Background
Question:
Discuss about the Business Corporation Law for Case of ASIC v Vines.
In Australia, the Corporations Act, 2001 (Cth) is the governing act for all the corporations. This act contains the duties for the officers and the directors of the companies, which have to be adhered in a strict manner (Latimer, 2012). In case these duties are not fulfilled as per the governing act, the breaching individual is liable to both civil and criminal penalties, depending upon the nature of the breach. The rationale behind imposing duties over the directors is that they are the ones who have been assigned to conduct the business of the company, and hence, are required to ensure that they work in the interest of the company, instead of their personal interests. Some of the duties which the director or the officers of the company have to adhere to include the duty of care and diligence and the duty of acting in the best interest of the company (Australian Institute of Company Directors, 2017). One of such cases where these duties were contravened is the case of Vines v ASIC [2006] NSWSC 760 (New South Wales Law Reports, 2013). In the following parts, a discussion is carried on this case, to depict the manner in which these duties were contravened.
GIO Australia Holdings Limited’s former chief financial officer, Geoffrey Vines, was the one who was said to have contravened his duty of care with regards to the profits forecast when the takeover bid was being undertaken (Jacobson, 2007). The civil proceedings were initiated in 2011 against Vines by the ASIC and two other executives of the company were also included in this case, Robertson and Fox. Fox was alleged to have breached his duty with regards to Part B Statement published by GIO when the takeover bid was being carried out in 1998 (Piper Alderman, 2007).
A profit forecast of $80 million was contained in this statement with regards o the GIO’s reinsurance division. Though, the same had been in controversy as a result of the hurricane of Sep 1998 which took place at Virgin Island and Puerto Rico (Australasian Legal Information Institute, 2006). It was alleged that the three had contravened the erstwhile section 232(4) of the Corporations Law (Webster and Swan, 2007). This section was related to breach of duty of care. The key issue in this case was the objectivity behind including the profit forecast owing to the controversy surrounding the exposure to Sep 1998 hurricane (Piper Alderman, 2007).
It was held in this matter that Vines had violated 4 provisions of the erstwhile Corporations Ac due to the reasons that he did not make a disclosure regarding the pertinent information when he had an obligation to do so, as a result of the position he had in the company, which was of CFO. When these provisions were alleged to have been contravened by him, Vines applied for honesty defense as is contained in the present day Corporations Act’s section 1317C (Stephens Lawyers & Consultants, 2007).
Case Study: Vines v ASIC
Corporations Act 1989 (the previous act) through its section 232(2) required that the officers of anybody corporate had to act in a manner which depicts honesty in each and every manner, when they use their powers or undertake their obligations, which have been put on them as a result of being in such position. Subsection 4 of this very section provides that a reasonable standards of diligence and care honesty in each and every manner, when they use their powers or undertake their obligations, which have been put on them as a result of being in such position (Jade, 2017a).
Under the current Corporations Act, 2001, section 181 puts and obligation over the directors and the officers to use their powers or undertake their obligations, to act for a proper purpose, in good faith and for the best interest of the company (Federal Register of Legislation, 2017). In case these provisions are contravened, civil penalties are imposed through section 1317E (Australasian Legal Information Institute, 2017).
It was stated by the court that negligence for standard of care was not required to be established when the erstwhile act contained the similar provisions through section 232(4), in comparison to the common law. The standard which is contained in sections pertaining to care and diligence applicable on Vines, did not reach the contents of the statement (Webster and Swan, 2007).
Apart from this, the information which was provided, did fell under the structure of due diligence procedure. The rationale behind designing these was to make certain that the final disclosure which was made to the company’s shareholders was adequately, as well as, materially finalized with regards to the law. Furthermore, the manner of making the disclosure was such that it allowed for the individuals to be safeguarded, who was particularly involved in this case, with regards to their owed liability, which could have been brought forward had a defect being established later on (Webster and Swan, 2007).
The earlier ruling of the case before this was given by Justice Austin and he had held that Vines had indeed breached his duties. The Court of Appeal upheld the decision given by Justice Austin on three different bases. When Vines signed the management sign off regarding due diligence report, as per which he had to give the advice to the committee pertaining to the assumptions related to profit forecast, he failed to take the requisite steps. He also failed in informing the committee of due diligence that he had no knowledge about the profit forecasts being reliable. Lastly, he did not consider the facts properly even when the same was attained by the company’s reinsurance division in a timely manner after issuance of the statement, but prior to the ending of the takeover procedure (Webster and Swan, 2007).
Some of the allegations which ASIC made were overturned by the Court of Appeal. And in certain cases it was held that Vines had not breached any of his duties. The duty of care was not breached when he made an unqualified statement regarding the management confidence to the board in the reinsurance division of GIO pertaining to the profit forecasts. Also, when Vines could not provide the requisite information which was related to the calculations of the profit to the committee of due diligence, no duty was breached. This duty was also not breached with regards to the report on which the media report was based. These three incidents occurred on November 1998’s 9th, 22nd and 17th, respectively (Webster and Swan, 2007).
Contraventions of Duties of Officers and Directors
The Court of Appeals agreed with Vines regarding him having acted in an honest manner. Though, they could not grant any relief to him due to the substantial nature of the contraventions. The court held that Vines had to consider the material information required adequate disclosure, due to the knowledge which he had by being in his position. The findings of each case showed that Vines had acted in a way which always left out the significant information. And so, the directors were left to make the decisions on the basis of inadequate facts as Vines did not provide them with the substantial information (Stephens Lawyers & Consultants, 2007).
