This paper contains the discussion on the case law ASIC v Maxwell and Others  NSWSC 1052. In this case, Court considers different issues such as duties of directors, distribution of director’s duties in the corporation, and contraventions of Corporations Act 2001.
This case mainly consider the question, whether it was fair to held all the directors accountable for any failure on the part of the company and whether board of directors were liable to comply with the relevant law as whole? This question was mainly highlighted in the recent prosecution announced by the Court against the number of directors of a group of companies which carried on the business related to financial services (Newsletter, 2007).
Structure of this report includes brief summary of the case, duties breached by the directors under Corporation Act 2001, critically evaluation of the decision of the Court in this case, whether this decision of the court contributes in the development of relevant law, and impact of this decision on the operations of the companies in Australia. Lastly, paper is concluded with brief conclusion.
About the case:
In case law ASIC v Maxwell and Others  NSWSC 1052, ASIC made the allegation that all the defendants contravened the provisions of the Corporation Act 2001 while promoting and conducting fund raising schemes. For the purpose of this case, defendants include two groups of companies, officers of the company, and also the consultant and an accountant to them.
ASIC alleged that all the defendants of the case contravened the sections of the Corporation Act 2001 while conducting and promoting the fund raising scheme through which both the groups raised funds from the public for the purpose of buying and developing real estate.
This case involves different breaches of law which were directly related to the fundraising and other activities conducted by company, and it also includes the episodes of misleading and deceptive conduct happened in this case. Maxwell was one of the directors of the two groups of companies, the ProCorp Group and the Central Development Group. Maxwell acted as consultant of both the groups through his company Business Express Success Techniques Pty Ltd (BEST). As per the allegation made by ASIC, Maxwell and other directors and officers of the two groups were prosecuted by the ASIC for different breaches of the law.
ASIC further stated that Mr. Nahed, who holds the position of the director in various companies of the Pro Corp group, breached his duties as a director of the company stated under corporation Act. He breached his duties by allowing and participating in the different contraventions act committed by those companies engaged in the schemes of fund raising. It also includes the offenses related to fundraising, financial services and also the misleading conduct provisions defined by the Corporation Act 2001.
ASIC reached the agreements with all the defendants of this case other than Mr. Nahed in context of orders passed by the Court against the defendants. Mr. Nahed did not agree with the settlements reached with the ASIC. The decision given by the Court in this case includes penalties and banning orders being sought by ASIC.
After considering the background and skills of Mr. Nahed, court considers the distribution of responsibility among the directors of ProCorp’s and dependency of Mr. Nahed on the advice of the advisors of the company. In this court found that Mr. Nahed was entitled to believe that fundraising activities performed by th company were performed on the basis of appropriate and legal advice. Accordingly, Mr. Nahed does not breach any duty of the director because he acted with reasonable care and diligence as a director of the companies in the ProCorp group. On the other side, court decided that Mr. Nahed should be disqualified from being the director of the company because the way in which he managed both the groups of the company also leads the company towards the insolvency.
Breach of director’s duties:
In this case, ASIC alleged that Mr. Nahed who holds the position of the director in both the groups of the ProCorp Companies, breached his duties as director of the company. Especially, those duties which were stated under section 180(1), 181(1) and 182(2) of the Corporations Act 2001. He breached his duties by allowing and participating in the contraventions of the Corporation Act 2001 by those companies, and these contraventions includes:
- All the offers made by the ProCorp in context of loan agreement were made under the contravention of s 727(1).
- Each advertisement, information memorandum and promotional brochure published by the ProCorp was published in contravention of s 734(2).
- Business of financial services carried out by the ProCorp in Australia was carried without holding an Australian Financial Services License, and this was the contravention of Section 9 of the Corporation Act 2001.
- ProCorp while conducting its operations in trade or commerce related to financial products and/or financial services engaged in such conduct which was misleading or deceptive or likely to mislead or deceive and this contravenes the provisions of Section 12DA of ASIC Act and Section 1041H(1) of the Corporation Act 2001. Every advertisement, information memorandum and promotional brochure published by the ProCorp contains misrepresentations which states that no civil-proceedings were pending which involves ProCorp Group Company as a defendant and the funds they raised from the public would only use for the purpose of starting the project (Legal vision, 2016).
There were number of cases under which ASIC sought civil proceedings against the directors of the company and alleged that directors contravene the duty of care and diligence under s 180 of the Corporations Act. They breach these provisions by permitting the Corporation to engage in any such conduct which mainly contravenes the Corporations Act and results in the civil liability, risk of litigation, and reputation damage to the company. Court does not accept any such claim which was formulated on the basis that any contravention of the Corporation Act involves the breach of duties of directors, and Australian Securities & Investments Commission v Maxwell was considered as good example of this point. In this case, Brereton J stated that directors were liable for breach of duties not only in such case when they allowed the company to infringe the provisions of Corporation Act 2001, but they were also liable when such contraventions results in threat to the interest of the company.
Court further rejected the fact that directors breach their duties under the Act by permitting the company to contravene any other provisions of the Act, for the purpose of giving the accessorial liability where Corporation Act does not provide for it. However, a failure on part of the directors of the company to prevent the infringement of the Corporation Act 2001, or taking steps that would result in any such infringement may be considered as breach of director’s duties on the basis of the facts of any particular case. Court considers the question whether any breach by the company also involves any breach by the director and this was to be answered in general way. Court answered this question by determining whether there was any specific fact which involves failure on part of directors to act with the requisite care and diligence under section 180 of the Corporation Act 2001, failure on part of directors to act in the best interest of the company and fore proper purpose which contravenes section 181 of the Corporation Act, or any wrong use of position and information of the company which contravenes section 182-183 of the Corporation Act 2001 (Black, 2014).
