A company is given the status of separate legal entity. This means that it is treated in a separate manner from its directors, officers or any such person running its affairs. The company is thus a separate person in the eyes of law (Talbot, 2015). However, the affairs of the company, be its operations or its conduct, is undertaken by different people. Based on the level of hierarchy, the role of each person is given significance. The workers are not given as much significance as is given to the senior management. This is the reason why each person is given different roles, and their roles have different consequences (Eisenberg, 2017). When it comes to the key officers of the company, or more importantly, its directors, their role is deemed as very important. This is the reason why the directors of the company are given so much weight under the law. The Corporations Act, 2001, which is an act of commonwealth, puts these duties on directors and the key officers of the company, and even on employees at some instances (Langford, 2015).
One of the recent cases, where this matter of director duties was analyzed by the court is the case of ASIC v Flugge & Geary [2016] VSC 779. ASIC is the regulatory body which ensures that the companies follow the duties put through Corporations Act, and stands for Australian Securities and Investments Commission (Smith, 2015). The following parts cover an analysis of ASIC v Flugge & Geary, where the facts, the duties breached, the decision given in this case and the relevance of this case is highlighted.
The key issues of this case started from the transactions which were brought before the Supreme Court of Victoria by ASIC in the end of 2007. This case was started against six of the erstwhile directors and officers of AWB Limited. The key case, in context of theme of this discussion, was related to the contraventions of section 180 and section 181 of Corporations Act (Supreme Court of Victoria, 2018). Instead of going in the details of the entire transactions, a brief of these have been covered here. The main contention raised by ASIC was regarding AWB’s wheat trade with Iraq-based Company. This was in addition to the company misusing the United Nations policy of Oil for Food Program, which had been created in 1995. This policy required that the proceeds from sale of oil of Iraq had to be put in a separate escrow account of the United Nations. The proceeds which were collected could be made use of for selling wheat to Iraq only or could be used for different humanitarian reasons. In order to buy the wheat, AWB had to take permission from United Nation. Once this approval was given on the price of wheat, AWB was free to buy the wheat from Iraq and this money had to go in United Nations’ escrow account (Supreme Court of Victoria, 2017).
As per ASIC, AWB had made indirect payments to Iraq government. These payments were related to the inland transportation fees, for wheat distribution. AWB had also compensated itself for making such payments. In order to do so, the price of wheat had been inflated for Iraq. Apart from this, the company also attained inflated price from the United Nations’ escrow account (Supreme Court of Victoria, 2017). ASIC went on to state that the transactions which were undertaken in this case had been a deception. The reason for this was these transactions were merely a way of getting hands on currency which was globally acceptable. This was a direct contravention of the United Nations Security Council Resolutions. Once the conduct of AWB came in light of general public, the company had to cope with huge financial loses. These losses took place due to following reasons:
There are different director duties which are imposed through the law on the directors of companies. The two which are relevant to this case include the ones covered under section 180 and section 181.
Section 180(1), of Corporations Act, presents the provisions for duty of care and diligence, on part of directors. This section provides that a director has to be careful and diligent when they undertake their work, particularly when it relates to use of power and fulfilment of duties. The next relevant section for this discussion is of duty of good faith set out under section 181(1) of Corporations Act. This section provides that a director has to work in best interest, good faith and for proper purpose, when they undertake their work, particularly when it relates to use of power and fulfilment of duties.
The contentions which were made in this case, by ASIC against the directors of AWB Limited were based on the sections 180 and 181. As per ASIC, the directors had not taken the required steps, as they had failed in ensuring that AWB complied with United Nations Security Council Resolutions, instead of breeching them. The specific content of this allegation was based on a currency which was acceptable worldwide, being given to Iraq government. Further, there were also acceptances of payments from the escrow account of United Nations, made for improper purpose. There was also the failure of directors in the board of AWB being informed properly and in responding to the aforementioned issues. In line of these breaches, the directors had failed in making sure that the proper approvals were applied for by the company and that United Nations had given such approval regarding the inland transport fees (Australian Securities and Investments Commission, 2018).
First Director: Flugge
The court began with analysis of breaches in context of section 180 of the Corporations Act. As per the judge, Flugge had failed in upholding this section, as he did not ensure that the inland transport fee got the required approval from United Nations (Collier, 2017). Once the meeting in Washington had taken place, the first director of this case acquired enough facts which made it clear that this approval was an obligation. It became clear from this meeting contents that for this transport fees, United Nations had to give their approval. In case there was someone else in place of Flugge, being a reasonable director, they would have paid heed to the raised suspicion, resulting in steps being taken to evaluate or investigate the matter. To place reliance on the decision taken by others is not something a reasonable director would do. Hence, Flugge could not be excused for not making the relevant inquiries and for not raising the proper questions. Where Flugge relied on the assurance given by another director, i.e. Lindberg, against whom another set of proceedings were raised in court, Flugge was not relieved of his director duties (Baker McKenzie, 2016).
The judge in this case made two crucial findings, which are detailed below.
Coming to the next section, it was deemed by the court that there had been no contravention of section 181(1) by Flugge (Tragardh, 2016). This was again based on two key reasons.