Vines was also held accountable for relying upon the senior executive who had reported in an inaccurate manner a substantially critical financial issue to him. The operation responsibility on all the matters of the report was present with the senior executive. On the other hand, Vines had the responsibility of investigation the report which was given to him as he was the CFO of the company and this position required him to be satisfied about the matters contained in the report by adequately inquiring about the validity of the information contained in the report. The claim made by Vines that this was due to the workload, associated pressure and the heavy responsibilities put on him was declined as being sufficient excuse for the failure in undertaking the duties put through the governing act (Stephens Lawyers & Consultants, 2007).
The court gave equal relevance to the position of a chief financial officer in this case to the individual who holds the position of director in any company. This was due to the special skills which were required for this particular position. Hence, due to the skill set which Vines had, he was required to undertake diligence and care and in this regard, the actions of a prudent individual had to be compared to that of Vines (Black, 2015). The identified breached by Justice Austin were appealed against by Vines and he applied for relied from these allegations and from the penalties which had been imposed on him. Even ASIC appealed against the imposed penalties (Australian Institute of Company Directors, 2011).
After establishing clearly that Vines had breached the sections of Corporations Act, on the basis of appeal of the ASIC, the court made an order of declaration of contravention. The court also made disqualification order against both Vines and Robertson, which disqualified them from being an officer in any company for a period of 3 years. Fox was also given similar disqualification order, but he was disqualified for a period of 12 years. This disqualification order was coupled with pecuniary penalty orders being awarded on the three officers. The value of penalties for the Vines, Robertson and Fox were $100,000, $50,000 and $220,000, respectively. The judgment did not end here. A compensation order was also passed in this case against Fox, as per which he had to pay an amount which equaled US$143,750, based on the exchange rates of 03rd Jun, 1999. Lastly, the costs which ASIC had to bear during this case, were also ordered by the court to be paid by the three on percentage basis of 22%, 28% and 33%, respectively (Jade, 2017b).
Conclusion
This case shows that the three officers had failed in taking the required care and diligence, which the Corporations Act required them to fulfill by reasons of being the GIO Australia Holdings Limited’s executive officers. This case clearly shows and establishes that the executives have certain responsibilities when it comes to the takeover bid related profit forecasts. When the case is broadly interpreted, it shows that the executives have to ensure that the information presented before the shareholders of the company with regards to the decisions related to invested, have to be accurate and also have to contain all the material aspects as are required.
References
Australasian Legal Information Institute. (2006) ASIC v Vines [2006] NSWSC 760 (2 August 2006). [Online] Australasian Legal Information Institute. Available from: https://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/nsw/NSWSC/2006/760.html?stem=0&synonyms=0&query=Geoffrey%20William%20Vines [Accessed on: 28/05/17]
Australasian Legal Information Institute. (2017) Corporations Act 2001 – Sect 181. [Online] Australasian Legal Information Institute. Available from: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s181.html [Accessed on: 28/05/17]
Australian Institute of Company Directors. (2011) Directors Counsel. [Online] Australian Institute of Company Directors. Available from: https://www.companydirectors.com.au/director-resource-centre/publications/company-director-magazine/2011-back-editions/may/directors-counsel-the-skills-you-need [Accessed on: 28/05/17]
Australian Institute of Company Directors. (2017) What are the duties of directors?. [Online] Australian Institute of Company Directors. Available from: https://www.companydirectors.com.au/membership/the-informed-director/what-are-the-general-duties-of-directors [Accessed on: 28/05/17]
Black, S. (2015) Australia: The responsibilities of becoming a director. [Online] Mondaq. Available from: https://www.mondaq.com/australia/x/412934/Directors+Officers/The+responsibilities+of+becoming+a+director [Accessed on: 28/05/17]
Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Federal Register of Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00003 [Accessed on: 28/05/17]
Jacobson, D. (2007) ASIC v Vines Appeal Decided. [Online] Bright Law. Available from: https://www.brightlaw.com.au/asic-v-vines-appeal-decided/ [Accessed on: 28/05/17]
Jade. (2017a) Corporations Act 1989 No. 109 Of 1989 – Table Of Provisions. [Online] Jade. Available from: https://jade.io/article/218423/section/6392 [Accessed on: 28/05/17]
Jade. (2017b) ASIC v Vines [2006] NSWSC 760. [Online] Jade. Available from: https://jade.io/article/1022 [Accessed on: 28/05/17]
Latimer, P. (2012) Australian Business Law 2012. 31st ed. Sydney, NSW: CCH Australia Limited.
New South Wales Law Reports. (2013) ASIC v Vines (2005) 65 NSWLR 281; [2005] NSWSC 349 (23 Dec 2005) (Austin J). [Online] New South Wales Law Reports. Available from: https://nswlr.com.au/case/2005-nswsc-1349/ [Accessed on: 28/05/17]
Piper Alderman. (2007) Piper Alderman Legal Update. [Online] Piper Alderman. Available from: https://www.piperalderman.com.au/__files/f/4017/PA%20eBulletin%20June%202007.pdf [Accessed on: 28/05/17]
Stephens Lawyers & Consultants. (2007) Corporations Law Update: Recent Decisions About Directors’ Duties And Liabilities. [Online] Stephens Lawyers & Consultants. Available from: https://www.stephens.com.au/Sites/2196/Images%20Files/Newsletters/October%202007%20-%20Corporations%20Law%20Update.pdf [Accessed on: 28/05/17]
Webster, J., and Swan, C. (2007) Focus: Implications Of Vines v ASIC. [Online] Allens. Available from: https://www.allens.com.au/pubs/ma/fomamay07.htm [Accessed on: 28/05/17]
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