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Business And Corporations Law Forrest V ASIC

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Question:

Discuss about the Business and Corporations Law Forrest v ASIC.
 
 

Answer:

Introduction

The directors of any corporation are bestowed with the responsibility of governing the company, on behalf of its shareholders. This responsibility or duty is imposed upon the directors in Australia through Corporation Act 2001(Cth). Section 198A (1) of this act puts forward that requirement of the business to be managed as per the directions provided by the directors of such company. This gives rise to the obligations on all the directors, in both general, as well as, lawful manner. This act provides a range of duties for all the directors of the company (Australian Institute of Company Directors, 2017). For instance, the directors have the duty of protecting the company from any such dealings or transactions, which can lead to insolvency.

The case of Forrest v ASIC (Australian Securities and Investment Commission) [2012] HCA 39 is amongst the leading cases, regarding the breach of directors’ duties which have been covered through the governing legislation, and the judgment of which was given by the High Court of Australia. In this case, the director of the company was alleged to have breached the various section of Corporations Act, which included the duty of care and diligence (Australasian Legal Information Institute, 2017a). This report covers the details of this case.

 

Forrest v ASIC (2012)

In this case, Fortescue Metals Group Ltd, Fortescue in short, wanted to develop a port, a railways and a mine, so as to enable the exportation of the output of the mine, which would be obtained in the future (Latimer, 2012). For this, the company entered into three different Framework Agreements, and each of these three agreements was with some Chinese entity. For these purposes announcements were made at different times, to the ASX, i.e., the Australian Stock Exchange, which were coupled by media releases’ issuing. These announcements claimed that binding contracts were drawn with all three Chinese entities (Levin, 2012).

The ASIC, in March 2006, initiated proceedings against Fortescue, along with Andrew Forrest, Forrest in short, who was a substantial shareholder of the company Fortescue, its chairman and CEO, in the Federal Court of Australia. The ASIC contested the legitimacy of truth behind the announcement of the company, made to the media, in addition to the broader market pertaining to a chain of Framework Agreements, among three of the state-owned Chinese corporations and the company (High Court of Australia, 2012).

This Framework Agreement was related to the financing and building services which had to be provided regarding the Pilbara Iron Ore and Infrastructure Project of the company (Hill & Thomas, 2015). The Framework Agreements were described in the announcements as amounting to a binding contract. Though, the agreement’s terms did not have the wholesome certainty and hence, it was doubtful to be enforceable in a lawful manner. The claims of the ASIC were dismissed by Justice Gilmour at the trial (High Court of Australia, 2011). But when an appeal was made to the Federal Court’s Full Court, the claims of ASIC were held to be successful for obtaining the order relating to the:

  • Misleading or deceptive conduct of Fortescue, which contravened Corporation Act’s section 1041H;
  • The breach of continuous disclosure requirements by Fortescue which were as per section 674 of the Corporations Act; and
  • The failure on part of Forrest for exercising his powers, along with the discharge of his obligations contained in section 180(1) of the act, regarding reasonable care, and diligence, resulting in the breach of this section (Naik, 2015).

Both Forrest and Fortescue made an appeal against this decision given by the Full Court of Federal Court. They also sought out for the reinstatement of the order which were made at the first instance by Justice Gilmour. The four members of the High Court, on October 2nd 2012, dismissed the case made by ASIC and stated that the statements made in this case, were neither misleading nor deceptive (Briffa & Jaque, 2012).

 

Duties Breached

Section 180 of the Corporations Act, 2001, enforces a civil obligation on the directors, along with the other officers of any company, pertaining to acting with care and diligence. Section 180(1) provides that the quoted individuals have to use their authority, and also have to fulfill their obligations with a level of diligence and care, which a prudent individual would exercise if he/she was in the position of the quoted individuals under similar circumstances and was occupant of the office of the quoted individuals in the company. A civil penalty for the breach of this section is provided in section 1317E (Australasian Legal Information Institute, 2017b).

However, section 180(2) provides the defense to the directors, which is also known as the business judgment rule. The requirements contained in subsection (1) are deemed as having been met, along with the equivalent duties contained in the common law and in equity, when the quoted individuals make a business judgment. This business judgment is based on the judgment made for proper purpose, and with good faith; and the quoted individuals do not have any kind of significant personal interest in the issue revolving round the undertaken judgment; has informed themselves regarding the issue of judgment, to such extent which is considered as appropriate one; and has an unhindered conviction that the undertaken decision is in the paramount interest of the company. For the rationality of this belief, the position of a reasonable individual in similar circumstances is taken as the benchmark (Swaab, 2017).

