1 DIRECTORS DUTIES Introduction The paper purports to discuss the case ofASIC v Padbury Mining Limited [2016] FCA 990that lays down discussion in relation to the duties of the directors under the Corporation Act 2001 (Cth). The duties of the directors are given by the members of the board of directors of a company who has been provided with the duties under the provisions of the statute as well as the common law. These are the obligations that are known as duties of the directors. These duties are given to beneficiaries by the trustees and to the principals by the agent. There are certain duties that are provided to the directors like they owe their duties towards the corporations but not to any individual or employees or shareholders until there is any emergency. The major duty of the director is to be loyal towards their company. Another duty is to maintain care of high standard and diligence. The directors of the company must be bona fide to make the company successful. These duties are said to be fiduciary duties that comes under the general laws of Australia. These duties of the directors come under the Corporation Act 2001. There are certain facts about the breach of duties by the directors. It is said that the director should not be dishonest towards the company otherwise he will be imposed with criminal charges. The remedy of the breach of duties is to give equitable damages or recession or compensation. Case Introduction The above mentioned case is about the announcement that has been made by the company (defendant) in relation to Australian security exchange (ASX). A ban was enforced by the court on the directors of the organization for a time of three years. There was a penalty of amount $25,000 that has been forced on the directors of the company for breaching the section 180 of the Corporation Act 2001. There was an announcement that was not supposed to be made
2 DIRECTORS DUTIES by the company but the directors did not prevent the company to make the announcement that the company will be receiving the fund the amounts to 6 million dollars. This fund was supposed to be used in carrying out a project in the west of Australia. The date in which the announcement was made is 10thof April 2014 and there are certain terms that are that the announcement consists. The fund for the project in the west of Australia has been received successfully by the company. Midwest Infrastructure Private Limited is a subsidiary company that is fully owned and the development of the project is to be done by them. There had been an agreement with a private investor who agreed to provide funding based on certain conditions. There are certain terms that needs to be complied with the agreement to secure the funding but the company has failed to mention in the announcement. One of the terms of the agreement has mentioned that if the bank does not guarantee to 1.3 billion that is needed to be secured by the company then the fund will not be procured. However, these terms exist in the agreement, but there were no steps that were taken by the directors of the company to mention that the agreement is conditional. Australian security exchange has been directed by the company to stop sharing the trade to the organization which they have asked again to raise them. However significant value of trading had been conducted during the period. The organization announced that the agreement with the financer have been terminated after the trading has been done in high prices. Breach of duties According to the section 180(1) of the Corporation Act 2001 (Cth) has explained that the directors of the company should have at least diligence and care towards the company while discharging the duties. In order to search out whether the real director has perceived the
3 DIRECTORS DUTIES minimum level of diligence and care while the duties have been discharged, the actions of the actual directors are compared to the actions of the imaginary directors. In the case if the reasonable director cannot take actions that have been taken by the real directors, the duty of diligence and care will be taken as breached. There are several reasons that have been stated that the duties of the directors have been breached under the Corporation Act. The manners of the directors of the company that has been mentioned as misleading or deceptive or that can be said as deceive or mislead has indulged the company’s directors. As per the section 1041H of the Act it has been said that the inducement of the conducts has been declared as a direct violation. These misleading or deceptive conducts has been made by the director’s actions and it has made company carry out the announcement about securing the funds that has not been secured by the investor because there were terms that were highly conditional in the agreement. A section of the company has failed to behave in accordance with the responsibility of making of proper disclosure under the provisions of section 674 of the CA. There prospectus contained a misstatement which is against the provisions of section 728 of the CA. It was the duty of the organization to let other people know that terms if the agreement are highly conditional. The real name of the investor who was actually funding the amount that the company wants was not disclosed by the company for the construction. CRITICAL ANALYSIS OF THE DECISION There are some legal punishment which has been wanted by The Australian security and investment Commission that is against the company (defendant) as well as the directors of the same company for seeking the purpose as follows. A declaration that Australian security and investment Commission wants to make in the court that under the 1041H of the Act the provisions has been breached by the organization that is in relation to deceptive and misleading
