Discuss about the Corporations Law for Preliminary Issues.
Dr Dawes, Mr Foster, Mr Huckenfusser and Mrs Duck after having dealt with certain shares of MMM later on sold them off upon receiving some vital information of the same from the internal sources of GML and also earned profits in the dealing. They would not have been entitled to these profits had they not received the information from GML. Thereafter, some of them have become liable under the civil penalties as enshrined in the Corporation Act.
There are several breaches of laws in the given situation. There are some people who have misused the information that they received from GML. Yet there are others who have traded in the shares of MMM to derive personal gains and benefits out of the information that they received. Though there might be some because of whom no detriment was caused to the company on the whole but it should be noted that if the minutes of the meetings of GML would not have been available to them, they would not have gained these benefits. Thus, the issues that arise in this matter may be outlined as follows:
- Whether Dr Dawes has incurred a liability under the Corporations Act for the benefits that he has drawn because of the investments made by his wife in the stocks of MMM?
- Whether Mr Foster has incurred any liability for having dealt in insider trading and making his new company QECG buy shares of MMM and thus become liable for prosecution?
- Whether any misappropriation of position has been made by Mr Huckenfusser and whether the personal gains that he has derived have made him liable for prosecution against him?
- Whether there is any liability of Mrs Duck and if anything wrong has been done by her in investing in the shares of MMM on getting information about the upcoming profits from Mr Huckenfusser?
The facts in the matter are clearly indicative of the fact that some of the people as identified above are directors while others are pseudo directors and some are even simple employees of the company. Thus, all cannot be dealt with under the provisions of director cannot be done here. Thus all the issues have to be discussed independently in this matter. There might be some people who are liable for civil penalties while there might be others who have been an accomplice in the matter and have in fact not contravened any law. Each of these issues shall be conclusively determined after making an analysis of the provisions of Corporations Law and making a note of the breached provisions of the law.
Possible Breaches of the Corporations Law
In order to successfully bring about a suit against a director or officer of a company, certain essential things needs to be proved under Section 183 of the Corporations Act. These are:
- That at the relevant time, the person against whom the suit is being instituted was an officer of the company under absolute authority;
- That the alleged person directly acquired the information himself;
- That he could obtain the information because of his position as a director or officer of the company and had he not been in that position, he would not have obtained the information;
- That the person alleged made an improper use of the information that he received;
- That the improper use in question was made directly by him so that he could gain something for himself in the matter;
- The same information that he has used could also have been used by him to cause some harm or detriment to the company.
Dr Dawes in the given instance got the information about the possible benefits of investing the stocks of MMM because he was enjoying the position of a director of the company and was also a member of the directorial meeting. He had given a clear indication to the company that he was declared insolvent and was not left with any assets. Thus, it can be said that no material facts were concealed from the company by Dr Dawes. Upon acquiring information about the shares of MMM, he advised his wife to make an investment in the shares. He also came to know about the possible fall in the prices of the shares because of his position and subsequently asked his wife to sell off the shares that she had bought. A good amount of returns were obtained by her by way of this transaction. It should be noted that though benefits were derived by Dr Dawes in the matter, no detriment was caused to the company because of his actions. All that Dr Dawes did was he invested his money in the stocks of the company and his wife derived benefits out of it. It should also be noted that Section 183 becomes applicable only in those conditions when benefits are derived by a director or an officer. However, because of his insolvency, Dr Dawes was not eligible to become a director and to hold on to his directorship, no permission was taken from ASIC as well. Thus, it can be said in this matter that Dr Dawes is not liable to get any civil penalties in the matter.
Mr Foster was a former director of the company and he acquired the information of the stocks of MMM because of his position. He thereafter left GML and joined QECG as a director and used the information he gained in GML for the advantage of QECG. He advised the Board in QECG to invest in the shares of MMM and when he did this, he was not associated with GML in any way. However, it cannot be denied that the information that was received by him was only because of his advantageous position and had he not been present in the meeting, he would have not known about it. Thus, there is no doubt over the fact that he made an advantageous use of his position and misused the gathered information there. There was no option in the hands of QECG to know about the stock priced had Mr Foster not told them about it. There is indication of misuse of information and though detriment was not caused to GML in the matter, yet the actions of Mr Foster have made him liable for insider trading. Hence, civil liabilities have been incurred by him in this situation.
Mr Huckenfusser is in the position of an employee in GML and is neither an officer nor a director there. Because of his work profile, he gathered the information about the stock prices of MMM and passed on this piece of information to an outsider Mrs Duck. This information was let out only with intent to gain personal advantage and to set off his debts in the matter. Mrs Duck has got no action or liability in this because that entire she did was she sought from some independent financial advice from her brother-in-law. However, it is worth noting here that Mr Huckenfusser succeeded in giving this information because of his position and this is a breach of fiduciary duties that have been given to him. Thus, it can be said that though Mrs Duck is not liable in the matter, Mr Huckenfusser is.
Dr Dawes acted honestly in the matter and though he gained monetary advantage his bankruptcy was known to GML. Though certain provisions of law have been contravened by him, he is not guilty under law and can claim immunity under Section 1317S.
Mr Foster in the matter has no available remedies and he can only state that GML did not incur any losses because of his actions. However, this is not a valid defense and there needs to be an independent procedural investigation taken up by ASIC in the matter.
Mrs Duck has total immunity in the matter because she is not in association with GML. She only took financial investment advice in the matter in absolute good faith. Based on the advice she obtained, she acted and hence she has not breached any law or provisions of the Corporations Act.
There are certain civil remedies in the matter. As and when a breach of duty is proved, the Courts can choose on any of the following remedies:
- For contravention of the law, a pecuniary penalty amounting to $200,000 may be imposed;
- The accused may be asked to pay compensation for damages under Section 1317E of the Corporations Act as a civil penalty;
- The directors might also face disqualification in the matter from the management of other companies.
Thus, in this matter, it can be concluded saying that there are certain people who have beached the provisions in the matter but there are also some who have not made a breach under Section 183 of the Corporations Act. Hence, civil penalties can be imposed in the matter. But, it should be noted that procedural process has to be independently taken up in the matter by ASIC before any breach is declared in the matter.
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