Law Reporter

  • Date:01 Oct 2007
  • Type:CompanyDirectorMagazine
Professor Bob Baxt provides an overview of recent court decisions affecting the role and responsibility of directors.

Another word on directors’ penalities – the Full Federal Court takes a tough stand on director disqualification

In the August issue of the Law Reporter, we discussed the second of the New South Wales Court of Appeal decision in Vines v ASIC ([2007] NSWCA 75) in which the court set out some interesting observations about appropriate penalties to be imposed on directors for breaches of what are described as duties of care. The NSW Court of Appeal adopted what this editor would regard as a much softer line in evaluating questions relating to disqualification as well as to penalties in general. The State Supreme Courts share the company law jurisdiction with the Federal Court of Australia. The recent decision of the Full Federal Court of Australia in Australian Securities and Investments Commission v Beekink & Ors ((2007) 61 ACSR 305), in which an appeal on penalties was considered, is rather important because the decision was handed down before the penalty decision in Vines v ASIC was available and because the Federal Court displays a somewhat tougher approach on questions of disqualification. However, the facts of this case may well warrant a different approach.

The relevant facts were briefly these. The three people being prosecuted (Beekink, Majteles and Gaunt) were directors of a company called Australian Managed Funds (AMF) which managed an investment scheme. At the time they were also partners in a law firm Phillips Fox (now known by a different name). The directors of AMF ‘approved’ the relevant investment scheme (Clifton Partners Finance Mortgage Scheme), issuing a prospectus that regrettably contained allegedly misleading and false information. It is unnecessary to discuss all the details. Suffice it to say that when the prospectus was issued, it was alleged that there had not been a proper review by either Beekink or the relevant company of certain information. Majteles and Gaunt were apparently not aware that the relevant authority had been given for the issue of the prospectus.

The allegation by ASIC was that the directors had not carried out proper due diligence in reviewing the relevant prospectus which contained allegedly misleading or deceptive material and that as a result, substantial losses were suffered by investors.

Each of the directors admitted that they had committed various breaches of the Corporations Act relating to the operation of a financial management scheme. These were specific breaches of the legislation related to the broader duties of care and diligence required of company directors.

ASIC appealed the penalties imposed by Nicholson J in the Federal Court. These, it argued, were too low. Nicholson J had fined Majteles and Gaunt $10,000 each while Beekink was fined $25,000 and avoided disqualification. ASIC argued that these penalties were not adequate in the context of the breaches and was concerned that its application for Beekink to be disqualified had been rejected.

At the first instance hearing, Nicholson J had ruled that while both Majteles and Gaunt had neglected their duties and had relied too much on Beekink, they were not motivated by any promise of personal profit. Nicholson J noted that they were not “persons who lacked competence, save as they allowed their inattention to the circumstances of the contravention as a result of their misplaced reliance upon [Beekink]”. In these circumstances, Nicholson J stated that it was “sufficient to satisfy the punitive objective of the [relevant law] to be seen to be a personal deterrent and to be apparent as a deterrent to the general public against repetition of like conduct”. Nicholson J recognised that because they were solicitors, that necessarily suggested they would and should display a higher standard of care. The penalties set were at the lower range of the penalties.

The Full Federal Court, however, held that in the case of each of these two directors, the penalties were inadequate (see para134). The judges (Mansfield, Jacobson and Siopis) noted that at the very least, the penalties “had failed to take account of the seriousness of the directors’ breaches”. The penalties were doubled.

The more interesting question was the one of whether Beekink should have been disqualified. Nicholson J relied on the evaluation of the grant of disqualification in the judgment of Santow J in the leading case of ASIC v Adler ((2002) 42 ACSR 80). Nicholson J had been impressed by the fact that Beekink was a “person of exemplary character, and that he breached his duties because of his misplaced confidence in the ability of the employees of Clifton Partners”. He felt that Beekink would not re-offend and that he would be severely disadvantaged if he was disqualified. Disqualification would, in his view, have been “disproportionate to the requirements of either punishment or deterrence”.

In reaching his views, he was influenced by the character references provided by a number of people, the number of charities that Beekink had served on and his good works more generally.

Again the Full Federal Court disagreed with the judgment of Nicholson J. Justices Mansfield, Jacobson and Siopis believed that, despite the suggestion by Nicholson J that he did take into account the importance of deterrence as an object of sentencing, he had in effect ‘marginalised’ this consideration by failing to disqualify Beekink. In their view, Nicholson J had given too much weight to personal considerations affecting Beekink, without considering “that part of the protective nature of the order which is concerned with providing a deterrent to other persons involved in the management of corporations”. (at [91])

The court drew attention to the active role of Beekink in conferring the authority on Clifton Partners (at [93], [97]), to issue the prospectus. The judgment indicates, however, that general deterrence is of importance regardless of whether a director’s breach arises out of carelessness or of actual misfeasance. Their Honours remarked that “general deterrence was applicable to those who might be minded to adopt a passive role”, but that in any event, the trial judge had found that Beekink was not guilty only of inaction.

Considering the seriousness of Beekink’s conduct and the lack of proper explanation from him, coupled with the need to take into account the object of general deterrence, the court arrived at a 12 month disqualification for Beekink.

On the question of pecuniary penalty, the Full Federal Court noted: “The principal purpose of a pecuniary penalty is to act as a personal and general deterrent against the repetition of like conduct [and that] it should be no greater than is necessary in order to achieve this objective.” (at [115])

The court furthermore acknowledged that a disqualification order would have serious consequences. Balanced against this was the perceived need in recent years to impose higher civil penalties to reflect community expectations. The court noted at [120] that: “This is particularly so at a time when the commercial community demands ever greater financial rewards from the benefit of public office. The expectation of such rewards must be accompanied by an expectation of higher penalties when those in office slip from the standards imposed upon them under the law.”

Their Honours did note, however, that in this case the directors did not seem to expect large financial rewards. In consideration of this, the court arrived at a pecuniary penalty of $40,000 for Beekink. Their Honours commented that, had they not decided to impose a disqualification order, the appropriate pecuniary penalty would have been $80,000 to $100,000.

This decision reflects a tougher approach than the NSW Court of Appeal followed in the Vines case. It would seem that the time has come for the High Court to be involved in a major case on disqualification. This is particularly relevant at a time when there are an increasing number of cases being brought to the courts involving alleged breaches of duty.

Professor Bob Baxtprovides an overview of recent court decisions affecting the role and responsibility of directors.