ASIC v Whitlam: Breach of Director Duties in Australia

This report evaluates the case of ASIC v Whitlam [2002] NSWSC 591 to determine what duties were breached by the directors. It highlights the importance of maintaining a degree of care and diligence while taking business decisions to avoid legal consequences.

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Corporations Law
ASIC v Whitlam [2002] NSWSC 591

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Table of Contents
Introduction...............................................................................................................................2
Facts of the Case........................................................................................................................3
Breach of Duties/responsibilities...............................................................................................3
Decision of the Court.................................................................................................................5
Relevance of this Judgement.....................................................................................................6
Conclusion..................................................................................................................................7
References..................................................................................................................................8

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Introduction
In Australia, the corporations are governed under the provisions of the Corporations Act
2001 (Cth) (the ‘Act’). It provides various guidelines which corporations have to comply in
order to ensure that they conduct their operations in an ethical manner. Various duties are
imposed by the Act on the directors of the companies who are responsibility for taking
business decisions. Directors can face legal obligations if they violation these director duties
(Adams, Hermalin and Weisbach, 2010). In this report, the case of ASIC v Whitlam [2002]
NSWSC 591 will be evaluated to determine what duties were breached by the directors. This
case illustrated that disqualification of the director as a result of contravention of civil
penalty provision. In this case, the judgement was given by Gzell J of the Supreme Court of
New South Wales who provided that the general purpose of disqualifying the director is to
protect the interest of the public and address the issue of deterrence from future conduct.
Mr Nicholas Whitlam was disqualified as the director of NRMA Limited because he violated
his duties as a proxy because he deliberately failed to vote on a poll as per the instruction
given by the party who appointed him as a proxy (Wolters Kluwer, 2002). However, this
decision was overturned by the Court of Appeal who provided that he was acting as an
agent based on which he has not violated his duties as a director. This report will evaluate
the background of the case by evaluating all the relevant facts and identify the key duties
breached by Whitlam as a director. The judgement given by the court will be analyse and
the relevance of this decisions in the Australian commercial law.

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Facts of the Case
In this case, Mr Nicholas Whitlam was acting as a director of NRMA Limited. He was
appointed by the shareholders of the company as a proxy to vote at the 1998 Annual
General Meeting of the company. Whitlam was the chairman of this meeting and he failed
to vote against the Resolution 6 which was to increase the remuneration of the directors of
the corporation. It was found that he deliberately failed to sign the poll paper in order to
override the intent of the member of NRMA (Cassidy, 2006). Since he failed to act honestly
towards the interest of the shareholders, he was found in the breach of former section 232
(2) of the Act. In the annual general meeting of the company which was held on 28th
October 1998, Whitlam was appointed the proxy in this capacity as the chairman of the
meeting. It was requested by Whitlam that the poll papers should be used so that he had
separate poll papers ‘for’ and ‘against’ voters on the resolution (SMH, 2004).
In order to constitute a valid vote, the members were required a poll paper which must be
signed by them. Resolution 6 which was discussed in the meeting was to increase the
remuneration of the directors of the company. In order to pass this resolution, the members
were required to pass a special resolution in the meeting. Around 29 percent of the 15,165
members hired their proxies in order to vote against the resolution 6 in the general meeting.
Whitlam was also appointed to vote against the resolution; however, he did not sign the poll
paper in respect for 3,973 votes (Baxt, 2005). Since he did not sign, those votes were not
considered against the resolution 6 based on which it was passed in the annual general
meeting. The Australian Securities and Investments Commission (ASIC) brought a suit
against Mr Whitlam by stating that he has violated the provision given under section 180,
181 and 182.
Breach of Duties/responsibilities
The objective of imposition of duties on the directors of the companies in Australia is to
ensure that they conduct their operations in an ethical manner without adversely affecting
the interest of the corporation or its stakeholders. The directors operate in an apex position
in the company and they have immense powers which come with responsibilities in relation
to protect interest of the corporation. Section 180 is a good example requires directors to

