Supreme Court Decision Analysis: ASIC v Flugge and Corporation Law

This report provides an in-depth analysis of the ASIC v Flugge (No 2) [2017] VIC 117 case, focusing on the contravention of directorial duties under the Corporations Act 2001 (Cth). The case involves the Australian Securities and Investments Commission (ASIC) against Mr. Flugge, a director of AWB Ltd, concerning the sale of wheat to Iraq under the UN Oil-for-Food Program. The report examines the breach of section 180(1) of the Act, the court's decision regarding the failure to exercise due care and diligence, and the application for relief. It also discusses the penalty and disqualification principles, highlighting the significance of the decision on the operations of Australian companies, particularly regarding the obligations of directors to exercise due diligence and care. The report concludes with the implications of the court's ruling on the imposition of penalties and disqualifications, emphasizing the importance of compliance with directorial obligations to avoid such consequences. The report is a valuable resource for students studying business and corporation law, offering insights into the legal complexities of corporate governance and the responsibilities of company directors.

Running head: BUSINESS AND CORPORATION LAW
Business and Corporation Law
Name of the Student
Name of the University
Author Note

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Table of Contents
Case Introduction.............................................................................................................................2
Breach of duties...............................................................................................................................2
Analysis of Court decision...............................................................................................................3
Significance of decisions on operations of Australian companies..................................................7
References........................................................................................................................................9

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Case Introduction
The recent decision in 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 that was decided
in 2016. The Australian Securities and Investments Commission [ASIC] initiated a legal action
against Mr. Flugge for contravening directorial duties under the Corporations Act 2001 (Cth).
The contravening conduct of the defendant was alleged to have been resulting from AWB’s
conduct in selling wheat to Iraq under the UN Oil-for-Food Program [OFFP]. The plaintiff has
claimed penalty of $200,000 to be imposed upon the defendant for such contravention and
disqualification of Mr. Flugge from managing corporations for a period of 10 years. Further,
the plaintiff claimed that the defendant must pay seventy percent of the expenses incurred by the
ASIC.
The defendant applied for pardoning the penalty and sought for a court order that ASIC
pays for proceeding expenses. However, the court exercised its discretionary power and held that
the plaintiff was not entitled to exonerated application under section [1318] or section [1718S]
of the Act. Further, the contravention of the defendant is established which led to the imposition
of pecuniary penalty of $50000 and disqualified the defendant for 5 years.
Breach of duties
The plaintiff, Trevor Flugge who was the director and the chairperson of AWB Ltd had
committed breach of section [180(1)] of the Corporations Act between 19 December 2001 and
March 2002. The defendant failed to discharge his duties and exercise his powers with due care
and intelligence, which any prudent person would exercise if such person was under similar
circumstances and holding the same position carrying out the same responsibilities within the
AWB Ltd as the defendant.
The defendant is said to have committed a breach of section [180(1)] of the Act as he
failed to make any adequate inquiries about the approval of the UN regarding sale of wheat to
the IGB Iraq by Australian Wheat Board [AWB]. The defendant was aware that UN was
making inquiries about inappropriate payments of transportation fees to Iraq. AWB was making
payments of inland transportation fees Iraqi Grain Board [IGB].

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Analysis of Court decision
The ASIC initiated two legal cases against the defendant for breaching his directorial
duties stipulated under section [180(1)] of the Act. Hargovan (2017) states that the defendant had
full knowledge about the fraudulent and offensive nature of the payment that is made by AWB to
the IGB as inland transportation fees. However, the plaintiff ASIC failed to establish the case
initiated in 2016 due to which it initiated another legal action against the defendant in 2017. In
this sequel case, Laby (2017) states that the defendant established that he had no knowledge
about the payment being offensive and fraudulent. Nevertheless, in the case of 2017, the
plaintiff alleged that even if the defendant did not have any knowledge of the payment being
fraudulent nature, he had sufficient means of knowledge to inquire if the UN approved of such
payment which he did not exercise. This amounts to a breach of his directorial duties to act with
due care and diligence under the corporations Act, 2001 (cth).
Contravention of section [180(1)] of the Act
The decision of the court in determining whether the defendant had committed a breach
of the legal provision, the court found Mr. Flugge to be in contravention based on the following
grounds. Firstly, a director is required to exercise every possible means of knowledge to ensure
diligence and due care has been complied while undertaking any actions on behalf of the
company. In the case of [2017], the court found that the defendant was fully aware of the fact
that the UN were making inquiries about the inappropriate payments being made by the AWB to
IGB for trucking/discharge.
Secondly, the court held that any reasonable director under similar circumstances and
carrying out similar responsibilities as the defendant would have exercised reasonable skill and
cares to use the means to obtain information about the inquiries being made by the UN regarding
the inappropriate payments made to Iraq.
Further, the court found that the defendant failed to establish that he undertook
reasonable inquiries about confirming whether the payments made to Iraq were inappropriate.
The defendant contended in his defense that he made the payments with the belief that the UN
had approved of such payments. The court was not satisfied with this contention and rejected the
same. However, Stewart (2017) agrees with the findings of the court as if the UN had approved

