Director Duties Breach in ASIC v Padbury Mining Limited Case

The report analyses the ASIC v Padbury Mining Limited case to identify the director duties which were breached. The judgement given by the court is also evaluated to analyse the relevance of this case in regards to the imposition of director duties and compliance with duties.

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Corporations Law

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Table of Contents
Introduction............................................................................................................................2
Case Background..................................................................................................................3
Breach of director duties........................................................................................................3
Judgement of the Court.........................................................................................................5
Relevance of the Decision.....................................................................................................5
Conclusion.............................................................................................................................7
References.............................................................................................................................8

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Introduction
The Australian government has imposed a number of regulations on companies to make
sure that they conduct their operations without harming the interest of their stakeholders.
These provisions are given under the Corporations Act 2001 (Cth) (“CA”), and they guide
the companies and its directors when they discharge their duties (AICD, 2019). There are
various director duties which are imposed to make sure that they did not take any actions
or decisions which violate their duties and harm the interest of the company or its
stakeholders. The provisions regarding director duties are given in the CA to make sure
that the directors did not misuse their powers while taking business decisions and they did
not use them to harm the interest of the organisation or its stakeholders. In this report, the
case of ASIC v Padbury Mining Limited [2016] FCA 990 will be analysed to identify the
director duties, which were breached. The facts of this case will be analysed in this report,
along with an evaluation of the violation of director duties. This report will also evaluate the
judgement given by the court and analyse the relevance of this case in regards to the
imposition of director duties and compliance with duties.

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Case Background
The Australian Securities and Investments Commission (ASIC) stated an investigation
against the Padbury Mining Limited (“Padbury”) in 2016. A lawsuit was filed by the
authority against the corporation and two of its directors, which include Gary Stokes
(Managing Director) and Terence Quinn (Chairman) (Hogan-Doran, 2019). Previously, the
company was trying to get a project regarding the development of deep water port for quite
some time. This project was to be made at Oakajee in Western Australia. Through this
project, the company was planning to increase its association with the railway network in
order to get this project. The company was also listed on the Australian Securities
Exchange (ASX). It made an announcement on April 11, 2014, on the ASX that it has
successfully achieved funding for this project. The company claimed that it is received $6
billion in order to work on this venture. This announcement was made at 9:40 am by the
company in which it claimed to “successfully securing” this deal (O’Leary, 2016). However,
this announcement did not contain any details regarding the terms of the contract, and it
also did not include the name of the parties that provided the funding to the enterprise.
The conditions of the project play a crucial role since they allowed Padbury to get a bank
guarantee for its operations based on those conditions. The share price of the company
was affected by this news. They opened at $0.02 per share; however, the prices quickly
increased to $0.045 per share on the same day. Its shares were trading between a range
of $0.032 and $0.052 per share (Levy, 2016). A total of 209,366,987 shares were traded
after this announcement. However, the shares were put in a trading halt by the ASX at
2.15 pm on the same day of the announcement. They were prohibited from trading until
the company provides further details regarding its project deal. The shares were kept in
the trading halt by the ASX till April 29, 2014, when it was announced by the company that
the funding which it secured has been cancelled (Levy, 2016). It was later disclosed that
the announcement of the company was false, and it had never entered into an agreement
to secure the funding for the project. The ASIC brought a civil action against the company
along with its directors who were alleged for being involved since they give authority to this
announcement.
Breach of director duties
After analysing the facts of this case, the court projected in its judgement that the directors
are guilty of violating their duties which are given under section 180 (1) and 672 (2A) of CA

