Analysis of ASIC v Flugge (No 2) Case: Director's Duties and Breach

This case study analyzes ASIC v Flugge (No 2), a significant decision by the Supreme Court of Victoria, which addresses the contravention of director's obligations under the Corporations Act 2001 (Cth). The case revolves around the Australian Wheat Board (AWB) and its involvement in the UN Oil-for-Food Program, specifically focusing on irregular payments of inland transportation fees to the Iraqi Grain Board (IGB). The defendant, a director, was found to have breached their duty to act with due diligence and care, failing to adequately inquire about the UN's concerns regarding these payments. The court's analysis highlights the defendant's awareness of the UN inquiries and their failure to use available means to confirm the appropriateness of the payments. The decision emphasizes the importance of directors discharging their powers with due diligence and care, with the court imposing a pecuniary penalty and disqualification. This case has implications for the operation of Australian companies, underscoring the need for directors to act in the best interest of the company and exercise reasonable skill and care. The assignment includes references to relevant case law and legal literature.

BUSINESS AND
CORPORATION
LAW

CASE INTRODUCTION
 ASIC v Flugge (No 2) [2017] VIC 117 given by the
Supreme Court of Victoria is a sequel to the ASIC v
Flugge and Geary [2016] VSC 779 ;
 Payment of inland transportation fees irregular and
fraudulent under the UN Oil-for-Food Program
[OFFP];
 Australian Wheat Board [AWB] was making payments
of inland transportation fees Iraqi Grain Board [IGB].
 Contravention of directorial obligation under
Corporations Act 2001 (Cth);

BREACH OF DUTIES
Breach of section [180(1)] of the Corporations
Act 2001 (Cth)
Duty to act with due diligence and care;
UN was making inquiries about inappropriate
payments of transportation fees to Iraq
Failure to make any adequate inquiries about the
approval of the UN regarding sale of wheat to
the IGB Iraq by Australian Wheat Board [AWB];

ANALYSIS OF COURT DECISION
 Defendant was fully aware of the UN inquiries
about the inappropriate payments being made
by the AWB to IGB for trucking/discharge;
 Defendant failed to failed to use means of
knowledge about confirming whether the
payments made to Iraq were inappropriate;
 Any reasonable director under similar
circumstances would have exercised
reasonable skill and care to use the means to
obtain information about the inquiries
 Defendant contravened section [180(1)];

 Defendant applied for an application for exoneration
under section [1318] or section [1718S] ;
 Defendant satisfied one condition: Honest intentions
required under section [1318] or section [1718S] as
ruled in ASIC v APCH [2014] FCA 1308 [39]-[41;
 All three requirements under section [1318] or section
[1718S] must be satisfied;
 Additionally, breach of duty committed by the defendant
was severe in nature and had adverse outcomes;
 Contravention of the defendant is established and was
imposed pecuniary penalty of $50000 and disqualified
the defendant for 5 years.

SIGNIFICANCE OF DECISION ON OEPARTION
OF AUSTRALIAN COMPANIES
Director must discharge its powers with
due diligence and care ensuring best
interest of the company;
Disqualification term and penalty amount
imposed upon the defendant shall be
proportionate to the amount of
contravention committed by the
defendant;

REFERENCES
ASIC v APCH [2014] FCA 1308 [39]-[41]
ASIC v Flugge (No 2) [2017] VIC 117
ASIC v Flugge and Geary [2016] VSC 779
ASIC v Plymin (No 2) [2003] VSC 230
ASIC V Whitlam (No 2) [2002] NSWSC 591.
Australian Securities Commission v John Phillip Donovan and Julia
Gwendolin Donovan [1997] No Qg 3006.
Coffee Jr, J.C., Sale, H. and Henderson, M.T., 2015. Securities regulation:
Cases and materials.
Corporations Act 2001 (Cth)
Hargovan, A., 2017. Corporate law: Foreign directors of Australian
companies put on notice: No leniency for ignorance of duties.
Governance Directions, 69(1), p.37.
Laby, A.B., 2017. The Fiduciary Structure of Investment Management
Regulation.
Rich v ASIC [2004] 220 CLR 129
Stewart, S., 2017. Are you the next ACM board director?. Australian
Midwifery News, 17(2), p.33.