HI6027 Business and Corporation Law For Australian Securities and Inve
Questions:
2. Discuss and critically ANALYSE the court/tribunal decision and the reason
Answers:
Introduction
The Victorian Supreme Court judge, Justice Robson, handed down the penalty judgment on August 09th, 2012, in the proceedings which were brought against Andrew Lindberg by the ASIC, i.e., the Australian Securities and Investments Commission. Lindberg was the ex-MD, i.e., Managing Director of AWB Limited who was claimed to have breached his directors’ duties. After an agreement was reached to settle the proceedings, this penalty judgment was awarded in ASIC v Lindberg [2012] VSC 332 (Jade, 2017). Through this judgment, the provisions with regards to the imposition of disqualification orders and pecuniary penalties were restated, as a result of the breach of provisions contained in the Corporations Act, 2001 (Cth) (Jacobson, 2012a).
The following parts contain a discussion over the case of ASIC v Lidenberg to understand which duties were contravened and the decision which was given by the court, through the penalty judgment.
ASIC v Lindberg (2012)
This case relates to the alleged contraventions on part of AWB with regards to a range of UN (United Nations) resolutions with regards to Iraq, which was a highly publicized event. Through these resolutions, the member states of the UN were called upon for the prevention of sale of commodities to Iraq, coupled with certain exceptions, which were based on humanitarian grounds and included food stuff. The hard currencies access were also sought to be denied to the Iraqi r
egime. OFFP, the Oil for Food Program was responsible for putting the sanctions in place, whereby the sale of Iraqi petroleum proceeds where paid in the escrow account of the UN. And the funds could be released from the escrow account only for the permitted commodities, which included food stuff. Under the OFFP, AWB was a major supplier to Iraq for wheat (Australasian Legal Information Institute, 2017a).
The contraventions which were alleged with regards to the UN resolutions were based on two issues. The first one was related to the payment of 10% as the trucking fee related to the wheat contracts to Alia, which was an intermediary company, which was passed to the government. Due to these actions of AWB, the Iraqi government was able to obtain hard currency. Further, the payment portion which was received by AWB for wheat was designed for the reimbursement of such payments. In simple words, the money from the escrow account of UN was being used for purposes which were other than making payment for the commodities which were permitted (Austin and Reynolds, 2012).
The second contravention was related to the contract that was entered by AWB with Tigris, which was a third party, for the recovery of debts amounting to $8 million for the wheat shipment to Iraq. This was done by AWB by inflating the wheat prices under the OFFP contracts, due to which, the payment was again made for purpose which was other than for the payment for commodities which were permitted, from the escrow account. Even though these contracts had been approved by the UN, the UN had not been informed about the increased prices or the purpose. This was in addition to the contract entered between AWB and Tigris, which wrongly described the recovered debt payment by the former to the latter as the service fees, along with the commission payment by the latter to the former as success fee. Under the OFFP, a range of investigations had been carried out with regards to the activities of AWB, and this included Project Rose, which was the internal AWB investigation, along with the UN IIC’s (UN Independent Inquiry Committee) external investigation (Austin and Reynolds, 2012).
These were coupled with the wide ranging proceedings which the ASIC brought forward against Lindberg, for the contravention of his duty of acting with good faith. After going through with a range of delays, plus the related applications, which included the ASIC applications for the amendment of the statement of claim, the parties initiated a long process in late 2009 for negotiating upon the settlement of actions. ASIC also initiated proceedings against certain other individuals, which included Paul Ingleby, who was the chief financial officer of AWB. These proceedings were, however, settled in another case of ASIC v Ingleby [2012] VSC 339, which is not being discussed here (Wyld, 2012).