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of payment inland transportation fees, if would not have suggested such payments to be
fraudulent and irregular in nature and neither it would have initiated any inquiries regarding such
payment. Thus, given the information that the defendant already possessed about payments being
offensive and fraudulent in nature, it is likely that the director breached section [180(1)] of the
Corporations Act 2001 (Cth).
Application for relief
The defendant applied for an application for exoneration and relied on the decision of
ASIC v Plymin (No 2) [2003] VSC 230 where it was held that court is empowered to grant
exoneration with respect to any orders including a declaration of a contravention as stipulated
under section 1317E of the Act. However, the plaintiff had rightly contended that under section
1317E, once a liability has been established, the court must make necessary declaration and
ASIC relied on the decision of ASIC V Whitlam (No 2) [2002] NSWSC 591.
As stipulated under section [1317 S] and section [1318], three conditions must be
fulfilled to determine whether the applicant must be granted relief. Firstly, the court must
determine whether the applicant has acted honestly. Secondly, whether it would be fair to excuse
the applicant and lastly, whether the applicant must be relieved from liability either wholly or
partly.
Coffee, Sale and Henderson (2015) believes that the court has rightly determined that the
defendant had not acted dishonestly as required under section 1317S (2) and 1318(1) of the Act.
This is because there is no evidence that the defendant has not acted with an objective to deceive
or earn monetary gains. The court was further right about the fact that the conduct of the
defendant was not deceitful or that it did not amount to deliberate impropriety. However, as was
stated in ASIC v APCH [2014] FCA 1308 [39]-[41], the court was bound to take into account of
all the three elements must be satisfied to determine whether the applicant is entitled to be
granted relief.
Therefore, Laby (2017) states that the court was correct to state that though the defendant
did not act dishonestly and neither had any intention to earn monetary gains deceitfully, but the
breach of duty committed by the defendant was severe in nature and had adverse outcomes.

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Penalty principles
Although the plaintiff had claimed $100000 penalty to be imposed upon the defendant for
contravening section 180(1) of the Act, the court had exercised its discretionary power and
imposed a penalty amount of $50000. According to Laby (2017), a pecuniary penalty imposed
upon the infringer purports to act as a personal deterrent against the repetition of similar conduct
like that of Australian Securities Commission v John Phillip Donovan and Julia Gwendolin
Donovan [1997] No Qg 3006. Stewart (2017) believes that the decision given in this case
explains the significance of imposition of pecuniary penalty as a deterrent. It was held that if
compliance of director with the appropriate standards of commercial conduct while managing the
corporations is achieved through deterrents, then penalty imposed upon the person should not be
more than what is necessary to achieve such deterrence.
Disqualification principles
Stewart (2017) states that in order to determine whether disqualifications under the
Corporations Act, the most appropriate approach was established in Rich v ASIC [2004] 220
CLR 129. The court must ensure that while disqualifying a director from managing corporations,
it should not only consider public protection as the only ground and must have regards to
deterrence, reformation, retribution and mitigation as well, as objectives of disqualifying a
director. However, Laby (2017) states that if the disqualification provision is deemed to be
completely protective in nature, then the court must determine whether the defendant is at
present or in future will be fit for operating corporations.
If the court deems that the defendant would be fit and proper to operate corporations in
the future, it is important to determine the appropriate time that shall be deemed appropriate for
such director to become fit and proper as per the court. such determination must be made while
considering that despite misconduct, the director would be competent to operate corporations.
As per the decision given in the sequel case of 2017, the court held that the conduct of the
defendant was contrary to the conduct that is expected from a director by any reasonable person.
The breach committed cannot even be considered as an accidental or a minor breach of
directorial duties that may be pardoned. The payment made by the AWB for as inland
transportation costs to Iraq were irregular and of fraudulent nature. Further, the payment was

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made under circumstances and that particular area which made it more important for the AWB
to be cautious and careful, given that wheat was being exported to Iraq under the OFFP which
was further tailored based on the prevailing sanctions rules.
Further, the defendant failed to establish why the inquiries were not made to confirm
whether such inland transportation expenses being paid by the AWB to IGB had approval of the
UN. Furthermore, the defendant did not provide any justified explanations for not conducting
such inquiries except for the fact that it did not have any knowledge that such payments were
irregular and fraudulent and that they continued with the payment with the honest belief that the
UN approved it.
Significance of decisions on operations of Australian companies
The decision given in this case has upheld the obligation of a director to discharge its
powers with due diligence and care to ensure best interest of the company. Under the
Corporation Act 2001 (Cth), a director is legally obligated to exercise reasonable care and
diligence while carrying out corporation activities. As per the facts of the above case, the failure
of the director, Mr. Frugge to exercise his powers as a director to use reasonable means for
obtaining information regarding the inquiries made by the UN with respect to the inland
transportation expenses. ‘
The case is significant as it also explains the importance of disqualification and penalty
principles that are usually claimed by the plaintiff to be imposed upon the defendant for the
contravention committed by the defendant. Like it was observed in this case that the plaintiff,
ASIC had claimed to impose $100000 upon the defendant and subject him to disqualification
from managing corporations for minimum 10 years.
However, the court had imposed penalty of 50000 and disqualified the defendant for 50
years after his contravention has been established. The reduction in the penalty amount as well as
in the number of years of disqualification is because while determining such penalty and
disqualification, it must not exceed than what is necessary to achieve the very purpose of
imposing of such penalty and disqualification orders. The purpose of such disqualification and
imposition of penalty is to deter the defendant from committing further contraventions and to
protect the public against such contravention.

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The disqualification term and penalty amount imposed upon the defendant in this case is
proportionate to the amount of contravention committed by the defendant. Hence, in order to
avert any such penalty imposition and disqualifications, it is important that directors must
comply with their directorial obligations, which would not only lead to business development but
will also ensure good reputation of the business amongst its stakeholders as well as the
shareholders.

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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.