Recent Prosecutions and
Implications for Directors
and Advisors
Michael Bennett
Barrister
13 Wentworth Selborne Chambers
www.legalwiseseminars.com.au
Directors Duties
Presented by Michael Bennett
Barrister, 13 Wentworth Chambers
Overview
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Regulators’ Approach Common law duties
Equitable, fiduciary duties
Statutory duties – care & diligence 180(1)
Good faith & for a proper purpose s181(1)
Use of position s182
Use of Information s183
Avoid conflict s191
1
Regulators’ Approach
• During February 2012 both chairman of the
ACCC (Rod Sims) and the ASIC (Greg Metcraft)
announced in speeches made at separate
presentations that their organisations would
be taking a more proactive approach in the
administration of their particular areas of
responsibility
• After initial criticism, ASIC is boasting
considerable success against company officers
(Enforcement Report 281, March 2012)
Care & Diligence s180(1)
History of statutory duty of care and diligence is reviewed
by Austin J in ASIC v Vines (2003) 49 ACSR 322 and in ASIC
v Rich (2003) 44 ACSR 341
Common law versus statute: ASIC v Rich [2009] NSWSC
1229 at [7174] per Austin J
Negligence or Mistake?
Forward looking
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Care & Diligence s 180(1)
What circumstances are relevant?: ASIC v Rich [2009] NSWSC
1229 at [7196] per Austin J
– Size and nature of the business
– Listed or unlisted
– Constitution
– Board composition
– Distribution of work between the board and company’s
officers
Core duties
What are the minimum standards for a director?:
ASIC v Rich [2009] NSWSC 1229 at [2497,7200,
7201]
– To keep informed
– To monitor
– To know financial status of industry
– To have a reasonable opinion of company’s
financial capacity
– Competence
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Good faith & Best interests
• S181(1)Good faith, best interests, proper
purpose
• S184 – Criminal sanctions where reckless or
dishonest
Conflicts
• Directors must avoid conflicts of interest and
duty
• S191 – must disclose personal interest
• S182 – must not use position to gain personal
advantage
• S183 – must not use information to gain
personal advantage
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Personal Liability
• Must not trade whilst insolvent s588G, 588H
• Disqualification – 206A
• Failure to pay employment debts – Ch 5, Pt
5.8A
• Failure to pay tax debts – 588FGA
Remedies
• Derivative Action Pt 2F.1A
• Injunction – 1324(8)
• Damages – 1324 (10)
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ASIC v Fortescue Metals Group Ltd
• First instance – ASIC v Fortescue Metals Group
Ltd [No 5] [2009] FCA 1586 per Gilmour J
• Full Court – ASIC v Fortescue Metals Group Ltd
[No 5] [2011] FCAFC 19 per Keane CJ, Emmett
& Finkelstein JJ
• High Court – argued on 29 February, 1 & 30
March 2012: decision pending
ASIC v Fortescue Metals Group Ltd
• FMG planned to export iron ore from the Pilbara
• FMG entered into “framework” agreement with
Chinese building companies for construction of
mine & railway at Port Hedland
• FMG notified ASX it had entered binding
agreements
• The Chinese company sought equity in the project
& when this did not occur, denied that the
agreements were binding
6
The Proceedings
• ASIC sued Fortescue & its director “Twiggy” Forest
for breach of continuous disclosure obligations under
s674(2) (ie disclosure to ASX of material that may
affect share price) and s674(2A) ancillary liability
• ASIC alleged that the agreements were not binding
and this would influence investors
• ASIC alleged Forest had authorised the disclosures
and breached s180(1) by exposing FMG to serious
harm
Key Findings
• "Allegations of dishonesty made by ASIC against directors, in
legal proceedings, are self evidently serious. They carry
considerable weight and will often, as in this case, attract
wide media coverage. That they are made by the corporate
regulator may injure the business of the particular company
and will tend to adversely affect the reputations of those
against whom the allegations are made…For at least these
reasons, it is important that allegations of dishonesty should
be made only where there is a reasonable evidentiary basis
for them. It is my opinion that on the totality of the evidence
available to ASIC there was no such basis in this case" per
Gilmour J
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Key Findings
• Assertions by FMG as to the legal effect of the
agreements were matters of opinion
• FMG’s opinion as to the effect of the agreements was
reasonably and honestly held
• FMG had obtained legal advice that the agreements
were binding & this was recorded in the minutes
• The conduct of the parties was consistent with a
binding agreement
• The information was not price sensitive
The Full Court
• On appeal the Full Court of the Federal Court of Australia
upheld ASIC’s appeal
• The announcements and failure to subsequently correct
them were misleading and deceptive in breach of section
