September 2021
Directors, as persons responsible for the management and control of a company, bear strict legal duties. Under the Corporations Act 2001 (Cth) and at general law, a director:
- Has a duty to act with care, skill and diligence [section 180 of the Corporations Act];[i]
- Has a duty to exercise their powers and discharge their duties in good faith in the best interests of the corporation and for a proper purpose [section 181 of the Corporations Act];[ii]
- Must not improperly use their position to gain an advantage for themselves or someone else or cause detriment to their company [section 182 of the Corporations Act];[iii]
- Must not improperly use information they have gained as a director to gain an advantage for themselves or someone else, or cause detriment to their company [section 183 of the Corporations Act].[iv]
If a director fails to perform their duties under the Corporations Act, a director:
1. May be guilty of a criminal offence and be required to pay a penalty, or be imprisoned [maximum of 15 years for serious criminal offences], or both.
Where the term of imprisonment is the only penalty specified for an offence and the term of imprisonment is less than 10 years, the fine is calculated by multiplying the term of imprisonment expressed in months by 10.
Where the term of imprisonment is the only penalty specified for an offence and the term of imprisonment is 10 years of more, the fine is the greater of 4,500 penalty units [currently $999,000.00], and three times the value of the benefit derived and detriment avoided because of the offence, if the Court can determine the value of the benefit and detriment; [v]
2. May have contravened a civil penalty provision and be ordered to pay the greater of 5,000 penalty units [currently $1.11 million] or three times the benefit obtained and detriment avoided;[vi] or
3. May be liable to compensate the company or others for loss and damage suffered;
4. May be disqualified from managing a company.[vii]
In addition, under the Australian Consumer Law, a director may also be held liable for being knowingly concerned in, or party to, its company’s contraventions of the Australian Consumer Law.[viii] The Australian Competition and Consumer Commission [“ACCC“] may bring proceedings against a company and its directors for engaging in conduct which is in breach of the Australian Consumer Law.
This update discusses recent cases in which directors have breached their duties under the Corporations Act and have been involved in contraventions of the Australian Consumer Law.
Recent Cases
VicBeef Holdings Pty Ltd & Anor v Chen & Anor [2021] VSC 546 (Victorian Supreme Court, 3 September 2021)
Mr Chen, one of 3 directors of VicBeef Holdings Pty Ltd (‘VicBeef’) and Tabro Meat Pty Ltd (‘Tabro’) procured and executed security loan agreements (the ‘Cai Security Agreements’) pursuant to which, inter alia, VicBeef, Tabro and Mr Chen unconditionally and irrevocably guaranteed the due and punctual payment to Mr Laiyin Cai (‘Mr Cai’) of monies (up to a maximum liability of AU$14,999,999.99) owing to Mr Cai by a limited partnership company incorporated in China (‘SSIE’) under a loan agreement between Mr Cai and SSIE. Mr Chen was also a shareholder and general partner/legal representative of SSIE as well as the Chairman of Sundiro Holding Co Ltd (‘Sundiro’), being one of the parties that guaranteed the loan agreement.
VicBeef and Tabro initiated proceedings seeking, inter alia, orders for rescission of the Cai Security Agreements (and related relief), asserting that the Cai Security Agreements were entered into in breach by Mr Chen of his obligations owed to VicBeef and Tabro.[ix]
The Supreme Court of Victoria declared that the execution by Mr Chen of the Cai Security Agreements:-
- in “circumstances that an ordinary person with the knowledge and experience of Mr Chen would not have executed the Cai Security Agreements”[x] constituted a breach by Mr Chen of his duty of care and diligence [under Sec 180(1) Corporations Act 2001 (Cth)];
- constituted a breach by Mr Chen of his duty to act in good faith and in the best interests of VicBeef and Tabro [under Sec 181(1)(a) the Corporations Act] as there was “no evidence from Mr Chen [or any other director] to the effect that [Mr Chen] honestly believed that the execution of the Cai Security Agreements was in the best interests of VicBeef and Tabro”[xi];
- “so as to confer an advantage on SSIE and the guarantors which included Mr Chen”[xii] constituted a breach by Mr Chen of his duty to act for a proper purpose (Under Sec 181(1)(b) of the Corporations Act];
- constituted a breach by Mr Chen of the duty to not improperly use his position to gain an advantage for himself or someone else [under Sec 182(1) of the Corporations Act][xiii]; and
- constituted a breach by Mr Chen of the ‘conflict rule’ under the General Law, which required Mr Chen, as director of VicBeef and Tabro, to avoid a conflict between his personal interests and the interests of VicBeef and Tabro.[xiv]
The Court held that VicBeef and Tabro were entitled to an order rescinding the Cai Security Agreements ab initio[xv].
