ASIC v Flugge & Geary: Director Duties and Requisite Inquiries

The ASIC v Flugge & Geary case serves as a significant legal precedent in corporate law, highlighting the critical responsibilities of directors under the Corporations Act 2001. The case centers on the breach of director duties due to inadequate inquiries by Mr. Flugge, contrasting with Mr. Geary's exoneration. This analysis underscores the ongoing duty of directors to diligently oversee company operations and potential risks, emphasizing proactive engagement rather than passive reliance on external counsel or information.

Business & Corporations Law

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Introduction
The Corporations Act, 2001 (Cth), through its different sections, presents a number of
duties on the directors and on the key officers of the companies in the commonwealth
jurisdiction of Australia. These duties are applied in context actions undertaken by the directors
while running the company, on behalf of the shareholders of the company (Latimer, 2012). In
doing so, the directors have to work in the best interest of the company, to not trade when the
company is or is about to become insolvent, duty of good faith, and the like. Not upholding these
duties can prove costly for the directors, as it could result in their disqualification from being
director in any company for a set period, and also the applicability of pecuniary penalties
(Cassidy, 2006).
ASIC v Flugge & Geary [2016] VSC 779 is amongst the cases where the directors duties
covered under the Corporations Act were applied. This case revolves around the duty of the
directors in making proper inquiries, where not doing the same, resulted in Flugge being held
liable and upholding the same resulted in Geary being acquitted (Baker McKenzie, 2016). This
discussion makes an attempt at highlighting the details of this case, in context of the duties of
directors.
Background
Back in December 2007, civil penalty proceedings were initiated by the ASIC in
Supreme Court of Victoria against six of the previous officers and directors of the company
called AWB, based on the breach of sections 180 and 181 of this act. These allegations were

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based on the wheat trade of the company with Iraq, along with the alleged misuse of OFFP, i.e.,
the Oil for Food Program, created by UN back in 1995. Under OFFP, the money from sale of
Iraqi oil was placed in the escrow account of UN and this could be applied for the sale of wheat
to Iraq, in addition for the other humanitarian uses. The company could attain the wheat price,
subject to the approval of UN, which had to be purchased by Iraq from the escrow account of
UN. It had been alleged by the ASIC that the company made payments to the government of Iraq
in an indirect manner, regarding the inland transportation fees which had been purported for
wheat which had to be distributed in Iraq. For these payments, the company compensated itself,
by inflating the wheat prices which had to be paid by the nation and by attaining the inflated
prices from the escrow account of UN (Supreme Court, 2016).
It was alleged by the ASIC that these payments had been a sham and had been simply a
mode through which the nation could attain the internationally traded currencies, which breached
the UN Security Council Resolutions. After the public disclosure of the conduct of the company,
it had to bear major financial harm, which was in form of the lost market capitalisation, which
was approximately of $781 million at the very least, followed by suspension, debarment from
participation in programs of US government, lost trade, major compliance and legal costs,
restructure and redundancy costs, and payments of settlements for the class actions, along with
suffering an immeasurable harm which included loss of reputation, loss of moral and loss of the
corporate knowledge (ASIC, 2016).
Relevant Duties
Under section 180(1) of the Corporations Act, the directors or the other officers of the
company have the duty of exercising their powers and also discharging their duties in a careful

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and diligent manner as would be done by a prudent person holding same office and same
responsibilities as the director (Federal Register of Legislation, 2018). Under section 181(1) of
this act, the directors have been imposed with the duty of discharging their duties and exercising
their power for proper purpose, in good faith and in the best interest of the company (Austlii,
2018).
As per the ASIC, the two sections quoted above had been contravened as the directors of
AWB did not take the reasonable steps regarding:
Making certain that the company was not in breach of UN Security Council Resolutions,
particularly by paying the globally traded currency to the government of Iraq and in
receiving the payments for improper purposes from the UN Escrow Account;
In ascertaining if the company had applied for and attained the approval of UN for the
payments regarding the inland transport fees; and
In making certain that the board of the company had been informed in a proper manner,
and responded in an appropriate manner regarding the above stated issues (Baker
McKenzie, 2016).
Court Decision
When it came to section 180 in context of failure of Flugge, the court stated that he had
failed in ascertaining that the payment of inland transport fees of AWB had been approved by the
UN and this was the reason why section 180(1) had been contravened. It was also stated by the
court that after the Washington meeting, sufficient facts were known to Flugge regarding he
being bound by the duty to take steps for inquiring regarding why the United Nations considered

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the payment of inland transport fee as not appropriate and whether the UN had the knowledge of
what was being on in the company for the approval to be given. Where the attention of the
director is brought to a suspicion that something is missing, then a prudent director would have
been woken up by this suspicion and would have inquired in the matter. By simply relying upon
the judgments made by others, the directors cannot be excused from making their own inquires
(Jade, 2016).
This is the reason why the court held that the reliance of Flugge on assurances of
Lindberg failed in relieving him from the duty of making the proper inquires. The court went on
to make two further findings. The first one was where Flugge had made the requisite inquiries,
he would have got to know the real nature of the payments and also that the company had not
informed the authorities regarding the inland transport fees; and that the company had not
applied for any legal advice, in context of what was going on. The second finding was that it was
the duty of undertaking inquiry was a constant duty and the breach of Flugge continued till the
time he lost his position as being the director of the company (Baker McKenzie, 2016).
In context of section 181(1), the court held that this section had not been breached by
Flugge for two reasons. The first one was that the failure of Flugge in not making the proper
inquires did not have an improper purpose. The second one was that Flugge had not turned his
mind for making any kind of inquiry and this therefore was not a decision of not making an
inquiry. It was held by the court that this section could not be enlivened owing to the same
testing the analysis of discharge of duty or exercise of power, which were both absent in this
matter. This case was distinguished by the court from the situation in which the director chooses
to not make an inquiry in a conscious manner (Baker McKenzie, 2016). As a result of this, he
was fined $50,000 and disqualified from being a director for five years (Jacobson, 2017).