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ensure that they maintain a degree of care and diligence while they discharge their duties
(Legislation, 2019). As per section 180 (1), the director have to maintain care and diligence
which a reasonable person would exercise in the particular position. This care should be
maintained by them while they are taking business decision as well pursuant to section 180
(2). The directors should not use their powers in a negligent manner that adversely affecting
the corporation’s interests. If directors failed to comply with their duty, then they can be
held liable for a civil penalty given under section 1317E.
Moreover, section 181 (1) imposed a duty on directors to ensure that they act in good faith.
According to this section, a director or officer must exercise their powers and discharge their
duties while acting in good faith (Austlii, 2019). They have to put the interest of the
company before anything else and they can only use their position in the corporation for
proper purposes only. Violation of these duties leads to civil penalties given under section
1317E. Section 182 also imposed a duty on directors in relation to use of their position for
proper purposes only. Section 182 (1) provides that the director should not improperly use
their position in order to gain personal advantage or causing harm to the company
(Legislation, 2019). The directors owe a duty that they must not use their position in the
company for taking unfair advantage or taking any business decisions which could
negatively affect in the corporation. In case this section is violated, then a civil penalty can
be imposed on the directors under section 1317E.
In the given case, Whitlam was acting as the director of NRMA based on which he owed
these duties towards the company. Justice Gzell provided that since he deliberately omitted
to sign the poll paper, he breached the provisions given under section 180, 181, and 182 of
the Act. Gzell J provided that Whitlam did not maintained a degree of care and diligence
while taking decision in the company. He breached section 180 (1) because he did not
considered the interest of the shareholders who appointed him as a proxy in the company.
He did not act with care and diligence while discharging his duties towards them (Wolters
Kluwer, 2002). Just become he was appointed as the agent for the shareholders does not
mean that he lost his capacity to act as a director. He was the chairman in the meeting and
acting as the director based on which he breached his duties as a director.

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It was also argued that by failing to ensure the best interest of the company, Whitlam has
breached the provision given under section 181 (1) of the Act. ASIC argued that failed to
determine the accuracy of the minutes of the meeting based on which he failed to discharge
his duties a director. It was also argued that he has misused his position in the company by
taking decision for personal benefits (Cassidy, 2006). He breached section 182 (1) because
person interest was put before the company’s interest and he discharged his duties in a
manner which is detrimental for the company. Justice Gzell was not satisfied with these
arguments and he did not hold Whitlam liable for violation section 181 (1) and 182 (1) of the
Act.
Decision of the Court
In the Supreme Court of New South Wales, the decision as given by Justice Gzell in the
favour of the ASIC. He found that Whitlam deliberately failed to sign the poll papers against
the Resolution 6 which was discussed in the annual general meeting. He acted against those
members who appointed him proxy in the meeting. Gzell J provided that Whitlam was
obligated to maintain a degree of care and diligence (180 (1)), good faith (181 (1)) and avoid
misusing his position (182 (1)) (Neylan, Mir and Sato, 2019). It was held that although he
was acting as the agent for the shareholders who appointed him as the proxy; however, he
still owes a duty as the director. Gzell J found he guilty for breaching section 180 (1) of the
Act and he imposed a penalty on him under section 1317S (2). He provided that Mr Whitlam
will be prohibited for five years for acting as the director and the court ordered him to pay a
civil penalty of $20,000 (Neylan, Mir and Sato, 2019).
Gzell J was not satisfied that Whitlam has breached section 181 and 182 because he
provided that it was not up to Whitlam to determine the accuracy of the minutes of the
board meeting. Moreover, this action was not taken by him to gain any additional
remuneration. Later, Whitlam filed an appeal in the Court of Appeal who overturned the
decision of the Supreme Court and gave a judgement in favour of Whitlam. The Court of
Appeal found that Whitlam breached his duties as an agent rather than the director of the
company. He did not owe a duty towards the shareholders as a director while acting as their
proxy (Wolters Kluwer, 2003). Lastly, the Court of Appeal left open the possibility that in