1041H of the Act (which deals with misleading or
deceptive conduct in relation to securities)
• Mr Forrest was found to have been personally involved in
the breaches and thereby contravened section 180 of the
Act
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The Full Court
• The Full Court concluded that the announcements were statements
of fact that went beyond the contents of the Framework
Agreements
• It found that Mr Forrest had not taken any steps such as obtaining
legal advice, to satisfy himself that the agreements were in fact
binding
• The Court further held that the business judgment rule defence was
unavailable because the decision related to compliance with
continuous disclosure obligations, rather than a business judgment
• The case is currently on Appeal to the High Court: Forrest v ASIC &
Anor P44/2011; Fortescue Metals Group Ltd v ASIC P45/2011 on the
basis that the conduct did not contravene s1041H of the
Corporations Act (misleading & deceptive conduct) because the
maker of the statements had an “honest and reasonable belief”
The High Court
• Decision is eagerly awaited
• On reading the transcript of argument there is
a suggestion, from some judges’ questions,
the court will discuss interpretation of both
– continuous disclosure regime and
– business judgment rule in s 180(2)
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Practical Implications
• The case was decided on the specific facts
• Companies should obtain legal or other advice
as to whether information may be price
sensitive
• Directors and officers remain responsible for
announcements
ASIC v McDonald & Ors
(“James Hardie”)
• First instance – ASIC v Macdonald (No 11)
[2009] NSWSC 287 per Gzell J (45 hearing
days)
• On appeal – Morley & Ors v ASIC [2010]
NSWCA 331 per Spigelman CJ, Beazley & Giles
JJA (9 hearing days)
• Further appeal – ASIC v Hellicar & Ors [2012]
HCA 17 & Shafron v ASIV [2012] HCA 18 (1
hearing day)
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James Hardie
• James Hardie sought to quarantine its exposure for
liability to asbestos victims by transferring the
relevant subsidiaries to a separate trust (Medical
Compensation & Research Fund)
• JH provided funding to the trust
• When it became apparent that the funding would be
inadequate to meet all claims, JH was publicly
criticised and ASIC commenced proceedings
The Proceedings
• ASIC sued James Hardie companies & 10 directors
and executives
• ASIC alleged statements about establishment and
funding of Medical Research & Compensation
Foundation to pay asbestos compensation claims in
breach of Corporations Act
• Non executive directors alleged that they had not
seen the announcements so could not have
approved them (but this also deprived them of a
s180(2) “business judgment rule” defence)
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Key Findings
• Gzell J in found that the companies, directors and 2
executives had breached s180 by approving the
statements
• Announcements to the ASX in 2001, press
conferences and investor roadshows that the fund
was fully funded ($284M) and provided certainty for
claimants and statements made at a press
conference were misleading
• All 7 directors breached s180(1) duty of care and
diligence
Key Findings
• CEO and general counsel had breached s180(1) by failing
to advise Board appropriately
• Not obvious what loss JH or anyone else suffered. If no
loss, how could directors be in breach of s180(1)?
• Not obvious that asbestos sufferers were misled as they
had been sceptical of the adequacy of the funding since
the announcements
• Gzell J said: “…there was the danger that [James Hardie]
would face legal action for publishing false or misleading
statements, its reputation would suffer and there would
be a market reaction to its listed securities.”
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Key Findings
• In making statements to ASX re sufficiency of
funding, JH breached s1041E (false statements re
financial products) and s1041H (misleading or
deceptive conduct re financial products) of the Act
• ASIC failed to make out breach of s181 (good faith
obligations) against CEO
• Where company is making a major announcement,
directors may not be exonerated by delegating
responsibility to other directors or management
The Court of Appeal
• The Court of Appeal of New South Wales upheld
appeals brought by James Hardie’s non executive
directors.
• The Court found that James Hardie had breached
s1041E (false statements re financial products) and
s1041H (misleading or deceptive conduct re financial
products) of the Corporations Act
• However, ASIC failed to make out breach of s181
(good faith obligations) against CEO
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The Court of Appeal
• The Court overturned the factual finding of Gzell J
that the non executive directors had in fact approved
a misleading draft ASX announcement.
• The Court noted that ASIC is a model litigant and
criticised it for failing to call one of JHINV’s legal
advisors.
