Concept of Director’s Duty
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).
Director’s duty is a concept which is covered under different parts of the governing act on companies, i.e., the Corporations Act, 2001, which is an act of commonwealth (Latimer, 2012). The reason for imposing duties on the directors, and on the key officers of the company, particularly in context of Part 2D.1 of this act stems from these people running the business of the company on behalf of the shareholders of the company. Where the duties imposed through this legislation are not upheld by the key personnel, they are held liable in both civil and criminal manner based on the provisions breached (Paolini, 2014).
The case of ASIC v Hobbs, i.e., of Idylic Solutions Pty Ltd – Australian Securities and Investments Commission v Hobbs [2012] NSWSC 1276, is an example of the court holding the directors liable for breach of their duties, put on them through the governing act. In doing so, the court also analyses the position of the person as being a director, based on the different provisions of this act. The following parts cover a detail of this case, along with an analysis of the duties breached.
The case of ASIC v Hobbs revolves around actions being brought by the defendant against fifteen defendants owing to their involvement in the unregulated investment scheme where a sum of $AUD50 million was raised, which was alter on invested in the offshore funds by the defendants. The allegations were made by ASIC in the matter of fourteen schemes, regarding the unlawful sale of the investment in this scheme to such investors who were not sophisticated, through the seminars and the investment meetings which were convened by promoters and this was done in absence of the license which was required (Carter Newell Lawyers, 2013).
For the case against David Hobbs in particular: Back in 2002, Hobbs was marketing in the investment funds of the nation which had been set up by him offshore. The operation undertaken by him was deemed in the media release of ASIC of November 06th, 2012 as targeting the investors of Australia and the self-management of the superannuation funds in a successful manner. Further, this was done in a manner that by 2008, over $50 million had been invested in funds where the earlier mentioned fourteen individual funds in different nations like Hong Kong and Anguilla. The ASIC also alleged that false representation had been made to the investors of the nation in the so-named investments or the financial education presentations, which provided that the:
- Offshore investments had been totally legal;
- There was an nonexistence of risk with regards to the money being lost which had been invested by the investors, since the same was capital guaranteed;
- Through this investment, they were likely to get a return of four percent for each month; and
- The investment which had been made by the investors could be redeemed with ease after a period of twelve months, by giving a notice of sixty day (Cordato, 2013).
On this basis, the key issue of this rule on whether Hobbs was a de facto director of the company, and whether or not there were any breaches in director duties on his part where he is proven to be a director of the company (Plessis and Koker, 2017).
Sections 180, 181 and 183 of Corporations Act 2001
The Corporations Act, 2001 (CA) is the governing legislations through which the person being a director or not is decided and also the duties are imposed on them (Cassidy, 2006). Under section 9 of CA, such a person who is not given the position of a director in a company in an official manner, but such individual acts as a director would and in such cases, the individual is considered as de facto director (Australasian Legal Information Institute, 2017). Upon an individual being proven as a director of the company based on applicability of section 9, the duties covered in CA become applicable on such individual (Baxt, 2007).
As per section 180 of CA, the directors are under an obligation to apply the necessary diligence and care in the discharge of their duties and making use of their powers. This section further provides that this has to be done as would be done by a rational person who holds the same power, same office and also is faced with the similar situations as were faced by the director. Section 181 of CA also imposes duties on the directors of the company, as per which the directors are required to make use of their powers and undertaken their obligations in the best interest of the company, which is for proper purpose and also in the good faith in context of the company. The next section, i.e., section 183 of CA presents the duty on directors to refrain from making such a use of the position held by them in the company through which a personal gain is attained or where the same results in detriment of the company in which they are the directors (Federal Register of Legislation, 2017).
The result of breach of these sections is attraction of provisions covered in section 1317E of this act. Under this section, the court gets the declaration making power for the undertaken contravention covering the details of the duties breached, the reasons and the other relevant details. Upon the declaration of contravention being passed by the court, the ASIC gets two major powers. The first one is to apply for an order seeking pecuniary penalties as per section 1317G of CA; and the second option is to apply for a disqualification order against the director as per section 206C of this act (Federal Register of Legislation, 2017).
The present case saw Hobbs being in breach of the duties mentioned in the previous segment. Sections 180 and 181 of the CA had been contravened by him as a result of the company being put in such a position where it contravened a number of statutory provisions. This case had the main requisite of the company going forward with the investment scheme only when the pertinent licenses had been undertaken and for the company to have taken the required steps for ensuring that the business was being conducted as per the laws of the jurisdictions in which the same was being done. However, this case presented a sheer lack of this being done by company, which had to be done by the directors of the company. The directors, particularly Hobbs failed in showing any kind of diligence or care in his actions and did not work in any manner in the best interest of the company. As a consequence of the misrepresentation made to the investors of the nation, the aforementioned sections of CA were violated since the directors allowed/ resulted in the company going forward with the misrepresentation being issued (Australasian Legal Information Institute, 2013).
