Australia: The Prime Trust case emphasises high standards for board processes and minutes

Last Updated: 16 April 2015
Most Read Contributor in Australia, September 2016

The decision of the Federal Court in the Prime Trust/ Australian Property Custodian Holdings (APC) case1 provides important judicial guidance on the high standard of care required of company secretaries in preparing and keeping board minutes.

The case considers issues regarding statutory duties of directors. It examines in detail company and boardroom procedure and how decision-making should be undertaken and recorded, particularly in circumstances where the issues of disclosures, conflict of interest, and abstentions arise.

Principles from the case

The case, and those that go before it such as the Bell Group decision2 and the James Hardie cases3, make the message plain that company secretaries have a significant obligation to their companies in relation to board processes and they should be prepared to assert the responsibilities that go with that obligation.

The APC case concerns the decision of the board of APC to introduce new fees to be charged, as the responsible entity of a trust, without seeking the approval of members of the trust. It also involved a conflict of interest with one of the directors who would benefit from the fees. That conflict was not disclosed and the relevant director claimed he had satisfied his fiduciary obligations by abstaining from voting.

This gave the court licence to examine in minute detail the process of the APC board meeting.

The general principles that follow from the APC decision are:

  1. those who prepare and approve board minutes are obliged to exercise a high standard of care.
  2. board minutes should record discussions of important matters.
  3. each director is required to actively support the resolution, actively oppose it or expressly abstain from supporting or opposing it, and it is his or her responsibility to ensure that his or her will is expressed and recorded in one of those ways director's responsibility to ensure that his or her will is clearly expressed and accurately recorded is amplified by the importance of the particular resolution.

The case is an important reminder that section 1308(2) of the Corporations Act 2001 (the Act) makes it an offence to make a statement in a document required by or for the purposes of the Act, which is false and misleading in a material particular. It should be noted that an omission which renders a board minute false and misleading would amount to a contravention under this section of the Act, and possible penalties include jail.

Consensual Decision Making Rejected

In the APC case the following excerpt of the judgment of Barrett JA in the Court of Appeal's decision in James Hardie was set out in full. It is worthy of some repetition as it indicates a clear line for individual responsibility within a collective decision making framework:

'[6] Section 248G of the Corporations Act 2001 (Cth) enacts replaceable rules that a resolution of the directors of a company must be passed by a majority of the votes cast by directors entitled to vote on the resolution and that the chair has a casting vote, if necessary, in addition to any deliberative vote to which he or she is entitled as a director. ...

[7] Under a regime of this kind, the required method of decision-making is the passing of a resolution of the body of persons; and the passing of a resolution depends on the casting of individual votes. It follows that procedures actually adopted must be such that each member of the body who is entitled to vote and wishes to do so may communicate his or her vote and have it taken into account.

[8] Value is often attached to collegiate conduct leading to consensual decision-making, with a chair saying, after discussion of a particular proposal. 'I think we are all agreed on that', intending thereby to indicate that the proposal has been approved by the votes of all present.

[9] Such practices are dangerous unless supplemented by appropriate formality.

[10] .The aim is rather that the members of the board should consult together so that individual views may be formed and the individual will of each member may be made known in a clearly communicated way.

[11] The culmination of the process must be such that it[is] possible to see (and to record) that each member, by a process of voting, actively supports the proposition before the meeting or actively opposes that proposition; or that the member refrains from both support and opposition. And it is the responsibility of an individual member to take steps to ensure that his or her will is expressed in one of those ways' [emphasis added].

APC case principles reinforced by ASIC

The general principles in the APC case have been neatly encapsulated in a recent enforceable undertaking (EU) published on 18 December 2014 entered into by NuSep Holdings Ltd in favour of the Australian Securities & Investments Commission (ASIC) on substantially similar subject matter. The EU was the culmination of a year long investigation by ASIC of the company. The company is not an ASX300 but rather at the smaller end of market capitalisation, indicating that it is not only the big end of town that needs to consider its governance practices.

The obligations contained in the EU summarise the corporate governance principles that have been the subject of judicial guidance in the last few years. Company secretaries familiar with the court's decisions in James Hardie. Bell Group and the recent APC case (referred to above) will recognise the principles that have been developing in the areas of corporate record keeping and boardroom behaviour.

The EU records that in seeking to address ASIC's concerns, the company has taken steps to adopt procedures to ensure accurate minutes and compliance with the Act in relation to the recording of company minutes.

