The recent case of ASIC v Vocation[1] confirms a trend by ASIC in employing the “stepping stone approach” to pursue officers and directors personally for contravention by the company, and the Court’s approval of that approach.
In previous cases against the directors of each of Storm Financial Limited[2], Padbury Mining Limited[3] and Sino Australia Oil and Gas Limited[4], the Federal Court found that the directors had breached their duty of care and diligence, in breach of section 180 of the Corporations Act 2001 (Act) by causing or permitting the respective companies to contravene provisions of the Act. Under section 180, directors and officers are required to exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person in their position would exercise.
In 2016, ASIC commenced actions against Vocation Limited (in Liquidation) (Vocation) and its Chairman (John Dawkins), its CEO (Mark Hutchinson), and CFO (Manvinder Grewal). In its decision handed down on 31 May 2019, the Court found that Vocation had breached its continuous disclosure obligations and engaged in misleading and deceptive conduct. Following the findings against Vocation, the Court found that the Chair, CEO and CFO breached their statutory duty of care and diligence on the basis that they caused or permitted Vocation to commit breaches of continuous disclosure obligations and misleading and deceptive conduct prohibitions.
Notwithstanding that the “continuous disclosure” obligation (section 674(2) of the Act) contains its own regime for pursuing directors who cause a company to breach that section (which contains a “reasonable steps” defence), ASIC chose to pursue the directors under section 180 of the Act (which does not have the “reasonable steps” defence) for breach of their duty of care. Liability arising under this approach is a “stepping stone” liability because the company’s contravention is a “stepping stone” to the finding against the directors.
The Court also held that the business judgement rule is no defence to failing to comply with continuous disclosure obligations as decisions relating to continuous disclosure are not business judgements.
This case illustrates the need for directors to be vigilant and challenge management on information presented to the Board.
Facts
Vocation is a public company that, through its acquisition of a number of subsidiaries, became a private provider of vocational education and training, engaged in student recruitment, education and training delivery as well as a provider of related services.
The subsidiaries of Vocation received funding from the Department of Education and Early Childhood Development (“Department“) pursuant to a number of funding contracts. When Vocation listed on the ASX, more than two-thirds of Vocation’s annual revenue was generated by its subsidiaries, the BAWM and Aspin businesses.
The Department advised BAWM and Aspin on 3 July 2014 and 5 August 2014, respectively, that the Department is withholding the payment of funds to BAWM and Aspin as the Department suspected that these entities have breached or may breach their respective funding contracts.
The Department also directed each of BAWN and Aspin, on 24 July 2014 and 24 August 2014, respectively, to suspend all future enrolments of students and suspend the commencement of training delivery for all students who had enrolled but not yet commenced.
The funding contracts held by BAWN and Aspin were consequently relinquished.
The cumulative effect of the withholding of the funds was that Vocation lost approximately $20 million in government funding.
On 25 August 2014, following a newspaper article about the dispute with the Department, Vocation made an announcement on the ASX stating that the funding contracts had not been suspended and any actions taken by the Department would not have a material impact on the company (25 August Announcement). It was not until October 2014 that Vocation provided the ASX with the full details of the materiality of the Department’s decision. When the information was released to the market in October 2014, it triggered a rapid decline of Vocation’s share price.
Around this time, Vocation undertook an underwritten placement, which completed on 11 September 2014 with approximately $74 million raised. The Placement was fully underwritten by UBS AG (“UBS”). Vocation provided UBS responses to UBS’s due diligence questionnaire (DDQ) (completed and signed by the CEO and CFO) which minimised the significance of the position in respect of the funding contracts.
Actions by ASIC
ASIC instituted proceedings against Vocation for contravention of its obligations under the Act and against the directors for breach of their duty of care and diligence by allowing Vocation to contravene the Act.
Action Against Vocation – Breach of Primary Obligations
ASIC’s case against Vocation can be categorised into the following actions:
- Vocation breached its continuous disclosure obligations
ASIC alleged that Vocation contravened section 674(2) of the Act during the period from 28 August 2014 to 8 September 2014 by failing to disclose certain information relating to the BAWM and Aspin funding contracts in accordance with ASX Listing Rule 3.1.