ASIC v Hobbs Case
The directors of the company allowed the company to carry on and be involved in a conduct where the applicable legislations were being contravened, which highlights the failure on part of the directors in exercising the reasonable amount of care and skill on the basis of the position held by them and a sheer lack of keeping the best interest of the company in mind, based on section 181 of CA. There was a breach of section 180 of CA on part of Hobbs due to the financial services business being run in a manner where no license was taken. Along with this, Hobbs allowed the participation in the unregistered investment scheme being operated, as a result of which, the company was left open for penalties being imposed on it (Australasian Legal Information Institute, 2013).
When it comes to section 182 of the CA, Hobbs breached this section also, as he resulted in detriment being caused to the company, owing to the presence of misrepresentation. He also promoted the unregistered schemes in an illegal manner, which was an addition to the already present misconduct of this case’s defendants. The quoted section had been violated as a result of the evidence presented against Hobbs where he made payments from the pooled funds of the investors to the people who were associated with these schemes; this was also done for the defendant getting their benefit from the payment of such benefits. Along with this, the payment of sums from the pooled funds for meeting the expenses and the funds for enhancing of the position of funds also contributed to the quoted section being contravened by Hobbs (Australasian Legal Information Institute, 2013).
Conclusion (court’s decisions)
When the matter reached the court, the judges analysed the issue in detail and took into consideration the allegations and counter allegations made. The court analysed definition of director to decide upon the position of Hobbs in this case. And this led to the court coming to the conclusion that indeed Hobbs had been a de facto director of the company, even when he had not been appointed as a director but due to Hobbs acting in position of one. The reason for holding this was that Hobbs was seen as an individual who participated in the decision making of the company as a result of which the business of the company was entirely or partially being affected. Along with this, he held the capacity of affecting the financial position of the company in a substantial manner, and that the work was being done as per his instructions (Australasian Legal Information Institute, 2013).
The court also relied upon the established cases in order to substantiate their viewpoint on Hobbs being a director of the company. For this purpose, reference was made to the case of Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296, specifically in order to clarify upon the meaning of the person who acted in the position of a company director. The quoted case presented that any individual who had not been appointed in the post of director at any time period, could be declared as a director of the company, when there is a degree of presence of requirements covered under section 9 of CA, as being working as a director of the company. Conversely, the court stated that there was a need to present that the shadow director had been acting in the role of the director in the company and that he/ she had been undertaking the functions which could be expected to be performed in a reasonable manner by any company directors, based on the present circumstances. Through this case, it was also presented that there are chances of the role played by a person evolving over time, which means that a person can start as a non-director but due to the role played by them, becomes a director of the company, lastly, just because a different name is given to the individual, it does not mean that the person is not in the position of the director, particularly a de facto director (Carter Newell Lawyers, 2013).
The court came to the conclusion that in this case Hobbs was the key brains behind the entire facade and that he also held an effective control on the scheme’s funds. Along with this, there was presence of enough evidence before the court to establish the improper payments made out of the fund and included in this were the ponzi payments, the private expenses of Hobbs being paid and finally the payments made to his family and to that of the administrators of the scheme. This led to the court concluding that the provisions of CA had been indeed breached by Hobbs (Australasian Legal Information Institute, 2013). Owing to the involvement of Hobbs in the aforementioned breaches, a disqualification order was passed against him, where he was permanently restrained from being involved in financial services business and in management of investment schemes (Cordato, 2013). Although, the decision given in this case presents nothing new, as a result of which this case could be deemed as a landmark verdict.
References
Australasian Legal Information Institute. (2013) In the matter of Idylic Solutions Pty Ltd – Australian Securities and Investments Commission v Hobbs [2012] NSWSC 1276 (24 October 2012). [Online] Australasian Legal Information Institute. Available from: https://www.carternewell.com/page/Publications/Archive/De_Facto_Directors_-_Lurking_in_the_Company_s_Shadow/ [Accessed on: 28/12/17]
Australasian Legal Information Institute. (2017) Corporations Act 2001. [Online] Australasian Legal Information Institute. Available from: https://www6.Australasian Legal Information Institute.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/ca2001172/ definitions [Accessed on: 28/12/17]
Baxt, R. (2007) Duties and Responsibilities of Directors and Officers. 19th ed. Sydney, New South Wales, Australia: The Australian Institute of Company Directors.
Carter Newell Lawyers. (2013) De Facto Directors – Lurking in the Company’s Shadow. [Online] Carter Newell Lawyers. Available from: https://www.carternewell.com/page/Publications/Archive/De_Facto_Directors_-_Lurking_in_the_Company_s_Shadow/ [Accessed on: 28/12/17]
Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: The Federation Press.
Cordato, A.J. (2013) How badly must a company director behave to be banned from corporate life permanently?. [Online] Lexology. Available from: https://www.lexology.com/library/detail.aspx?g=7216432f-3e66-4e08-b19f-f3e0338d81e8 [Accessed on: 28/12/17]
Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Federal Register of Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 28/12/17]
Latimer, P. (2012) Australian Business Law 2012. 31st ed. Sydney, NSW: CCH Australia Limited.
Paolini, A. (2014) Research Handbook on Directors Duties. Northampton, Massachusetts, United States: Edward Elgar.
Plessis, J.J.D., and Koker, J.N.D. (2017) Disqualification of Company Directors: A Comparative Analysis of the Law in the UK, Australia, South Africa, the US and Germany. Oxon: Routledge
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