ACCC v Campbell (No 3) [2021] FCA 528 (Federal Court of Australia, 19 May 2021)
The Federal Court of Australia declared that the founder and former managing director of Jump Loops Pty Ltd (in liquidation) [Jump Swim], Ian Campbell, was knowingly concerned in, and a party to, the false “representations made to prospective franchisees that an operational swim franchise would be provided within 12 months of signing a franchise agreement” and the wrongful acceptance of payments from franchisees, in contravention of the Australian Consumer Law.[xvi]
The Court ordered that Mr Campbell:
- pay $500,000.00 in compensation to franchisees, and a penalty of $400,000.00 to the Commonwealth;[xvii]
- be restrained from being knowingly concerned in, or party to, making representations to prospective franchisees about timeframes for establishing an operational franchise where there are no reasonable grounds, and wrongly accepting of payment for the supply or goods or services for the business of a franchisor, for a period of 5 years;[xviii]
- be restrained in Australia from being in any way, directly or indirectly, involved in carrying on a business as or of a franchisor, including (amongst other things) as an individual franchisor or as an employee, director, or agent of another person, for a period of 3 years.[xix]
ACCC v Megasave Couriers Australia Pty Ltd and Bourne (Orders by Consent – Federal Court of Australia – 29 April 2021)
The sole director of Megasave, a franchised Australia-wide courier delivery business, Gary Bourne, admitted that he was knowingly concerned in false and misleading representations made by Megasave to prospective franchisees.
In promotional and marketing statements on its websites and advertisements, and in communications to prospective franchisees, Megasave represented that prospective franchisees would receive guaranteed minimum weekly payments and a guaranteed annual income if they purchased a Megasave courier franchise.[xx]
In proceedings brought by the ACCC, the Federal Court of Australia ordered Mr Bourne to pay a penalty of $120,000.00, and also ordered Megasave to pay a penalty of $1,900,000,00.[xxi]
The Federal Court also ordered that Megasave and Mr Bourne contribute to the losses suffered by affected franchisees to the sum of $500,000.00.[xxii]
Oliana Foods PtyLtd v Culinary Co Pty Ltd (in liq) [2020] VSC 693 (Victorian Supreme Court, 21 October 2020)
Oliana Foods Pty Ltd (“Oliana“) which carries on the business of importing and distributing food products to supermarkets took action against Mr Floropoulos, a former long-time director and officer of Oliana in connection with Mr Floropoulos’ role in securing an alternative supply of vegan cheese for the benefit of Oliana.
Mr Floropoulos was responsible for identifying and securing a new supplier of vegan cheese for Oliana. Mr Floropoulos identified Kremel AE (“Kremel“) as a suitable alternative manufacturer and supplier of vegan cheese products and negotiated a supply price for Kremel vegan cheese. Mr Floropoulos interposed a company between Kremel and Oliana, being Culinary Co, to obtain the vegan cheese products from Kremel and then on sell them to Oliana for a substantially marked-up price, without Oliana’s knowledge.
