In the recent decision of ASIC v Vocation Limited (In Liquidation)  FCA 807, the Federal Court found three directors personally liable under section 180 of the Corporations Act 2001 (Cth) for allowing Vocation Limited to breach its statutory obligations as an ASX listed entity.
ASIC commenced civil penalty proceedings against Vocation and three of its directors: Mr Mark Hutchinson (CEO), Mr John Dawkins (Non-Executive Chairman) and Mr Manvinder Gréwal (CFO).
The key issue in this case concerned a misapprehension on the part of the defendants as to the potential impact of contractual measures being taken against two of Vocation's subsidiaries by the Victorian Department of Education and Early Childhood Development (DEECD) in relation to contracts for government funding of vocational education and training. These measures included the withholding of payments totalling approximately $20 million, and a direction that these subsidiaries suspend all future student enrolments.
Overall, it was found that the directors had failed to adequately inform themselves of these matters by unreasonably and uncritically relying on information provided to them by senior management regarding the company's ongoing dispute with the DEECD.
Breach of primary obligations by Vocation
The defendants' conduct resulted in Vocation breaching a number of its obligations as a listed entity under the Act. The following contraventions were alleged by ASIC:
- Breach of continuous disclosure obligation– Nicholson J found that Vocation failed to notify the ASX of the action being taken against it by the DEECD, despite this being information that would be reasonably likely to influence investors in deciding whether to acquire or dispose of Vocation's shares. This was found to be a breach of ASX Listing Rule 3.1, resulting in Vocation's contravention of section 674(2).
- Misleading and deceptive conduct – Nicholson J found two instances of misleading and deceptive conduct in relation to a financial product (Vocation's securities) in contravention of section 1041H:
- Vocation made an announcement to the ASX that failed to include key information regarding the extent of the measures being taken against it by the DEECD.
- In connection with a proposed share placement, Vocation's CEO and CFO provided a misleading due diligence questionnaire (DDQ) to UBS Australia in circumstances where UBS Australia was considering underwriting the proposed offer of shares.
- Lodgement of a defective Cleansing Notice – in connection with the share placement, Vocation lodged a 'Cleansing Notice' with the ASX pursuant to section 708A(5), which contained incorrect statements regarding Vocation's compliance with its disclosure obligations. However, Nicholson J declined to find Vocation liable for this, as it could not be shown that the defendants had actual knowledge of this defect, as required by the provision.
Directors' duties – 'stepping stone liability' under section 180
ASIC alleged that each of the defendants had breached their duty of care and diligence under section 180 by allowing Vocation's breaches of the Act.
This demonstrates the 'stepping stone' approach to liability under section 180 – whereby directors may be personally pursued for failing to protect their company from a 'foreseeable risk of harm' by exposing it to a risk of penalty for breaching the Act.
Nicholson J made the following findings on the liability of each of the defendants:
- Liability of Mr Hutchinson (CEO)
- One of the key responsibilities of Mr Hutchinson was to provide the board with timely and quality information that would assist it to make decisions in relation to matters such as ASX disclosure.
- As CEO, Mr Hutchinson had a greater responsibility than Vocation's non-executive directors to inform himself of matters affecting its business.
- It should have been clear to Mr Hutchinson that the information provided to him by senior management in relation to the dispute with the DEECD was 'wholly unreliable'.
- Mr Hutchinson breached his duty under section 180(1) by failing to properly assess the likely impact of the measures imposed by the DEECD on Vocation's business, which lead to the company's breach of its continuous disclosure obligation, the misleading ASX announcement, and the submission of the misleading DDQ.
- Liability of Mr Dawkins (Non-Executive Chairman)
- As a non-executive director, Nicholson J made some allowance for Mr Dawkins' reliance on information provided to him by Mr Hutchinson and senior management.
- Mr Dawkins' principal failing was that he did not turn his mind to the correctness of the assumptions underlying the information provided to him.
- Overall, it should have been clear to Mr Dawkins that management could not be relied upon to provide accurate or reliable information in relation to the dispute with the DEECD.
- Mr Dawkins breached his duty under section 180(1) by allowing Vocation's breach of its continuous disclosure obligations.
- Liability of Mr Gréwal (CFO)
- As CFO, Mr Grewal's responsibilities included the completion of DDQs.
- A reasonable person in Mr Gréwal's position would have at least reviewed the key correspondence from the DEECD for the purpose of confirming the accuracy of the DDQ.
- Mr Gréwal breached his duty under section 180(1) by providing the DDQ to UBS Australia in circumstances where he should have been aware it contained misleading representations.
Latest statement on the 'business judgment rule'
This case has provided the latest judicial statement on the debate as to whether the business judgment defence under section 180(2) applies to compliance decisions.
Mr Hutchinson sought to contend that the decision not to disclose the information to the ASX was an exercise of business judgment. In rejecting this contention, Nicholson J followed the authority in ASIC v Fortescue Metals to confirm that decisions relating to compliance with the requirements of the Act, such as whether or not to make an accurate disclosure, are not an exercise of business judgment for the purpose of the defence.
Furthermore, it was held that even if the rule had applied, it could not be said that Mr Hutchinson had appropriately informed himself of relevant matters in order to be able to avail himself of the defence.
The decision raises a number of important points that company officers should be aware of:
- Company board members must be proactive in analysing and understanding matters affecting their business, and should critically assess information provided to them by senior management particularly where there is a reason to question its reliability.
- Company officers should also be aware of any important assumptions that advice provided to them by external legal advisers might be based on.
- The business judgment defence will not be available for decisions on compliance matters such as ASX disclosure.
- A director may be liable under section 180 for allowing their company's breach of the Act even where they had no actual knowledge of the contravention – this is a lower threshold than other personal liability provisions, such as section 674(2A) (personal involvement in company's breach of its disclosure obligations).
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