Legal Implications of Breach of Statutory Duties by Directors of Slater and Gordon

This article discusses the breach of statutory duties by directors of Slater and Gordon under the Corporations Act, 2001. It analyzes the legal implications of their actions and explores the options available to law enforcement officials and directors of the company. The article also discusses the lifting of the corporate veil in such cases.

Running head: LAW OF BUSINESS ORGANIZATION
LAW OF BUSINESS ORGANIZATION
Name of the Student
Name of the University
Author Note

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Question 1
Issue
Slater and Gordon was the first law firm to be listed on an Australian stock exchange. It
was a reputed law firm and was expected to be a successful venture which is what attracted
numerous investors around the country. However an expansion tactic that involved an
acquisition of the professional services wing of a United Kingdom based law firm “Quindell”.
Shortly after the acquisition “Quindell” was under investigation for fraud. Additionally, there
were claims that the assets of the company were overvalued in the balance sheets. The first and
foremost claim of the shareholders is that the company did not inform their investors of the
accurate financial stand of the company. The issue here is to determine the legal implications of
the incident.
Law
Corporations functioning within the jurisdiction of the Australian Commonwealth are
regulated and governed by the provisions of the Corporations Act, 20011. As per Section 180 of
the Act directors of a company have a duty of care to observe utmost care and diligence when
undertaking actions on behalf of the company2. This is a civil obligation and it denotes that all
directors must fully understand the implications and consequences of the actions they are
undertaking before they enter into transactions of behalf of the company.
As per Section 181 of the Act the directors of a company have a duty to act in good faith
and in the best interests of the company3. The company’s foremost responsibility lies towards the
1 Bronitt, Simon H. "Policing Corruption and Corporations in Australia: Towards a New National Agenda." (2013).
2 Corporations Act, 2001.
3 Corporations Act, 2001.

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shareholders (investors) and the directors have a responsibility to act in good faith when
mobilizing the investments of the shareholders. This obligation also includes a duty to disclose
all material information to the shareholders and additionally represent a true and accurate image
of the company’s financial position.
Section 183 of the act says that if a director uses any information gained by him by virtue
of his position and uses it to gain an advantage for themselves or a third-party which causes a
detriment for the company would be in breach of their statutory duty4.
Section 184 of the Corporations Act, 2001 lays down a criminal penalty in cases where a
director’s obligations under Sections 180-183 are breached5.
Application
In the given set of circumstances the directors of Slater and Gordon had a statutory duty
to ensure that the actions undertaken by them on behalf of the company do not have detrimental
effects on the company. When acquiring the Professional Services wing of “Quindell” they had a
statutory duty towards care and diligence to fully understand the implications of the acquisition.
This followed the provisions of 180 of the act6. If they had observed this duty the fraud being
committed by “Quindell” would become evident and material and would be identified before it
has detrimental effects on the company as a whole.
As per the director’s duty to act in good faith and in the best interests of the company as
mandated by Section 181 of the act, the directors of Slater and Gordon had a statutory duty to
ensure that their actions are in the best interests of the company7. They had however fabricated
4 Corporations Act, 2001.
5 Haas, Jeffrey J. Corporate Finance. West Academic, 2014.
6 Corporations Act, 2001.
7 Corporations Act, 2001.

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financial statements and represented an inflated asset value which deluded the shareholders.
Furthermore, the acquisition of “Quindell” was clearly not in the best interests of the company
and could be construed as financial self-interests of the shareholders. This would be conflict of
interest which is a breach of the director’s duty under common law and statutory law as laid
down in the Judgment in Chan v Zacharia8. Thus this conflict of interest was an unfair
advantage gained by the directors (since informing the investors would make them withdraw
their investment by disposing off the shares) and it had detrimental effects on the company. They
were thus in breach of their statutory duties under Section 183 of the Act9.
The directors had also not informed the shareholders of the alarming financial
predicament of the company. This would form a part of their duty to act in good faith and in the
best interests of the company and thus was a contravention of Section 181 of the act.
Conclusion
To conclude, the directors of Slater and Gordon were in breach of their common law
duties to act in the interests of the company and in good faith as laid down in Chan v Zacharia.
They were also in breach of their statutory duties under Section 180,181 and 183 of the
Corporations Act, 2001.
Question 2
Issue
In the case of Slater and Gordon the options available to law enforcement officials and
directors of the company need to be determined. The issue here is thus to determine the best
8 [1984] HCA 36.
9 Corporations Act, 2001.

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recourse for the directors of Slater and Gordon and the remedies available to the law
enforcement authorities.
Rule
Section 184 of the Corporations Act, 2001 imposes a criminal liability in case the
directors of a corporation are in breach of their statutory duties as prescribed by the act. The
consequences for such a breach as stated by the act are10:
 Face criminal charges which would amount to imprisonment and/or fine of $200,000.
 Be held personally liable for the damages faced by the company or other third parties.
 Face civil penalties that could extend to $200,000.
 Be barred from company administration for a limited or indefinite period of time.
It has been reiterated in the judgment in ASIC v Citigroup Global Markets Australia Pty
Ltd (No 411) that directors of a company have a duty under common law to act in good faith and
in the best interests of the company. It has also been decided that such a breach of their
obligations under common law would amount to equitable damages.
The Australian Securities and Investment Commission (ASIC) is the primary regulatory
body that enforces statutory duties under the Corporations Act, 2001. Thus, this is the regulatory
authority that would legally pursue corporations in breach of their statutory duties12.
10 Ferran, Eilís, and Look Chan Ho. Principles of corporate finance law. Oxford University Press, 2014.
11 [2007] HCA 963.
12 He, William Peng, and Andrew Lepone. "Determinants of liquidity and execution probability in exchange
operated dark pool: evidence from the Australian securities exchange." Pacific-Basin Finance Journal 30 (2014): 1-
16.

