Breach of duties involved in this scenario
Discuss about the Case Gore V Australian Securities Commission.
The case Gore v Australian Securities and Investments Commission [2017] FCAFC 13 has reiterated that officers, directors and advisors of a company can be held to be personally liable as an accessory breach of the Corporations Act 2001 by any other director, officer or advisor. They can be held personally liable for particularly in a scenario which involves issues of disclosure of securities as provided in Part 6D.2. In this case, Gore v ASIC, Ms. Mariana Gore made an appeal against the decision of the lower court, which had given the verdict involving:
- Injunction for time period of seven and a half years according to the provision as provided in section 1324 of the Corporations Act 2001 restricting her to engage or carry on any business in the industry of financial services.
- The lower court had given the verdict after it was convinced that the defendant, Mrs Gore had knowingly contravened the provisions of sections 727(1) and section 727(2). She had offered securities without the issuance of a current disclosure document. The court held that the defendant had also breached section 1041H and section 12DA of the Australian Securities and Investments Commission Act 2001while she engaged in isleading and deceptive conduct.
The ASIC had cross-appealed against the terms of the injunction and on the ground that the terms of the injunction was inadequate. However, the Federal Court dismissed the appeal.
In this scenario the provisions of Accessorial liability of a person in aiding another person to contravene the provisions of the Corporations Act is relevant. It can be stated in accordance with section 79 of the Corporations Act 2001 a person can be found guilty or personally liable if it is established that the former person was involved in the contravention of provisions of the Corporations Act by the latter person. However, it has been clearly provided that for being involved in the process of contravention a person:
- Must have abetted, aided, counselled or procured in the contravention
- Directly or indirectly knowingly had been involved in the contravention
- Conspired about the effect of the contravention or the act of aiding another person in the contravention with others.
It can be stated that Ms. Gore had been knowingly concerned and involved in the contravention of section 727(1) and 727(2) of the Corporations Act 2001. It has been specifically provided in section 727(1) of the Corporations Act 2001 that any person, who is in charge of the operations of business, must not offer securities or issue a form of application for offering securities, which needs to be disclosed to the investors under part 6D.2 of the Corporations Act unless ASIC has received the disclosure document for which the securities had been offered. In section 727(2), it has been provided that a person must not make an offer of securities or issue application form for offering securities, which needs to be disclosed to the investors under part 6.2 unless:
- A prospectus is issued for conveying the offer of securities
- A profile statement and a prospectus are issued to convey the offer of securities
- An information statement is used for the offer.
In this caseMsGore had also been concerned with the contravention of section 1041H of the Corporations Act 2001. It has been provided in section 1041H that any person who engages in misleading and deceptive conduct will incur civil liability. In subsection 1041H(2) the definition of engaging in misleading and conduct in relation to financial product has been given.
Discussion and the Analysis of the decision of the Court in relation to the case
In addition to the aforementioned contraventions Ms. Gore had also been found to have aided in the contravention of the 12DA of the Australian Securities and Investments Commission Act 2001(Cth) (AA 2001)
Discussion and the Analysis of the decision of the Court in relation to the case
The Federal Court in relation to this case, dismissed the appeal of appellant and the cross appeal by the ASIC with costs. The court gave the following reason for dismiss the appeals:
- The federal court stated that that it only wished to address the alleged accessorial liability of the appellant in relation to breach section s 727 of the Corporations Act 2001(Cth). The federal court further stated that it otherwise agreed with HIS Honour’s reasons for giving the verdict.
- In this case the primary allegation which had been brought against the appellant was concerning section 727 of the CA. It was alleged that Ms. Gore was indirectly or directly knowingly concerned about the contravention of the aforementioned section (727) by the other defendants. The respondent, ASIC sough declarative and injunctive relief against her. For the purpose of availing the injunctive the ASIC relied upon the provisions of the section 1324(1) of the Corporations Act 2001(Cth). This section states that a person will be held to have engaged in conduct which constitutes a contravention to the provisions of the Act, attempting to contravene the provisions of this act, aiding another person in the contravention of the provisions of this act, inducing another person to contravene this act by threatening him or conspiring with others to contravene this act.
- In relation to assessment of accessorial Liability of the appellant, the Federal Court held that there was a distinction between being a party to a contravention or being concerned in contravention and being knowingly concerned in the contravention or being a party to the contravention. The court held that neither knowledge of the essential elements of contravening the section in consideration, nor participation of the appellant in contravention in consideration is sufficient to attract accessorial liability. The Federal court had been satisfied about the aspect of the judgment of Rares J which stated that the appellant had participated in the contravention of section 727. However, the Court focused on the question which concerned about the knowledge of MS. Gore about the possibility of the contravention at the time when she participated in the contravention.
- The Court cited the case Yorke v Lucas (1985) 158 CLR 661 for the purpose of assessing the accessorial liability of the appellant. In this case it had been held by the judges unanimously that for establishing accessorial liability of a person for contravening the statutory provisions of this act in civil proceedings, it is important to prove all of the essential elements of the contravention and that alleged person had the knowledge of facts which said that the knowledge of the alleged person must not be constructive nut actual as held in the case Australian Securities and Investments Commission v Adler [2002] NSWSC 171, (2002) 168 FLR 253 (ASIC v Adler).
