ASIC v Flugge (No 2) [2017] VSC 117 - Analysis of Breaches of Directors' Duties under the Corporations Act 2001

This presentation provides an analysis of the court's decision in the case ASIC v Flugge (No 2) [2017] VSC 117, focusing on the breaches of directors' duties under the Corporations Act 2001. It discusses the relevant sections of the act, the facts of the case, the court's decision, and the relevance and impact of the decision. The presentation concludes with a summary of the case and its implications.

Corporation law
Case: ASIC v Flugge (No 2) [2017] VSC 117

Table of content
 INTRODUCTION
 a. CASE INTRODUCTION
 b. BREACHES OF DIRECTORS’ DUTIES UNDER THE CORPORATIONS
ACT 2001(CTH)
 c. ANALYSIS OF THE COURT’S DECISION
 d. RELEVANCE AND IMPACT OF THE DECISION
 CONCLUSION

Introduction
• The corporation act 2001 of the Australia states various provisions over
formation, operation and conducting the operations of a business organisation
in Australia.
• This act also defined the general and specific duties of the directors who are
responsible for conducting the operation of the corporations.
• The acts lay out the directors duties with a compulsory imposition to adhere
with such duties without any breach.

a. CASE INTRODUCTION
 Travor Flugge was the chairman and Peter Geary was in the position of Group
general manger in the company Australian Wheat broad Limited (AWB).
 The company was under a contract with Irani government for supplying wheat
to Iraq.
 In 2004 a case against both Flugge and Geary was brought by ASIC
(application-specific integrated circuit) related with payments made to the
Irani government
 . Its was held by the AISC that many of the payments were referable as inland
transportation fees which was defined in the contract.
 It also stated that the Zairian government has evaded the security council
resolutions through bribery, kickbacks and surcharges on oil and illicit
payments in respect of humanitarian goods

CONTI….
 In this case ASIC sues Flugge and Geary for alleged breach of their duties
under section 180 (1) and 181 of the act as well as other pieces of legislations.
 The conduct aroused out of the contractual relationship between the AWB
and the government of Iraq where the AWB sold wheat to Iraq under the
United Nation Oils for Food Program (OFFP).
 For this case the basic duties of the directors imposed on them by the virtue of
corporation act 2001 were checked and prosecutions and palatines were
imposed for breach of such duties

CONTI…
 In 2005 the findings over the case were presented and the final report was submitted in
2006.
 In 2007 civil proceedings were commenced in the supreme court of Victoria against six
directors of the company including Flugg and Geary.
 In 2008 a stay on the proceedings was given. In 2009 the announcement was done to
investigate into criminal matters arising out of this case.
 In 2010 the curt ordered a lifting of the stay of proceeding against Flugge and Geary
along with two others officers of company (Charles Stott and Michael Long).

b. BREACHES OF DIRECTORS’
DUTIES UNDER THE
CORPORATIONS ACT 2001(CTH)
Section 180: Care and diligence the civil obligation of director:
 This section of the corporation act define the care and diligence which must
be taken by directors and other officered under while exercising their duties
 Section 181 (1) of the act states that a director or the officer of a corporation
are required to exercise their power and discharge their duties with the
degree of care and diligence that a reasonable person would exercise, when
that person is

CONTI…
 Section 180 (1) of the corporation states outs the best judgement rule to decide
whether a director has breached any of their duty and the court are reluctant to
substitute their own judgement for the business decisions which are made by
the directors.
 This rule is applicable to the section 180 only over the care and diligence duty
of the directors and not applicable on the section 181 or 182.

CONTI…
The business judgement rules requires directors or officers in this capacity are
required to take a decision for the business:
 in good faith for a proper purpose,
 must not have a material or personal interest in the subject matter of the
decision over which a judgement is made,
 Inform the other director and officials about the material interests in the
subject matters of the judgement and the extent that is reasonably believed to
be appropriate, and
 Must have a rational belief that the decision taken is in the best interest of the
company.