Nicholson J agreed and found that Vocation breached its continuous disclosure obligation by failing to update the market of the matters related to the withholding of the funds and risk of the funding contracts being relinquished.
- Vocation engaged in misleading and deceptive conduct
- ASIC alleged that the 25 August Announcement was misleading or deceptive or likely to mislead or deceive and that, by making it, Vocation contravened section 1041H of the Act.
The 25 Announcement made direct reference to only three courses and did not make it clear that the withholding of payments related to all funds due to BAWM and Aspin.
Nicholson J found that Vocation had engaged in conduct that is misleading and deceptive or likely to mislead or deceive as the Announcement failed to include key information and the extent of the measures taken by the Department – that the Department had determined that it would withhold payment of all funds to BAWM and all funds to Aspin until such time as the Department was satisfied that the issues it had identified were satisfactorily resolved).
- ASIC alleged that, in relation to the share placement, the DDQ responses contained representations that were misleading or deceptive or likely to mislead or deceive and that, by providing the responses through the DDQ to UBS, Vocation contravened section 1041H of the Act.
The Court found by providing UBS certain answers to the DDQ, Vocation had engaged in conduct that is misleading and deceptive or likely to mislead or deceive.
Action against the directors and officers – the Stepping Stone Approach
ASIC alleged that, by causing or permitting Vocation to commit breaches of the Act (the primary action), the CEO, Chairman and the CFO contravened section 180 of the Act (the secondary action).
Nicolson J found that:
- The CEO failed to discharge his duty of care and diligence in breach of section 180 of the Act by causing or permitting Vocation’s contravention of section 674(2) of the Act and contravention of section 1041H in relation to the 25 August Announcement and the responses to the DDQ.
- The Chairman failed to discharge his duty of care and diligence in breach of section 180 of the Act by causing or permitting Vocation’s contravention of section 674(2) of the Act.
- The CFO failed to discharge his duty of care and diligence in breach of section 180 of the Act by causing or permitting Vocation’s contravention of section 1041H in relation to the DDQ responses.
Nicolson J further observed that:
- The Directors cannot rely on information from management nor advice from external advisers as a defence to the breach of their duty of care.
- Following the authority in ASIC v Fortescue Metals, the business judgement rule cannot be used as a defence to a breach of the continuous disclosure obligation as continuous disclosure decisions are not business judgements – it is a decision related to compliance.
KEY TAKEAWAYS
- Notwithstanding that section 674(2A) of the Act is intended to apply to directors involved in breaches of the continuous disclosure obligation, ASIC was successful in holding directors personally responsible for breach of section 180 of the Act for “causing or permitting” the breach by the company.
- Directors are unable to rely on the “reasonable steps” defence under section 674(2B) if ASIC pursues the directors under section 180.
- Directors are unable to rely on the “business judgement rule” as a defence to a failure to comply with continuous disclosure obligations.
- Directors are unable to rely on external advice or the advice of management when directors know, or by the exercise of ordinary care should have known, any facts that deny such reliance on others.
- Directors should test the materiality of the information provided by management, request management to provide the board with relevant information, critically analyse the information provided as well as challenge the correctness of the advice they receive.
ASIC is more willing to utilise the “stepping stone” approach, as illustrated recently whereby ASIC has now commenced proceedings in the Federal Court against Mr Gary Helour and Mr Bradley Hingle, executives of Murray Goulburn, in relation to their involvement in MG Responsible Entity Limited’s breach of its continuous disclosure obligations.
Given the strong penalties for breach of continuous disclosure obligations, and the potential disqualification, Directors should put in place rigorous processes to ensure that the companies comply with the Act.
[1] ASIC v Vocation Limited (in Liquidation) [2019] FCA 807
[2] ASIC v Cassimatis (No 8) [2016] FCA 1023
[3] ASIC, in the matter of Padbury Mining Limited v Padbury Mining Limited [2016] FCA 990
[4] ASIC, in the matter of Sino Australia Oil and Gas Limited (in liq) v Sino Australia Oil and Gas Limited (in liq) [2016] FCA 934
Alfonso Grillo
Partner
agrillo@grillohiggins.com.au
Ashleigh Le
Senior Associate
ale@grillohiggins.com.au