Director Duties in ASIC v Flugge & Geary [2016] VSC 779

This article analyzes the case of ASIC v Flugge & Geary [2016] VSC 779 and the director duties breached under Corporations Act. It covers the facts of the case, reasons for breach of director duties, decision given by the court and its relevance. The case highlights the importance of fulfilling director duties and the negative consequences of not following the required laws.

Corporations Law 2018
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Corporations Law
May 24
2018
Director duties as was applied in the case of ASIC v Flugge & Geary
[2016] VSC 779.
Group
Assignment

Corporations Law 2018
Introduction
A company is given the status of separate legal entity. This means that it is treated in a
separate manner from its directors, officers or any such person running its affairs. The
company is thus a separate person in the eyes of law (Talbot, 2015). However, the affairs of
the company, be its operations or its conduct, is undertaken by different people. Based on the
level of hierarchy, the role of each person is given significance. The workers are not given as
much significance as is given to the senior management. This is the reason why each person
is given different roles, and their roles have different consequences (Eisenberg, 2017). When
it comes to the key officers of the company, or more importantly, its directors, their role is
deemed as very important. This is the reason why the directors of the company are given so
much weight under the law. The Corporations Act, 2001, which is an act of commonwealth,
puts these duties on directors and the key officers of the company, and even on employees at
some instances (Langford, 2015).
One of the recent cases, where this matter of director duties was analyzed by the court is the
case of ASIC v Flugge & Geary [2016] VSC 779. ASIC is the regulatory body which ensures
that the companies follow the duties put through Corporations Act, and stands for Australian
Securities and Investments Commission (Smith, 2015). The following parts cover an analysis
of ASIC v Flugge & Geary, where the facts, the duties breached, the decision given in this
case and the relevance of this case is highlighted.
Facts of this case (case introduction)
The key issues of this case started from the transactions which were brought before the
Supreme Court of Victoria by ASIC in the end of 2007. This case was started against six of
the erstwhile directors and officers of AWB Limited. The key case, in context of theme of
this discussion, was related to the contraventions of section 180 and section 181 of
Corporations Act (Supreme Court of Victoria, 2018). Instead of going in the details of the
entire transactions, a brief of these have been covered here. The main contention raised by
ASIC was regarding AWB’s wheat trade with Iraq-based Company. This was in addition to
the company misusing the United Nations policy of Oil for Food Program, which had been
created in 1995. This policy required that the proceeds from sale of oil of Iraq had to be put in
a separate escrow account of the United Nations. The proceeds which were collected could be
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made use of for selling wheat to Iraq only or could be used for different humanitarian
reasons. In order to buy the wheat, AWB had to take permission from United Nation. Once
this approval was given on the price of wheat, AWB was free to buy the wheat from Iraq and
this money had to go in United Nations’ escrow account (Supreme Court of Victoria, 2017).
As per ASIC, AWB had made indirect payments to Iraq government. These payments were
related to the inland transportation fees, for wheat distribution. AWB had also compensated
itself for making such payments. In order to do so, the price of wheat had been inflated for
Iraq. Apart from this, the company also attained inflated price from the United Nations’
escrow account (Supreme Court of Victoria, 2017). ASIC went on to state that the
transactions which were undertaken in this case had been a deception. The reason for this was
these transactions were merely a way of getting hands on currency which was globally
acceptable. This was a direct contravention of the United Nations Security Council
Resolutions. Once the conduct of AWB came in light of general public, the company had to
cope with huge financial loses. These losses took place due to following reasons:
 Loss of market capitalizations to the value of $781 million (in approximations);
 High compliances resulting in high legal costs;
 Company being suspended;
 Company being debarred from taking part in United States government plans;
 Paying for class action settlement;
 Restructure and redundancy costs;
 Immeasurable harm:
o Loss of corporate knowledge
o Loss of reputation
o Loss of moral (Baker McKenzie, 2016).
Duties breached
There are different director duties which are imposed through the law on the directors of
companies. The two which are relevant to this case include the ones covered under section
180 and section 181.
Section 180(1), of Corporations Act, presents the provisions for duty of care and diligence,
on part of directors. This section provides that a director has to be careful and diligent when
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Corporations Law 2018
they undertake their work, particularly when it relates to use of power and fulfilment of
duties. The next relevant section for this discussion is of duty of good faith set out under
section 181(1) of Corporations Act. This section provides that a director has to work in best
interest, good faith and for proper purpose, when they undertake their work, particularly
when it relates to use of power and fulfilment of duties.