Duties Breached
Both Lindberg and ASIC agreed upon the declaration of contravention being made by ASIC under the governing act, against the defendant with regards to the four limited, but particular circumstances, and the facts of these circumstances, where agreed upon between the two. The first one in this was the failure on part of Lindberg in making the necessary enquires with regards to the recovery of debt from Tigris amounting to $8 million from the escrow account through the medium of inflating the prices of wheat, when the same was being done without the approval ad knowledge of the UN. The second one was related to the failure on part of Lindberg in information the boards of AWB about Project Rose, which was limited to the documents examination which the company possessed and the existing employees’ interview; and that the ex employees who had the requisite information were not being interviewed (Austin and Reynolds, 2012).
The third contravention was related to Lindberg’s failure in informing the boards of AWB about the debt of Tigris which had been recovered through increased prices of wheat under the OFFP contracts and where the commission and success fee had been wrongly described. The last contravention was related to the failure on part of Lindberg in informing the boards of the company till 2005’s September that he had been made aware in 2005’s February by the IIC that Alia was being used to channel funds to the Iraq government and there was not exemption for the company with regards to the trucking fee. This was in addition to the failure in disclosing that the 10% kickback had been included in the contract prices (Austin and Reynolds, 2012).
With each of the conditions stated here, Lindberg agreed that section 180(1) of the Corporations Act, 2001 had been breached. Under section 180(1), a duty has been imposed over the directors and the other officers of the company to use their powers and authorities in a manner which depicts both care and diligence (Australasian Legal Information Institute, 2017b). This duty mandates that the powers have to be used and the duties have to be discharged in a manner which would be undertaken by a prudent person, who holds the same office and has the same duties and powers in similar circumstances (Federal Register of Legislation, 2017). In case the provisions of this section are not fulfilled, civil penalties are imposed pursuant to section 1317E of this act (Australian Government, 2017). This section allows a declaration of contravention to be made by the Court (Cassidy, 2006). After this, the pecuniary penalties can be sought after by the ASIC under section 1317G or a disqualification order can be sought pursuant to section 206C of this act (WIPO, 2015).
Lindberg agreed that as a CEO of the company, along with holding the post of MD of AWB, he had failed to discharge his duties and exercise his powers with the degree of care and diligence which was required. Further, which would have been applied by a prudent individual in case they faced the same circumstances in AWB by being its officer or director and held the office and responsibilities as were being held by Lindberg. An agreement was reached with regards to the contraventions not including dishonesty, moral turpitude or deliberate wrongdoing (Donovan, 2012). Furthermore, an agreement was also attained on the lack of casual link between the contraventions on part of Lindberg and the harm suffered. The role played by Lindberg in this whole case was that of monitoring, as well as, supervising (Austin and Reynolds, 2012).
It was mutually agreed between ASIC and Lindberg that a pecuniary penalty amounting to $100,000 would be imposed on Lindberg (Adams, 2012). Along with this, a disqualification order which would end on September 14th, 2012 was also imposed (Jacobson, 2012b). Holding the contraventions as serious, for the purpose of section 1317G, the pecuniary penalties were imposed (ICNL, 2017).
Decision of the Court
Even with the mutual agreement of the penalties and the contraventions, without the court order, the same could not be applied by ASIC. The question which was put before Robson J. was related to the contravention of section 180(1) on part of Lindberg, the seriousness of the contraventions, and regarding the appropriateness of making both pecuniary penalty and disqualification orders. Robson J was satisfied with regards to the contravention of section 180(1) and the same was held similar to Lindberg’s negligence in performance of his duties as being an officer and the director of AWB. Even the court upheld the lack of dishonesty, moral turpitude or deliberate wrongdoing on part of Lindberg. But Justice Robson upheld that there was a failure on part of Lindberg in performing his duties, as a prudent director or officer would in the given circumstances; and he also stated that the provisions contained in section 180 were of great importance (Austin and Reynolds, 2012).