Critical analysis of Judges Decision:
In this case, Court mainly determine the question, what values should be anticipated from the director like Nahed who was not play main role in the judgment of the board of directors of the company, and who cannot be considered as the main designer of the different s chemes and other arrangements made by the company. Argument was stated that Nahed does not allow the relevant companies to conduct any such activities which result in contravention of the provisions of the Corporation Act and other relevant laws. Court determines whether it was right to hold the Nahed individually liable either directly or indirectly for the breaching of sections of Corporation Act 2001. For this purpose, Bereton J stated that, Bereto should not be held personally liable for any breach of particular financial services obligations imposed on the company because these matters does not fall under the ambit of director’s responsibility (Lexology, 2016).
Court also determines the question whether Nahed breach his duties as a director of the ProCorp and specially the duties stated by Section 180 and 181 of the Act, and whether he was responsible for breaching any other laws by allowing and participating in other different contraventions committed by those companies. This includes the agreement of loan which includes contravention of various provisions of the Act by publishing the content which was misleading and deceptive in nature, and also by allowing the company to conduct their business operations without getting necessary license for the same. Bereton J hesitantly held the Nahed was guilty for breaching his duties as director and these duties involved wider obligations in comparison of those which he owned as director of the company. For this purpose he consider the age of Nahed at the time when these schemes were promoted, and he further stated that Nahed was builder and he mainly appointed in the company for the purpose of provide expertise in context of construction (AICD, n.d.). It must be noted that, Berenton J provide important summary for the purpose of evaluating the duties of directors for the purpose of exercising reasonable care and diligence.
For the purpose of determining whether director of the company expressly contemplates the situations of the particular corporation concerned were important for the content of the duty. The situations include the type of the company, provisions of the constitution, size and nature of the business, board’s composition, position and responsibility within the company , functions performed by the director, distribution of responsibility between the directors (Thomas reuters, n.d.).
Various cases were reviewed by the Court in this case such as ASIC v Elm Financial Services Pty Ltd (2005) 55 ACSR 411 and ASIC v Elm Financial Services Pty Ltd  NSWSC 1065. In these cases, Court stated that relevant duty of the director towards the person investing money in the company was different from the duty owned by director towards the company.
While taking decision in this case, Judge failed to consider the other factors which affect the decisions taken by directors of the company, and judges also failed in providing the description related to the exact manner in which directors of the company held liable for their actions. However, court in this case introduce various other factors which must be determine at the time of evaluating the liabilities of the directors if directors were not involved on front foot (Wolters Kluwer, n.d.).
Impact of the Decision:
This case was considered as very important case because in this case, court introduces various factors which must be considered by the court before deciding the liability of the company’s directors. In this case, court use proper will at the time of evaluating the situation of the directors in the company. This case provide clear message to the directors of the company that they must not take their responsibilities casually in the company because if directors omit their liabilities in one sense then they might be caught up on other aspect of the relevant law.
After considering the facts and decision of this case, it can be said that no matter whether director play main role or not in the contravention of the Corporate Law provisions or any other relevant law but they must be held liable in some or another way for not performing their duties with due care and diligence. Therefore, it was necessary for the directors of the company not to take their role lightly and ensure that all their obligations towards the company were fulfilled.
AICD, (2007). Law Reporter. Available at: https://www.companydirectors.com.au/director-resource-centre/publications/company-director-magazine/2000-to-2009-back-editions/2007/february/law-reporter. Accessed on 13th January 2018.
ASIC v Elm Financial Services Pty Ltd (2005) 55 ACSR 411.
ASIC v Elm Financial Services Pty Ltd  NSWSC 1065.
ASIC v Maxwell and Others  NSWSC 1052.
Black, A. (2014). Recent Developments in Corporate Law. Available at: https://www.austlii.edu.au/au/journals/NSWJSchol/2014/17.pdf. Accessed on 13th January 2018.
Corporation Act 2001- Section 1041H(1).
Corporation Act 2001- Section 180.
Corporation Act 2001- Section 181.
Corporation Act 2001- Section 182.
Corporation Act 2001- Section 727.
Corporation Act 2001- Section 734.
Legal vision, (2016). What is the Proper Purpose Duty?. Available at: https://legalvision.com.au/what-is-the-duty-not-to-improperly-use-my-position/. Accessed on 13th January 2018.
Lexology, (2016). ASIC v Cassimatis: What is a director’s liability for a breach of law by the company?. Available at: https://www.lexology.com/library/detail.aspx?g=5ca9bdbe-da55-462b-a5ca-e6d1d1621235. Accessed on 13th January 2018.
Newsletter, (2007). Corporations Law Update: Recent Decisions About Directors' Duties And Liabilities. Available at: https://www.stephens.com.au/wp-content/uploads/sites/1838/2016/11/October-2007-Corporations-Law-Update.pdf. Accessed on 13th January 2018.
Thomson Reuters. Duties and powers. Available at: https://legal.thomsonreuters.com.au/browse/law-annuals/pdf/corporations-legislation-2014-key-section-annotation-example-thomson-reuters.pdf. Accessed on 13th January 2018.
Wolters Kluwer. Australian Securities & Investments Commission v Maxwell & Ors, Supreme Court of New South Wales, 10 October 2006. Available at: https://www.iknow.cch.com.au/document/atagUio914887sl50219123/australian-securities-investments-commission-v-maxwell-ors-supreme-court-of-new-south-wales-10-october-2006. Accessed on 13th January 2018.