According to the corporation act 2001 it has been made compulsory for the directors and officers to use their power to discharge the duties implied on them with care and diligence that an ordinary person can be expected to exercise in case that person is:
The act also helps in creating a rebuttable presumption that if in cases the director has relied on the information or advices given to them or presented by their professional advisors in terms of matters which he believes are under their professional competency it is to be ensured that this reliance stays under good faith and that the director is allowed to access such advises or information without any hindrances. The defence in such cases are complemented through subject related provisions that are considered to be the part of such acts provided directors and officers will never breach any section and will take reasonable care while implying them (Armstrong, 2010).
This report is being studied by us to have a deep analysis of the case: ASIC v Flugge (No 2) [2017] VSC 117 which specifies the claims of ASIC on the director and the chairman of the Company named AWB for breaching their duties as officers and directors as per the section 180 (1) of the Corporation Act. ASIC has asked to penalise these officers for the breach of their duty which relates to taking reasonable care while discharging the duties. Also section 181 is acting in the case which relates to act for proper purpose and in good faith. The below research work shall present all the points related to the case which laid to a decision and also the impact of such decision on the corporation act and ASIC.
ASIC has asked to charge penalty on the director, chairman and the former senior officer working in AWB who were blamed to have breached their responsibilities and duties to be exercised as director or officer as per section 180 (1) and section 181 of the corporation act 2001. The case deals with breaches arising due to payment of fees on transportation by AWB to Iraq which was stated under the sales contract for wheat and also different allegation which were related to the misconduct that are contrary to the sanctions by United State.
Due to evasion of Iraq by Kuwait in the year 1990, the United Nations prevented their nationals from giving Iraq any kind of financial resources. Such sanction impeded the sales of wheat to Iraq which was previously being done by AWB. But in year 1995, Oil for Food Program was introduced by AWB which allowed Iraq to sell oil to other Nations and receive basic needs, on the condition that all the payments shall be made through the escrow account held by AWB. But this new amendment did not eradicate the previous one in terms of making finance available to Iraq (Victoria, 2016).
But in the year 1999, Iraq informed AWB that the sales contract for wheat as per OFFP included payments by AWB to some Iraqi state body. These payments included transportation fees of $12 per tonne in regards to distribution of wheat throughout Iraq. IGB gave information to AWB specifying that such payments had been authorised by UN.
After this, AWB made a payment of $223 million as per the agreement to Iraq. But after Iraq was invaded in year 2003, UN conducted inquiry about these fees and finally AWB was accused for acting differently for the sanctions by UN. This accusation resulted to scandal which led to demise of AWB (Collier, 2007).
The corporate regulators on the case have argued that these payments mentioned above were under a scam which was meant to allow Iraq to obtain foreign currency that was against the sanction by UN. The court has mentioned as per the findings that Mr. Flugge was known to the fact that AWB was involved in making such payments which were contradicting the decision by UN.
The court has also mentioned that ASIC has been able to prove, Mr. Flugge has breached the duties which he was expected to follow as a director as per section 180 (1) as he did not enquire the issue which was raised by UN. If he would have went deep into the matter he would have known the fact that UN has just approved the sales of wheat to Iraq and has knowingly disapproved the payments to the Nation (Victoria S. o., 2018).
Certain claims on the breach of duty as mentioned by ASIC on Mr Flugee as per section 180(1) includes the following:
Though these facts have been presented by ASIC in front of the court but they had not been proved yet in front of the court.
ASIC has also alleged Mr. Geary who is the senior officer with AWB as he was known to the fact that AWB was paying Iraq against the sanctions by UN. Also AWB has been alleged of improperly obtaining the funds out of the escrow account for making such payments to Iraq for supplying contaminated wheat to Iraq.
The court has held that after the meeting at Washington, it was the duty of Mr. Flugge to make certain enquires on the irregularity of the transportation fees and the reasons why UN has raised the enquiry on such fees if they have preapproved them. Such acts made Mr. Flugee breach his duties as per section 180 (1).
The court has also mentioned just due to the reliance of Mr. Flugge on the assurance given by Managing Director he was not relieved of his duties on making proper enquires. Also they have stated that continuous enquiry on the matter was the obligation on Mr. Flugge and thus his breach continued till the time of losing his position in board.
The court has finalised and ordered a penalty of $50000 on Mr. Flugge and also has disqualified him for five years from managing corporation. Though the court has believed that Mr. Flugge acted honestly but the application of being relieved from penalty was denied by the court as they believed that such breach was not just an accidental or minor one, in order to be excused (Alerts, 2017).