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Application
In the given set of circumstances the directors of Slater and Gordon had been in breach of
their statutory duties as per the provisions of Section 180 of the act when they undertook the
acquisition of “Quindell” without first analyzing all implications of such a takeover and the
paper trails to all their transactions. This meant that they had not been reasonably diligent in
determining the state of affairs of “Quindell” before entering into such a transaction and had thus
not observed the reasonable duty of care that they had by virtue of their powers in the apex
position within the organizational structure.
They had also not informed the shareholders about the alarming financial position of the
company following the investigations into “Quindell”. This was material information which
needed to be conveyed to the investors immediately as it was their investment which was at risk.
This was a duty in good faith and in the best interests of the company as per the provisions of
Section 181 of the act13. They were thus in contravention of this provision. They had also
fabricated financial statements and reported inflated assets which mislead the investors into
thinking Slater and Gordon was a stable investment which was also a breach of this statutory
duty. The non-disclosure was also a breach of the director’s duties under Section 183 of the act
to the extent that they had used the information to gain an advantage for themselves which
caused a detriment to the company14.
Thus under these circumstances, the acts of the directors would attract criminal liabilities
as per the provisions of Section 184 of the Act.
13 Corporations Act, 2001.
14 Corporations Act, 2001.

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The acts of the directors also display financial self-interests and are thus a breach of their
common law duties against conflict of interest. Thus, following the judgment in ASIC v
Citigroup Global Markets Australia Pty Ltd (No 4) the directors would be liable to pay damages
to any injured parties.
Conclusion
Thus, in this predicament ASIC would have the power to enforce statutory penalties on
the directors for the breach of their duties under Section 184 of the Act. This would impose
criminal liabilities.
The shareholders would also have the option of approaching the law enforcement
authorities with their claims under the breach of their common law duties and in such a case civil
penalties in the form of damages would apply.
The directors would have the option of making appropriate disclosures which would
establish the true and accurate financial stand of the company and may show cause to establish
they had no knowledge of Quindell’s fraud. However, unless backed by evidence there would be
no defenses available to directors in such a case.
Question 3
Issue
The issue is to determine if such a case (Slater and Gordon) warrants the lifting of the
corporate veil.

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Rule
A company is a separate legal entity and can sue and be sued in its own name. This
however does not imply that in cases where the acts of the company have had detrimental effects
on its investors and other stakeholders the corporate personality cannot be pierced to hold the
persons originally responsible for the decision making process which lead to such acts.
It was held in Campbell v Gordon15 that in cases where the directors of a company have
used to corporate veil to facilitate fraud the veil would have to be lifted and the directors would
be held personally liable. This has also been reiterated in VTB Capital plc v Nutritek
International Corp and others16.
Application
It has already been established that the directors of Slater and Gordon were in breach of
the statutory duties under Section 180,181 and 183 of the act. This also meant that the fabrication
of financial statements and reporting of inflated profits would be construed as fraud if
established. Following the judgment in Campbell v Gordon it may be inferred that in such a case
the court would have to look beyond the corporate veil and attribute responsibility to the ones
originally responsible for the decision making process which brought about these actions on
behalf of the company, namely, the directors.
Thus in case such a veil is lifted it would attribute personal liabilities on all the directors
who ratified the actions in question jointly and severally.
15 [2016] UKSC 38.
16 [2013] UKSC 34.

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Conclusion
Under the given set of circumstances, the corporate veil would have to be lifted and it
would amount to criminal liabilities and civil penalties on part of all the directors of Slater and
Gordon. This would be because of the fraud found in their disclosures and transactions.

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Bibliography:
Statues:
Corporations Act, 2001.
Case law:
Chan v Zacharia [1984] HCA 36.
ASIC v Citigroup Global Markets Australia Pty Ltd (No 4) [2007] HCA 963.
Campbell v Gordon [2016] UKSC 38.
VTB Capital plc v Nutritek International Corp and others [2013] UKSC 34.
Articles:
Bronitt, Simon H. "Policing Corruption and Corporations in Australia: Towards a New National
Agenda." (2013).
Haas, Jeffrey J. Corporate Finance. West Academic, 2014.
Ferran, Eilís, and Look Chan Ho. Principles of corporate finance law. Oxford University Press,
2014.
He, William Peng, and Andrew Lepone. "Determinants of liquidity and execution probability in
exchange operated dark pool: evidence from the Australian securities exchange." Pacific-Basin
Finance Journal 30 (2014): 1-16.

10LAW OF BUSINESS ORGANIZATION