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In case of Geary, similar allegations were made by the ASIC in context of contraventions
of the two quoted sections, regarding two additional transactions. Each of the allegations, which
were made against Geary, was dismissed by the court (Baxt, 2017). This was because the ASIC
could not show to the satisfaction of the court that Geary held the knowledge, belief or even
suspected that the United Nations had not approved the payments in a knowing manner, in
context of the inland transport fees. As against Flugge, the court did not find Geary to be aware
of the inquiry of UN regarding these payments, which had not been presented at the meeting
which took place in Washington. This is the reason why he was not put on notice, which have
rise to the duty of making the proper inquiries. It was also held by the court that Geary had acted
in an honest manner and he did believe in a reasonable manner that he had fulfilled the duties as
per the best interest of the company and also as per the proper purpose. It had also been accepted
by the Court that where Geary had came to know that there was any wrong doing by the
company, he would have been bound by the duty to inform the senior management and also for
taking all the rational steps which were required on his part as a result of being a rational officer
holding his position (Baker McKenzie, 2016).
Impact of decision
Even though Flugge had relied upon the information provided by Lindberg in the middle
of 2000, it was held by the court that he was required to make the proper inquires after the
meeting at Washington took place. The ruling given here is quite similar to the comments which
were made by the Court regarding the Chief Financial Officer of AWB, Paul Ingleby, who was
held to have contravened his duties as being an officer as he had failed in connecting the dots in
context of the payments which were made. This further reinforces the significance of the officers

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and directors regarding keeping informed of the issues which could have a chance of affecting
the company in an adverse manner, irrespective of the reliance placed on advice and also on the
information of others. The same is particularly in context where the situations are born which
alert the director regarding the possible risk of harm to the company. There is a need for the
officers and the directors to have the awareness of the risk assessments which are undertaken by
the company, in order to gain a full understanding to the possible result of any of the issues
which are raised with them (Baker McKenzie, 2016).
The courts have held that it is the duty of the director to make the proper inquire which
continues from time to time and they have to put a notice on the possible wrongdoings till such
time they cease to be the director of the company. Particularly, this is the case in which the event
or transaction has a lasting effect which is beyond its conclusion. There is a need for the officers
and directors to commit to making of such inquires, in the earliest possible manner, and there is a
need to evaluate again the obligations which they have and the need to correspond to the efforts
where there is a change in the circumstances (Baker McKenzie, 2016).
In this matter, the court had accepted the submission of the ASIC regarding the revelation
of the conduct of the company causing major harm to the reputation of the company, along with
to the financial standing of the company. Even though there was no direct link between the loss
and the conduct of Flugge, the case acts as a timely reminder for the directors in making certain
that they accurately, constantly and actively monitor the activities of the companies, particularly
the ones which could have the result of a possible reputational damage or financial exposure,
noting that such a failure to do so could have consequences which are far reaching (Baker
McKenzie, 2016).

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Conclusion
Thus, the case of ASIC v Flugge & Geary is another example of the breach of duties
owned by the directors of the company. In this case, only one of the two defendants was found to
have breached the director duties, and that two one out of the two duties claimed to have been
breached. The breach of director duty in this case was related to the failure of Flugge in making
the requisite inquiries, which were required from him, owing to the position which he held in
AWB. However, unlike him, Geary was acquitted by the court and held to have not been in
breach of the sections of Corporations Act. This case saw the ruling being given after nine years
of the case being initiated by the ASIC against the company. The decision of the court is an
important reminder for the directors to make the requisite inquiries for the issues which could
harm the company potentially, instead of merely relying on the information or advice of others.

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References
ASIC. (2016). In the Supreme Court of Victoria. Retrieved from:
http://download.asic.gov.au/media/4113228/16-441mr-orders.pdf
Austlii. (2018). Corporations Act 2001. Retrieved from:
https://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/
Baker McKenzie. (2016). Why Failing to Ask Questions Can Be a Breach of a Director's Duties.
Retrieved from: http://www.bakermckenzie.com/en/insight/publications/2016/12/a-
reminder-to-directors-and-officers/
Baxt, B. (2017). Directors' Counsel - Crime and punishment. Retrieved from:
https://aicd.companydirectors.com.au/membership/company-director-magazine/2017-
back-editions/june/directors-counsel
Cassidy, J. (2006). Concise Corporations Law (5th ed.). NSW: The Federation Press.
Federal Register of Legislation. (2018). Corporations Act 2001. Retrieved from:
https://www.legislation.gov.au/Details/C2013C00605
Jacobson, D. (2017). AWB v Flugge & Geary (AWB Case). Retrieved from:
https://www.brightlaw.com.au/awb-v-flugge-geary-awb-case/
Jade. (2016). ASIC v Flugge & Geary. Retrieved from: https://jade.io/article/509100
Latimer, P. (2012). Australian Business Law 2012 (31st ed.). Sydney, NSW: CCH Australia
Limited.

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Supreme Court. (2016). Summary of Judgment. Retrieved from:
https://www.supremecourt.vic.gov.au/sites/default/files/embridge_cache/emshare/
original/public/2017/09/f5/703491644/
summaryofjudgmentasicvfluggeandgeary2016vsc779.pdf