Case Of The Contraventions Of Corporations Act 2001 | Assignment


Added on  2019-09-23

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PART AFacts of the CaseUnder the scheme of National Innovation and Science Agenda (NISA), Australian Governmenthas decided to invest $250 million in different research facilities across the country in order toencourage entrepreneurship and innovation. The aim of the Government was to make health andmedical research commercial. Therefore, a company called Medco Ltd. got interested in thisscheme as its business was to invest in new avenues regarding alternative medicine. After thatBrenda, who is one of the executive directors (Director, Innovation) in Medco Ltd. applies toavail the Government funding from NISA on the basis of research on medicinal properties ofLanolin which is a natural compound found in sheep fleece. But the truth was something elsethat this research trial was going on in another company called Merino Pty Ltd privately ownedby another director of Medco Ltd David. Brenda signs EOI on behalf of Medco Ltd to seek afunding of up to $500,000 and submitted to NISA. After that four of the five directors had ameeting and the company made an announcement to ASX regarding the so called agreement ofthe company with Government under NISA. Brenda, then purchased 1,000 more shares ofMedco Ltd by topping up. The fifth director, Frank warns the other directors that theannouncement was a premature one, but he anyways sold his shares that were increased by 45%after the announcement. However, later on Brenda incurred a significant loss due to the 60%reduction in the prices of the shares because NISA decided not to fund Medco Ltd. research.Critical AnalysisThe above scenario presents a clear case of the contraventions of Corporations Act 2001(Commonwealth) in many aspects. Under the Section 1041 A of Corporation Act 20011, there are different provisions drafted for theevent of market manipulation. The Act lays down the rules as follows: If a person involves in any of the unscrupulous activities directly or indirectly and in the currentjurisdiction or anywhere else. Such activities can be described with the help of the followingprovision:A transaction or more transactions that have the propensity to have an effect of generating a priceartificially in order to trade in financial products belonging to a financial market coming underthat jurisdiction. Also, maintaining an artificial level of the price regarding trade or transaction infinancial instruments belonging the financial market that runs in that particular jurisdiction.1 CORPORATIONS ACT 2001 Austlii.edu.au <http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/>.

Penalty provisions of violating Section 1041 A of Corporation Act 2001If a person is involved in any activity that is forbidden under the provision of this Act or doesn’tdo anything that is required for him to do what the provision of this act prescribes or involves inthe other contravention of the provision of this Act. He would be found guilty of the offense byvirtue of this subsection, unless some different provision of the Act states otherwise. When theperson is found guilty of violating this Act, he/she is liable to be punishedor convicted by apenalty not exceeding the required applicable penalty of the offence. The provision of this Actsets the applicable penalty on account of contravention as a specified one which is pecuniary orotherwise. The person who is found guilty of violating the above Act will also come under theclause of getting strict liability2. Under this, the person will be disqualified from managingcorporations and under section 206F or 206G, he will not be given any permission to manage thecorporation any longer. So, if the person ceases to be the director or alternate director, then undersection 2, the company is needed to notify ASIC3. After the contravention of the civil penalty provision is established in the court, then it isrequired to make the declaration of the contravention. After that the ASIC is required to seekpecuniary penalty order. It is mandatory that the declaration of contravention should specify a)the Court, b) the civil penalty provision that was declared to have been contravened, c) theperson in question, d) the conduct of the person because of which contravention took place.Civil action to cover damage due to the contraventionIf any individual has suffered a loss or damage because of the contravention by another person,he is allowed to recover the amount of damage by taking an action against the person whocontravened, whether or not he has been convicted of an offence on account of contravention.Section 1044B limits the amount limits the amount which is to be recovered on account of thecontravention by misleading or deceptive information. However, as per the law, under subsection(1), the aggrieved person can claim economic loss or damage to the property being caused byanother person4. He can also claim the damages incurred by him because of the failure to takereasonable care. In any case, the damages being recovered by the claimant on account of the losscould also be reduced to the extent the court finds it just and equitable according to its discretion.It is the Division 2A that applies for the proportionate liability in order to recover the damageson account of the contravention under section 1041H. An action can be started any time in 6years from the day of the cause. Also, under this section any other liability of the person of anyother law is not affected.In the present case, there is a clear infringement of the Section 1041 A of Corporation Act 2001on the part of the directors of Medco Ltd in general and Brenda in particular. All the fourdirectors who were present in the meeting agreed on making an announcement to the AustralianStock Exchange (ASX) that the company has just made an agreement with the Australian2 CORPORATIONS ACT 2001 - SECT 1041Amarket Manipulation Austlii.edu.au <http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s1041a.html>.3 George Gilligan and Helen Louise Bird, "Financial Services Misconduct And The Corporations Act 2001" SSRN Electronic Journal.4 E. E Clark, Julien Stuyck and Evelyne Terryn, Commercial And Economic Law In Australia.

