Legal Issues for Managers
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1. Is Patricia an Officer of Stadium Enterprises Pty Ltd (SEPL)?
2. Has Patricia breached her duty to act with due care and diligence?
3. Has Patricia breached her duty to act in good faith in the best interests of SEPL?
4. Did Patricia improperly use information to gain an advantage, causing detriment to SEPL?
5. Has Patricia acted recklessly, dishonestly, and failed to exercise and discharge her duties for a proper purpose and in the best interests of SEPL?
6. Did Patricia engage in insider trading?
7. Is Dan an Officer of Fancy Pants Pty Ltd (FPPL)?
8. Did Dan have a duty to prevent insolvent trading?
1. Section 9 Corporations Act 2001 (Cth) (CA) – definition of Officer
2. Section 180 CA – due care and diligence
3. Section 183 CA – use of information
4. Section 184 CA – duty to act in good faith, use of position and use of information
5. Section 1043 CA – insider trading (all persons, not just directors) 6. Section 588G CA – duty to prevent insolvent trading
Daniels v AWA Ltd (1995) 37 NSWLR 438
1. Section 9 defines an Officer to include a Director of a company. (slides) We are told Patricia is a Director of SEPL so she will be an Officer within the Corporations Law. 2. Section 180 requires that an Officer must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would. (slides) Patricia and Dan did not act in a way that a reasonable person would because they failed to make good decisions that deal with the financial and business affairs of SEPL, therefore it is likely they have breached section 180. Daniels v AWA Ltd (1995) 37 NSWLR 438: The CEO breached his duty of care and diligence because he did not exercise due care and skill to cover decisions dealing with the financial status and business affairs of the company. (fact) 3. Section183 states a person who obtains information because they are, or have been, a Director of a corporation must not improperly use the information to gain an advantage for themselves or someone else; or cause detriment to the corporation. (slides)
Patricia caused SEPL to pay $1,000,000 more for its takeover bid than originally anticipated because the share price of FPPL doubled. Hence, it is probable Patricia has breached section 183. ASIC v Vizard  FCA 1037: The CEO of Telstra provided the Directors with confidential information about ASX listed companies, so the best investment decisions could be made for Telstra. Vizard, a Director of Telstra, used this information to buy shares in those companies before Telstra did and thus made money. Vizard was held to have breached section 183. (fact) 4. Section 184 requires that Officers will be liable to a criminal offence if they contravene a civil penalty provision, recklessly or dishonestly, and fail to discharge their duties in good faith in the best interest of the corporation, or for a proper purpose.
As Patricia has contravened sections 180 and 183, then it is expected she has breached section 184. Adler v ASIC (2002) 42 ACSR 80: Santow J, ordered Adler be disqualified from managing a company for 20 years, imposed a pecuniary penalty on him of $450,000, and ordered him to pay compensation of $7,958,112 to HIH Insurance. On appeal to the NSW Court of Appeal, these orders were upheld. (fact) 5. Section 1043 prohibits insider trading by any person to deal with shares or to use, or engage with others to deal in, price-sensitive information of a public company before the information is readily available to the public. Patricia provided information to her sister Faye about SEPL’s intention to make a takeover bid to FPPL, and Patricia directed Faye to buy shares in FPPL while they were cheap so she could make some money. As a result, her sister Faye purchased a large amount of shares in FPPL and she made $250,000 profit.
Consequently, it is likely Patricia will be found to have violated section 1043. R v Rivkin  NSWCCA 7: Mason P Wood CJ at CL and Sully J, ordered the high profile Sydney stockbroker Rene Rivkin, be prosecuted for the insider trading of Qantas shares, hence sentenced him to imprisonment for a term of 9 months to be served by way of periodic detention, and fined him in the sum of $30,000. (fact) 6. Section 9 defines an Officer to include a Director of a company. (slides) We are told Dan is a Director of FPPL so he will be an Officer within the Corporations Law. 7. Section 588G prescribes that an Officer has a duty to prevent insolvent trading by a company. They should not allow the company to become insolvent by incurring debts, or incur a debt while it is insolvent. Dan used FPPL’s credit to purchase a $300,000 machine even though he knew FPPL was unable to pay company’s bills, which illustrates that Dan traded whilst FPPL was in an insolvent position. Thus, Dan is likely to have breached section 588G. R v Hannes (2002) 173 FLR 1. Hannes bought TNT options and realised a profit of $2million when a takeover of TNT was announced during their currency. He was sentence to imprisonment for two years and two months and fined $100,000. (fact) Conclusion
On the balance of probabilities, Patricia and Dan will be found to have breached the following sections of the CA: 1. Patricia and Dan – Section 180 for not using care and diligence; 2. Patricia – Section 183 by improperly using information; 3. Patricia and Dan – Section 184 for failing to discharge their duties in good faith in the best interest of the corporation, or for a proper purpose; and 4. Patricia – Section 1043 for engaging in insider trading with others. Remedies
The civil remedies are:
1. Section 1317J – Patricia and Dan ordered to each pay a pecuniary penalty of $50,000 to the Commonwealth; 2. Section 1317H – Patricia ordered to pay compensation of $1,000,000 to SEPL; 3. Section 206C – Patricia and Dan each disqualified from Directorships for a period of 10 years; and 4. Section 233 – winding up of FPPL.
Under section 1317E, the criminal remedies are $200,000 and/or 5 years in prison for Patricia and Dan.