Analysis of ASIC v Padbury Mining Limited Case: Director Duties

This case study analyzes ASIC v Padbury Mining Limited [2016] FCA 990, which involved misleading ASX announcements and breaches of director duties. The case revolves around Padbury Mining Limited's announcement of securing $6 billion in funding for a project, without disclosing the conditions precedent or identifying the funding parties. The announcements led to a surge in share prices, followed by a trading halt and eventual suspension when the funding fell through. The ASIC prosecuted the company and two directors, Terence Quinn and Gary Stokes, for breaching their duties under the Corporations Act, including the duty of care and diligence (section 180(1)) and continuous disclosure obligations (section 674(2)). The directors admitted to the contraventions, acknowledging that the announcements were misleading and deceptive. The court found the company in breach of section 1041H and 674(2) of the Act, and the directors in breach of sections 180(1) and 674(2). Justice Siopsis disqualified both Quinn and Stokes from managing companies for three years and ordered them to pay pecuniary penalties and costs. The case serves as a reminder for companies to prepare ASX announcements carefully and for directors to fulfill their duties diligently.

qwertyuiopasdfghjklzxcvbnmqwertyui
opasdfghjklzxcvbnmqwertyuiopasdfgh
jklzxcvbnmqwertyuiopasdfghjklzxcvb
nmqwertyuiopasdfghjklzxcvbnmqwer
tyuiopasdfghjklzxcvbnmqwertyuiopas
dfghjklzxcvbnmqwertyuiopasdfghjklzx
cvbnmqwertyuiopasdfghjklzxcvbnmq
wertyuiopasdfghjklzxcvbnmqwertyuio
pasdfghjklzxcvbnmqwertyuiopasdfghj
Business and Corporation Law
ASIC v Padbury Mining Limited [2016] FCA 990
15-Jan-18
(Student Details: )

Business and Corporation Law
Introduction
The ASX announcements are something which has to be made in a careful manner. This is
particularly important because a misleading ASX Announcement can result in the prosecution of
the listed entity by the ASIC, along with the officers of the entity, who authorized the made
announcement. The Corporations Act is another important matter which has to be considered by
the companies. This act presents different duties which have to be followed by the key personnel
of the company, and included in this is the duties set out under Part 2D.1 of this act. Where this
is not done, the result is imposition of civil and criminal liabilities on the relevant person
breaching their duties (CCH Australia, 2011).
An example where both the above mentioned aspects were merged is the case of ASIC v Padbury
Mining Limited [2016] FCA 990. This case had both misleading ASX announcement and breach
of director duties (Narushima, 2016). This discussion presents an analysis of this case, in order to
show how these beaches took place and the decision given by the court in this matter.
Background of the Case
Constant attempts were being made by Padbury Mining Limited since last some time, where the
attempts were related to the development of a deep water port, located in Western Australia’s
Oakajee, along with an associated railway network (ABC News, 2016). A victorious
announcement was made by Padbury on April 11th, 2014 at 9:40 am, where it was stated that the
company had attained funding of $6billion in a successful manner for the project. Though, this
announcement failed to make adequate disclosures regarding the conditions which were
precedent, as the funding was dependent on it, and also failed in identifying the parties who
would be providing this claimed funding. These precedent conditions help a lot of importance.
This is because the conditions precedent required the company to get a bank guarantee which
could match the funding which had been provided by the proposed funder. It came to be known
later on that the company did not have the ability of doing so (Levy, 2016).
Before the announcement was made, the last sale price was $0.02 for each of the share. Once the
announcement was made, the shares were traded at the value of $.0.045 and were traded in the
Page 2

