Australian Securities And Investments Commission V Padbury Mining Limited [2016] FCA 990

Facts of the Case

Facts of the case

There are two parties involved in the case,

Australian Securities and Investment Commission – Plaintiff

Padbury Mining Limited – First Defendant 

Gary Wayne Stokes – Managing Director  -Second Defendant

Terence Martin Quinn  – Executive director/Chairman – Third Defendant 

The Defendant, Padbury Mining Limited, is a company (public company). Padbury Mining Limited normally trades its shares in the Stock Exchange of Australia. The main facts that has risen to the issue before the court includes that:

The Padbury Mining Limited is aiming at developing/constructing a water port at Oakajee. Padbury Mining Limited is also intending to build a railway network near the port. In order to do so, Padbury Mining Limited requires finance and thus it has made contract with several people on 8^th April 2014. Superkite Pty Ltd is also one of the arty with whom Padbury Mining Limited has made a contract and Superkite Pty Ltd has given an assurance that it will provide $6 billion to Padbury Mining Limited subsidiary. However, the finance will only be provided if certain requirements are met by Padbury Mining Limited. Thus, the finance of $6 billion is contingent upon certain conditions. The finance is very much important for Padbury Mining Limited as the construction is possible only if it has the relevant funds.

Based on the assurance given by Superkite Pty Ltd, Padbury Mining Limited on 11^th April 2014 made an announcement in the Australian Stock Exchange. The announcement that is made submits that Padbury Mining Limited has acquired $6 billion that is much needed for the completion of the project. But, while making the announcement, Padbury Mining Limited did not specify that it is under the obligation to fulfill few conditions and it is only after the compliance of such conditions that Superkite is willing to finance the project.

The announcement (?akajee Funding Announcement) that was made by Padbury Mining Limited on 11^th April 2014 was carried out with the presence of the second and third defendant of Padbury Mining Limited. The second and third defendant is the managing and executive/chairman of Padbury Mining Limited respectively. The second and third defendants not only drafted the announcement but also released the same.

Padbury Mining Limited also took annoyer step and before the announcement is made, the company asked the Australian Stock Encage to stoop the trading of the shares of the company and the trading must be initialed after the announcement. This resulted in the increase of the trading in shares from $0.02 – $0.045 a share.

Duties Violated

Even after so many occurrences the project that was intended by Padbury Mining Limited and for which the finance was secured and announcement were made was never comes into life and was cancelled.

Considering the above facts, it is now important to analyze the duties that are violated by the directors of the company and the reasons as to why such duties were violated.  

The duties/responsibilities breached (ex. CA sections 181 or 588G) and 
explain why the duties were breached. 

Padbury Mining Limited is the first defendant in the given case. The second and the third defendant are the managing and executive/chairman of the company when the above facts were incurred that has resulted in the violation of the duties.

Duties that were breached:

There were three prime duties that were violated by the company and its directors. The same are:

1. Section 1041 H (1) of the Corporation Act 2001 – The acts that were carried out by the First Defendant were deceptive and misleading in nature or are likely to deceive or mislead.
2. Section 180 (1) of the Corporation Act 2001 – Section 180 (1) of the Corporation Act 2001 deals with the duty of care and diligence on the part of the officers and directors of the company which must be carried out in the interest of the company and for proper purpose.

• Section 674 (2A) of the Corporation Act – section 674 (2A) of the Corporation Act 2001 is violated in pursuance of section 1317E.

Reasons for the violation of the duties 

Reasons for violation of section 1041 H (1) of the Act 

1. Breach by First Defendant – The First defendant, Padbury Mining Limited, was found to be in violation of section 1041H (1) of the Corporation Act 2001. Padbury Mining Limited has acquired the report of the announcement that was to be made on 11^thApril 2014. A representation was made by the First Defendant that in order to comply with the project it has raised finance (funding representation) of $ 6 billion. But, no disclosure is made that in order to raise the finance from Superkite Pty Ltd the first defendant has to fulfill some conditions. Thus, the finance is contingent upon the compliance of the conditions.

This non disclosure is nothing but is likely to deceive or misled or have actual deceive or misled as the parties relying on the announcement are not aware of any pre requirements of the compliance of the condition before the finance is secured.

Reasons for violation of section 180 (1) of the Act 

1. Breach by Second Defendant- The second defendant was considered to be in violation of section 180 (1) of the Corporation Act 2001 because the second defendant was the engrossed with Padbury Mining Limited when section 180 (1) was violated by Padbury Mining Limited. It is necessary that the second defendant being the Managing director must act with reasonable care and diligence which is carried out in the interest of the company and proper purpose. But, this duty is not comply with because the second defendant was part of the funding announcement that was drafted and released on 11^thApril 2014.
2. Breach by Third Defendant- The third defendant was considered to be in violation of section 180 (1) of the Corporation Act 2001 because the third defendant was the engrossed with Padbury Mining Limited when section 180 (1) was violated by Padbury Mining Limited. It is necessary that the third defendant being the Executive director and chairman must act with reasonable care and diligence which is carried out in the interest of the company and proper purpose. But, this duty is not comply with because the third defendant was part of the funding announcement that was drafted and released on 11^thApril 2014 (Commonwealth of Australia v Director, Fair Work Building Inspectorate (2015); NW Frozen Foods Pty Limited v Australian Competition and Consumer Commission(1996); Gillfillan v Australian Securities and Investments Commission (2012))

