Corporations Law Case Study: ASIC v Whitlam and Director Duties

This case study analyzes the landmark case of ASIC v Whitlam [2002] NSWSC 591, which revolves around the disqualification of a company director due to breaches of the Corporations Act, 2001. The case involves allegations against Whitlam for failing to properly vote against a resolution, and the subsequent legal proceedings initiated by the Australian Securities and Investments Commission (ASIC). The study examines the duties breached by Whitlam, including those under sections 180, 181, and 182 of the Corporations Act, focusing on the duty of care and diligence, good faith, and the improper use of position. The case's progression through the lower court and the Court of Appeal is detailed, highlighting the differing decisions and the implications for director duties and corporate governance. The analysis explores the relevance of the case, especially concerning shareholder expectations and the role of proxy holders, concluding with an overview of the court's final decision and its impact on corporate law.

1/21/2018
ASIC v Whitlam | (Student Details: )
Corporations law

January 21,
2018 Corporations law
Introduction
ASIC v Whitlam [2002] NSWSC 591 is a leading case which highlights the disqualification of
director of company, when they breach the civil penalty provisions covered under the
Corporations Act, 2001. This case had Justice Gzell of the Supreme Court of New South Wales
stating that even though the general goal in disqualifying a person was to safeguard the public,
there is also the significance of the deterrence from the future conduct which mandates such
disqualification, when the judges decide upon such orders being made or in not doing the same.
This case presents that the chair of the board are required to maintain high standards at all times
(Hincy and McDermott, 2018). Though, this decision was reversed later on by Court of Appeal.
Background information
On July 10th, 2003, a lower court finding was reversed by the Court of Appeal where it was held
that Whitlam had been in breach of the different sections of the erstwhile Corporations Law.
There were a number of allegations made regarding the contraventions made by Whitlam, in his
failure of properly voting against the Resolution 6, which had been instructed upon by the
shareholders, who had appointed Whitlam as their proxy. This particular resolution had proposed
certain amendments to the Articles of Association, which would have resulted in the fixed
amount of annual remuneration being increased and the same being distributed amongst the
directors, where the resolution was passed. This raise was to $665,000 from the earlier $617,000,
and this resolution was supported by Whitlam (McConvill and Bagaric, 2004).
There was a failure by Whitlam in signing the poll papers which covered the votes given by 3973
members, which were against this particular resolution. Based on the articles of association of
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NRMA, these votes were rendered invalid as a consequence of this. Even though the votes were
not counted up earlier, the returning officer got legal advice on this matter where the law
provided that these votes had to be counted up, even with the failure of Whitlam in signing these
poll papers. This ultimately led to the votes against the resolution being counted up and this
resolution was resultantly defeated. However, this was done a little too late and the publications
were made in the newspaper advertisements, which showed the opposite (Neylan, Mir and Sato,
2018).
This led to the ASIC initiating civil proceedings against Whitlam, who was the Chairman and
President of the company, where it was stated that Whitlam had breached section 232 of the
Corporations Law in his failure on voting the proxies, based on the instructions given by the
members, against the resolution. Further, it was claimed that Whitlam had been in breach of
sections 180, 181 and 182 of the Corporations Act, 2001 (Cth) (CA) in terms of changing the
minutes of meeting of directors of the NIGL (Allens, 2002).
Duties breached
The director duties mentioned to have been contravened by Whitlam are the three key duties of
directors, which attract civil penalties covered under 1317E of CA. Under section 180(1) of this
act, the duty of care and diligence as a civil obligation has been provided (Jade, 2018). This
section provides that the directors in the company have to exercise their powers and fulfil their
duties with a degree of diligence and care, as would be done by a reasonable individual, where:
This person was the director of company in the circumstances; and
Held the office of the director and had the same responsibilities in the company (WIPO,
2015).
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Under section 181 of this act, the civil obligation of good faith is covered (Cassidy, 2006). This
section provides that the directors in the company have to exercise their powers and fulfil their
duties in best interest in good faith of company and for a proper purpose (Latimer, 2012). Section
182 of this act provides civil obligations regarding the use of position. This section provides that
the directors in the company are not to make an improper use of the position which they have in
the company, for gaining an advantage for themselves or for someone else; or causing detriment
to the company (ICNL, 2018).