Business and Corporation Law
range of $.0.032 and $.0.052 for each share. The total numbers of shares traded were
209,366,987. On the day of the announcement, at 2:15 pm, the shares went in a trading halt
based on the request of the company. This was due to the announcement regarding more details
of funding being pending. Till April 29th, 2014, the shares were in suspension or in trading halt.
This was the date on which the announcement regarding the funding parties had terminated their
agreement. As a result of this, the project never got the funding which was needed and this led to
the project never being constructed. This led to the company being prosecuted by ASIC, along
with two of the directors, who had been involved in the making of the first announcement being
prosecuted by the ASIC. These two were the chairman, Terence Quinn, and the managing
director, Gary Stokes (Levy, 2016).
Duties breached
In the introduction portion of this discussion, it was stated that the directors of the companies
have been given certain responsibilities and duties by the Corporations Act. Amongst the
different duties is the one covered under section 180(1), which provides the duty of care and
diligence. As per section 180(1), the directors or the other officers of the company are required to
exercise their powers and have to discharge their duties, in a careful and diligent manner (ICNL,
2018). This has to be done as would be done by a reasonable individual, where this individual:
Was an officer or the director of the company in the situations faced by the company; and
Was holder of the office as was held by and also had the same responsibilities in
company, as the officer or the director held (Austlii, 2018).
This section provides that a breach of this section would attract civil penalty covered under
section 1317E of this act. Section 1317E relates to the declaration of contravention. Upon the
court becoming satisfied that the civil provisions have been breached, they make a declaration of
contravention. One of the civil penalty provisions is the director/ officers duties. Under
subsection 2 of this section, the contents of declaration of contravention have been covered. This
section also provides that once a declaration is made, the ASIC can seek a disqualification order
as per section 206C of this act, or they can seek pecuniary penalty order as per section 1317G
(Federal Register of Legislation, 2018).
Page 3

Business and Corporation Law
In this case, the basis of claim of ASIC regarding the contravention of the director duties was
related to the misleading and deceptive announcements made by the company, which were a
contravention of section 1041H of this act. As per the ASIC, the Quinn and Stokes had failed in
discharging their duties in a diligent and careful manner, which were required on their part,
which led to the company making funding representations which breached section 1041H. This
was also due to the breach of section 672(2) of this act, which was related to the continuous
disclosure requirements, as the company had not notified the ASX regarding the announcement
that there had been conditions precedent to funding, along with the parties not being identified,
which were responsible for providing the required funding (Narushima, 2016).
This case saw the companies admitting to the contraventions of the ASX continuous disclosure
requirements in their failure in disclosing the conditions precedents and in identifying the
individuals who had the responsibility of providing the funding. They also admitted that this
information had the possibility of influencing the individuals who commonly invested in the
securities in making the decision regarding whether to acquire shares in the company or not; and
that a reasonable individual would have the expectation that the information had to have major
impact on the value or price of the shares of the company, where the same was available in a
general manner (Narushima, 2016).
Both the directors had admitted that through the authorization of the ASX announcement release,
there had been a contravention of section 180(1) of the Corporations Act, regarding the director
duties. This was due to their knowledge regarding the announcement made by them would be
harmful for the company. They knew that by doing so, the company would be contravening the
continuous disclosure obligations. Further, there was a misleading or deceptive nature of the
announcement. This meant that the same would be harmful to the reputation of the company,
which had an adverse impact over the ability of the company in procuring the funding for
developing the project. This resulted in the company being exposed to regulatory action and
litigation (Narushima, 2016).
Page 4

Business and Corporation Law
Decision of the Court
In this case, the parties tendered a minute of consent orders and an agreed upon statement of
facts, where the proposed orders for the submissions of each of the parties were made. In this
case, Justice Siopsis of the Federal Court of Australia established that there had been a
contravention of section 1041 H (1) of the act as the announcements made by the company had
been deceptive and misleading. Further, this had likelihood of misleading or deceiving as the
funding was entirely dependent on the conditions precedent being satisfied, in context that the
company was not in a position of satisfying these at the time when the announcement had been
made. Siopsis J further stated that the company had also been in breach of the continuous
disclosure obligations which were covered under section 674(2) of this act as there was no
notification to the ASX regarding the announcement covering conditions precedent to the
funding and also by failing in identifying the parties responsible for providing the funding. The
judge further stated that both Quinn and Stokes had been in breach of section 674(2) of the
Corporation Act, as they had been involved in the company breaching this very section. Lastly,
Justice Siopsis provided that both Quinn and Stokes had been in breach of section 180(1) of this
act as they did not discharge the duty which they owed to the company, of being diligent and
careful in their work, as would have been done by a prudent individual in their similar situation
through the authorization or otherwise for approving the announcement release. This caused the
company in making the funding representation, which was in breach of section 1014H of this act
(ASIC, 2016).
In context of the director duties being contravened in this case, which have been covered under
section 180(1) of this act, Justice Siopsis noted that for both of the directors, there had been an
admission of different aspects. This included that while they had approved the announcements,
they had to be reasonably aware that where the company made this announcement, this would be
deemed as misleading or deceptive and that there would be a failure in disclosure of information.
They clearly knew about this being possibly harmful for the company, owing to the risks
associated with these breaches, and where these would be revealed, they would be harmful for
the reputation of the company (Austlii, 2016).
The judge also took into consideration the knowledge of the directors in the need of discharging
their duties in a proper manner, for satisfying the conditions laid down under section 674(2) of
Page 5