The Supreme Court of Victoria held that Mr Floropoulos breached the statutory duties under the Corporations Act that he owed to Oliana in that:
- Mr Floropoulos breached his duty to act with care, skill and diligence by “failing to disclose the Kremel Supply Price to Oliana and for its benefit; seeking to interpose, and interposing, Culinary Co in the Oliana supply arrangement and marking up the Kremel Supply Price to the amount ultimately charged to Oliana; and failing to take steps to pass on the Kremel Supply Price to Oliana. No director or officer exercising the required degree of care and diligence could have so acted.”[xxiii]
- Mr Floropolous failed to act in good faith in the interests of Oliana by, amongst other things, not disclosing to Oliana the true position regarding his involvement with Culinary Co.[xxiv]
- Mr Floropoulos improperly used information obtained as a director/officer of Oliana to gain advantage for himself and to cause detriment to Oliana.[xxv] Mr Floropoulos artificially inflated the supply charges paid by Oliana for his own benefit [xxvi] by using his knowledge of Oliana’s overheads and profit margins relating to the supply of vegan cheese and his position in overseeing all dealings with Kremel.[xxvii]
The Court accepted that Oliana suffered damage as a result of Mr Floropoulos’ contraventions of the Corporations Act, and Mr Floropoulos was ordered to pay damages in the sum of $987,811.26 to Oliana.
Mr Floropoulos was also found to have breached the fiduciary duties he owed to Oliana and engaged in misleading and deceptive conduct in contravention of section 18 of the Australian Consumer Law. Although Oliana established that it relied upon the misleading and deceptive conduct, Oliana did not establish that the loss and damage claimed by it in respect of that conduct was suffered because of that conduct.[xxviii]
ASIC v Mitchell (No 2) [2020] FCA 1098 (Federal Court of Australia, 31 July 2020)
The Federal Court of Australia held that Harold Mitchell, former Tennis Australia (TA) vice president, contravened section 180(1) of the Corporations Act 2001 (Cth) on three occasions in December 2012 in connection with a decision by the TA Board to approve a $195.1 million broadcast deal with Seven Network for the Australian Open tennis tournament.
The Court found that Mr Mitchell failed to discharge his duties with the degree of care and diligence a reasonable person would have exercised in the circumstances. The contravening conduct included an email forwarded by Mr Mitchell to the Chief Legal and Commercial Director of the Seven Network that disclosed TA’s internal deliberations and gave rise to reasonably foreseeable harm to TA, although that was not Mr Mitchell’s purpose.[xxix] The Court imposed a pecuniary penalty of $90,000.00 on Mr Mitchell for contraventions that were described as ‘serious’.[xxx]
Office and Role of Chairperson also considered
In the same proceedings, ASIC also alleged that Mr Stephen Healey, Chair of TA, breached his directors’ duties in that a reasonable person occupying the office of chair in the circumstances would have disclosed certain matters to the TA Board.
Justice Beach, however, held that Mr Healy was entitled to a significant extent to rely on Mr Wood, TA’s CEO, and his judgment on what information was disclosed to the TA Board in connection with the broadcast rights deal.[xxxi] Beach J concluded that “there was no proper basis for saying that Mr Healy should have second-guessed Mr Wood’s judgement calls concerning the disclosure of information to the Board, albeit that Mr Wood was an officer but not a director of TA”.[xxxii]
Previous case law, namely ASIC v Rich,[xxxiii] established that the role of chair was not a purely ceremonial position, and that the standard of care of a chairperson is to reflect contemporary community expectations. ASIC v Mitchell further clarifies the role of the chairperson. A chairperson is not “some sort of directorial overlord”,[xxxiv] but is responsible, amongst other things, for:
- setting the agenda items for Board meetings,
- ensuring sufficient time is allowed to discuss complex or contentious matters,
- maintaining workable and harmonious relations between executive and non-executive directors, and
- implementing appropriate corporate governance structure.[xxxv]
Further, in determining the standard of care owed by a certain chairperson a Court will take into account a chairperson’s represented special qualifications and experiences.[xxxvi]
Authored by Peter Divitcos, Lawyer, Stephens Lawyers & Consultants. The contribution of Rochina Iannella in authoring the VicBeef Holdings Case Summary in this article is acknowledged.
This update is not intended to be a substitute for obtaining legal advice.
