Australian Securities And Investment Commission Law: A Case Study Essay.

Breach Of Directors Duty

Discuss about the Australian Securities and Investment Commission Law.

In the case of ASIC v Sydney Investment House Equities Pty Ltd [2008] NSWSC 1224 (21 November 2008) Australian Securities and Investment Commission is the plaintiff and Mr. Goulding is the 3^rd out of the 9 defendants. In this case, the plaintiff had made a claim against the defendant that he had committed various infringements of the provisions of the Corporation Act 2001 (CA) and the Australian Securities and Investment Commission Act 2001 with respect to his role as the director of several companies comprising the Sydney Investment House Group . The plaintiff seeks from the court against the defendant that he should be he should be disqualified for an appropriate period from managing corporations and prevented from providing any financial services within Australia. However, the plaintiff had not made any claims for the imposition of any kind of penalties and others orders with respect to compensation payment. 

The plaintiff had initially brought proceedings against eight companies, which belonged to the SIG group. Mr. Goulding and the Mr. Geagea (fourth defendant) were or acting as the directors of most of the companies which are all in liquidation. Application made by the fourth defendant with respect to Section 29.9(1) (a) and 29.10 one after the other against the claim of the plaintiff were dismissed by the court. The court in this case had to determine the fourth defendant committed the breach of the provisions related to director’s duty or not.

The plaintiff claimed that the court should determine that the following breached were committed by the defendant with respect to the Corporation Act and the Australian Investment and Securities Commission Act.

• According to the plaintiff, the defendant had breached the Section 180-182 of the Corporation act 2001 by permitting or causing capital and equities for making advance and loans moneys with relation to those loans to other members of the SIH Group (Keay 2016). The defendant had alleged that such loans have been provided in situations it could be deemed that the borrowers were virtually insolvent and there was little or no chance that the loan would be paid back.
• The plaintiff also claimed that the defendant breached the procedures, which have been laid down in the capital prospectus and equities information memorandum for the purpose of making such loans. The fourth defendant breached the Section 180-182 of the Corporation Act 2001 by permitting or causing the conversion of right to repayment of the investors into equity shares with respect to a roll over transaction entered into by Equities and capital with the investors.
• The plaintiff also alleged that the fourth defendant misappropriated a sum of $4.5 million or $3.5 million in the alternative in relation to the company belonging to the SIH group. The fourth defendant breached Section 180 and 181 of the CA by permitting or causing equities to go forward with a managed investment scheme, which was unmanaged, and therefore a breach of Section 601ED of the CA.
• The fourth defendant also breached the Section 180 and 181 of the CA by permitting or causing Capital with respect to failing to report to the ASIC and the investors therefore resulted in the breach of Section 319 and 314 of the CA.
• The fourth defendant also made equity, capital breach the Section 911A, AND 911B of the CA by allowing or causing them to conduct financial services without authorization and as a result himself breach Section 180 and 181 of the act (Tewari 2015).
• The fourth defendant himself provided financial services without proper authorization and therefore breached Section 911B of the act.
• The fourth defendant also caused the breach of Section 180 and 181 of the act by allowing equities and capital to advertise financial products in breach of Section 1018A of the act.
• The defendant also breached the provisions of Section 180 and 181 by permitting or causing Equities and Capital to breach Section 12DA, 12DB and 12DF of the act by engaging in deceptive or misleading conduct.
• The fourth defendant also breached Section 180-182 of the act by permitting or causing Newcastle, capital House and Melbourne to get into many ad hoc deals with investors (Keay 2014).

The court in this case held the fourth defendant liable for the breach every allegation made by the ASIC. With respect to this decision, the court considered the following law. The court took into consideration the provisions of Section 180. The Section states that it is the duty of the and other officers of a company to use their powers and exercise their duties with proper diligence and care which any reasonable person would have used if they were an officer or director of the company in similar circumstance or held or occupied such a position in the company similar to that of the directors and officers (Gerner, Paech and Schuster 2013).  The court in this case held that the defendant was liable for the breach of this Section by not observing diligence and care while discharging his duties as the director of the companies.

