Corporation Law Case Study: ASIC v Flugge (No 2) - Duties of Directors

This case study examines the corporation law case of ASIC v Flugge (No 2) [2017] VSC 117, focusing on the breaches of directors' duties under the Corporations Act 2001 (CTH). The case involves Trevor Flugge, chairman of Australian Wheat Board Limited (AWB), and Peter Geary, in relation to payments made to the Iranian government. The analysis delves into Section 180 (care and diligence) and Section 181 (exercise of powers and discharge of duties) of the Act, and the application of the business judgment rule. The court's decision, including the penalties imposed, is thoroughly analyzed. The case's relevance and impact on corporate governance, particularly the implications for directors' responsibilities and the importance of adhering to the Corporations Act, are also discussed. The study references key legal precedents and concludes with a summary of the findings and their significance.

Corporation law
Case: ASIC v Flugge (No 2) [2017] VSC 117

Table of content
 INTRODUCTION
 a. CASE INTRODUCTION
 b. BREACHES OF DIRECTORS’ DUTIES UNDER THE CORPORATIONS
ACT 2001(CTH)
 c. ANALYSIS OF THE COURT’S DECISION
 d. RELEVANCE AND IMPACT OF THE DECISION
 CONCLUSION

Introduction
• The corporation act 2001 of the Australia states various provisions over
formation, operation and conducting the operations of a business organisation
in Australia.
• This act also defined the general and specific duties of the directors who are
responsible for conducting the operation of the corporations.
• The acts lay out the directors duties with a compulsory imposition to adhere
with such duties without any breach.

a. CASE INTRODUCTION
 Travor Flugge was the chairman and Peter Geary was in the position of Group
general manger in the company Australian Wheat broad Limited (AWB).
 The company was under a contract with Irani government for supplying wheat
to Iraq.
 In 2004 a case against both Flugge and Geary was brought by ASIC
(application-specific integrated circuit) related with payments made to the
Irani government
 . Its was held by the AISC that many of the payments were referable as inland
transportation fees which was defined in the contract.
 It also stated that the Zairian government has evaded the security council
resolutions through bribery, kickbacks and surcharges on oil and illicit
payments in respect of humanitarian goods

CONTI….
 In this case ASIC sues Flugge and Geary for alleged breach of their duties
under section 180 (1) and 181 of the act as well as other pieces of legislations.
 The conduct aroused out of the contractual relationship between the AWB
and the government of Iraq where the AWB sold wheat to Iraq under the
United Nation Oils for Food Program (OFFP).
 For this case the basic duties of the directors imposed on them by the virtue of
corporation act 2001 were checked and prosecutions and palatines were
imposed for breach of such duties

CONTI…
 In 2005 the findings over the case were presented and the final report was submitted in
2006.
 In 2007 civil proceedings were commenced in the supreme court of Victoria against six
directors of the company including Flugg and Geary.
 In 2008 a stay on the proceedings was given. In 2009 the announcement was done to
investigate into criminal matters arising out of this case.
 In 2010 the curt ordered a lifting of the stay of proceeding against Flugge and Geary
along with two others officers of company (Charles Stott and Michael Long).

b. BREACHES OF DIRECTORS’
DUTIES UNDER THE
CORPORATIONS ACT 2001(CTH)
Section 180: Care and diligence the civil obligation of director:
 This section of the corporation act define the care and diligence which must
be taken by directors and other officered under while exercising their duties
 Section 181 (1) of the act states that a director or the officer of a corporation
are required to exercise their power and discharge their duties with the
degree of care and diligence that a reasonable person would exercise, when
that person is

CONTI…
 Section 180 (1) of the corporation states outs the best judgement rule to decide
whether a director has breached any of their duty and the court are reluctant to
substitute their own judgement for the business decisions which are made by
the directors.
 This rule is applicable to the section 180 only over the care and diligence duty
of the directors and not applicable on the section 181 or 182.

CONTI…
The business judgement rules requires directors or officers in this capacity are
required to take a decision for the business:
 in good faith for a proper purpose,
 must not have a material or personal interest in the subject matter of the
decision over which a judgement is made,
 Inform the other director and officials about the material interests in the
subject matters of the judgement and the extent that is reasonably believed to
be appropriate, and
 Must have a rational belief that the decision taken is in the best interest of the
company.

CONTI...
 In cases where a director is found under the breach of these duties and
business judgement rule section 1317 and section 1318 are applicable.
 For this the requirement are that the directors of officers have acted honestly
and they have acted without deceit or conscious impropriety.
 Without an intention to gain an advantaged or benefit with no prejudice to the
facts which are under judgement

CONTI...
 For the present case the director Flugge of AWB, was imposed with an
allegation of breach of section 180 (1) where he did not act with care and
diligence while to making the payment to Iraq government over the inland
transportation fees.
 Flugee stated that he was of the view that the Irani government have taken a
sanction over accepting the payments for transportation which was a due
requirement specified by the UN over making a payment to other countries.
 He flailed under the business judgement rule of section 180 (1) of the
corporation act.

c. ANALYSIS OF THE
COURT’S DECISION
 For this case, ASIC sought two sets of penalties against Flugge – a
disqualification order for a period of 10 years, plus the maximum $200,000
penalty that is available under the legislation for a breach of section 180 and
181 of the Corporation Act.
 But for the case a decision was given by justice Robson of the supreme courts
as imposing a pecuniary penalty of $50000 on Flugge and issued an order of
disqualifying him from the managing the corporation for a period of 5 years