Reasons for breach of director duties
The contentions which were made in this case, by ASIC against the directors of AWB
Limited were based on the sections 180 and 181. As per ASIC, the directors had not taken the
required steps, as they had failed in ensuring that AWB complied with United Nations
Security Council Resolutions, instead of breeching them. The specific content of this
allegation was based on a currency which was acceptable worldwide, being given to Iraq
government. Further, there were also acceptances of payments from the escrow account of
United Nations, made for improper purpose. There was also the failure of directors in the
board of AWB being informed properly and in responding to the aforementioned issues. In
line of these breaches, the directors had failed in making sure that the proper approvals were
applied for by the company and that United Nations had given such approval regarding the
inland transport fees (Australian Securities and Investments Commission, 2018).
Decision given by court
First Director: Flugge
The court began with analysis of breaches in context of section 180 of the Corporations Act.
As per the judge, Flugge had failed in upholding this section, as he did not ensure that the
inland transport fee got the required approval from United Nations (Collier, 2017). Once the
meeting in Washington had taken place, the first director of this case acquired enough facts
which made it clear that this approval was an obligation. It became clear from this meeting
contents that for this transport fees, United Nations had to give their approval. In case there
was someone else in place of Flugge, being a reasonable director, they would have paid heed
to the raised suspicion, resulting in steps being taken to evaluate or investigate the matter. To
place reliance on the decision taken by others is not something a reasonable director would
do. Hence, Flugge could not be excused for not making the relevant inquiries and for not
raising the proper questions. Where Flugge relied on the assurance given by another director,
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Corporations Law 2018
i.e. Lindberg, against whom another set of proceedings were raised in court, Flugge was not
relieved of his director duties (Baker McKenzie, 2016).
The judge in this case made two crucial findings, which are detailed below.
 In case the first director of this case had raised the required questions, he would have
evaluated the entire case. This would have made the exact nature of the undertaken
payments very clear. It would have become clear to Flugge that AWB had not
informed the United Nations regarding this transport fees. Apart from this, it would
have been clear that AWB did not attain any legal advice despite the transactions
which were taking place in the company.
 As stated earlier, the directors have certain duties. As a part of these duties, the first
director was duty bound to make some inquiries. By not doing so, there had been a
contravention of such duties as had been imposed on Flugge. This contravention
continued till Flugge stopped being a director in AWB (Jade, 2018).
Coming to the next section, it was deemed by the court that there had been no contravention
of section 181(1) by Flugge (Tragardh, 2016). This was again based on two key reasons.
 When Flugge did not make the inquiries which the reasonable standards of director
required him to do, there was nothing to show that this was done for an improper
purpose.
 Apart from this, the first director of this case did not tune in the mind for inquiry,
which meant that the decision was not related to making of an inquiry (Australasian
Legal Information Institute, 2017).
As per the judges, section 181(1) could not be applied in context of a contravention for the
first director. This was based on the test regarding duty being discharged or power being
exercised being analyzed, as there was an absence of both these issues in this matter. This led
to the court making differentiating this case from such cases where there were deliberate
attempts of not making an inquiry by the directors. So, for the breach established in this case,
Flugge was disqualified from holding the post of director for a period of five years based on
section 206C of the Corporations Act. Apart from this, he was also awarded pecuniary
penalties of $50,000 based on section 1317G of the Corporations Act (Jacobson, 2017).
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Second Director: Geary
ASIC had made similar contentions against the second director of this case as well. However,
two more allegations were made against Geary. All four allegations made by ASIC, were out
rightly dismissed by the judges in this case (Baxt, 2017). The reason for this was the lack of
evidence which could lead the court to conclude that the second director did know, suspect or
even had the belief that there was an absence of relevant approval by United Nations
regarding the inland transport fees. In comparison to the first director, the judge did not find
the second director as having the knowledge regarding United Nations’ inquiry, or of these
payments, as the same had not been presented in the United States meeting (Jade, 2018).
Owing to these reasons, he had not been placed on the notice, which could have resulted in
the duties being owed by the second director, as were owed by the first director, regarding the
need for making proper examinations. The judge went on to state that the second director had
been completely honest in his acts. Further, the second director did reasonably believe that
the director duties owed by him had been properly met. This was done for proper purpose and
also in the best interest of AWB. The judge went on to state that in case the second director
had been aware of unlawful transactions taking place in AWB, only then he would have owed
a duty of making the board aware. And only in this scenario, was the second director required
to take the required measures as any reasonable director is required to (Australian Securities
and Investments Commission, 2018).