Under 1317E of CA, when the court gets satisfied regarding the contraventions of the
aforementioned provisions, they make a declaration of contravention, where the details of such
breach are provided (Gibson and Fraser, 2014). When this declaration has been made, ASIC can
seek disqualification order against the director based on section 206C of this act, or seek a
pecuniary penalty order based on section 1317G of CA (Australian Government, 2018).
Decision of the court
First instance decision
Initially, the decision was given in favour of the ASIC by Justice Gzell. He stated that there had
been deliberate omissions by Whitlam to sign the poll papers in context of the resolution and the
intent here was to disenfranchise the voters who had actually appointed him as their proxy. In his
view, Whitlam was attempting to override the intentions of the company members in a deliberate
manner, where he knew that the voters were against the passing of this resolution as a special
resolution. Based on this, it was held by the court that Whitlam had been in contravention of a
number of provisions of Corporations Law, which included the failure of acting in an honest
manner based on section 232(5), the improper use of position based on section 232(6) and
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breaching the duties of chairman regarding the proxies based on section 250A(c). These coincide
with the present day quoted sections of the CA (Neylan, Mir and Sato, 2018).
This led to Justice Gzell making an order which prohibited Whitlam from managing the
company for duration of 5 years and also imposed a civil penalty of $20,000 on Whitlam (Segal,
2002). While making these orders, it was stated by Justice Gzell that not only the director in
position of Whitlam, acting as proxy of voters, acted as agent with regards to the appointed
shareholder as principal; but the shortfall of the director appointed as proxy for voting purposes
based on the instructions of the members who appointed such person, was the contravention of
the duty qua director. The failure of Whitlam, in context of signing of the poll papers, was as a
result of this, seen as a violation of the duties which he owed in his capacity as the director of the
company (Neylan, Mir and Sato, 2018).
It was held by the court that in entertaining, revising and circulating the adoption of revised
minutes of board of NIGL, Whitlam had failed in exercising the degree of diligence and care
which a prudent individual holding the position of Whitlam would have exercised and would
have thus breached the provisions of section 180(1) of CA. Justice Gzell though did not find
Whitlam guilty for contravention of sections 181 and 182 as it was not the duty of Whitlam to
determine that the minutes of board meeting had been prepared accurately. He did not get any
kind of additional remuneration or even result in the recording of the same in the documents of
the company which entitled him to some additional remuneration. This led to the ruling being
given based on the breach of section 180(1) of CA alone (Allens, 2002).
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Appeal decision
The decision by the Court of Appeal was made in favour of Whitlam where they reversed a
range of findings given by the previous judge. Even though the court left the possibility of
Whitlam having failed in signing the poll papers as deliberate one, they did find enough evidence
to show that this failure in signing was not a dishonest act. The court also reversed the finding of
the previous judge regarding Whitlam having contravened section 250A(c) in context of failing
to vote, as a chairperson appointed proxy, as he had been instructed. This was due to the fact that
Whitlam had actually voted regarding the resolution, by simply completing and filing the
unsigned poll papers. The most crucial element was the overturning of statements by Court of
Appeal of principle made by the earlier judge in context of the duty of director proxies to vote
based on the instructions of the appointing shareholders. It was held by the Court of Appeal that
Whitlam had not been voting as director and was simply acting as an agent. Thus, Whitlam was
not held to have contravened the duties as a director of the company (Neylan, Mir and Sato,
2018).
Here, voting based on the instructions of the shareholders was not a duty of Whitlam in the
position he held in the company, and this was also not Whitlam exercising his powers as a
director. Just because Whitlam had been a proxy owing to the position which he held as the
director was not sufficient to make the dealings with the votes of shareholders and the poll
papers, as a discharge of his duties as a director. Till the time there was an involvement of certain
further element, the duty of Whitlam regarding the voting of proxy votes was just to the proxy
providers, and this was in no way to the company, making it not a part of his duty as a director.