Reasons for violation of section 674 (2A) of the Act 

• Breach by First Defendant – it is stated that when the announcement was made by Padbury Mining Limited on 11^thApril 2014 in the Australian Stock Exchange, at that time Padbury Mining Limited has not made any kind of discloser which are the pre requisites to obtain finance from the Superkite Pty Ltd. the pre requisites are made part of paragraph 22 and 31 of the claim. It is obligatory on Padbury Mining Limited that the said information should have been provided to the Australian Stock Exchange on 11^th April 2011 between 9:40- 2:15 AEST

1. Breach by Second Defendant – The second defendant was considered to be in violation of section 674 (2A) of the Corporation Act 2001 because the second defendant was the engrossed with Padbury Mining Limited when section 674 (2A) was violated by Padbury Mining Limited.
2. Breach by Third Defendant – The third defendant was considered to be in violation of section 674 (2A) of the Corporation Act 2001 because the third defendant was the engrossed with Padbury Mining Limited when section 674 (2A) was violated by Padbury Mining Limited.

Thus, these are the various duties that are violated by the First Defendant, Second and Third defendant. However, it is now important to analyze the decision of the court and the reasons for such decision.

The decision of the Court tribunal 

After analyzing the breaches that are incurred by the First, second and third defendant, the falling order were submitted.

1. Second defendant is found to be in violation of section 180 (10 and section 674 (2A) of the Corporation Act and thus he is imposed with penalty of $25,000. As per section 206C of the Act, he was also disqualified for three year from the post of the Ageing Director (Gillfillan v Australian Securities and Investments Commission(2012);
2. Third defendant is found to be in violation of section 180 (10 and section 674 (2A) of the Corporation Act and thus he is imposed with penalty of $25,000. As per section 206C of the Act, he was also disqualified for three year from the post of the Executive Director;

• The cost of proceedings of $200,000 was also imposed upon both the second and third defendant.

Reasons for the decisions of the court

Various orders were made by the court wherein the defendants were penalized. However, the main reasons for the imposition of the orders include:

1. It was affirmed by the defendants that the announcement that was made by them on 11^thApril, 2014 at the Australian Stock Exchange is nothing but an act which was deceptive and misleading in nature. when the anno8uncement was made then there was no disclosure that was made that the company has to comply with certain pre requisites before the finance of $ 6 billion is provided to the company by Superkite Pty Ltd. this non disclosure will make the investors believe that the funds are already in the hands of the defendant company which was not true. Thus the act is nothing but an act of misleading and deceptive conduct as per section 1041H of the Corporation Act 2001.
2. Both the defendants, that is, defendant Second and Third were art of the announcement which was made by the first Defendant. Thus, their participating in the drafting and release of the announcement is nothing but an act of deception which made them volatile of section 1041H of the corporation Act 2001.

• The main reason because of which Section 674 (2) of the Corporation Act 2001 was considered to be violated is that It is obligatory on Padbury Mining Limited that the said information should have been provided to the Australian Stock Exchange on 11^thApril 2011 between 9:40- 2:15 AEST. The disclosure is necessary because it will have a significant impact on the investors who intend to trade with the shares of the company and thus will have significant impact upon the share price of the company. Section 674 (2) makes it compulsory that such information must be disclosed. The requirement is also established under 3.1 of the Australian Stock Exchange Listing Rules. But by not complying with these statutory requirements there is violation on the part of the defendants. No disclosure was also made regarding who is the party who is investing the company project. Thus all these non-disclosures has resulted in the violation of section 674 (2) of the Corporation Act 2001.

1. Also, both second and third defendant were found to be in violation of section 180 (1) of the Corporation Act 2001. It is submitted by the court they must be aware that of the funding requirements as per section 674 (2) of the corporation Act 2001 was not made then it is certainly an act of deception and misleading on the part of the company and thus violation of section 1041H of the Corporation Act 2001. These deceptive acts if disclosed to the public will certainly have a negative impact on the goodwill and reputation of the company and will make it very difficult to raise fund requirements for the project and thus they decided not to disclose the same. All these non disclosures on the part of the defendants are carried out without adequate and diligence and thus resulted in the violation of section 180 (1) of the Corporation Act 2001.

The relevance of the decision to the development of Australian Corporations law or the impact of the decision on the operation of companies in Australia

The leading decision tries to highlight the responsibilities that are imposed on the company and its directors that before taking any acts for the company they must be sure that such acts does not result in any kind of deceive or misleading actions

Reference List

Case laws

Australian Securities and Investments Commission v Padbury Mining Limited [2016] FCA 990

Australian Competition and Consumer Commission v REIWA Inc (1999) 161 ALR 79

Commonwealth of Australia v Director, Fair Work Building Inspectorate (2015) 326 ALR 476

Gillfillan v Australian Securities and Investments Commission (2012) 92 ACSR 460

NW Frozen Foods Pty Limited v Australian Competition and Consumer Commission(1996) 71 FCR 285

Online Material

Australian Securities and Investments Commission v Padbury Mining Limited [2016] FCA 990 < https://download.asic.gov.au/media/3985403/asic-v-padbury-mining-2016-fca-990.pdf>.