Does an employee owe a fiduciary duty for credit limit increases?

Employees owe certain fiduciary duties to their employers. Generally, this means an employee cannot do either of the following things:

  • Make or pursue a personal gain in circumstances in which there is a real and substantial possibility of a conflict of interest arising between the personal interests of the employee and the interests of the employer (the no conflict duty); and
  • Make or pursue a personal gain based by using his or her position as an employee or by using information or opportunities received in the course of his or her employment (the duty of trust).

As these duties are quite broad in scope a variety of circumstances could constitute a breach of either duty. A recent case in the Queensland Court of Appeal examined whether an employee owed a fiduciary duty to his employer in regard to providing a credit limit increase to a customer.

In Metal Manufactures Limited v Johnston & Anor [2020] QCA 42, a company was permitted to purchase goods on credit up to an amount of $20,000 which was later extended to $50,000. However, the company was unable to keep within this agreed credit limit and, with the assistance of an employee of its supplier, was ultimately able to purchase goods up to an amount of $325,797.50.

The supplier sought to recover this owing account; however, the company was wound up in insolvency prior to trial leaving no possibility of recovery. A case was instead bought against the company’s director and the employee of the supplier.

The supplier alleged a breach of fiduciary duty on the part of their employee for allowing the company to purchase goods beyond their credit limit in contravention of section 182(2) of the Corporations Act 2001 (Cth). The case against the director was that he had knowingly, or ought to have know, assisted the employee in breaching his duty. The case was accordingly dependant on successfully proving a breach of duty by the employee.

There is a long line of authority establishing that employees owe a fiduciary duty to their employers. This is also expressly indicated in section 182(2) of the Corporations Act. Not all employees will owe a fiduciary duty however and accordingly it must be established that a particular employee owes by looking at all circumstances of the case.

In this case the Court did not find that a fiduciary duty was established. Whilst the employee was a store manager, he was not a senior employee in the overall context of the business, did not have discretionary power to allow a customer credit beyond what was already agreed. On this basis the employee was not deemed to be in a position of special trust or confidence.[i]

Even if a fiduciary duty had been established, the claim still may not have succeeded. While the Court was willing to accept that the employee had deliberately allowed unauthorised supply beyond the credit limit which was “consciously wrongful” and took deliberate steps to conceal the conduct, the Court was not willing to label the conduct dishonest in the sense of impropriety.[ii]

The basis for this finding was an absence of evidence demonstrating the employee received some personal benefit, either from his employer in terms of commission, salary increase or promotion; [iii] or from the company or director in the form of a bribe.[iv]

Whilst a fiduciary duty could not be established on these particular facts, it may still be possible for an employee of a similar position or standing to be considered a fiduciary of their employer. Additionally, further causes of action may be pleaded against an employee; simply not being in a fiduciary relationship will not be sufficient to avoid liability.

 

Wiebke Herrmann

Wiebke Herrmann is a Director at James Conomos Lawyers where she practices in the areas of insolvency, bankruptcy and commercial litigation. If you or your business needs assistance navigating a legal dispute, please do not hesitate to contact her. 

3004 8214 |    |  wiebke@jcl.com.au

 

[i] Metal Manufactures Limited v Johnston & Anor [2020] QCA 42 at [20].

[ii] Metal Manufactures Limited v Johnston & Anor [2020] QCA 42 at [35].

[iii] Metal Manufactures Limited v Johnston & Anor [2020] QCA 42 at [24].

[iv] Metal Manufactures Limited v Johnston & Anor [2020] QCA 42 at [26].