CONTI...
 In cases where a director is found under the breach of these duties and
business judgement rule section 1317 and section 1318 are applicable.
 For this the requirement are that the directors of officers have acted honestly
and they have acted without deceit or conscious impropriety.
 Without an intention to gain an advantaged or benefit with no prejudice to the
facts which are under judgement

CONTI...
 For the present case the director Flugge of AWB, was imposed with an
allegation of breach of section 180 (1) where he did not act with care and
diligence while to making the payment to Iraq government over the inland
transportation fees.
 Flugee stated that he was of the view that the Irani government have taken a
sanction over accepting the payments for transportation which was a due
requirement specified by the UN over making a payment to other countries.
 He flailed under the business judgement rule of section 180 (1) of the
corporation act.

c. ANALYSIS OF THE
COURT’S DECISION
 For this case, ASIC sought two sets of penalties against Flugge – a
disqualification order for a period of 10 years, plus the maximum $200,000
penalty that is available under the legislation for a breach of section 180 and
181 of the Corporation Act.
 But for the case a decision was given by justice Robson of the supreme courts
as imposing a pecuniary penalty of $50000 on Flugge and issued an order of
disqualifying him from the managing the corporation for a period of 5 years

CONTI...
 For providing the decision over this matter the court under took the facts and
inquires into whether AWB was making any inappropriate payments of
transportation fees to Iraq.
 In this context Flugges failed and continue to fail to make adequate and
reasonable required inquiries whether the UN has fully informed by the AWB
of the circumstances over the payments made by Iran government which
required a due permission and sanction from the UN.
 The circumstances of this case establishes a necessary to inform UN over the
AWB' payment of inland transportation fees it the IGB.

CONTI...
The court took into account the facts resented on the face of case, requisite
permission requirement and taking of the same, where Flugge knew that
 there is a requirement of OFFP and the UN sanctions against Iraq
 hat AWB was making payments of inland transportation fees to the IGB under
the OFFP
 that AWB was doing so in the belief that the UN had approved the payments
of the inland transportation fees even though they involved the payment of
internationally traded currencies to Iraq.

CONTI...
 The case from which references were taken to decide upon this case were Rich
v ASIC [2004] HCA 42, principle stated in case of Jones v Dunkel, ASIC v
Whitlam 2002, ASIC v Australian Property Custodian Holdings Limited
(receivers and managers appointed) (in liquidation), Dominium Insurance
Company of Australia Limited (in liquidation) v Finn, ASIC v McDonald(No
12) and others.

d. RELEVANCE AND IMPACT
OF THE DECISION
 The relevance of this case and its deception can be stated that the courts
decided the case after taking into each facts and evidence related to the case
 This case took almost 14 years to get a final decision. Moreover, 6 of the
directors and officials of the corporation AWB were imposed with allegation
but the courts took in to account the facts present on the face of case and
dismissed the proceeding against 5 of the directors.
 The main person who was held liable for the breach of section 180 (1) ,
directors duties was Flugge who was the directors of the company and did not
take the business judgement with care and diligence and also with not abiding
with the business judgement rule.

CONTI...
 The impact of the decision of this case is immense and signifiant over the
corporation and its directors.
 As, although this case took almost 15 years to get a final decision but the
main facts of the corporation acts were kept intact.
 The judges do not take their discrimination power into account rather they
stick to the provisions of the corporatisation act, with increasing the
authenticity of the rules of this act.
 The corporation are given a clear picture over the implication of non
abidance and consequences of the breach made for the sections of this act.

CONCLUSION
 Form the above report it can be concluded that the directors duties mentioned in the
corporation act 2001 have a mandatory application.
 All the directors and officers under the same capacity are required to abide by such
duties. Furthermore, it can be articulated that for the case of ASIC and Flugge, the
defended who was director of the company AWB was founds under the breach of
section 180 and section 180 (1) of the corporation .
 He failed in taking due care and diligence while making the business judgement. He
did not check the fact of UN sanction before making payment to the Irani
government as inside transportation fees for delivering wheat to the government of
Iran.
 For this breach Flugge was imposed with a penalty of $50000 and was restricted to
operate as director of the corporation AWB for a period of 5 years.

Reference
Books and journals
 Ramsay, I. (2015). Increased corporate governance powers of shareholders and
regulators and the role of the corporate regulator in enforcing duties owed by
corporate directors and managers. European Business Law Review. 26(1), 49-
73.
 Hedges, J., Bird, H., Gilligan, G., Godwin, A., & Ramsay, I. (2016). The
policy and practice of enforcement of directors' duties by statutory agencies in
Australia: An empirical analysis. Melb. UL Rev. 40, 905.
 Huggins, A., Simnett, R., & Hargovan, A. (2015). Integrated reporting and
directors’ concerns about personal liability exposure: Law reform
options. Company and Securities Law Journal,.33. 176-195.