Question

Travel Australia Pty Ltd is a company that provides elite travel experiences in Australia. Top 4wd Pty Ltd has three directors: John, Chris and Michelle. John has been appointed the managing director. Michelle is appointed as an independent non-executive director. Chris is a qualified chartered accountant, and the board refers to him for his accountancy skills. The company maintained a good profit for the first three years of operation but has recently experienced an increase in cost, causing some financial strains on the company.

Despite the decline in the company’s financial position, the board believe that they should expand into providing motel accommodation. The board delegates to Chris the task of investigating the financial returns on a proposed motel project.

Chris delegates the task to his secretary as he is about to go on holidays. The report (prepared by the secretary) recommends the project. It later turns out the report is misleading as it has missed a number of costs involved in the new project. At the board meeting the directors are in a hurry to get through a number of items and the proposal is considered as the last item on the Agenda. The directors spend less than five minutes discussing the report and agree to accept the proposal. During the Board meeting Chris notes the company is struggling to pays its debts as they fall due. Michelle was not at the meeting and has missed several meetings lately as she has been committed to other ventures.   

Three months later the company is placed into liquidation by one of its Creditors.

Advise the Liquidator on the following:

a)       Have any of directors breached the Duty of Care contained in Sec 180 of the Corporations Act? Discuss with reference to cases and also consider any defences which maybe available to them.                                                                                                                             

b)       Consider when the directors maybe liable for any debts occurred in relation to the projects as a result of the financial position of the company at the time of the Board meeting.

Answer 1

A)

(1) A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they:

(a) were a director or officer of a corporation in the corporation’s circumstances; and

(b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.

Business judgment rule

(2) A director or other officer of a corporation who makes a business judgment is taken to meet the requirements of subsection (1), and their equivalent duties at common law and in equity, in respect of the judgment if they:

(a) make the judgment in good faith for a proper purpose; and

(b) do not have a material personal interest in the subject matter of the judgment; and

(c) inform themselves about the subject matter of the judgment to the extent they reasonably believe to be appropriate; and

(d) rationally believe that the judgment is in the best interests of the corporation.

The director’s or officer’s belief that the judgment is in the best interests of the corporation is a rational one unless the belief is one that no reasonable person in their position would hold.

(3) In this section:

business judgment means any decision to take or not take action in respect of a matter relevant to the business operations of the corporation.

CASE LAW

In the recent decision of ASIC v Vocation Limited (In Liquidation) [2019] FCA 807, the Federal Court found three directors personally liable under section 180 of the Corporations Act 2001 (Cth) for allowing Vocation Limited to breach its statutory obligations as an ASX listed entity.

Background

ASIC commenced civil penalty proceedings against Vocation and three of its directors: Mr Mark Hutchinson (CEO), Mr John Dawkins (Non-Executive Chairman) and Mr Manvinder Gréwal (CFO).

The key issue in this case concerned a misapprehension on the part of the defendants as to the potential impact of contractual measures being taken against two of Vocation's subsidiaries by the Victorian Department of Education and Early Childhood Development (DEECD) in relation to contracts for government funding of vocational education and training. These measures included the withholding of payments totalling approximately $20 million, and a direction that these subsidiaries suspend all future student enrolments.

Overall, it was found that the directors had failed to adequately inform themselves of these matters by unreasonably and uncritically relying on information provided to them by senior management regarding the company's ongoing dispute with the DEECD.

Breach of primary obligations by Vocation

The defendants' conduct resulted in Vocation breaching a number of its obligations as a listed entity under the Act. The following contraventions were alleged by ASIC:

• Breach of continuous disclosure obligation– Nicholson J found that Vocation failed to notify the ASX of the action being taken against it by the DEECD, despite this being information that would be reasonably likely to influence investors in deciding whether to acquire or dispose of Vocation's shares. This was found to be a breach of ASX Listing Rule 3.1, resulting in Vocation's contravention of section 674(2).
• Misleading and deceptive conduct – Nicholson J found two instances of misleading and deceptive conduct in relation to a financial product (Vocation's securities) in contravention of section 1041H:
• • Vocation made an announcement to the ASX that failed to include key information regarding the extent of the measures being taken against it by the DEECD.
  • In connection with a proposed share placement, Vocation's CEO and CFO provided a misleading due diligence questionnaire (DDQ) to UBS Australia in circumstances where UBS Australia was considering underwriting the proposed offer of shares.
• Lodgement of a defective Cleansing Notice – in connection with the share placement, Vocation lodged a 'Cleansing Notice' with the ASX pursuant to section 708A(5), which contained incorrect statements regarding Vocation's compliance with its disclosure obligations. However, Nicholson J declined to find Vocation liable for this, as it could not be shown that the defendants had actual knowledge of this defect, as required by the provision.

B)

A limited company is legally separate from its directors and shareholders. In a small limited company, the directors are often the shareholders.

A company must have at least one director and, in some cases, will also have a secretary. It needs to be registered at Companies House and must send audited accounts to Companies House each year.

Limited companies.

By becoming a director, you agree to act in the best interests of the company, its shareholders, its employees and its creditors. This is called a ‘duty of care’ or ‘fiduciary duty’. Usually, if you are a director (or acting as a director), you are not personally liable for paying the company’s debts. This means that if the limited company does not pay its debts and a creditor takes court action, only the company assets are at risk.

However, you can be made personally liable for the following.

• Your own PAYE and National Insurance payments.
• Any income tax you have not paid on cash you have taken from the company.
• Any personal guarantees you have given for the company (usually to banks, finance companies, landlords and major creditors). This is when you sign an agreement to say that if your business cannot pay the money back, you will pay it back yourself.
• Any liabilities that have come out of your company after it has been investigated in relation to liquidation (a formal option to deal with the company debts and bring it to a close) and found guilty of wrongful trading. This is when you carry on trading when the company was insolvent and there was no reasonable chance of avoiding liquidation.
• Any liability where you have benefited from a transaction at the expense of your creditors. For example, if you have bought a company asset for less than it was worth, or you have paid your own wages or directors’ loans from the company assets but cannot afford to pay your creditors. This is called ‘misfeasance’.
• Any liability that comes from committing fraud while you were running the company. For example, fraudulently taking credit in the company name. This is called fraudulent trading.

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