ASIC v Maxwell & Ors [2006] NSWSC 1052

This case study discusses the breaches of directors’ duties under the Corporations Act 2001(Cth) by Mr. Maxwell, who was one of the directors of two group companies: the Central Development Group and the ProCorp Group. The article also discusses the court's decision and its relevance and impact.

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ASIC v Maxwell & Ors [2006] NSWSC 1052
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Case Facts
Mr. Maxwell was one of the directors of two group companies: the Central
Development Group and the ProCorp Group. At the same time, Maxwell was running another
business; Business Express Success Techniques Pty Ltd. The director put his company as a
consultant for the two group companies. However, he placed an advertisement in the
newspaper which consisted of misleading promotional material with the intention of
attracting more public investors. The court determined that Mr. Maxwell failed to satisfy his
obligations and duties as the directors and improperly using his power as the director of the
company to gain financial advantage. The ASIC had already alleged that the director
breached his duties as stipulated in Corporation Act 2001 (CTH). As a result, he was
completely suspended from managing corporations or even providing financial services .Mr.
Maxwell. The court determined that Mr. Maxwell should pay $936,500 in compensations and
an additional $110,000 and $55,500 costs (Baxt, 2009).
The judges determined that the big issue in this cases was whether, in the context of
these corporations, Mr. Maxwell contravened his obligations as a director by allowing and
taking part in the various contraventions that were committed by those companies or any of
them. The resulting jeopardy to the organisation was the incurred liability for the
contraventions of fundraising and other misleading conducts under the corporation's act. Such
provisions are considered as civil penalty provisions and the exposure was driven by criminal
intentions under the Act. The countervailing benefits from the fundraising were the perceived
profits that were intended to be derived from the developments that the fundraising would
facilitate.

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Breaches of directors’ duties under the Corporations Act 2001(Cth)
The Corporations Act 2001 provides the terms of directors under section 9 where it
indicates that a person holding the duties of an organisation as a director is obliged to operate
with due diligence and avoid circumstances that would lead to a conflict of interest . Under
the Act, the general duties have further been elaborated under s 180 to s 184 of the
legislation. Fiduciary duties are clearly stipulated under section 185 as a provision of general
laws.
Notably, companies have the full liberty to make independent judgement of all its
directors. In this case of Mr. Maxwell, since he was the director of two different
organisations, he owed conflicting fiduciary obligations. Being a fiduciary, the court
determined that they were not supposed to exercise their powers as a director of both
companies for his own benefits or any other third party, without clearly expounding such
interest to the directors and obtaining informed consent from the directors. Company
directors are often faced with the dilemma of choosing between multiple opportunities, thus
tempting them to seek their own individual interests using their power for their own benefits.
Section 182(1) of the Corporation Act provides that a manager should refrain from improper
use of the power to gain benefits for themselves or cause damage to the company (Hill, &
McDonnell, 2009).
It was evident from the cases that the promotional brochure produced by Mr.
Maxwell conveyed misleading information that the mortgage would be secured over the
ProCorp properties and that a caveat would be lodged to provide the interests of all the
investors. The brochure further indicates that the loans would be used in low-risk
investments. Such actions go against the provisions of the Corporations Act 2001(Langford,
& Ramsay, 2014).Under the Act, the responsibilities of directors are classified as common

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law obligations, such as equitable care and persistence (s 180), the good faith (s 181).
Breaching of these provisions resulted in the director being responsible for the losses(s
588G). The directors have a reasonable fiduciary obligation that they have to observe. These
included conflict of interest in compliance with section 182 and the use of confidential
information under section 183 .According to corporate Act 2001, the director is responsible
for certain criminal conducts such insolvent trading among other activities (Lan, 2015).
Mr. Maxwell breached his fiduciary obligation due to the conflict of interest within
his obligations and thus they were confronted with the dilemma of the necessary actions they
needed to apply in order to pay the debt for the first organisation. However, courts are still
not clear on the fundamental factors or requirements when directors operate like Mr.
Maxwell. Disclosing the intentions and the nature of interest would ensure that all the
directors make informed decisions and thus avoid a breach of duty. Company directors are
always required to provide clear information not only on the nature of their dealings but also
details deemed relevant to the decisions being made by the other directors. In most instances,
directors are supposed to always consider positive procedures that would prevent any
negative dealings from commencing.
It was possible for Mr. Maxwell to escape fiduciary for breach of their duties if they
obtained fully informed consent from the directors of both companies. Nevertheless, the
extent and sufficiency of the proper disclosure are often in terms of avoiding any form of
breach of obligations as indicated in section 3 of the Corporate Act 2001. Such consent might
happens if there was prior approval by the other directors, however, guaranteed with the
necessary limits put in place. Approvals might not be effective if concerns of breaches of
statutory duty occurred (Deakin, 2010).