Critical Analysis of Decision

The court also considered the provisions of Section 181 of the Corporation Act 2001 with respect to this decision. The Section states that it is the duty of the directors and the other officers of the company to discharge their responsibilities towards the company in good faith and in the best possible interest of the company (Gelter and Helleringer 2013). In addition, the directors and other officers of the company must discharge their duties for a proper purpose towards the company. Duties in this Section refer to the statutory duty, which the direct owns towards the company with respect to the general law o fiduciary duties. The court in this case also considered the decision provided in the case of Chew v R (1991) 4 WAR 21, where the court held that good faith means (Knepper et al. 2015)

• Best exercise of their powers towards the interest of the company
• No conflict between personal interest and the interest of the company
• No unfair use of advantage for making secret profits
• No misappropriation of company’s assets for personal gains

The court in this case reading Section 184 of the CA along with Section 181, the Section can be breached if the director has not acted in the best interest of the company, even if there is no act of dishonesty committed by the director (Huebner and Klein 2015).

The court also considered the provisions of Section 182 of the CA in deciding this case, according to the provisions of the Section it is the duty of the directors and other officers of the company not to gain unfair advantaged for someone else or themselves by making unfair use of their position in the corporation. In addition, the directors and other officers of the corporations are not allowed to use their position in the company to cause detriment to the company. The court also considered the decision made in the case of ASIC V Adler 458 which held that entering into an agreement by the director which provides him with unfair advantage is the breach of Section 180,181,182 of the CA (Keay 2012). In the case of R v Byrnes [1995] HCA 1; (1995) 183 CLR 501 the court held that  if a director of a corporation acts with respect to a transaction in which the part to whom he owns a fiduciary duty gains benefits without making proper disclosure in relation to his interest, then the director is deemed to act improperly with respect to Section 182 of the CA (Welch et al. 2015). In addition, this would also lead to the breach of the provision of good faith provided in Section 181 of the act. In the case of Chew v The Queen [1992] HCA 18, the court held the provisions of Section 180,181,182 of the CA can be reached by mere conduct to a director to attain unfair advantaged or himself or someone else , it is not relevant in this case that whether the advantage was actually breached or not (Stout et al. 2016).

Conclusion

With respect to the decision made by the court in this case the court also considered that although the corporation itself owes the duties imposed by Section 181 and 180 of the CA the direct could be held liable for the breach of provisions of these sections (Land and Saunders 2014). This breach can arise from making or not preventing the corporation from breaching the provisions of law, which may indirectly involve failure to exercise skill and care towards the interest of the company on the part of the directors (Fairfax 2013).

After making such findings, the courts focused on the individual breaches, which were made by the defendant.  With respect to the first breach of making loans the question before the court was to determine whether the pleading made by the ASIC  are enough for the orders sought by them against the defendant and whether the objection of ASIC with respect to final formulation of loans were made out. The court in this case held that both the questions before the court were in favor of ASIC nod the defendant sis liable for the breach of Section 181 and 181 of the CA by making such loans (Prashker 2014).

In relation to the allegation of rollovers against the defendant the question before the court was whether the orders sought by the plaintiff was in accordance with the pleading and whether roll over transaction finally formulated had been made out or not. After analyzing the submissions made by both ASIC and the fourth defendant the court decided that the defendant had breached directors duty by getting involved in the roll over transaction as alleged by the plaintiff. In addition the court also decided that the order sought with respect to roll over transaction were according to the pleadings made by the plaintiff. The court held that it is clear that the fourth defendant was clearly the sole director of equities and capital and he allowed the company to go forward with a role over transaction by issuing preference share without any consideration and subsequently breached the provision of Section 180 and 181 of the CA (Donner 2016). The court also held that the defendant breached the provisions of Section 182 by causing detriment to the cpmpany through his actions (Bilchitz and Jonas 2016).  