© Stephens Lawyers & Consultants.16 September 2021
For further information contact:
Katarina Klaric
Principal
Stephens Lawyers & Consultants
Suite 205, 546 Collins Street
Melbourne VIC 3000
Phone: (03) 8636 9100
Fax: (03) 8636 9199
Email: [email protected]
Website: www.stephens.com.au
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Melbourne VIC 8007
[i] Corporations Act 2001 (Cth), section 180.
[ii] Corporations Act 2001 (Cth), section 181.
[iii] Corporations Act 2001 (Cth), section 182.
[iv] Corporations Act 2001 (Cth), section 183.
[v] Corporations Act 2001 (Cth), sections 184 and 1311B.
[vi] Corporations Act 2001 (Cth), section 1317G.
[vii] Corporations Act 2001 (Cth), section 206C.
[viii] Australian Consumer Law, sections 2 and 236.
[ix] VicBeef Holdings Pty Ltd & Anor v Chen & Anor [2021] VSC 546 at Pars. 20, 21
[x] VicBeef Holdings Pty Ltd & Anor v Chen & Anor [2021] VSC 546 at Par. 246
[xi] VicBeef Holdings Pty Ltd & Anor v Chen & Anor [2021] VSC 546 at Par. 249
[xii] VicBeef Holdings Pty Ltd & Anor v Chen & Anor [2021] VSC 546 at Par. 252
[xiii] VicBeef Holdings Pty Ltd & Anor v Chen & Anor [2021] VSC 546 at Par. 252
[xiv] VicBeef Holdings Pty Ltd & Anor v Chen & Anor [2021] VSC 546 at Par. 254
[xv] VicBeef Holdings Pty Ltd & Anor v Chen & Anor [2021] VSC 546 at Par. 322
[xvi] ACCC v Jump Loops Pty Ltd (in liquidation) and Ors (Justice O’Bryan), 20 May 2021, https://www.comcourts.gov.au/file/Federal/P/VID612/2019/3859547/event/30685558/document/1775107.
[xvii] Ibid.
[xviii] Ibid.
[xix] Ibid.
[xx] ACCC, ‘Megasave and Gary Bourne to pay penalties for misleading prospective franchisees’ 29 April 2021, https://www.accc.gov.au/media-release/megasave-and-gary-bourne-to-pay-penalties-for-misleading-prospective-franchisees.
[xxi] ACCC v Megasave Courtiers Pty Ltd, Federal Court of Australia Court Order (Justice O’Callaghan), 29 April 2021, https://www.comcourts.gov.au/file/Federal/P/VID413/2020/3892537/event/30666235/document/1765742.
[xxii] ACCC v Megasave Courtiers Pty Ltd, Federal Court of Australia Court Order (Justice O’Callaghan), 29 April 2021, https://www.comcourts.gov.au/file/Federal/P/VID413/2020/3892537/event/30666235/document/1765742.
[xxiii] Oliana Foods Pty Ltd v Culinary Co Pty Ltd (in liq) [2020] VSC 693, [390].
[xxiv] Oliana Foods Pty Ltd v Culinary Co Pty Ltd (in liq) [2020] VSC 693, [402].
[xxv] Oliana Foods Pt yLtd v Culinary Co Pty Ltd (in liq) [2020] VSC 693, [340].
[xxvi] Oliana Foods Pt yLtd v Culinary Co Pty Ltd (in liq) [2020] VSC 693, [326].
[xxvii] Oliana Foods Pty Ltd v Culinary Co Pty Ltd (in liq) [2020] VSC 693, [369], [380].
[xxviii] Oliana Foods Pty Ltd v Culinary Co Pty Ltd (in liq) [2020] VSC 693, [9].
[xxix] Australian Securities and Investments Commission v Mitchell (No 3) [2020] FCA 1604.
[xxx] Australian Securities and Investments Commission v Mitchell (No 3) [2020] FCA 1604, [18].
[xxxi] Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098, [1198].
[xxxii] Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098, [1200].
[xxxiii] (2003) 44 ACSR 341; [2003] NSWSC 85.
[xxxiv] Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098, [1409].
[xxxv] See Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098, [1409]-[1420].
[xxxvi] Australian Securities and Investments Commission v Mitchell (No 2) [2020] FCA 1098, [1425]-[1429].