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The court determined that Mr. Maxwell was guilty of having breached the statutory
obligation to always act honestly and in good faith as stipulated in s 181 of the Corporations
Act 2001. He failed to provide information to the board of both companies concerning the
necessary requirements of the programme to the other directors. The court expressed the view
that, in such circumstances, further actions beyond disclosure were necessary. This
demonstrates that any company director faced with the conflict of interest may be required to
take action beyond disclosure under the obligation to act in good for the interest of the
organisation.
Analysis of the Court’s decision
In determining whether Mr. Maxwell exercised reasonable care and diligence while
acting as stipulated in s 180(1), it is important to understand the circumstances of the
particular corporation. Such circumstances include the type of organisation, the key
provisions of the organisation’s constitution, the size of the organisation and the specific
functions the director is performing and the terms on which the director has undertaken while
acting in such circumstances (Rodrigues, 2009).
Given Mr. Maxwell’s background and the particular skills that he holds , the apparent
distribution of obligations among the directors of ProCorp companies , it is evident that
Mr .Maxwell should have known that , whatever ProCorp was making was publishing
statements detailing how they would be offering securities or conducting misleading
information against the provisions of corporation Act. However, until ASIC intervened, he
had the liberty to suppose that the ProCorp fundraising was being conducted in compliance
with the set legal guidelines (Pan, 2009). In such circumstances, his duty care and diligence
required him to do more than he did to confirm whether the scheme was compliant with the
necessary company regulations or not.

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In the case of ASIC v Maxwell & Ors [2006], section 182 of the Corporations Act
2001 indicates that the court did not require any form of evidence that the director essentially
accomplished his or her objectives to advance a personal benefit. The court in its decision
determined that indecency must be assessed factually. Indecency might only occur when the
director provided the corporation to conduct business transactions with a third party in which
the director has an interest and does not disclose to the organisation.
Here, in this case, the court had proven that the improper behavior by the accused was
intended to gain an advantage on behalf of the second company. The court pointed out that
the outcome of committing the offense with the objective in mind to cause a detriment to
ProCorp. It is important to note that, this is not to argue for a different charge against the
respondent based on the information. It is simply to emphasize what would seem to be the
best outcome relevant to the sentencing that came from the misconducts that the accused
committed (Deakin, 2010). If Central Development Group suffered any damage due to the
misconduct of the accused under subs (5) as directors of the company, then there are strong
grounds in the law to order Mr. Maxwell to make the necessary compensations to Central
Development Group. It does not matter whether the court didn’t refer to any detriment caused
to Central Development Group or that the proof of the case didn’t deal with the subject.
The Companies Act 2006 provides that, the court might order the accused person to
compensate the corporation. The term “may” indicates discretion ought to be exercised and
there is no reason to think that that this could not be a position in these cases. How the court
exercised discretion depended on the condition of the case and whether the application is
opposed or whether the hearing is possibly going to be decided against the accused in a civil
court (Mohd-Sulaiman, 2010). Therefore, the court determined that the director was required
to notify other directors on the nature of his interest and that he intended to continue with the
project with the view of making revenue .Moreover, he was required to spell out the inherent