With respect to misappropriation, after considering the submissions made by both the plaintiff and the defendant the court had two factors to analyze firstly whether according to the submission of the defendant the defects in pleading made by the plaintiff is extreme and defies all principles of pleadings. Secondly, to what extent the allegation with respect to misappropriation are true. The court in this case held that the payment made by the company were made for non business and in proper purpose or to give unfair advantage to the defendant and these payments were made to be caused by the defendant himself breaching the provisions of Section 180-182 of the CA.

References

The court held the same with respect to unregistered managed investment scheme by not registering the investment scheme and therefore a breach of the defendant’s duty of care as provided in Section 180(1) of the CA along with the breach on Section 181 by not acting in best interest of the company (Bruce 2013).

The court had a different view with respect to the breach of reporting failure by capital. The court held the the defendant breach the provisions of Section 180 by not complying with his duty of care towards the company. However, the court held that the defendant did not breach the provisions of Section 181 in this situation, as his acts cannot be considered not to be in good faith.

Conclusion

The findings conducted by the court in this case are broadly discussed the range and limits of the duties of directors and other officers towards the company. The provisions provided in Section 180-182 of the CA have a very wide but simple meaning to them. Through this case the court made it clear that the it is not necessary that detriment was actually caused to the corporation or unfair advantage was actually gained by the director , it is enough that the directors acted in such a way which would have resulted in such problem.

References

Bilchitz, D. and Jonas, L.A., 2016. Proportionality, Fundamental Rights and the Duties of Directors. Oxford Journal of Legal Studies, p.gqw002.

Bruce, M., 2013. Rights and duties of directors. Bloomsbury Publishing.

Donner, I.H., 2016. Fiduciary Duties of Directors When Managing Intellectual Property. Nw. J. Tech. & Intell. Prop., 14, p.203.

Fairfax, L.M., 2013. Sue on Pay: Say on Pay's Impact on Directors' Fiduciary Duties. Ariz. L. Rev., 55, p.1.

Gelter, M. and Helleringer, G., 2013. Constituency Directors and Corporate Fiduciary Duties. Forthcoming: The Philosophical Foundations of Fiduciary Law (Andrew Gold & Paul Miller eds., Oxford University Press, 2014).

Gerner-Beuerle, C., Paech, P. and Schuster, E.P., 2013. Study on directors’ duties and liability.

Huebner, M.S. and Klein, D.S., 2015. The Fiduciary Duties of Directors of Troubled Companies. American Bankruptcy Institute Journal, 34(2), p.18.

Keay, A., 2012. Directors’ duties to creditors and financially distressed companies’.

Keay, A., 2016. Wider Representation on Company Boards and Directors’ Duties. Journal of International Banking and Financial Law, 31(9), pp.530-533.

Keay, A.R., 2014. Directors' duties.

Knepper, W.E., Bailey, D.A., Bowman, K.B., Eblin, R.L. and Lane, R.S., 2015. Duty of Loyalty (Vol. 1). Liability of Corporate Officers and Directors.

Land, A.L. and Saunders, R.S., 2014. Folk on the Delaware General Corporation Law: Fundamentals. Aspen Publishers Online.

Prashker, L., 2014. Corporation Law for Officers and Directors (Book Note).

Stout, L.A., Robé, J.P., Ireland, P., Deakin, S., Greenfield, K., Johnston, A., Schepel, H., Blair, M.M., Talbot, L.E., Dignam, A.J. and Dine, J., 2016. The Modern Corporation Statement on Company Law.

Tewari, S.P., 2015. Directors Fiduciary Duty not to make Secret Gains.

Welch, E.P., Saunders, R.S., Land, A.L., Voss, J.C. and Turezyn, A.J., 2015. Folk on the Delaware General Corporation Law: Fundamentals. Wolters Kluwer Law & Business.