COURT DECLINES TO GRANT RELIEF FROM CIVIL PENALTIES TO COMPANY OFFICER

Author: Valentina Misevska, Martin Ball

Publish Date: January 23, 2006

ASIC –v- Vines [2005] NSSC 1349

The NSW Supreme Court (Austin J) has declined to grant relief under either s.1318 or s.1317JA of the Corporations Act 2001 to the former chief financial officer (Mr Vines) of companies in the GIO group, in respect of earlier findings by the Court that he had failed to discharge his statutory duty of care and diligence in his disclosures to the Board in the context of a takeover bid.

Background

Mr Vines was found to have failed to exercise due care and diligence by misleading or inadequate disclosure of material information to the board of directors. The defective disclosures related to matters within Mr Vines' personal knowledge, in circumstances where the board was relying on him to make timely, accurate and complete disclosure of all material matters. To the extent that Mr Vines had made limited disclosure he effectively substituted his own decisions for those of the board. Officers in the position of Mr Vines were not expected to treat disclosure obligations as an occasion for exercising entrepreneurial flair and risk-taking.

The Court noted that the corporations legislation imposed heavy civil, and sometimes criminal, liability on those who provide misleading information to the public securities markets about the price or value of quoted securities and that the law seeks to protect investors, in particular target shareholders, by endeavouring to ensure that the information upon which they make their decisions is materially accurate and complete.

The Court thought that Mr Vines’ conduct was of real significance, was serious and was not trivial and such actions acted to undermine the efficacy of corporate boards.

Eligibility for Relief

S.1318 states that if, in any civil proceeding against a person, for negligence, default, breach of trust or breach of duty (the act), it appears to the Court that the person is or may be liable in respect of the act but that the person has acted honestly (the first limb) and that, having regard to all the circumstances of the case the person ought fairly to be excused for the act (the second limb) the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit. S.1317JA is in similar terms.

Austin J took the view that even if the Court considered that the first limb was met and the second limb was met, the Court still had a discretion as to whether to wholly or partly grant relief from a civil penalty and if so on what terms.

Relevant Factors

The Court considered the nature of the discretions given to the Court, both in assessing the second limb, and in determining whether to grant relief, and determined that the following factors or considerations were relevant:

whether any contrition had been shown by the officer
the seriousness of the contravention by the officer (viewed from three angles: the importance of the provision contravened in terms of public policy; the degree of flagrancy of the contravention; and the consequences of the contravention in terms of harm to others)
whether the officer obtained and followed competent advice before acting in contravention
whether the conduct was in accordance with some established practice
whether the officer was paid for the contravening conduct
testimonials and the officer’s service to the community and the impact of proceedings on the officers reputation, career and family
whether the officer had obtained personal gain from the contravention
impropriety on the part of the officer or consciousness on the officer’s part of impropriety by others
whether the officer had engaged in any deceptiveness

His Honour further noted that many of these factors would be relevant again if relief from civil penalty was not granted, and a penalty was to be imposed.

Outcome

The Court accepted that Mr Vines:

had acted honestly
had not obtained any personal gain
had not engaged in any impropriety or deceptiveness
had not been conscious of any impropriety on the part of others
was entitled to defend the proceedings and this did not mean he had failed to show any contrition

The Court ultimately declined Mr Vines relief under either s.1318 or 1317JA because it considered that the nature and seriousness of his contraventions was such to outweigh all the above factors. Other factors raised by Mr Vines such as the great pressure he was under at the time of the contraventions and the absence of a causal connection between the contraventions and shareholder losses did not counter the seriousness of the contraventions.

This decision is a reminder to company officers of the difficulties which will be faced if they are found to have contravened their statutory duty of care and diligence and wish to be exonerated from civil penalty pursuant to sections 1318 or s.1317JA.

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