• The Court would have reached the same conclusion
as Gzell J had it not overturned the factual finding
The High Court
• 3 May 2012 High Court, in 2 unanimous
decisions (Heydon J giving separate reasons),
allowed appeals
– In Hellicar confirmed Gzell’s J decision
– In Shafron upheld Shafron liability for failing to
provide adequate advice to JH’s board
• Remitted matters to Court of Appeal in
relation to issue of penalty
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Practical Implications
• Directors should ensure that the basis for their
decisions on crucial matters are noted in the
minutes
• Senior management should bring to the
board’s attention material information on
which public announcements are based
• Directors should read documents they are
asked to approve and understand underlying
facts – this is a non delegable obligation
Practical Implications
• Directors will be presumed to have read and
understood material in “board packs”
• Directors who disagree with a decision should
speak up and have their dissent recorded
• General counsel are regarded as “officers” and
have a duty to protect their company from
legal risk
• General counsel cannot “split” officer role
from General counsel role
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Practical Implications
• ASIC has no duty beyond model litigant
(Heydon J)
• ASIC and opponents in civil penalty cases
should approach on basis of civil rules of
evidence
• ASIC Press Release ‘12 85MR’ dated 3 May 12:
– ‘reinforce the behaviour expected of gatekeepers
in our markets such as directors’
– ‘already shaping corporate behaviour and …
having a positive deterrent effect’
ASIC v Healey & Ors (Centro)
196 FCR 291
• Middleton J found that the directors of Centro, a substantial publicly listed
company, had breached their duties in relying on extensive advice from its
accounting managers and auditors before approving annual financial
reports that indicated Centro had no short term liabilities but rather non
current liabilities when it was in fact due to repay $1.1Bn within 12
months
• The matters not disclosed were known to the directors or ought to have
been known but the directors failed to apply their minds to the financial
statements and failed to question the non disclosure.
• The directors were required to carefully read and understand the
statements and make further enquiries where appropriate
• The directors were required to have sufficient knowledge of accounting
practice and terminology & may not delegate responsibility for
undertaking their own examination to specialist advisors
• Declarations were made that the directors and officers had breached s180
and certain provisions of the Corporations Act
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Practical Implications
• Establish a sufficient process to prepare accounts
and that these provide enough time for the board
has enough time to consider the accounts;
• Read notes to the accounts, especially statements
and assumptions attributed to the board;
• Meet the auditors (without management);
• CEO & CFO should check the s 295A declarations;
• Check D&O insurance policy to ascertain scope of
cover
ASIC v Rich [2009] NSWSC 1229
ASIC sued 4 directors of One.Tel Ltd following
their collapse
Breaches under 180(1) Corporations Act 2001
(Cth) – failure of directors to disclose the true
financial position of One.Tel during the period
of January to May 2001
Penalties sought under Part 9.4B
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The One.Tel Boys
The Hearing
By 2004, 2 directors accepted banning
orders and agreed to pay between them
$112 Million
The trial lasted 232 days over 4 years
4,000 pages of submissions, 7000 pages of
transcript
Judgment pronounced 18/11/2009
3000 pages surpassing C7
Spigelman CJ later noted it could have been
handled better (in terms of time)
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Key Findings
There is a real Question whether ASIC should ever
bring civil proceedings seeking to prove so many
things over such a period of time as in this case .
Austin J
Findings Continued
ASIC s evidentiary case was too big
ASIC made submissions outside its pleaded case
AON Risk Services Australia Ltd v Australian
National University [2009] HCA 27
ASIC failed to call witnesses who might explain
ambiguous documents
ASIC s argument that the liquidity of One.Tel
should be based only on its Australian operations
was unsound
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Business Judgment Rule
Chapter 23 paragraphs 7178 to 7295
180(2) is still an untested area of the law
Business Judgment Rule Statutory
Issue
whether [directors] failed to meet the standard of
care and diligence that the statute lays down…that
requires the defendant s conduct to be assessed with
close regard to the circumstances existing at the
relevant time, without the benefit of hindsight and
with the distinction between negligence and mistakes
or errors of judgment firmly in mind . At [7242]
20
Who bears the Onus?
Defendant s argued that ASIC had to disprove the
business judgment rule defence
Austin J formed the view, with hesitation, that the
defendant s have the burden of proving the
elements of a defence under s180(2) At [7269]
May be considered by Appeal Courts
Mr James Packer
Mr Packer s memory failed him 1, 951 times.
Packer Jnr appeared to misunderstand the purpose
of cross examination …and gave evasive answers; and
coupled with the inability to recollect important
matters…[he gave] angry answers …accompanied by
his banging his hand on the desk in front of him
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Mr Murdoch Jnr
He answered I can t recall …in response to
881 questions, a higher daily rate than Mr
Packer Jnr. This was despite having spent
several days preparing to give his
evidence…He recalled very little, even on
substantial matters such as what occurred at
board meetings
Shareholder Class Action Suits
• Allowed for 2 decades now
• Approx 14 filed in courts each year
• Makes up less than 1% of Federal Court cases I
the area
• Cause of concern to directors
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Shareholder Class Action Suits
• Recent high profile shareholder class action
suits:
– Andrews & Ors v Australia and New Zealand
Banking Group Limited [2012] HCATrans 181 (14
August 2012)
– Kirby v Centro Properties Ltd & Ors (various
through 2012)
• On 19 June 2012, a settlement of $200 million was
agreed to by all parties to the Centro class actions
New Zealand Aspects
• Focus on related party transactions
– Between 2006 and 2010 approx 32 finance
companies into receivership
– the decision of Heath J in R v Moses & Ors (CRI
2009 004 1388), which arose from the collapse of
Nathans Finance; and
– the decision of the Court of Appeal in R v Steigrad
[2011] NZCA 304, which arose from the
Bridgecorp collapse.
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