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(ASIC, 2016). The provisions given under section 180 provide a key duty of directors to
maintain “care and diligence”. Subsection 1 (a) provides that directors and other officers
that are operating at a similar position are expected to maintain a degree of “care and
diligence” which is generally expected for a reasonable person. In this regards, subsection
2 provides that these provisions which are provided under subsection 1 must be
maintained by the directors or other officers when they make decisions for the enterprise
(Covington, 2016). In case these provisions are not followed by the directors, then they
can success legal consequences through civil litigations under section 1317E.
Another relevant duty is given under section 674 (2) of CA. This section provides
provisions regarding continuous disclosures which are necessary to be made by the
company that is listed on the ASX (Addison and Chew, 2011). These obligations are
necessary to be fulfilled to make sure that the companies continue trading their shares on
the stock market. Civil liability is imposed on the parties that are involved in disclosure
requirements as per section 674 (2A). It provides that a person who violates the provisions
given under section 674 (1) can face civil penalties as per the provisions given under
section 1317E (Addison and Chew, 2011). It was also held that the provisions given under
section 1041H provide that directors must not make a misleading or deceptive
announcement while providing information to the ASX. The directors of a company that are
responsible for making the announcement are expected to comply with these duties.
In the case of Padbury, Stokes and Quinn were acting as the directors of the company,
and both of them were also involved in the process of authorising the issue of the
announcement to the ASX in which they claimed that the company had secured funding
the project. They also failed to act while maintaining “care and diligence” while taking
business judgement, which is expected from there when they act as the directors of the
company (ASIC, 2016). They failed to take corrective steps to make sure that the company
fulfils its obligations which are given under the CA by avoiding many any announcement
that is misleading or deceptive, which violates the provisions of section 1041H. The
provisions given under section 674 (1) are violated since the announcement issued by the
company to the ASX did not contain all the relevant information such as details regarding
the party that has given the funding to the company (O’Leary, 2016). The announcement
was also false as it was later revealed because the company never acquired any funding
for the development of the deep water port project. Both the directors were aware of the
fact that this information will have a material impact on the share prices of the company;
however, they continued with the announcement (O’Leary, 2016). The duties are violated

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as a result of failing to provide complete and correct information to the ASX as per the
listing requirements and provisions gave under the CA.
Judgement of the Court
While providing its judgement, the court held both the directors guilty of violating the
provisions given under the CA relating to their duties. It was held that section 1041H is
violated since the information given by the directors to the ASX was considered as
misleading and deceptive (Levy, 2016). The information given by the company that it has
secured a funding of $6 million in order to develop the project of a deep water port was
false since the corporation has not received any funding. Since this announcement was
made after the authorised received by both the managing director and the Chairman, the
court holds them liable for violating their duties. The court provided in its judgement that
provisions given under section 180 (1) 674 (1) are violated by Stokes and Quinn when
they were discharging their duties. Based on this judgement, both the directors were
ordered to pay a penalty of $25,000 for failing to fulfil their obligations. The directors were
also held to pay a sum of $200,000 for the costs which were incurred by the ASIC while
filing the lawsuit against the company and its directors (ASIC, 2016).
During this judgement, it was held by Siopis J that making a declaration comes within the
scope of director duties and it is expected from them that they will take corrective actions
to ensure that the announcements are not misleading or deceptive. Siopis J provided that
this judgement sets an example for other companies that are listed on the ASX to make
sure that they also avoid making similar misleading claims in the future (ABC, 2016). He
provided in its judgement that the failure of both the directors show that they have not
maintained the standards that are expected from them by the stakeholders of the
company. Furthermore, Siopis J disqualified both the defendants from acting as the
director for any company for three years since they did not maintain reasonable care that
was expected from them as per their posts (Waye, 2018). While providing this judgement,
the provisions established by the court in the case of Commonwealth of Australia v
Director, Fair Work Building Industry Inspectorate [2015] HCA 46 were applied. The court
established in this case that directors could be held liable for a civil penalty in case they
give their consent for issuing a miniature consent order (Waye, 2018). This judgement is
justified since it shows that seriousness of director duties and consequences which could
be faced by directors in case they did not comply with their duties.