The allegation of the ASIC was that Forrest had contravened the subsection (1) of this act, on the basis of the contravention of section 1041H or section 674 of this act (Humphrey & Corones, 2014).

Decision

Holding the announcements as based on the opinions, which was held in a reasonable manner, the case of ASIC was dismissed by the trial judge. When an appeal was made by the ASIC to the Full Federal Court, the same was upheld. It was held by the full bench of Federal Court that the announcements made by Fortescue did indeed amount to deceptive and misleading conduct and that the company had failing in fulfilling the continuous disclosure requirements, as they did correct the deceptive and misleading conduct, upon the release of the announcements (Lo, 2016). It was also established by the full bench that Forrest had contravened the duties imposed on him as a director and also breached the act, through the involvement in both the drafting, and the release of the announcements (Australasian Legal Information Institute, 2012).

When this decision was made, Fortescue and Forrest jointly applied to the High Court of Australia, an appeal, which asked for reinstating the decision taken by the trial judge. It was held by the High Court of Australia that the announcements were the representation of the Chinese companies and Fortescue and that these had entered into the agreement, with the intention of each of the parties, to make the same as binding. This representation was held by the High Court as being none of the following, i.e., fraud, deceptive or misleading (Yip, Tan & Lim, 2013).

 


The issues which were present in the appeal were narrowed by the summary dismissal of the contentions of ASIC by the High Court of Australia, as per which the Board of Fortescue and Forrest had acted in a manner which can be deemed as dishonest, regarding the making of the above stated announcements. The inquiry of the High Court was focused upon whether or not, the use of term “binding agreement” by Fortescue in the announcements was actually deceptive or misleading, or whether or not, the same was likely to deceive or mislead. With reference to the intended audience, a close scrutiny of the implication of this expression was conducted by the High Court of Australia. Wide sections of the business or commercial community, along with the investors, were defined as the intended audience by the High Court (Jade, 2012).

In spite of the literal meaning of the term “binding agreement”, it was held by the High Court that the expression did not essentially convey the notion that the agreement would be enforceable in a legal manner. It was stated by the judges that an individual in specific situation, should not be required to evaluate the legitimacy of a contract, in short its valid formation. Along with this, it was also not necessary to assess the practicability of the contract to compel performance as per the enforcement measures applicable on the main jurisdiction, before a statement is made to the community regarding a contract being as a binding one (Naik, 2015).

The High Court also held that there was an absence of the evidential base for making the assumption that an individual who read these announcements would form an opinion or understanding regarding the parties entering into agreements, which would be enforceable by the courts of Australia as per the law of the nation, in case of a dispute arising in the future, amongst them. The court also held that Fortescue was not required to release the entire text of the Framework Agreements, so as to be in conformity with the obligations relating to continuous disclosure (Briffa & Jaque, 2012).

The approach of the High Court in this case was consistent with the claims being dependent on the facts, relating to the deceptive or misleading conduct. The court analyzed the accurate summarization of the Framework Agreement’s content and the announcements brought forward the point as being constituted as a binding contract. Reliance was also made on the preliminary issue regarding the reasonable belief, as stated earlier. Rejecting the submission of ASIC, the High Court held that the agreements were governed by the Australian laws and the contract included the foreign state owned entities, which were executed in China, and they did not have a clause of choice of forum (Naik, 2015).

 


A contention was also made by the ASIC regarding the attempt of the director, i.e., Forrest to modify the conditions stated in the Framework Agreements, pointing in the direction that the drawn agreements did not have the intention of being binding. This argument was rejected by the judges and they stated that the contractual negotiations taking place after the same has been drawn could not be amounted as repudiation of the previous agreements.  Further, the same was deemed as legitimate commercial conduct for continuation of making an attempt for striking a better bargain (Briffa & Jaque, 2012).

As the statements were held to be neither of the three, i.e., fraud, deceptive or misleading, the court held that there was no failure on part of Fortescue and Forrest regarding the compliance of obligations covered under this act. As a result of this, the declarations and the decision of the Federal Court were set aside by the High Court. Further, the High Court reinstated the decision of the trial judge declaring that there was no contravention of the Corporations Act 2001, on part of Fortescue and Forrest (Plessis, Hargovan & Bagaric, 2010).

In short, the appeal of Fortescue and Forrest was upheld that their conduct was not held as deceptive or misleading, which could contravene section 1041 of this act. And the claims made regarding the breach of section 674, pertaining to continuous disclosure, along with section 180 (1) of this act pertaining to duties of directors, were contingent upon the breach of section 1041 of this act. And so, the claims for both these sections were dismissed, due to the dismissal of claims relating to the deceptive or misleading conduct (Naik, 2015).