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risks in the proposed plan and the probable financial consequences. This is because the
company’s articles of association necessitated the director to always “declare the nature of his
interest” which the court found to determine the requirement for disclosure while discharging
duties to avoid conflicts. Therefore the accused persons were guilty of improper conducts as
they didn’t declare the nature of their interest (Furlow, 2009).
Even though cases such as Centofanti v Woolworths have determined that disclosure
of interest is enough, in other cases directors have been compelled to disclose more than this.
Directors have been considered to be in breach of duty for not disclosing issues deemed
necessary to the determinations made by the company. This is evident in the case of
Fitzsimmons v Groenveld. In this case, Mr. Fitzsimmons was the director in both the Duke
Holdings Ltd and Kia Ora Gold NL. The financial situation at Duke Holdings Ltd was very
low. Kia Ora another company paid Duke Holdings Ltd and Duke in return purchased shares
in Kia Ora which was against the statutory financial assistance prohibition. The court
determined that the director breached the obligation of acting honestly in compliance with
section 181 of the Corporations Act 2001 (Cth) (Hill, & Conaglen,2017).
Relevance and impact of the decision
Liability to Disclose
This case shows that there is quite a number of breaches found where the directors
have been found guilty of engaging in deceptive conducts .In this case, the directors have
been found with the breach of duty of care because of the insolvency on the director’s
position. On matters concerning the duty of standard care, Brereton J had clearly set out the
interests of the corporation and did not provide any backdoor methods to impose accessorial
liability for contraventions, which does not give rise to such liability. In any circumstance,
directors are now being held liable in compliance with s.180 of corporation act. Directors are

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further faced with civil penalties among other liabilities under the act. Moreover, the cases set
the standards of conducts for directors, especially where there is a risk of the organisation
breaching the corporations' act (Batrouney, 2016).
The case demonstrates that courts tend to consider the importance of disclosure of
interests as the key foundation in the context of informed consent. The level of disclosure
required of directors often goes beyond the basic elements to other issues deemed relevant to
the case. Therefore, it is imperative for the directors to always remain cautious while
exercising the duties in accordance with the obligations to act in good faith and in the positive
interest of the organisation. Such obligations might also be the source of more requirements
to disclose information deemed relevant to the transaction or even take positive stapes to
caution other directors of the impending implications of such transactions.

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References
Books and Articles
Baxt, B. (2009). Behind a 25 year ban [The reasoning behind the 25 year ban on directors
who do not fulfil their duties of care and diligence or act in good faith.]. Company
Director, 25(4), 46.
Batrouney, E. (2016). Are the legal risks faced by company directors in Australia
intolerable?. Victorian Bar News, (159), 68.
Deakin, S. (2010). What directors do (and fail to do): some comparative notes on board
structure and corporate governance. NYL Sch. L. Rev., 55, 525.
Furlow, C. W. (2009). Good faith, fiduciary duties, and the business judgment rule in
Delaware. Utah L. Rev., 1061.
Hill, C., & McDonnell, B. (2009). Executive Compensation and the Optimal Penumbra of
Delaware Corporation Law. Va. L. & Bus. Rev., 4, 333.
Hill, J. G., & Conaglen, M. (2017). Directors’ Duties and Legal Safe Harbours: A
Comparative Analysis. Research Handbook on Fiduciary Law, DG Smith, AS Gold, eds,
Edward Elgar, UK.
Lan, G. (2015). Benefit Corporations: A Persisting and Heightened Conflict for Directors. JL
Bus. & Ethics, 21, 113.
Langford, R. T., & Ramsay, I. (2014). Conflicted directors: What is required to avoid a
breach of duty?. Journal of Equity, 8(2), 108-127.

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Mohd-Sulaiman, A. N. (2010). Directors' Oversight Responsibility and the Impact of
Specialist Skill.
Pan, E. J. (2009). A Board's Duty to Monitor. NYL Sch. L. Rev., 54, 717.
Rodrigues, U. (2009). From loyalty to conflict: Addressing fiduciary duty at the officer
level. Fla. L. Rev., 61, 1.
Cases
Centofanti v Eekimitor Pty Ltd (1995) 65 SASR 31
Groeneveld Australia Pty Ltd v Wouter Nolten (No 3) (2010) 80 ACSR 562; [2010] VSC 533
ASIC v Maxwell & Ors [2006] NSWSC 1052
Legislation
Corporations Act 2001 (Cth)
Companies Act 2006 (UK)