- The Federal court held that knowledge of the important elements of the contravening conduct does not require knowledge of the fact that the conduct in consideration is contravening conduct. The judgment in the first instance with respect to the case (Australian Securities and Investments Commission v ActiveSuper Pty Ltd (in liq) (2015) 235 FCR 181; [2015] FCA 342) provided that defendants had been indirectly or directly been concerned in the contravention of section 727 of the Corporations Act 2001. The court had granted injunctions which restrained the defendants from engaging in business activities which involved financial products, financial services and superannuation.
- Upon receiving the application of appeal the Federal court considered extensively the state of Ms. Gore’s knowledge at the time of her participation in the contravention. The majority of the judges of the Federal Court upheld the decision of the Primary Judge and subsequently dismissed the appeal of Ms Gore as well as the cross appeal by the ASIC. However, Dowsett and Gleeson JJ had a disagreed with the initial judgment given by the primary judge. The disagreement was in regards to the analysis of the elements of section 727(1) of the (Gore v ASICat [37]-[40]). It can be stated that the primary judge in this case had identified the following elements in relation to interpretation of the aforementioned section:
- The contravenor had offered the securities or had distributed an application of the securities
- The offer of securities needed to be disclosed to the investors as per Part6D.2 of the Corporations Act 2001
- However, no profile statement, prospectus or offer information was lodged with the Australian Securities Investment Commission.
It had been stated by Dowsett and Gleeson JJ that the primary judge had considered that ASIC was required to only prove the first and third element and that the ASIC was not required to establish in the court that the defendants possessed the knowledge, that they were mandated to disclose the securities being offered to the investors under Part 6D.2. However, with reference to the case Giorgianni v The Queen (1985) 156 CLR 473 and Yorke v Lucas, Dowsett and Gleeson JJ found that the primary judge did not identify the second element correctly. It was held by the aforementioned judges that the relevant knowledge in this case referred to the knowledge of the relevant facts which led to the need for the disclosure of the information and not that such disclosure was necessary under Part 6D.2. It had been further held by the aforementioned judges that the approach of the primary judge was erroneous as ignorance of law cannot be considered to be a valid excuse.
Relevance of the Decision and the impact of the decision on the operation of the companies
It can be stated that the decision of the aforementioned case sends a timely warning to the directors of the companies and has also been successful in explaining the implications of accessorial liabilities. The Federal Court of Australia has recently considered in numerous cases whether directors can be accessory to contraventions of the provisions of the Corporations Act 2001and the Australian Securities and Investment commission Act 2001. The case Australian Securities and Investments Commission v ActiveSuper Pty Ltd is followed by the investigations commenced into the operations of two self-managed superannuation fund (SMSF) advisory companies; Royal Capital and Active Super Pty Ltd. In relation to the case the Federal Court had held that it is important for a person take part in the contravention intentionally and with the actual knowledge of the important elements of the contravention for him to incur accessorial liability. Further it had been held by the Federal Court that evidence or proof of actual knowledge about the essential elements can be derived from the direct knowledge of the circumstances of the person and their failure to conduct enquires to eliminate any suspicion. Such proof can also be derived from actual and direct evidence. Inaction of a person or mere knowledge of such person is not sufficient for establishing that a person was knowingly concerned in the contravention. It can be stated that section 79 of the Corporations Act 2001 (Cth) has been relied upon in many recent decisions of the courts in conjunction with the provisions of common law regarding accessorial liability as provided in the Barnes v Addey (1874) LR9Ch App244 (Barnes v Addey) case. In the case of Gore vs ASIC it was held by the majority of the court that it was unnecessary for the appellant to have knowledge of the provisions with respect to the offer of securities or the specific legal provisions in relation to disclosure of such offer to the investors as mentioned in the Corporations Act 2001. It was held by the court that the knowledge of the factual matters leading to the illegality was sufficient enough to establish a breach of section 79 of the CA and incur accessorial liability. Therefore in light of the decision of the aforementioned case, it can be stated that the impact of the principle of accessorial liability is generally more far reaching. However, a difficulty is often encountered while proving the knowledge of the accessory about the contravention of any section of the corporations act for the establishment of accessorial liability. Therefore in light of the judgment of the aforementioned case it can be said that business associates and advisors must be conscious of getting involved in illegal dealings that may give rise accessorial liability.
Reference List:
Barnes v Addey (1874) LR9Ch App244 (Barnes v Addey) case
Corporations Act 2001 (Cth)
Australian Securities and Investments Commission v ActiveSuper Pty
Giorgianni v The Queen (1985) 156 CLR 473
Australian Securities and Investments Commission v ActiveSuper Pty Ltd (in liq) (2015)
Australian Securities and Investments Commission v Adler [2002] NSWSC 171, (2002) 168 FLR 253 (ASIC v Adler)
Yorke v Lucas (1985) 158 CLR 661
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