ASIC V Vizard [2005]: Essay On Breach Of Director's Duty.

Research on an Australian case (ideally not more than 10 years old since the decision by the Court) involving breach of company director’s/officer’s duties under the Corporations Act 2001 (Cth).

Circumstances under which duty of directors can be breached

ASIC v Vizard [2005] provides a good example of the case it was illustrated by the court that what are the circumstances where it can be stated that there has been a breach of the duty of the directors according to which we should not improperly use information received by them in their capacity as the director of the corporation. The decision in Vizard’s case acts as a reminder regarding the powers available with the ASIC for pursuing a suspected breach of the Corporations Act by the directors by adopting civil penalty proceedings. In this case, Vizard was the former nonexecutive director of Telstra. Therefore briefly speaking, some information was used by Vizard that was obtained by him as a result of his position as the director of Telstra before purchasing the shares in three IT companies in which Telstra had also shown its interest. Therefore in the case, it was admitted by Vizard that there has been a breach and therefore the court ordered him to pay a civil penalty of $390,000. At the same time, Vizard was also disqualified by the court from acting as a director of the company for the next 10 years.

These are the circumstances under ASIC made a declaration that it was going to start civil penalty proceedings against Steve Vizard in the Federal Court. It was alleged by the ASIC that there has been a breach of duty by Vizard as the director of Telstra Corp. Ltd. This breach took place when Vizard had improperly use the information that was available to him as the director of Telstra for the purpose of achieving your personal advantage. According to the ASIC, Vizard had used confidential information of Telstra between March and July 2000 four trading in the shares of 3 listed public corporations. 

In this case, the ASIC was seeking the following orders against Vizard. The first was the declaration that the former corporations’ law has been breached by Vizard on three separate occasions when he improperly used Telstra information for the purpose of achieving a personal advantage. ASIC was also seeking pecuniary penalties from the court to such amount that may be considered as appropriate by the court for each contravention. Similarly, the ASIC was looking for a disqualification order from the court with prohibited Vizard from involving in the management of the Corporation for such as may be considered as fit by the court.

Penalties imposed and orders made by the court

the additional duties that have been imposed on the directors and other officers of corporations have been provided with statutory force in the form of the provisions that are mentioned in chapter 2D, Corporations Act. Along with the provisions regulating the conduct of the directors of insolvent or nearly insolvent corporations (like the duty of the directors to prevent the company from trading if it is insolvent), these provisions and the predecessors of these provisions have seen a lot of litigation during the recent years. Particularly in view of the high-profile corporate collapses that took place during the recent years, including the HIH and One. Tel, the ASIC has started to follow a number of directors and other officers of corporations regarding the management of their corporations. The decision in ASIC v Stephen William Vizard [2005] FCA 1037 acts as a reminder regarding the powers available with the ASIC for pursuing a suspected breach of the Corporations Act by the directors by adopting civil penalty proceedings. Such proceedings can be initiated against the directors of high-profile and substantial corporations.

As mentioned above, this case is related with the duty of the directors which prohibits them from using the information received by them as a result of their position in the company. In this regard it as been mentioned in section 183(1) of the Act that any information received by the person as a result of the fact that such person is a director or other officer of the corporation, should not use such information improperly and with a view to achieve a personal advantage or to cause a loss to the company (ASIC v Colgate-Palmolive Pty Ltd., 2002). 

It needs to be noted that section 183(1) is a civil penalty provision in view of s1317E of the Act. When the court is satisfied that there has been a breach of s. 183, the court is required to make a declaration of such a breach under section 1317E. Then it is available to the court to make an order. In accordance with section 1317G, which provides that the director or the officer is required to pay a pecuniary penalty to the Commonwealth (this becomes a civil debt payable to the ASIC on behalf of the Commonwealth), in case the court is satisfied that there has been a breach which:

• Significantly, prejudices dangers of the Corporation or its members; or
• Significantly prejudices the ability of the company to pay its creditors; or
• Can be described as serious.

Apart from it, another order can also be made by the court under s 1317H which requires the director of the office of the corporation to provide compensation to the company for the damage that has been caused as a result of the breach of duty (Rich v ASIC, 2004). As mentioned below, the court has the power to make some other orders which include the order disqualifying the director from managing a corporation for a particular period.

Provisions regulating conduct of directors of insolvent corporations

In 2000, Mr. Vizard was the nonexecutive director of Telstra Corp. Ltd. At the same time another company was also set up by him. This was known as Creative Technology Investments Pty Ltd. and the sole director and shareholder of this company was Mr. Lay, the accountant of Vizard. In December 1999, Brigham Pty Ltd., which was a trustee company and Vizard, his wife and their children had been officially owned the shares of Brigham. This company entered into a loan agreement with CTI and loans were given to CTI out of the funds that were provided by Vizard. The funds were going to be applied for the purchase of a share portfolio.. It was discovered by the court that Vizard had entered into three checkout elections in 2000 as he received confidential information. Due to his position as the director of Telstra, he had come to know that the transactions were going to be profitable. 

