Research on an Australian case (ideally not more than 10 years old since the decision by the Court) involving breach of company director’s/officer’s duties under the Corporations Act 2001 (Cth).
When a person is appointed as a director or officer of a company they are imposed with obligations under statutory provisions as well as common law which they have to observe while discharging the duties. These obligations are commonly known as directors’ duties. One of such duties of the directors towards the company is that they must have a minimum level of care and diligence while they are discharging the duties towards the company. This particular duty is stated expressly in the provisions of section 180 of the Corporation Act 2001 (Cth) as well as under landmark cases of common law. When such directors failed to comply with this duty they are charged under provisions of the act where buy they are subjected to suspension as well as financial penalties. One of the cases where this duty had been discussed by the court is the case ofASIC v Padbury Mining Limited [2016] FCA 990.
The case is in relation to an announcement made by the defendant company with respect to the Australian security exchange (ASX). The court in this case imposed a ban on the directors of the defendant company for a period of 3 years. In addition to the band the court also imposed upon the directors a financial penalty work $25,000 for the breach. The directors were held liable for breaching section 180 of the act as they did not prevent their company from making an announcement where it was stated that the company is going to receive funding amounting to 6 million dollars for the purpose of carrying out a construction project in west Australia. This announcement was made by the company on the 10th of April 2014. The announcement consisted the following terms.
What the company failed to mentioned in the announcement was that the company still needed to comply with certain terms of the agreement in order to secure the funding. According to one of the terms the company needed to secure a 1.3 billions bank guarantee before it would be eligible to the required financing. The presence of this term in the agreement was known to the directors of the company. However although such terms were present in the agreement no steps were taken by the directors of the company to state within announcement that the agreement is highly conditional.
The organization had directed ASX to halt share trading in relation to the company which they again asked to be lifted. Between such period at least 200 Million shares of the company had been traded. After the trading at surge prices the company made an announcement stating about the termination of the agreement with the financer.
Directors towards the company must have a minimum level of care and diligence while they are discharging the duties towards the company as stated expressly in the provisions of section 180 (1) of the Corporation Act 2001 (Cth). The actions of the directors are compared to the actions of an imaginary director who is put in the same situation and position as the directors of the company in order to find out whether the actual director has observed minimum level of care and diligence towards discharging their duties. The duty of care and diligence will be considered to be breached in case no reasonable director in the same situation would have taken the action taken by the actual director.
There are a number of reasons under which it can be stated that the defendant company breached the duties provided under the Corporation Act. A conduct which is deceptive and misleading or what is likely to mislead or deceive was indulged by the directors of the company. Indulging into such a conduct is a direct violation of section 1041H of the Act. The action of the directors which constituted a kind of misleading and deceptive conduct was that they made the organisation carry on with the announcement about securing funding from an investor which it has not actually secured as the agreement was subjected to highly conditional terms.
There was also a failure on the part of the organisation to act in accordance with its obligation of making proper disclosure. The Organisation was required to state that the agreement is subjected to highly conditional terms. The organisation also failed to disclose before the public the actual name of the investor who was supposed to provide funding for the required project.
The Australian security and investment Commission commenced legal proceedings against the defendant company along with its directors as defendant for the purpose of seeking the following as relief
The parties executed an agreed statement of fact in relation to the case under the evidence act 1995 s 191. These statements were directed towards penalty hearing. The parties have also produced minutes of consent before the court.
With respect to the provisions of s 180(1) of the Act the court held that the section had been breached by the defendant directors in relation to their duties. The breach was in relation to the allowance permitted by them towards making the announcement. The directors knew that on case they permit such announcement the company will surely breach the provisions under section 1041H of the Act as the conduct is going to constitute misleading or deceptive or a conduct which is likely to mislead or deceive. In addition the breach of the section would also mean significant loss of reputation for the company which any reasonable director in the same situation would have not allowed. The investors in this case were actually mislead or deceived by the announcement made by the company as they indulged in trading.
Moreover where the company released such statements there was a failure on the part of the company to make the required disclosure under the provisions of section 674(2) of the Act which were to ensure that the highly conditional requirements are disclosed.
The defendants’ directors in this case also admitted before the court that they are aware of the situation where they had to be satisfied totally before they indulged in making the announcement in relation to the financing, however according to the facts of the case it is clear that the directors did not do so. They had the knowledge about the terms of the contract being highly conditional but they did not take this factor into consideration while making the announcement (FCA 990 at 58).
It had been ruled by the court in the case of Commonwealth of Australia v Director, Fair Work Building Industry Inspectorate (2015) 326 ALR 476 that the plaintiff or a government regulatory body has the right to make submission in relation to the penalties imposed on the directors under the civil penalty provisions.
It had been stated by the court in the famous case of Australian Competition and Consumer commission v Reiwa Inc (1999) 161 ALR 79 at 86 that it is the duty of the court to be totally satisfied that the penalties imposed on are at least not detrimental to public interest and are in accordance to such interest. Thus the proposal which had been made by the ASIC has been accepted by the court in relation to the penalties.
The directors of the company had also admitted before the court that the company indulged in the violation of section 674(2) of the CA upon two instances. This is because it was evident and also admitted that where the conditional nature of the agreement is provided to a reasonable investor it is going to have a material impact on the price of the shares. It has also been admitted by the directors of the company that they failed to ensure proper disclosure required under section 674(2) of the Act towards the name of the parties who were to provide the funding for the project.
The directors also made an admission in relation to the fact that the provisions of section 674(2) had been knowingly violated by the company and this was because they made or allowed the company not to do proper disclosure required by law (FCA 990 at 51).
The company made an actual or potential representation before the investors of the company while making the publication through ASX that the company has been actually able to procure a funding of 6.1 billion for the project in west Australia.
An admission was also made by the organization that the representation made by them had elements of being misleading and deceptive or which is likely to mislead or deceive. This can be stated as the company had no capacity to procure a bank guarantee for of $1.6 billion which had been asked for by the defendant before he would provide the required funding. This was a direct contravention of section 1041H on the part of the company. A reasonable director in the same situation would have prevented the company from indulging in a deceptive or misleading conduct or a conduct which is likely to mislead or deceive. However the defendant directors did it and thus violated the provision of section 180(1).
With respect to the third defendant who was Terence Martin Quinn a declaration had been made by the court that he has violated the provisions of section 674(2) and thus has to be subjected to the civil penalty provisions under section 1317E of The Act.
the directors of a company has to be fully satisfied before that make an announcement on the behalf of the company which may have a impact on the share price of the organization
if the directors fail to be totally satisfied in relation to such announcement the decision of the directors would be considered as misleading or deception of what is likely to mislead or deceive.
In case the directors may any announcement it has to be in compliance with the disclosure requirements under the provisions of section 674(2) of the CA.
The failure to do so would also be a breach of section 180(1) of the Act as no reasonable director would have done so in the same situation.
The ASIC have the right to make recommendation to the court in relation to the penalties to be imposed on the defendants
Conclusion
Concluding the analysis it can be stated that the directors have to be very careful while making any announcement on behalf of the company which may have a detrimental impact on the reputation of the organization or may mislead or deceive the investors. The directors must restrain under section 180(1) to indulge in an act which no reasonable director in the same situation would do.
References
ASIC v Padbury Mining Limited [2016] FCA 990
Australian Competition and Consumer commission v Reiwa Inc (1999) 161 ALR 79 at 86
Commonwealth of Australia v Director, Fair Work Building Industry Inspectorate (2015) 326 ALR 476
Corporation Act 2001 (Cth
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