The relevant obligations of the company under the EU are summarised below:

  1. drafting minutes of the board, board committee and member meetings immediately to ensure that they are contemporaneous records that are more likely to be an accurate reflection of the proceedings of the meeting rather than a reconstruction of them. This was the thrust of the remarks by the court in the Bell Group case although courts in other cases have made similar comments4.
  2. distributing with the board packs, minutes of board committees that have occurred since the previous board meeting and the minutes of the previous board meeting.
  3. recording resolutions by directors (without a meeting), by the directors signing the resolution in a way that meets the requirements of section 251A to be entered into the minute book and approved at the next meeting. Careful readers will recall that the obligations under section 251A were given prominence in the James Hardie and APC cases5. However, it is the authors' experience that the obligations contained in Section 251A are still not being universally applied by companies in corporate Australia.
  4. taking reasonable precautions to prevent damage, destruction, substitution and falsification of the minute book by sequentially numbering the agendas, meetings and pages. In addition, in the case of an electronic minute book providing for limited, secure access and a programme that identifies unauthorised access so as to comply with section 1306(3) of the Act6.
  5. keeping a complete set of board, board committee and members' meeting agendas, papers previously circulated and documents tabled at these meetings for future reference so as to comply with section 1306(3) of the Act.
  6. distributing a schedule of tasks arising from board and board committee meetings with details of who is to perform the task and by when, by the time the draft minutes are circulated to board or board committee members.
  7. amending employment terms and/ or job descriptions to reflect who is responsible for the above occurring.

Reporting line requirements for company secretaries

The role of the company secretary and reporting lines have often been informal and blurred by the fact that the company secretary role is often an 'add on' to another role such as general counsel or CFO. As part of the EU process the company has appointed a new company secretary with a direct reporting line to the board through the chair7 and terms of engagement that specifically provide that the company secretary will be responsible for fulfilling compliance with the Act and in particular sections 188(1), 251A and 1306, among other things.

The EU also highlights the company's agreement to employ effective practices in keeping:

  1. records evaluating the board, individual board members and officers.
  2. reports to the board about governance issues.
  3. records of the board reviewing continuance disclosure obligations
  4. records of drafting and approving ASX announcements so that these procedures may be monitored by the audit committee. Again readers will recall that a misleading ASX announcement was the subject of the James Hardie case, as was an ASX announcement that was omitted to be made regarding restructuring arrangements.
  5. communications with external auditor.
  6. records of communications with debtors to assist in causing debts.

The EU records a number of steps that the company has initiated voluntarily, and which the company agrees to maintain into the future until 2017. These obligations will be monitored by an independent compliance expert8. In many respects they reflect the clear legal obligations under the Act and the legal standards required by the court of company secretaries.

Consequences for the company secretary role

The implication of the EU is that ASIC requires adherence to the legal standards of record keeping and minutes no matter how big or small a company may be and company secretaries have been armed with the basis to assert their responsibility.

Since the first James Hardie decision there has been much discussion about the role of the company secretary. The decisions on which the EU is based make it clear that the role is not merely passive minute taking but is an active and coordinating role in board processes and governance.

The state of play for the APC directors

Penalties have recently been handed down by the court as follows:

  • The director who did not disclose a conflict of interest and did not abstain from voting on the relevant resolution, Mr Lewski, was disqualified for 15 years and fined $230,000. ASIC had sought a lifetime ban.
  • The chairman of the flawed meetings Dr Michael Wooldridge was disqualified for two years, three months and fined $20,000.
  • Two other directors who participated were disqualified for four years and fined $20,000 each.
  • The most recently appointed director, where the meeting in question was his first meeting, Mr Clarke, was not disqualified but fined $20,000.

All of the directors have lodged appeals against their penalties.

This penalty decision reinforces the need for clear decision-making and record keeping in the boardroom.

Takeaway for boards and company secretaries

This article has focused on the implications of the APC case and subsequent EU for company secretaries. However, in order for company secretaries to meet the obligations, as set out in the EU, it is likely that a broader conversation with the chair and the board will be required to ensure ASIC's now clear and unambiguous requirements are embedded in company processes.


1 ASIC v Australian Property Custodian Holdings Limited (Receivers & Managers Appointed) (In Liquidation) (Controllers Appointed) (No. 3).

2 The Bell Group Ltd (ACN 008 666 993) (in liquidation) and Others v Westpac Banking Corporation (ACN 007 457 141) and Others (No9) (2008) 70 ACSR 1.

3 The authors refer to the Court of Appeal's decision in Gillfillan v ASIC (2012) 92 ACSR 460 at 4–11.

4 The authors particularly refer to the decision of the Court of Appeal: Gillfillan v ASIC (2012) 92 ACSR 460.

5 The authors also refer to the judgment in Galladin Pty Ltd (rec and mgr apptd) v Aimnorth Pty Ltd (in liq) and others (1993) 11 ACSR 23 at 44 and Claremont Petroleum NL v Cummings and Another (1992) 110 ALR 239 at 258 (referred to in the Galladin case).

6 See Re RM (No 13) Pty Ltd (1995) 17 ACSR 758 at 759.

7 See recommendation 1.4 of the ASX Corporate Governance Council as set out in Corporate Governance Principles and Recommendations, 3rd ed.

8 One of the authors, Lyn Nicholson, has been appointed the Independent Compliance Expert (IEC). It is noted that this article was prepared using publicly available sources and before any work as IEC commenced.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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