At the relevant time of the acts that have been mentioned above it was provided by s232 and later on s183, Corporations Act that the director of a corporation is prohibited from using confidential information for achieving your personal advantage. However in this case it was discovered by the court that the breach of these provisions has been established due to the following facts.

• Vizard was the director of Telstra;
• He received confidential information on account of his position in the company;
• He improperly use the information for making the decision to purchase or to sell the shares on the basis of such information;
• The improper use of information was made by Vizard in order to achieve an advantage for CTI (and in this way, for Brigham, Vizard and his family members).

While considering if the breach can be described as serious (as it is a requirement for making a pecuniary penalty order, unless it is established that the conduct had begin prejudice the interests of the company or the ability of the corporation to pay its creditors), it was noted by Finklestein J. that the cost of white-collar crime is extremely high and it may result in serious harm to many people. The directors have been prohibited from using confidential information for the personal advantage. In this regard, he does not matter if the actions of the director have not resulted in any harm to the corporation or has not robbed the corporation of an opportunity which has been used for its own advantage. This is also visited by the court in Regal (Hastings) Limited v Gulliver [1967]. It was further mentioned that the relief provided by the Corporations Act is provided for the purpose of avoiding the potential harmful consequences related with the conduct of a particular type. Therefore, section 232 sought and now s183 seeks to establish the norms of behavior related with the proper conduct of commercial life. As a result, these sections contain a significant level of moral blameworthiness.

Conclusion

In this case, the court and the ASIC had accepted the submission made by Mr. Vizard that he will not be involving in such conduct again. Contrition was expressed by Mr. Vizard, and evidence was also produced regarding his good character. This included his philanthropic role and the services done for the community. But Finklestein J. Refer to the decision delivered in Australian Competition and Consumer Commission v ABB Transmission and Distribution Ltd (No 2 – Distribution Transformers) (2002) where the court arrived at the conclusion that the nature of the offense instead of the character of the offender needs to be the main consideration while imposing punishment for the contravention. However some other factors were also considered to be relevant by the court. These included: 

The lack of profit was the result of the decline in the share market. Therefore it is irrelevant that no profit has been made as a result of the breach.

General deterrence of conduct needs to be the consideration while imposing penalties for the breach;

Although 'shaming' is also a form of punishment but it cannot act as a substitute for form of retribution;

A 'discount' in penalties can be considered as appropriate, if the wrongdoing was acknowledged early and the offender cooperated with the regulator;

The court should not depart from the penalty that has been jointly recommended by the parties unless such penalty is clearly out of bounds. As mentioned in NW Frozen Foods Pty Limited v Australian Competition and Consumer Commission (1996).

In this regard, it was stated by the ASIC that the appropriate penalty for each contravention should be $130,000. As a result, it was ordered by the court that Mr. Vizard did pay the penalty of $390,000. However, the court also noted that higher penalty would have been imposed by it if it was "left uninstructed". Moreover, it was noted by the court that the current maximum amount of penalty of $200,000 for each breach of duty has been put in place for the last 13 years and therefore it may need to be reviewed by the Parliament.

Therefore it can be stated that this case remains another chapter in increased regulation of conduct of directors and officers. Particularly, it can be stated that this case has created a significant storm in the media that is going to impact the approach of the regulators and similar matters in future. The ASIC, as well as the Director of Public Prosecutions will make an effort in future to ensure that any “deal” that is made with the respondents. In case of civil penalty proceedings are not going to be the subject of criticism by the press or by the court. In this case the comments made by Finkelstein J. will result in precipitating the rise in the maximum penalty that has been prescribed for the breach of civil penalty provisions, if the comments are considered by the Parliament. The parties to civil penalty proceedings should be aware of the fact that in appropriate cases the court may impose more onerous penalties as compared to the penalties recommended by the regulator.

Moreover, in view of this decision moves are being made to applied obligations of directors and officers to the employees of the corporations also as well as other individuals. 

References

ASIC v Vizard [2005] FCA 1037

Australian Competition and Consumer Commission v ABB Transmission and Distribution Ltd (No 2 – Distribution Transformers) (2002) ATPR 41-872

Australian Competition and Consumer Commission v Colgate-Palmolive Pty Ltd (2002) ATPR 41-880

NW Frozen Foods Pty Limited v Australian Competition and Consumer Commission (1996) 71 FCR 285

Regal (Hastings) Limited v Gulliver [1967] 2 AC 134

Rich v Australian Securities and Investments Commission (2004) 50 ACSR