Government in a significant investment under NISA. Because of this news, the value of theshares of Medco Ltd was artificially increased on the premise that the company has now thebacking of the Government and the fact that investors would have an impression that thecompany will make profits, the chances are that the prices of the shares will increase even moreartificially. So, it is a case of stock market manipulation because it entails an intentionaldistortion of the market prices of the shares on the part of the directors of Medco Ltd. Finally,when the prices of the shares of Medco were dropped by 60%, then a substantial loss must havebeen incurred by other shareholders of the Medco Ltd. Therefore, the directors are liable to payfor the damages or losses in the form of penalties. Also, they are liable to face the law andpunishment for the manipulation or distortion5 of the shares. There was a similar case regarding market manipulation that was surfaced in 2013 (15 – 271 MRNSW) after an investigation of ASIC took place in New South Wales. In this case, a man namedNigel Derek Heath was found guilty of the market manipulation charges. The quantum ofpunishment meted out to him was that of 2 years and three months of imprisonment and apenalty amount of $10,000. Mr. Heath was found to be guilty of two charges of marketmanipulation that come under Sec 1041A and Sec 1041B of Corporations Act 2001. The Judgein this particular case felt the need to establish a free, open and transparent market which shouldnot have been contaminated by the activities such as that of Mr. Heath’s. Therefore, his conductwas found to have distorted the market and on account of that the value of his own portfolio wasincreased and eventually it gave rise to the free equity in the CFD trading accounts of Mr. Heath.It was also observed on the part of the court that any activity that manipulates the market leads tothe undermining the integrity of financial markets. It is the ASIC that has been conferred theresponsibility to protect the financial markets so that it can bring those individuals who areinvolved in the market misconduct to the justice6. The court found that Mr. Heath’s modusoperandi was to operate on the a direct access model, in which the issuer of the CFD made ahedging exposure to a client by making a direct position to be taken in the underlying security. The Corporations Act 2001, Section 1041E also underlines the provisions in the event of false ormisleading statements furnished by the officials of corporations. It says that it is strictly illegalon the part of a person belonging to that jurisdiction, to make a statement or disseminate theinformation, when that statement is false (fully or partially) or is misleading. Because of the falsestatement or misleading information, the people could be induced or become ready to invest in orapply for the related financial products. People in this jurisdiction would be induced to dispose ofor acquire the said financial products. Also, if the given statement or information creates aneffect that increases, reduces or stabilizes the price needed for the trade in financial productsbelonging to the given financial market operating in the current jurisdiction7. While making such5 J MERRICKJR, N NAIK and P YADAV, "Strategic Trading Behavior And Price Distortion In A Manipulated Market: Anatomy Of A Squeeze" (2005) 77 Journal of Financial Economics.6 15-271MR NSW Man Jailed For Market Manipulation | ASIC - Australian Securities And Investments Commission (2015) Asic.gov.au <http://asic.gov.au/about-asic/media-centre/find-a-media-release/2015-releases/15-271mr-nsw-man-jailed-for-market-manipulation/>.7 Theresa M. Greaney, "Manipulating Market Shares: The Indirect Effects Of Voluntary Import Expansions (Vies)" (1999) 11 Japan and the World Economy.

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