Breach Of Director’s Duties.

Breach Of Director’s
Duties
ASIC v Flugge (No2) [2017] VSC 117
(sequel to ASIC v Flugge & Geary)

Case Introduction
•Civil proceeding was brought under the Corporations Act
2001 (Cth) by Australian Securities and Investment
Commission (ASIC) against the chairman of AWB Limited
(AWB), Mr. Flugge
•Allegations against him were breach of his duties as a
director under the sections 180 and 181 of the
Corporations Act
•The breach was arising out of the conduct of AWB in the
United Nations ‘Oil-for-Food Program’ for the selling of
wheat to Iraq
•Allegedly the price for the purported fees of the inland
transportation that were being made to Alia, a company of
Jordanian origin that is partly seen to be owned by the
Ministry of Transport of Iraq

Case Introduction
(Contd.)
•The payment of the fees for the inland transportation has
been alleged by ASIC to be a sham
•It was further alleged to be a means for Iran to be obtaining
currencies that have been internationally traded
•ASIC alleged that the chairman Mr. Flugge was
knowledgeable of the act of AWB in contrast to the United
Nations sanctions in relation to the payment of fees of the
inland transportation
•it was done with the money that had been obtained from
the escrow account of United Nations.

Case Introduction
(Contd.)
•It was further alleged that stated that even if it
was not known to him yet he was sufficiently
notified
•For the notification if he had enquired into would
have been alerted towards the breaches of the
sanctions of the United Nations

Breaches of Directors’ Duties
•The action of Mr. Flugge is alleged by the Australian
Securities and Investment Commission as a breach of
sections 180 (1)and 181 under the Corporations Act 2001
•Penalties for this breach were claimed under the section
206C, 1317E, 1317G of the Corporations Act 2001
•Section 180 of the Corporations Act provides with the duty
of a director to be acting with care and diligence.
(Australian Securities and Investments Commission v
Macdonald (No 11) [2009] )
•Section 181 of the Corporations Act 2001 requires a
director to be exercising his powers and discharging his
duties to the company in good faith and for the company’s
best interest [Daniels v Anderson (1995)]

Breaches of Directors’ Duties
(Contd.)
•Section 206C of the Corporations Act 2001 gives the power
to the court to disqualify any person from managing any
company for a certain period if the court finds a declaration
that has been made under the civil penalty provisions
•Section 1317E of the Corporations Act 2001 provides for a
declaration by a court if a person is found to be in
contravention of any of the sections relating to the duties of
the directors, rules of the related parties, share capital
transactions, financial report requirements and insolvent
tradings.

Breaches of Directors’ Duties
(Contd.)
•Under the provision of the section 1317G of the
Corporations Act 2001 a court has the power to order a
person for paying pecuniary penalty for contravening civil
penalty
•Section 1318 of the Corporations Act gives the court the
power to grant relief to any civil proceeding for negligence,
breach of trust or duty if the court finds the person liable for
the negligence or breach but has not acted dishonestly

Analysis of Court’s Decision
•In this case it was decided by the court that although Mr. Flugge could be found to
be in breach of section 180 of the Corporations Act
•In the case he could not be found guilty for the breach of section 181 of the
Corporations Act 2001
•It was stated that as a chairman and a director of the company AWB Mr. Flugge
has a duty towards the company which he is seen to fail in making inquiries
regarding the proprietary payments of the fees of inland transportation to the ‘Iraqi
Grain Board’
•He was held guilty of breach of his duty to act in care diligence under section 180
of the Corporations Act 2001
•The allegation of ASIC for knowledge of Mr. Flugge, about the payments of fees of
the inland transportation to Iraq to be in breach of the resolutions of the United
Nations and the payment of the fees being a sham and improper conduct, as a
breach of his duties under the section 181 of the Corporations Act 2001 was
dismissed by the court because of lack of proof.

Analysis of Court’s Decision
(Contd.)
•ASIC has sought for a declaration of contravention in regard to the breach of
duty of Mr. Flugge as a director under the section 1317E of the Act, $200,000
as a maximum penalty for the breach of section 180 under section 1317G and
under section 206C the disqualification of Mr. Flugge for 10 years.
•Mr. Flugge is seen to be asking for relieving from the breach of his liability
under the section 1318 of the Act and further is seen to be resisting the
pecuniary penalty and disqualification sought by ASIC
•The court observed Elliot v ASIC [2004], Briginshaw v Briginshaw (1938) and
Jones v Dunkel (1959) regarding the civil and criminal rules of evidence in
relation to imposing of penalty
•Mr. Flugge was imposed with a declaration by the court and further a
pecuniary penalty of $50,000 and disqualification of 5 years

Relevance and Impact of the Decision
•The decision of the court regarding this case can be seen to be impactful to the
directors, chairmen and other professionals in the management position of the
company
•It can be seen to be having wide application in the Corporation Law in Australia.
•In this study the duties of a director to be exercising in due care and diligence and
to be acting in good faith under the sections 180 and 181 were discussed in detail
•The provisions for penalties, declaration of contravention and the disqualification
of a director for his breach of duties under the sections 1317G, 1317E and 206C of
the Corporations Act 2001 respectively
•The provision to grant relief under the section 1318 of the Act also has been
discussed in this study

Reference
ASIC v Flugge & Geary [2016] VSC 779
ASIC v Flugge (No2) [2017] VSC 117
austlii. (2019). CORPORATIONS ACT 2001 - SECT 206CCourt power of
disqualification--contravention of civil penalty provision. Retrieved from
http://www5.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s206c.html
Australian Securities and Investments Commission v Macdonald (No 11)
[2009] NSWSC 287
Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336
CCH iKnow. (2019). CCH iKnow | Australian Tax & Accounting. Retrieved
from
https://iknow.cch.com.au/document/atagUio488250sl14527775/corporatio
ns-act-2001-section-1318-power-to-grant-relief
Corporations Act 2001 (Cth)
Daniels v Anderson (1995) 37 NSWLR 438
Elliot v ASIC; Plymin v ASIC [2004] VSCA 54; [2004] 10 VR 369 137
Jones v Dunkel (1959) 101 CLR 298