Relevance of this decision
This case is important from the stance of reliance placed by directors on the information
provided by some other person, be it another director or officer of the company. Due to the
wrongful reliance placed by Flugge on Lindberg, he was made liable for breaching the
directors’ duties, resulting in court imposing civil penalties on him. Another important point
highlighted through this case was the need for the directors to fulfil their duties, till the time
they no longer hold the position of director in such company. Whenever a director is
suspicious about anything, it is their duty to question, inquire and examine such matter in
detail. Only then the defences given under the Corporations Act can save a director.
The most important lesson from this case is that where a company does not follow the
required laws, they have to face a lot of negative consequences, which are majorly reflected
on financial position of the company. The directors are thus required to keep on their toes and
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play a proactive role in the companies. They have to keep themselves properly informed of
all matters, particularly which have the capacity of negatively impacting their company.
Apart from following the words of law, the spirit of law needs to be adhered as well. The
directors also have to undertake a full risk assessment, in order to ascertain the possible issues
which can bite them back, as did happen in this case.
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Reference List
ASIC v Flugge & Geary [2016] VSC 779
Australasian Legal Information Institute. (2017) ASIC v Flugge & Geary [2016] VSC 779 (15
December 2016). [online] Available from:
http://www8.austlii.edu.au/cgi-bin/viewdoc/au/cases/vic/VSC/2016/779.html [Accessed
24/05/18]
Australian Securities and Investments Commission. (2018) In the Supreme Court of Victoria.
[online] Available from: http://download.asic.gov.au/media/4113228/16-441mr-orders.pdf
[Accessed 24/05/18]
Baker McKenzie. (2016) Why Failing to Ask Questions Can Be a Breach of a Director's
Duties. [online] Available from:
http://www.bakermckenzie.com/en/insight/publications/2016/12/a-reminder-to-directors-and-
officers/ [Accessed 24/05/18]
Baxt, B. (2017) Directors' Counsel - Crime and punishment. [online] Available from:
https://aicd.companydirectors.com.au/membership/company-director-magazine/2017-back-
editions/june/directors-counsel [Accessed 24/05/18]
Collier, B. (2017) Recent Developments in Australian Corporate Governance. [online]
Available from: http://www.fedcourt.gov.au/__data/assets/pdf_file/0006/45672/20170601.pdf
[Accessed 24/05/18]
Corporations Act, 2001
Eisenberg, M. A. (2017) Legal models of management structure in the modern corporation:
Officers, directors, and accountants. In Corporate Governance (pp. 103-167). London:
Taylor & Francis Group.
Jacobson, D. (2017) AWB v Flugge & Geary (AWB Case). [online] Available from:
https://www.brightlaw.com.au/awb-v-flugge-geary-awb-case/ [Accessed 24/05/18]
Jade. (2018) ASIC v Flugge & Geary. [online] Available from: https://jade.io/article/509100
[Accessed 24/05/18]
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Langford, R. T. (2015) Directors' Duties: Conflicts, Proactive Disclosure and S 181 of the
Corporations Act. Company & Securities Law Journal, 33, pp. 205-211.
Smith, H. (2015) Australia's Company Law Watchdog: ASIC and Corporate Regulation.
University of Tasmania Law Review, 34.
Supreme Court of Victoria. (2017) Summary of Judgment. [online] Available from:
https://www.supremecourt.vic.gov.au/sites/default/files/embridge_cache/emshare/original/
public/2017/09/f5/703491644/summaryofjudgmentasicvfluggeandgeary2016vsc779.pdf
[Accessed 24/05/18]
Supreme Court of Victoria. (2018) Judgment in ASIC v Trevor Flugge. [online] Available
from: https://www.supremecourt.vic.gov.au/contact-us/news/judgment-in-asic-v-trevor-
flugge [Accessed 24/05/18]
Talbot, L. (2015) Critical company law. Oxon: Routledge.
Tragardh, A. (2016) Judgment handed down in ASIC v Flugge and Geary. [online] Available
from: https://www.fraudbarrister.com.au/judgment-handed-down-in-asic-v-flugge-and-geary/
[Accessed 24/05/18]
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