Therefore, in principle, the director proxy is under the obligation of voting as per the instructions
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of the individual based on the fiduciary duty which was raised owing to the relationship of
agency. There was no further fiduciary duty which was imposed on the director-proxies, owing
to the lack of special facts. The court here left the possibility open that based on the law, a
director could be appointed as the proxy under a duty in their capacity as director for voting
based on the instructions of the shareholders. This was in context that such a director was not
duty bound to threaten or challenge the normal procedures of AGM. Interestingly, this issue was
not decided. Though, such an argument is bound to raise questions on appeal, particularly the
ones which had not been raised at the very first instance (Neylan, Mir and Sato, 2018).
Relevance
Even if the decision of the Court of Appeal is technically sound, it does manifest out of step in
context of the present expectations of the general public regarding corporate governance. This is
more so in context of the reasonable expectations of the shareholders in giving the proxies to the
chairperson of the company. As a result of this decision, it presents that the law provides no great
protection or even recourse to the proxy giver where the proxy is given by them to the stranger
who is not well versed in meeting and corporate procedures, or to the chairperson. The proxy
holders are thus merely the agents, and they have no more roles to play. This is quite
unsatisfactory. This is because the shareholders are used to giving their proxies to the
chairpersons owing to the position held by them, which is at the very centre of all of the meeting
and voting procedures, along with their assumed superior competency and knowledge.
Understandably, the shareholders not only expect a high level of competence, but they also
expect a high level of lawful duties owing to the office which is held by the chairperson (Neylan,
Mir and Sato, 2018).
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Conclusion
Thus, based on the discussion carried in the previous segments, it can be concluded that ASIC v
Whitlam saw the ruling being initially given in favour of the ASIC and Justice Gzell holding that
the director duty covered under section 180(1) of CA had been breached. However, when the
matter reached the Court of Appeals, they reversed the decision and held that there had been no
breach of director duties by Whitlam. This was due to the fact that while acting as the proxy of
the voters, he had failed in his fiduciary duties which he owed to the voters as a proxy, but not
the duties of the directors which he owed towards the company. This decision is however a bit
harsh for the proxy voters, who place their trust on the chairpersons due to the position which
they hold in the company while making them their proxy holder.
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References
Allens. (2002) Cases. [Online] Allens. Available from:
https://www.allens.com.au/pubs/itm/sep02/cases.htm [Accessed on: 21/01/18]
Australian Government. (2018) Corporations Act 2001. [Online] Australian Government.
Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 21/01/18]
Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: The Federation Press.
Gibson, A., and Fraser, D. (2014) Business Law 2014. 8th ed. Melbourne: Pearson Education
Australia.
Hincy, R., and McDermott, P. (2018) Management of Companies. [Online] Pearson Ed.
Available from:
wps.pearsoned.com.au/wps/media/objects/2604/2667009/summaries/Chapter5.doc [Accessed on:
21/01/18]
ICNL. (2018) Corporations Act 2001. [Online] ICNL. Available from:
http://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf [Accessed on:
21/01/18]
Jade. (2018) Corporations Act 2001 (Cth). [Online] Jade. Available from:
https://jade.io/article/216652/section/2204 [Accessed on: 21/01/18]
Latimer, P. (2012) Australian Business Law 2012. 31st ed. Sydney, NSW: CCH Australia
Limited.
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McConvill, J., and Bagaric, M. (2004) Ambiguities and Inconsistencies in Relation to the
Obligations of Proxies under Corporations Law: A Model for Reform. University of New
England Law Journal, 1(1).
Neylan, M., Mir, S., and Sato, K. (2018) Duty-free director-proxies: Whitlam v ASIC. [Online]
Find Law. Available from: http://www.findlaw.com.au/articles/486/8216duty-free8217-director-
proxies-whitlam-v-asic.aspx [Accessed on: 21/01/18]
Segal, J. (2002) Corporate Governance: Substance Over Form. University of New South Wales
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WIPO. (2015) Corporations Act 2001. [Online] WIPO. Available from:
http://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 21/01/18]
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