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case the director is appointed as a proxy on the instruction of the shareholders, then he/she
is liable to comply with the directors duties as well.
Relevance of this Judgement
In this judgement, the importance of compliance with director duties is highlighted by the
court even when the director is acting as the proxy for shareholder. This judgement has
shaped the Corporations Law in Australia by identifying the scope of the penalty of director
duties. It was held that by Gzell J that the director did not ceases to be a director in the
meeting based on the fact that he was appointed as a proxy by the director. While
addressing the meeting, the director was obligated to discharge his duties while ensuring
that the instructed of the shareholders are fulfilled as well (Baxt, 2005). It shows that the
objectives of the corporations law is to protect the interest of shareholders and companies
from unfair or immoral practices of directors by ensuring that they did not violate their
duties. Although the judgement given in this case was overturned by the Court of Appeal;
however, a possibility is left open by the court based on which the director duties can be
considered as violated in case the director did not discharge its duties as a proxy and a
director (Neylan, Mir and Sato, 2019). The current laws relating to corporate governance are
stricter due to which a high degree of care and diligence is expected from directors to
protect the interest of the shareholders and the company.

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Conclusion
Based on the above observations, it can be concluded that the director duties play a crucial
role in ensuring that the directors prioritised the interest of the company and its
stakeholders above anything else. The case of ASIC v Whitlam shows that directors should
maintain a degree of care and diligence while they are taking business decisions to ensure
that they did not violate their duties and avoid legal consequences. In this case, the director
was held liable by the Supreme Court of New South Wales for breaching his duties given
under section 180 (1) since he failed to vote in favour of the shareholder who appointed him
as their proxy. Although this decision was overturned by the Court of Appeal; however, it
still highlighted that directors are expected to maintain a degree of care and diligence in
case they wanted to avoid legal consequences. The relevance of this case in the corporation
law in Australia is discussed in this report as well since it highlighted the importance of
maintaining a degree of care and diligence.

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References
Adams, R.B., Hermalin, B.E. and Weisbach, M.S. (2010) The role of boards of directors in
corporate governance: A conceptual framework and survey. Journal of economic
literature, 48(1), pp.58-107.
ASIC v Whitlam [2002] NSWSC 591
Austlii. (2019) Corporations Act 2001. [Online] Available at:
http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/ [Accessed 30/01/2019].
Baxt, B. (2005) Duties and Responsibilities of Directors and Officers. [PDF] Available at:
https://www.savillhickscorp.com.au/sites/default/files/D&OExtensiveExplanation.pdf
[Accessed 30/01/2019].
Cassidy, J. (2006) Concise corporations law. Alexandria, NSW : Federation Press.
Corporations Act 2001 (Cth)
Legislation. (2019) Corporations Act 2001. [Online] Available at:
https://www.legislation.gov.au/current/C2015C00336 [Accessed 30/01/2019].
Neylan, M., Mir, S. and Sato, K. (2019) Duty-free director-proxies: Whitlam v ASIC. [Online]
Available at: https://www.findlaw.com.au/articles/486/8216duty-free8217-director-proxies-
whitlam-v-asic.aspx [Accessed 30/01/2019].
SMH. (2004) Whitlam wins High Court case. [Online] Available at:
https://www.smh.com.au/business/whitlam-wins-high-court-case-20040402-gdintu.html
[Accessed 30/01/2019].
Wolters Kluwer. (2002) AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v
WHITLAM (NO 3), Supreme Court of New South Wales, 15 August 2002. [Online] Available
at: https://iknow.cch.com.au/document/atagUio379057sl10447712/australian-securities-
and-investments-commission-v-whitlam-no-3 [Accessed 30/01/2019].
Wolters Kluwer. (2003) WHITLAM v ASIC, Supreme Court of New South Wales, Court of
Appeal, 10 July 2003. [Online] Available at:

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https://iknow.cch.com.au/document/atagUio378602sl10441517/whitlam-v-asic [Accessed
30/01/2019].