The decision by the court is quite relieving as they have considered every minute detail in the case and the people held accused have been penalised on proper grounds. The two of the major elements which had been considered by court while imposing penalty were in terms of circumstances of the offender and that of the offence. The court has considered the circumstances in which Mr. Fungge offended the sections of the act and considering the facts that he was unaware of the happenings and had a blind faith on the directors he was alleged to the breach of section 180 (1) which implies proper care and due diligence to be taken by directors and officers in any such cases.
ASIC alleged the directors and officers of their breach of conduct which was not considered completely by the court which is quite a questionable decision though. The court has also the proof in terms of statement to lay penalty on the officers for going against the order by UN, but has still not considered the work presented by ASIC.
ASIC also brought such proceedings against other five executives and directors with AWB. The proceeding in this case against two of them was closed and other two proceedings were settled. The case which was against former general manager of trading for AWB group, Peter Geary were brought to the court for the purpose of hearing but were dismissed. Mr. Geary unlike chairman was not put on notice in regards to the misconduct by AWB in terms of inland transportation fees because he did not have his presence at the meeting in Washington. This was another questionable step by the Court. It is necessary to consider each and every party that may have been involved in evasion of the act or the ones who can be held responsible for taking care of such issues taking place in the company. Thus, the court should have considered the opinion of ASIC on Mr. Geary’s case as well (Slyke, 2016).
The Corporation Act 2001 has witnessed quite a number of changes after the case was ordered and closed by the court. These changes had been in terms of the following:
In the year 2015 it was recommended by Australian Productivity Commission to announce safe harbour for the directors as an amendment in the act in context with insolvent trading claims. Such reforms were meant to protect the company’s directors against the liabilities which may be held on them due to insolvent trading in particular cases.
After the decision of the above mentioned case it came to light that any conduct in jurisdictions is not acceptable and also that the work of non-executive chairman can also be fraught with risk. Thus, it was important to highlight in the law the major duties which are to be taken care by the chairman in charge so that he cannot back out in such cases and there are proper grounds to prove claims against them. It is important to amend and also mention the obligations on the chairman in case of domestic and international transaction to ensure he takes due care and work with diligence while discharging his duty.
Also the Act was implemented to ensure that the directors have full knowledge about their duties in regards to the company and that they discharge it with due diligence. It was also to ensure that there is a proper communication channel to take care of the interaction of the directors with others in the company and to lay the grounds of enquiry in case like the one above. It is also considered important for the directors to have a complete knowledge about the conflicts and acts happening in the company and resolve the issues at the nearest time possible to avoid such allegations on the company.
After the decision was taken it become clear that each person who shall be held responsible for the functioning of the company or the directors and officers in charge shall be penalised in the cases they have not discharged their duty properly. ASIC has also the rights to bring such matters to the court and prove allegation against them.
ASIC has also suggested certain amendments and suggestions that include: Ordering disqualification and ordering penalty and compensation. These thus have been accepted as general practices for ASIC which are meant to ensure that each of the company behave as per the act as they are under the threat of losing the reputation by not complying with the law.
Alerts, J. (2017). ASIC v Flugge [No 2] [2017] VSC 117. Australian Law Journal.
Armstrong, D. (2010). Limits on and Rationale for Section 187 of the Corporations Act 2001 (Cth). Commercial Law Quarterly: The Journal of the Commercial Law Association of Australia .
Collier, B. (2007). RECENT DEVELOPMENTS IN AUSTRALIAN CORPORATE GOVERNANCE. Federal Court of Australia.
Dermansky, P. (2006). Should Australia Replace Section 181 Of the Corporations Act 2001 (Cth) With Wording Similar to Section 172 of the Companies Act 2006 (UK)?
Publishing, O. o. (2005). Corporations Act 2001. Office of Legislative Drafting and Publishing.
Seddon, E. (2017). Australia: Why Failing to Ask Questions Can Be a Breach of a Director’s Duties. Global Compliance News UG.
Slyke, S. R. ( 2016). The Oxford Handbook of White-Collar Crime. Oxford University Press.
Victoria, S. C. (2016). ASIC v Flugge and Geary [2016] VSC 779.
Victoria, S. o. (2018). Judgment in ASIC v Trevor Flugge. Judgment in ASIC v Trevor Flugge.
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