Company Law Assignment: Fame Decorator Agencies v Jeffries Industries

This assignment analyzes the case of Fame Decorator Agencies Pty Limited v Jeffries Industries Limited, focusing on the breach of officer's duty concerning deceptive trading practices. The report examines how the appellant, a shareholder, manipulated the market to lower share prices, thereby violat...Read More

Running Head: COMPANY LAW ASSIGNMENT
Breach of officer’s duty
Name of student
Name of University

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Introduction
In Fame Decorator Agencies Pty Limited v Jeffries Industries Limited, the respondent
was a public company listed in the stock exchange. The appellant was an ordinary and
convertible preference shareholder in the respondent company. The appellant was allowed to
transform its convertible shares into ordinary one on a given day. The method for the conversion
of the shares required lower average sale rate of ordinary shares in respondent in the last twenty
working days before the day of conversion so that after conversion more number of ordinary
shares may be given to the appellant. Accordingly, on the last day of the said period, the
appellant sold the ordinary shares of the respondent company resulting into lowering the market
rate of the shares of the respondent company. The judge at the trial court decided that the
appellant has breached sections 995 and 998 of the Corporation Act, 2001 (Fame Decorator
Agencies Pty Limited v Jeffries Industries Limited (1999) HCATrans 52; AustLii 1999).
In the instant case the company holding the convertible preference shares, the procedure
for the conversion of which was linked to the average selling rate of the given ordinary shares for
a period of twenty days, positioned an order soon before the closing of the working day for the
period of the said twenty days with an object to bring down the average selling rate of the shares
for that particular day thereby raising the count of ordinary shares that is to be given after
conversion. The effect of the act of the appellant company was that the value of the shares
reduced by 22 cents. This act was therefore considered to be in contravention of section 1041B
of the Corporation Act. Also the act was of deceiving nature as the persons who wanted to buy

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the shares of the respondent company were influenced to think that the market rate of the shares
imitated the real relation of the force of demand and supply.
Issues
The main issue in the instant case was that whether the appellant has made contravention
of Sections 995 and 998 by deceiving the share purchasers in the stock market by selling shares
at a lower rate. Further the question was did the director of the appellant company owed any duty
with regard to the deceptive trading of shares.
Rules
The Corporation Act prohibits misleading and deceptive conduct of a person of an
organisation with regard to trading of securities (Corporation Act 2001 (Cth) s 995(2)). Further
the Act also prohibits any act which is in the nature of creating a false or deceptive appearance
with regard to the rate of any share in the share market (Corporation Act 2001 (Cth) s 998(1)).
The Corporation Act also prohibits a person to engage or to enter into a dealing which
might result into the creation of an artificial rate for the purpose of dealing into shares listed in a
stock exchange (Corporations Act 2001 (Cth) s 1041A).
Under the Corporation Act a director is not exempted from his general duties (as given
under sections 180, 181, 182, 183 and 184) or his fiduciary duties with regard to any of the
transactions related to shares or their conversion where such transaction is authorised under the

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provisions of the Corporation Act or is permitted under a resolution by the members
(Corporation Act 2001 (Cth) s 260E; Director of Public Prosecutions (Cth) v JM (2013) HCA
30).
The general duties of a director include certain legal obligations. As laid down in the
provisions of the Corporation Act a director of a company is required to perform the functions
that have been cast upon him with caution and assiduousness of a standard that a prudent man
would have taken in the similar circumstances (Corporation Act 2001 (Cth) s180(1)).
The director of a company owes responsibilities towards the company and its
shareholders. The director holds a duty to make sure that the company works at standard values
and abides by the relevant laws made for the governance of the corporations and also that the day
to day business of the company is carried on appropriately. If the director fails to perform his
duties penalties may be imposed on him as given under the provisions of the Corporation Act
(Australian Securities & Investments Commission 2014).
Application
A person who holds shares which are of alternative or convertible nature and the
conversion rate of which is linked to the market value of the given shares on a fixed date or for a
fixed period such person may require that the market rate of such shares is comparatively low so
that he may receive more shares on the conversion of such shares.

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The court held that the act of the vendor of thinly traded shares, intended to conclude the
sale of the shares at a low rate and scheduled in order to influence the potential buyers of the
shares at a higher rate, had the aim and result of making an artificial market and rate for a
provisional period (Corporation Act 2001 (Cth) s 1014B) and this act was of deceiving nature
with regard to the potential buyers of the shares of the respondent company (Corporation Act
2001 (Cth) s 1014H).
Section 998 focuses on saving the veracity of the stock market. While reflecting the
relations of influence of demand and supply the market may undergo different deficiencies
without such deficiencies affecting their veracity. On the other hand, the behaviour of a vendor
of thinly- traded stocks, intended to conduct selling of shares at a minimum rate instead of
selling it on maximum possible rate and is scheduled in order to reduce the chances of the buyers
calling higher rates, had the aim and result of making an artificial market and rate for a
temporary period (Australian Stock Exchange 2000).
The market purchaser and single purchaser, who made bids soon before the trading for
the period got over, are distinct from each other. The impact of the appellant’s action upon the
market for the stakes of the respondent, and the market rate, was not incidental only. The main
purpose of the act of the appellant was to affect the market rate of the shares. The judge at the
trial court observed that both the aim and result of the appellant’s action was to make an artificial
market rate for the shares in the respondent company which was in violation of the section 998.
Further regarding section 995 of the Corporation Act 2001, the majority opinion of the
bench was that while the buyers of the shares of the respondent company that were sold by the