Conclusion

The study of the case of Forrest v ASIC presents an important lesson, which is in conformity to the established principles under the corporate law, specifically relating to the statements which are made in the ASX announcements, and these have to be both correct, as well as, verifiable. In the given case, the ASIC made claims against the company and its director, for undertaking misleading or deceptive conduct, which resulted in the failure of compliance with the continuous disclosure requirements and contravened the duty of care, as well as, diligence on part of the director. The trial judge discarded these claims, upon which an application was made by the ASIC to the Federal Court, which overturned the decision of the trial judge. As a result of this, both the company and its director, made an appeal to the High Court of Australia, which reinstated the decision of the trial judge after rejecting the decision of the Federal Court.

 

References

Australasian Legal Information Institute. (2012). Forrest v Australian Securities and Investments Commission & Anor; Fortescue Metals Group Ltd v Australian Securities and Investment Commission & Anor ([2012] HCA 39) Case Summary [2012] HCASum 39 (2 October 2012). Retrieved from: https://www3.austlii.edu.au/au/other/HCASum/2012/39.html

Australasian Legal Information Institute. (2017a). Forrest v Australian Securities and Investments Commission [2012] HCA 39 (2 October 2012). Retrieved from: https://www.austlii.edu.au/au/cases/cth/HCA/2012/39.html

Australasian Legal Information Institute. (2017b). Corporations Act 2001 - Sect 180. Retrieved from: https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s180.html

Australian Institute of Company Directors. (2017). What are the duties of directors?. Retrieved from: https://www.companydirectors.com.au/membership/the-informed-director/what-are-the-general-duties-of-directors

Briffa, P., & Jaque, A. (2012). Twiggy Off the Hook- Forrest v Australian Securities and Investments Commission [2012] HCA 39. Retrieved from: https://www.swaab.com.au/Publications/Publications/Twiggy-off-the-hook-Forrest-v-ASIC

High Court of Australia. (2011). Forrest V. Australian Securities And Investments Commission And Anor (P44/2011) Fortescue Metals Group Ltd V. Australian Securities And Investments Commission And Anor (P45/2011). Retrieved from: https://www.hcourt.gov.au/assets/cases/p44-2011/P44-2011.pdf

High Court of Australia. (2012). John Andrew Henry Forrest V Australian Securities And Investments Commission & Anor Fortescue Metals Group Ltd V Australian Securities And Investments Commission & Anor [2012] HCA 39. Retrieved from: https://www.hcourt.gov.au/assets/publications/judgment-summaries/2012/hca39-2012-10-02.pdf

Hill, J.G., & Thomas, R.S. (2015). Research Handbook on Shareholder Power. Northampton, MA: Edward Elgar.

Humphrey, J., & Corones, S., (2014). Forrest v ASIC : a ‘perfect storm’. Australian Law Journal, 88(1), pp. 26-37.

Jade. (2012). Forrest v Australian Securities and Investments Commission; Fortescue Metals Group Ltd v Australian Securities and Investments Commission [2012] HCA 39; 247 CLR 486; 86 ALJR 1183; 291 ALR 399; 91 ACSR 128. Retrieved from: https://jade.io/article/281587

Latimer, P. (2012). Australian Business Law 2012 (31st ed.). Sydney, NSW: CCH Australia Limited.

Levin, D. (2012). Forrest v ASIC; Fortescue Group Metals Ltd v ASIC [2012] HCA 39. Retrieved from: https://mtecc.com.au/forrest-v-asic-fortescue-group-metals-ltd-v-asic-2012-hca-39/

Lo, S.H.C. (2016). In Search of Corporate Accountability: Liabilities of Corporate Participants. Newcastle upon Tyne: Cambridge Scholars Publishing.

Naik, L. (2015). A case note on the Forrest v ASIC decision and the High Court's view on when the term 'binding contract' may be misleading or deceptive. Retrieved from: https://cornwalls.com.au/sharing-knowledge/legal-updates/high-court-rules-in-favour-of-fortescue-metals-group-ltd-and-andrew-forrest.aspx

Plessis, J.J.D., Hargovan, A., & Bagaric, M. (2010). Principles of Contemporary Corporate Governance (2nd ed.). Cambridge: Cambridge University Press.

Swaab. (2017). A Practical Guide To Directors’ Duties. Retrieved from: https://www.swaab.com.au/expertise/corporate/directors-duties/

Yip, A., Tan, J., & Lim, H.Y. (2013). Forrest v Australian Securities and Investments Commission [2012] HCA 39 (Australia, High Court, 2 October 2012). Retrieved from: https://www.lexology.com/library/detail.aspx?g=34dadd8a-2201-4331-80a8-513a56c2df9c

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