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4 DIRECTORS DUTIES conduct. There are some rules that have been given in the section 674(2) of the above mentioned act and ASIC wants a declaration order that these provisions has been breached by the organization as the company has fail to make suitable disclosures of the announcement. The watchdogs of Australian corporations have said that the company’s directors have breached the section 674(2) and the section 1041H of the abovementioned act. If the directors breach any of their duty or any kind of violation in relation to the civil penalty provisions they may be provided with management ban under section 206C of this Act and also they will be imposed with the financial penalties that have been mentioned under the section of 1317H of the above mentioned act. Thus the ASIC demanded declaration under section 1317E to obtain a pecuniary penalty and management ban for the directors. The section of 180(1) has been breached by the company’s directors’ and ASIC seeks declaration for the same. The directors as well as the defendant company have evidently violated the provisions of section 674(2) and 1041(h) of The CA. This is because the highly conditional terms which were present in the agreement the company had with the financer has been omitted from the prospectus. As discussed above the rules under section 180(1) deals with the duty of due diligence and care. Through the analysis of the facts of the situation with respect to the rules under this section it had been held by the court that the defendants have been guilty of contravention in relation to the section. There were significant reasons available to the directors to get to know about the fact that it would be illegal for the company to carry out the intended announcements and by making such announcements thus would be considered as the contravention of section 180(1) of the CA. Any reasonable director positioned in this context would know that indulging into violation of law and a conduct which is misleading and deceptive may bring significant losses for the company in terms of finance as well as reputation. These actions were not in good faith. The
5 DIRECTORS DUTIES directors were rightly held not to have complied with the test provided via the rules of section 180(1) of the CA. Those who had indulged in training with the company when the trade restrictions were not in place had been actually deceived and mislead by the company.The provisions of section 674(2) of the CA have also been violated by the organization. It is the duty of the company to make continuous disclosures under this section. The section had been rightly found by the court to have contravened as the conditions which had been imposed by the financer to provide the required investment had not been discussed by the company. In order to obtain a defence under the provisions of section 180(2) of the CA. The directors must satisfy to the court that the decision is not a kind of decision which “any reasonable director will not take”, there was no personal benefit associated with the decision and the directors had fully informed themselves before making the decision. In the given situation although the directors have conceded before the court that they totally informed themselves in relation to the capacity of the company to get the conditions fulfilled. They were reasonably expected to have the knowledge that the terms which were highly conditional would affect the share price of the company and did not take into consideration such circumstances before the making of the announcements. Through the application of the “any reasonable director will not take” test it can be stated that the directors had not informed themselves about the situation and thus they cannot rely on the business judgement rule as correctly held by the court.Although the case did not consider the provisions of the case of Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023 It can be stated that the decision of the court to hold that the provisions of section 180(1) has been breached are correct as there has been a loss of reputation for the company.
6 DIRECTORS DUTIES In the case of Commonwealth of Australia v Director, Fair Work Building Industry Inspectorate (2015) 326 ALR 476the decision of the court signified that a regulatory body has to take into consideration. In the case of Australian Competition and Consumer commission vReiwa Inc (1999) 161 ALR 79 the judge has stated that when the question is in relation to the determination of penalties to be imposed by the courts, the courts must be convinced beyond reasonable doubt that the penalties are not contrary to public interest and such interest is to be considered while making such announcements.The reasonable limit in relation to imposing a ban under the provisions of section 206C can even be 20 years as provided by the case of Sino Australia Oil and Gas Limited (in liq) v Sino Australia Oil and Gas Limited (in liq) [2016] FCA 934. The court came to the conclusion that the penalties which the ASIC seeks are not detrimental to public interest and thus took the suggestion made by the ASIC in relation to the penalties. Thus the penalties of the imposed by the courts in this case are also justified. IMPLICATIONS OF THE DECSION The primary implication of the decision which has been identified is that the level of satisfaction in relation to making an announcement has to be reasonable in situation where the announcement would materially affect the price of the share. Where the directors failed to act in a reasonable way as asked above they would be considered to have contravened the duty of due diligence and care under section 180(1) Suggestions for Penalties in relation to contraventions of the CA can be proposed by the ASIC to the courts. CONCLUSION
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7 DIRECTORS DUTIES Thus it can be concluded for the above discussion that the directors cannot merely claim that they had informed themselves about the subject matter of the decision where a reasonable director would not have taken such decision.
8 DIRECTORS DUTIES References ASIC v Padbury Mining Limited [2016] FCA 990 Australian Competition and Consumer Commission v Reiwa Inc (1999) 161 ALR 79 Australian Securities and Investments Commission v Cassimatis (No 8) [2016] FCA 1023 Commonwealth of Australia v Director, Fair Work Building Industry Inspectorate (2015) 326 ALR 476 Corporation Act 2001 (Cth) Sino Australia Oil and Gas Limited (in liq) v Sino Australia Oil and Gas Limited (in liq) [2016] FCA 934.