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appellant on the last day of the said trading period were not deceived by the acceptance of the
proposal to purchase the shares by the appellant. The appellant’s action violated section 995 as
his action could possibly deceive the prospective buyers of shares of the respondent company to
believe that the market rate showed the real relations of influence of demand and supply. The
prospective buyers would not have been able to predict that the appellant was looking forward to
sell his shares at a minimum rate possible as against the prospective higher bidder.
These above mentioned sections (i.e. Sections 995 and 998) when read in harmony with
Section 260E it may be observed that the directors of the appellant company owed a general duty
towards the respondent company. Accordingly, the director of the shareholder company were
bound not to deal into shares in way that the transaction misleads or deceives the potential buyers
of the respondent company.
In the instant case the directors of the shareholding company were under a general
obligation to take due care that the company should not act in a manner which is detrimental to
the interest of the company in which they held shares. The directors were also under a fiduciary
obligation to ensure that the company did not make any such conduct while selling the shares in
the stock market which leads to deception in the mind of the potential buyers of the shares of the
respondent company (Australian Senate 1989). Further the directors were under a duty to make
sure that the company works with respect to the standard values of the corporate governance
rules while complying with the laws governing the conduct of the business.
The Supreme Court of New South Wales has laid down a principle that it is the obligation
on the part of the director to take reasonable measures in order to direct and observe the

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administration of the organisation (ASIC v Adler 2002 NSWSC 171; Parliament of Australia
n.d.).
The observations made in the instant case were later on followed in a number of cases. In
a Singaporean case the Court of Appeal held that the judge at the trial court made a correct
observation that both the aim and result of the appellant’s action was to make an artificial market
rate for the shares in the respondent company which was in violation of the section 998. The
ratio of the judgement given in the instant case were applicable to the Singaporean case as well
(Tan Chong Koay v Monetary Authority of Singapore (2011) SGCA 36).

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Conclusion
Therefore, on the basis of the observations made above it can be concluded that the
directors of the shareholding company were under obligation to ensure that their company was
abiding by the rules of conduct of a corporation as laid down under the various provisions of the
Corporation Act. Further the directors could have been made liable by the court for failing to
perform their general duties as prescribed under the corporate governance rules.
The company failed to make genuine dealing in shares as it acted against the rules of the
Corporation Act which required it not to make any deceptive or false dealings such that it
interference in the interest of the respondent company.
The judge at the trial and the court of appeal made a correct opinion by taking decision
by abiding by the rules of the Corporation Act. The observations made by the court of appeal
were further referred in a number of latter cases relating to the misleading and deceptive conduct
of the companies while dealing in shares.

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Reference List:
AustLii 1999, Fame Decorator Agencies Pty Limited v Jeffries Industries Limited. Available
from: http://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/HCATrans/1999/52.html. [11
September 2017].
Australian Securities & Investments Commission 2014, Directors- what are my duties as a
director? Available from http://www.asic.gov.au/regulatory-resources/insolvency/insolvency-
for-directors/directors-what-are-my-duties-as-a-director/. [11 September 2017].
Australian Senate 1989, Company director’s duties; report on the social and fiduciary duties
and obligations of company directors, Senate Standing Committee on Legal and Constitutional
Affairs. Available from:
http://www.takeovers.gov.au/content/Resources/parliamentary_reports/downloads/
social_fuduciary_duties_obligations.pdf. [11 September 2017].
Australian Stock Exchange 2000, Business rule guidance note. Available from:
http://www.asx.com.au/pdf/TradingPractices.pdf. [11 September 2017].
Corporations Act 2001 (Cth).
Director of Public Prosecutions (Cth) v JM (2013) HCA 30; 250 CLR 135; 87 ALJR 836; 298
ALR 615; 228 A Crim R 570; 94 ACSR 1; 6 BFRA 662; (2012) VSCA 21.
Fame Decorator Agencies Pty Limited v Jeffries Industries Limited (1999) HCATrans 52.

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Parliament of Australia n.d., Chapter four- director’s duties, Available from
http://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_
Services/Completed_inquiries/2004-07/corporate_responsibility/report/c04. [11 September
2017].
Tan Chong Koay v Monetary Authority of Singapore (2011) SGCA 36.