With regards to the penalties, Robson stated that the breaches by Lindberg were of serious nature and that the penalties which were presented after mutual agreement between the parties, were within the permissible range, even though they were at the upper end of the range. A reference was made to the case of ASIC v Donovan (1998) 28 ACSR 500 by Robson J to deal with the context of seriousness. The lack of dishonesty, moral turpitude or deliberate wrongdoing on part of Lindberg was held as the reason for the absence of casual link between the breaches undertaken by Lindberg and the harm which AWB suffered. Though the admission of Lindberg and his knowledge of what seriousness is in such matters, due to his experience, made the admission significant. The court referred to the earlier authorities for the both the pecuniary penalty and the disqualification orders to not be solely for the purpose of protecting the general public but also acted as a general, as well as, specific deterrent. Hence, the penalties mutually decided between the parties, along with the disqualification order were upheld by Robson J (Austin and Reynolds, 2012).
Conclusion
The case of ASIC v Lindberg highlights that the directors who hold the position of CEO or of MD in the company, have to stay alert in their investigations with regards to possible wrongdoings or discrepancies, specially where the case was a high profile one, thus attracting high risks in the operations of business, which have the potential of resulting in serious harm for the company. Due to these reasons, the CEO of the company, who fails to meet the directors’ duties, can be held liable for such breaches, and ultimately liable to pecuniary penalties and disqualification orders.
References
Adams, M.A. (2012) Australian Corporate Governance. [Online] University of Western Sydney. Available from: https://www.law.hku.hk/aiifl/wp-content/uploads/2012/05/ppt-AusCorpGovernance-ADAMS-12Oct.pdf [Accessed on: 17/06/17]
Austin, R., and Reynolds, C. (2012) Minter Ellison Alert | ASIC v Lindberg – more on the duty of care and diligence. [Online] Minter Ellison. Available from: https://www.minterellison.com/publications/asic-v-lindberg/ [Accessed on: 17/06/17]
Australasian Legal Information Institute. (2017a) Australian Securities & Investments Commission [ASIC] v Lindberg [2012] VSC 332 (9 August 2012). [Online] Australasian Legal Information Institute. Available from: https://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/vic/VSC/2012/332.html?stem=0&synonyms=0&query=Lindberg [Accessed on: 17/06/17]
Australasian Legal Information Institute. (2017b) Corporations Act 2001. [Online] Australasian Legal Information Institute. Available from: https://www.companydirectors.com.au/director-resource-centre/organisation-type/organisation-definitions [Accessed on: 17/06/17]
Australian Government. (2017) Corporations Act 2001. [Online] Australian Government. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 17/06/17]
Cassidy, J. (2006) Concise Corporations Law. 5th ed. NSW: The Federation Press.
Donovan, S. (2012) Lindberg fined $100k over AWB Iraq kick-backs. [Online] ABC. Available from: https://www.abc.net.au/worldtoday/content/2012/s3564108.htm [Accessed on: 17/06/17]
Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Federal Register of Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 17/06/17]
ICNL. (2017) Corporations Act 2001. [Online] ICNL. Available from: https://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf [Accessed on: 17/06/17]
Jacobson, D. (2012a) ASIC v Lindberg (AWB) Update. [Online] Bright Law. Available from: https://www.brightlaw.com.au/asic-v-lindberg-awb-update/ [Accessed on: 17/06/17]
Jacobson, D. (2012b) ASIC v Lindberg: AWB Penalty. [Online] Bright Law. Available from: https://www.brightlaw.com.au/asic-v-lindberg-awb-penalty/ [Accessed on: 17/06/17]
Jade. (2017) ASIC v Lindberg [2012] VSC 332; 91 ACSR 640. [Online] Jade. Available from: https://jade.io/article/269532 [Accessed on: 17/06/17]
WIPO. (2015) Corporations Act 2001. [Online] WIPO. Available from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 17/06/17]
Wyld, R. (2012) An Update From Australia – AWB Wheat Kickbacks To Iraq Result In Sentences. [Online] FCPA Professor LLP. Available from: https://fcpaprofessor.com/category/andrew-lindberg/ [Accessed on: 17/06/17]
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