., and Gavan Duffy J., all expressly said that the alderman did not have a pecuniary interest in the contract. They did not consider that the possibility that the director might at a later date be voted a share in the profits of the company gave him a pecuniary interest in the contract. It is not entirely clear, however, whether these three Judges considered that, if the director in question and actually been voted a share in the profits of the particular contract, or of profits of the company which included profits arising from the particular contract, he would thereby have acquired a pecuniary interest in that contract.

This case, in my opinion, supports the view that a director of a company has not normally, as such ‘any direct or indirect pecuniary interest in’ agreements made by the company. The case also contains dicta which supports the view that the mere fact that a director receives a director’s fees voted out of the general profits of the company does not give him such an interest.

In the case of the directorship offered to you, your connexion with the Commonwealth contracts would be even more remote than that of a director of a trading company with the contracts made by that company, since your fees could not come from the profits on the contracts as such. The holding company would not receive those profits as such, but would merely receive dividends declared partly out of those profits.

In my opinion, assuming that you were not entitled to, and did not receive, any share of the profits arising from the contracts of the subsidiary company with the Commonwealth except to the extent that those profits were reflected in the general profits of the holding company out of which directors’ fees were payable, you could safely hold the directorship in question.

[Vol. 37, p. 516]

Note: This opinion was sent to a senator of the Australian Parliament, but the original opinion does not identify the senator.