Business and Corporation Law
this act; and they knew that the announcement made by the company clearly lacked this. The
directors had given the authorization for releasing the announcement, which meant that they
should have known, amongst the various other things, that the shareholders agreement had the
guarantee conditions precent. This meant that the directors knew about the company not being
able to procure the guarantees and that the company had failed in getting a third party
verification regarding the capacity of the funding party, for the purpose of fulfilling the funding
obligation (Federal Court of Australia, 2016).
This led to Justice Siopsis passing the order that both the directors of the company, i.e., Quinn
and Stokes had to be disqualified from managing the company for three year duration. When this
order was passed, the judge noted that this case was not one related to dishonesty on part of
Quinn and Stokes. This led to the judge emphasizing that both of them had recognized that their
conduct in the approval of announcement was of critical significance to the future of the
company and also in context of the market perception. They knew that this was a major
departure from the standards which were expected from the public company’s directors in
similar situations. Apart from the fact that both of them had given their full cooperation to the
ASIC from the initial stages, nothing else was one. Had they not recognized the seriousness of
their exhibited contrition and conduct, the judge would have awarded a disqualification period of
five years. The judge also ordered both of them to pay a pecuniary penalty of $25,000, along
with paying the costs of proceedings to ASIC, which stood at $200,000 (Narushima, 2016).
Conclusion
Thus, this case involved ASX announcement being made by the company, which was misleading
and deceptive. This led to the ASIC initiating a case against the company and its directors. The
directors were particularly made liable for breaching their director duties, as they failed in
showing diligence and care in performing their role in the company. The directors even agreed to
these breaches, in addition to agreeing that they had not made the relevant disclosure
requirements and that the company had made misleading and deceptive announcement. This case
acts as a salutary reminder of ensuring that the companies prepare the ASX Announcements in a
careful manner. Not doing the same not only results in pecuniary penalty being imposed but also
in the directors being disqualified from managing the companies.
Page 6

Business and Corporation Law
Page 7

Business and Corporation Law
References
ABC News. (2016) Padbury Mining directors fined over 'misleading' $6b Oakajee
announcement. [Online] ABC News. Available from:
http://www.abc.net.au/news/2016-08-19/padbury-mining-directors-fined-and-banned/7768184
[Accessed on: 15/01/18]
ASIC. (2016) 16-263MR Padbury Mining directors banned for three years due to 'Oakajee
Funding Secured' announcement. [Online] ASIC. Available from: http://asic.gov.au/about-
asic/media-centre/find-a-media-release/2016-releases/16-263mr-padbury-mining-directors-
banned-for-three-years-due-to-oakajee-funding-secured-announcement/ [Accessed on: 15/01/18]
Austlii. (2016) Australian Securities and Investments Commission, in the matter of Padbury
Mining Limited v Padbury Mining Limited [2016] FCA 990 (19 August 2016). [Online] Austlii.
Available from: http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2016/990.html?
context=1;query=Padbury%20Mining%20Limited;mask_path=au/cases [Accessed on: 15/01/18]
CCH Australia. (2011) Australian Corporations & Securities Legislation 2011: Corporations
Act 2001, ASIC Act 2001, related regulations. Sydney, NSW: CCH Australia.
Federal Court of Australia. (2016) Australian Securities and Investments Commission, in the
matter of Padbury Mining Limited v Padbury Mining Limited [2016] FCA 990. [Online] Federal
Court of Australia. Available from:
http://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2016/2016fca0990
[Accessed on: 15/01/18]
Federal Register of Legislation. (2018) Corporations Act 2001. [Online] Federal Register of
Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed
on: 15/01/18]
ICNL. (2018) Corporations Act 2001. [Online] ICNL. Available from:
http://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf [Accessed on:
15/01/18]
Page 8

Business and Corporation Law
Levy, R. (2016) Implications of Padbury’s Misleading ASX Announcement. [Online] Herbert
Smith Freehills. Available from:
https://www.herbertsmithfreehills.com/latest-thinking/implications-of-padbury%E2%80%99s-
misleading-asx-announcement [Accessed on: 15/01/18]
Narushima, H. (2016) Corporate Advisory Update - September and October 2016. [Online]
Gilbert Tobin. Available from: https://www.gtlaw.com.au/insights/corporate-advisory-update-
september-and-october-2016 [Accessed on: 15/01/18]
WIPO. (2015) Corporations Act 2001. [Online] WIPO. Available from:
http://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 15/01/18]
Page 9