As per the judges, section 181(1) could not be applied in context of a contravention for the first director. This was based on the test regarding duty being discharged or power being exercised being analyzed, as there was an absence of both these issues in this matter. This led to the court making differentiating this case from such cases where there were deliberate attempts of not making an inquiry by the directors. So, for the breach established in this case, Flugge was disqualified from holding the post of director for a period of five years based on section 206C of the Corporations Act. Apart from this, he was also awarded pecuniary penalties of $50,000 based on section 1317G of the Corporations Act (Jacobson, 2017).
Second Director: Geary
ASIC had made similar contentions against the second director of this case as well. However, two more allegations were made against Geary. All four allegations made by ASIC, were out rightly dismissed by the judges in this case (Baxt, 2017). The reason for this was the lack of evidence which could lead the court to conclude that the second director did know, suspect or even had the belief that there was an absence of relevant approval by United Nations regarding the inland transport fees. In comparison to the first director, the judge did not find the second director as having the knowledge regarding United Nations’ inquiry, or of these payments, as the same had not been presented in the United States meeting (Jade, 2018).
Owing to these reasons, he had not been placed on the notice, which could have resulted in the duties being owed by the second director, as were owed by the first director, regarding the need for making proper examinations. The judge went on to state that the second director had been completely honest in his acts. Further, the second director did reasonably believe that the director duties owed by him had been properly met. This was done for proper purpose and also in the best interest of AWB. The judge went on to state that in case the second director had been aware of unlawful transactions taking place in AWB, only then he would have owed a duty of making the board aware. And only in this scenario, was the second director required to take the required measures as any reasonable director is required to (Australian Securities and Investments Commission, 2018).
This case is important from the stance of reliance placed by directors on the information provided by some other person, be it another director or officer of the company. Due to the wrongful reliance placed by Flugge on Lindberg, he was made liable for breaching the directors’ duties, resulting in court imposing civil penalties on him. Another important point highlighted through this case was the need for the directors to fulfil their duties, till the time they no longer hold the position of director in such company. Whenever a director is suspicious about anything, it is their duty to question, inquire and examine such matter in detail. Only then the defences given under the Corporations Act can save a director.
The most important lesson from this case is that where a company does not follow the required laws, they have to face a lot of negative consequences, which are majorly reflected on financial position of the company. The directors are thus required to keep on their toes and play a proactive role in the companies. They have to keep themselves properly informed of all matters, particularly which have the capacity of negatively impacting their company. Apart from following the words of law, the spirit of law needs to be adhered as well. The directors also have to undertake a full risk assessment, in order to ascertain the possible issues which can bite them back, as did happen in this case.
Reference List
ASIC v Flugge & Geary [2016] VSC 779
Australasian Legal Information Institute. (2017) ASIC v Flugge & Geary [2016] VSC 779 (15 December 2016). [online] Available from: https://www8.austlii.edu.au/cgi-bin/viewdoc/au/cases/vic/VSC/2016/779.html [Accessed 24/05/18]
Australian Securities and Investments Commission. (2018) In the Supreme Court of Victoria. [online] Available from: https://download.asic.gov.au/media/4113228/16-441mr-orders.pdf [Accessed 24/05/18]
Baker McKenzie. (2016) Why Failing to Ask Questions Can Be a Breach of a Director’s Duties. [online] Available from: https://www.bakermckenzie.com/en/insight/publications/2016/12/a-reminder-to-directors-and-officers/ [Accessed 24/05/18]
Baxt, B. (2017) Directors’ Counsel – Crime and punishment. [online] Available from: https://aicd.companydirectors.com.au/membership/company-director-magazine/2017-back-editions/june/directors-counsel [Accessed 24/05/18]
Collier, B. (2017) Recent Developments in Australian Corporate Governance. [online] Available from: https://www.fedcourt.gov.au/__data/assets/pdf_file/0006/45672/20170601.pdf [Accessed 24/05/18]
Corporations Act, 2001
Eisenberg, M. A. (2017) Legal models of management structure in the modern corporation: Officers, directors, and accountants. In Corporate Governance (pp. 103-167). London: Taylor & Francis Group.
Jacobson, D. (2017) AWB v Flugge & Geary (AWB Case). [online] Available from: https://www.brightlaw.com.au/awb-v-flugge-geary-awb-case/ [Accessed 24/05/18]
Jade. (2018) ASIC v Flugge & Geary. [online] Available from: https://jade.io/article/509100 [Accessed 24/05/18]
Langford, R. T. (2015) Directors’ Duties: Conflicts, Proactive Disclosure and S 181 of the Corporations Act. Company & Securities Law Journal, 33, pp. 205-211.
Smith, H. (2015) Australia’s Company Law Watchdog: ASIC and Corporate Regulation. University of Tasmania Law Review, 34.
Supreme Court of Victoria. (2017) Summary of Judgment. [online] Available from: https://www.supremecourt.vic.gov.au/sites/default/files/embridge_cache/emshare/original/public/2017/09/f5/703491644/summaryofjudgmentasicvfluggeandgeary2016vsc779.pdf [Accessed 24/05/18]
Supreme Court of Victoria. (2018) Judgment in ASIC v Trevor Flugge. [online] Available from: https://www.supremecourt.vic.gov.au/contact-us/news/judgment-in-asic-v-trevor-flugge [Accessed 24/05/18]
Talbot, L. (2015) Critical company law. Oxon: Routledge.
Tragardh, A. (2016) Judgment handed down in ASIC v Flugge and Geary. [online] Available from: https://www.fraudbarrister.com.au/judgment-handed-down-in-asic-v-flugge-and-geary/ [Accessed 24/05/18]
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download