The Duties/ Responsibilities breached
Discuss about the A Report Outlining the Case of ASIC V PADBURY Mining Limited [2016] Fca 990.
The case is about two directors of a company Padbury mining limited who had made a representation to which was relied on by the plaintiff company, Australian Securities and Investments Commission. The directors were held to have caused the company to make a misleading Australian Stock Exchange announcement.
In entirety Padbury mining Limited had been trying to oust a project in developing a deep water port at Oakajee in the western part of Australia. However, they made an announcement that they had secured a funding of $6 billion to support the project pending which ASX relied on. The announcement, on the other hand, failed to highlight some of the important instruments pertaining to the funding such as the financiers’ identities and the conditions bestowed upon for the funding.
In essence, this resulted in an increase in the cost of shares leading to over 200 million shares being traded over the same. However, this trade went into a halt and remained on suspension when the ASIC Company requested for the funding details but the Padbury mining company was unable to give, pending an announcement that the parties to the funding had terminated their agreement.
In reality, there had been no funding channelled for the project and in actual sense, the project had never been constructed. The mining company had given an incompetent announcement to which the Australian Securities and Investments Commission had relied on leading to trade in loses, in which case the last sale price for the shares before the announcement was $0.02 per share which later increased to $0.045 per share after the announcement.
With regards to this, the Australian Securities and Investments Commission sued Padbury Mining Limited Company and its two directors Mr Gary Stokes and Mr Terence Quinn for authorising the first announcement.
Given any public office or entity, the officers elected or nominated to run such posts have an obligation to deliver their best at all material times. Responsibilities come with ranks and it is the duty of each and every officer to carry out their duties with due care and diligence[1], having regards to their personal reputation and generally that of the company.
In line with the foregoing case, the two managing directors had given consent to an announcement which basically was meant to profit the mining company. It is true to effect that decisions made by persons in authority pertaining the administration of any given entity, should be for the utmost benefit of such entity. However, the main concern here is to what discourse it should be. The two directors in their capacities were in breach of Section 181 of the Corporations Act 2001 in good faith basically civil obligations which state[2]
Analysis of the court decision in view of the Corporations Act
“(1) A director or other officer of a Corporation must exercise their powers and discharge their duties;
- In good faith in the best interests of the corporation and
- For a proper purpose”
Basically, the decision of the managing directors was meant to accrue profits for the company by soliciting funds from shares traded by the Australian Securities and Investments Commission. On the other hand with an increase in sale per share from $0.02 to $0.045 the plaintiff company risked running losses. Further, the decision was not made in good faith as it would, in the long run, depict the company as deceptive in their announcement hence destroying its reputation and blocking further access to financial aid.[3]
With regards to the aforementioned section 180 of the Corporations Act 2001, it is evident that by not taking into considerations the contents of the announcement as to whether it contained details of the financiers’ identities and the conditions for the funding before being released to the public, the directors were in breach of their statutory or rather civil obligation to discharge their duties with due care and diligence.
In line with the same, the directors were also in breach of section 588G of the Corporations Act of their duty to prevent insolvent trading by the company. The directors waived their statutory duty by maliciously engaging the company in transactions that would render them insolvent.
Court decision
It was the decision of the court that the two directors be henceforth prohibited from running a corporation for the next 3 years and that a pecuniary penalty of $25,000 is imposed upon each director. The above clearly affirms the imposition of liability on directors.[4] This was based on Australian Securities and Investments Commission on enforcement objectives.[5]
Analysis
The court acted in liaison to Corporations Act Section 588J based on an application by Australian Securities and Investments Commission for a civil penalty order granting compensation to the plaintiff company. The court ordered the two directors to seize from running any corporations company and in addition to that ordered them to compensate the plaintiff company based on the same section.[6]
In civil penalty proceedings, a regulatory authority and a defendant could make submissions on the appropriate penalty to which the court could entertain.[7] The court in the same vein, the court has an obligation to ensure that what is proposed is not inconsistent with the public interest.[8] There is also a public policy over the same when contraventions are made hence avoidance of lengthy and complex litigation.[9]
Impact of the Decision on the Operation of Companies in Australia
The case of Gilfillan v Australian Securities and Investments Commission was also instructive in assessing whether the disqualification of 3 years on the managing directors was appropriate[10], this was further confirmed to be appropriate pending to the decision in James Hardie case.
The court also in exercising this decision affirmed that directors in exercising due care and diligence must, think beyond the financial consequences of a given action but generally consider the potential harm that may accrue such as diminishing reputation.[11]
Generally, the directors had gone through the announcements[12] and went ahead to approve their release to the public domain.[13]
The decision of the case at hand is of great impact to the operations of companies in Australia in the sense that; it has upheld section 588 J of the Corporations Act which advocates for compensation on the application for a civil penalty order. With respect to this, corporate managements are in turn forced to be wary of monetary decisions that they make, failing to which if they make mistakes either knowingly or unknowingly, they will be liable to compensate the aggrieved party.[14]
In view of section 588G, pertaining to directors’ obligation or duty to prevent insolvent trading, and in liaison with the fact that the two managing directors allowed an announcement that inter alia mislead the ASIC company into trading their shares hence insolvency, subsequent companies have therefore been subjected to an obligation to be wary of the decisions they make with an aim of preventing losses that may lead to insolvencies.[15]
The decision has also seen forth directors making decisions with due care and diligence on matters affecting various companies.[16] Decisions made out of due care and diligence just as provided for in section 180 of the corporation’s act ensures companies make major steps in terms of development. Good decisions lead to effective policies and hence a good reputation which attracts more financiers and shareholders.[17]
Taking a look at section 181 of the corporation’s Act 2001, the decision of the court with regards to the same in the sense that directors have a civil obligation to act in good faith has made it possible for the other companies to serve their clients wholesomely with the intention to ensure maximum satisfaction. Act in good faith just as ensuring due care and diligence[18] in decision making has seen many corporations sell their names positively with the effect that more shareholders continue to subscribe to them.[19]
From the above, companies have an obligation to ensure information disclosed to the public or shareholders continuously, be accurately verified to prevent misleading information being released and relied on by the public.[20]
References
- Australian Competition and Consumer Commission v REIWA Inc. (1999) 161 ALR 79 at 86
- Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023
- Australian Securities and Investments Commission v Drake (No 2) 2016 FCA 1552
- Australian Securities and Investments Commission v Healey (2011)
- Australian Securities and Investments Commission v Macdonald (2009)
- Barker, Sarah, ‘Lifting The Corporate Veil: An Introduction To Directors’ Liability Exposures For Stranded Asset Risks’, in Caldecott, Ben (ed.), Stranded assets and the environment: risk, resilience, and opportunity, Chapter 9, Routledge (forthcoming, 2018).
- Commonwealth of Australia v Director, Fair Work Building Industry Inspectorate (2015) 326 ALR 476
- Corporations Act 2001
- Directors’ Liability and Climate Risk: Australia – Country Paper by Sarah Barker
- Gilfillan 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 at 291
- L, 23 September 2016, Implications of Padbury’s misleading ASX announcement
- Standard Australia, Australia/ New Zealand Standard: Risk Management Principles & Guidelines, AS/NZS ISO 31000:2009,1
- W, 2014, realising the public potential of corporate
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