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Relevance of the Decision
The judgement of this case provided a recent example which recognises that directors are
bound to a number of duties, and they are expected to comply with them to make sure that
they did not face legal consequences. In this case, the court sets a good example for
directors to make sure that they did not authorise any announcement that is made on the
ASX, which is misleading or deceptive (Hogan-Doran, 2019). This case is also relevant
when understanding the directors’ obligations for ensuring that they comply with their
duties while maintaining a high degree of care and diligence which any reasonable person
would at the same position. This case sets an example for Australian companies to make
sure that they comply with the guidelines as well, especially when they are listed on the
ASX. In such case, any information that could have a potential impact on the share prices
of the company should be checked by the directors to make sure that it contains all the
relevant information. The directors must also ensure that they did not harm the interest of
the stakeholders of the company by making announcements that could affect the share
prices of the company (Waye, 2018). The court further established the principle set in
Commonwealth of Australia v Director, Fair Work Building Industry Inspectorate case
regarding duties relating to the consent given by directors for announcements. Thus, this
case plays a major role when it comes to establishing and complying with the duties of
directors.

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Conclusion
In conclusion, the court held that directors of Padbury liable for violating their duties which
are given under section 180 and 674 of CA. Both the directors authorised an
announcement that was misleading and deceptive, and it was issued with the intention to
fluctuate the prices of its shares. A standard that is expected from the directors was not
maintained by Stokes and Quinn; as a result, they faced civil penalties, and they were
disqualified by the court as well. The court sets an example for the directors managing
Australian companies to make sure that they comply with these guidelines given under the
CA to avoid facing legal consequences which can be imposed on them if they failed to
take corrective actions. This judgement is relevant since it shows the negative
consequences of violation of director duties and the exceptions which are made from
directors in Australia to ensure that they discharge their duties while considering the
interest of the company and its stakeholders.

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References
ABC. (2016) Padbury Mining directors fined over 'misleading' $6b Oakajee announcement.
[Online] Available at: https://www.abc.net.au/news/2016-08-19/padbury-mining-directors-
fined-and-banned/7768184 [Accessed on May 28, 2019].
Addison, A. and Chew, L.J. (2011) Continuous Disclosure - What Duties do Directors
Have?. [Online] Available at:
http://www.mondaq.com/australia/x/155592/Directors+Officers+Executives+Shareholders/
Continuous+Disclosure+What+Duties+do+Directors+Have [Accessed on May 28, 2019].
AICD. (2019) General duties of directors. [PDF] Available at:
https://aicd.companydirectors.com.au/-/media/cd2/resources/director-resources/director-
tools/pdf/05446-6-2-duties-directors_general-duties-directors_a4-web.ashx [Accessed on
May 28, 2019].
ASIC v Padbury Mining Limited [2016] FCA 990
ASIC. (2016) Padbury Mining directors banned for three years due to 'Oakajee Funding
Secured' announcement. [Online] Available at:
https://asic.gov.au/about-asic/news-centre/find-a-media-release/2016-releases/16-263mr-
padbury-mining-directors-banned-for-three-years-due-to-oakajee-funding-secured-
announcement/ [Accessed on May 28, 2019].
Commonwealth of Australia v Director, Fair Work Building Industry Inspectorate [2015]
HCA 46
Corporations Act 2001 (Cth)
Covington, C. (2016) Section 180(1) of the Corporations Act: a backdoor means of
prosecuting company directors for corporate contraventions of environmental law?.
[Online] Available at:
http://www.mondaq.com/australia/x/549746/Directors+Officers/Section+1801+of+the+Corp
orations+Act+a+backdoor+means+of+prosecuting+company+directors+for+corporate+con
traventions+of+environmental+law [Accessed on May 28, 2019].
Hogan-Doran, D. (2019) Chartered secretary: Minutes of directors' meetings: Minimising
the risk. Governance Directions, 71(1), p.18.

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Levy, R. (2016) Implications of Padbury’s Misleading ASX Announcement. [Online]
Available at: https://www.herbertsmithfreehills.com/lang-ko/latest-thinking/implications-of-
padbury%E2%80%99s-misleading-asx-announcement [Accessed on May 28, 2019].
O'Leary, T. (2016) ASIC information sheet 214: A work in progress?. Australian Resources
and Energy Law Journal, 35(2), p.93.
Waye, R. (2018) Penalties increased under Australian Consumer Law. Bulletin (Law
Society of South Australia), 40(9), p.12.