Background

The ASX announcements are something which has to be made in a careful manner. This is particularly important because a misleading ASX Announcement can result in the prosecution of the listed entity by the ASIC, along with the officers of the entity, who authorized the made announcement. The Corporations Act is another important matter which has to be considered by the companies. This act presents different duties which have to be followed by the key personnel of the company, and included in this is the duties set out under Part 2D.1 of this act. Where this is not done, the result is imposition of civil and criminal liabilities on the relevant person breaching their duties (CCH Australia, 2011).

An example where both the above mentioned aspects were merged is the case of ASIC v Padbury Mining Limited [2016] FCA 990. This case had both misleading ASX announcement and breach of director duties (Narushima, 2016). This discussion presents an analysis of this case, in order to show how these beaches took place and the decision given by the court in this matter.

Constant attempts were being made by Padbury Mining Limited since last some time, where the attempts were related to the development of a deep water port, located in Western Australia’s Oakajee, along with an associated railway network (ABC News, 2016). A victorious announcement was made by Padbury on April 11^th, 2014 at 9:40 am, where it was stated that the company had attained funding of $6billion in a successful manner for the project. Though, this announcement failed to make adequate disclosures regarding the conditions which were precedent, as the funding was dependent on it, and also failed in identifying the parties who would be providing this claimed funding. These precedent conditions help a lot of importance. This is because the conditions precedent required the company to get a bank guarantee which could match the funding which had been provided by the proposed funder. It came to be known later on that the company did not have the ability of doing so (Levy, 2016).

Before the announcement was made, the last sale price was $0.02 for each of the share. Once the announcement was made, the shares were traded at the value of $.0.045 and were traded in the range of $.0.032 and $.0.052 for each share. The total numbers of shares traded were 209,366,987. On the day of the announcement, at 2:15 pm, the shares went in a trading halt based on the request of the company. This was due to the announcement regarding more details of funding being pending. Till April 29^th, 2014, the shares were in suspension or in trading halt. This was the date on which the announcement regarding the funding parties had terminated their agreement. As a result of this, the project never got the funding which was needed and this led to the project never being constructed. This led to the company being prosecuted by ASIC, along with two of the directors, who had been involved in the making of the first announcement being prosecuted by the ASIC. These two were the chairman, Terence Quinn, and the managing director, Gary Stokes (Levy, 2016).

Breach of Director Duties

In the introduction portion of this discussion, it was stated that the directors of the companies have been given certain responsibilities and duties by the Corporations Act. Amongst the different duties is the one covered under section 180(1), which provides the duty of care and diligence. As per section 180(1), the directors or the other officers of the company are required to exercise their powers and have to discharge their duties, in a careful and diligent manner (ICNL, 2018). This has to be done as would be done by a reasonable individual, where this individual:

• Was an officer or the director of the company in the situations faced by the company; and
• Was holder of the office as was held by and also had the same responsibilities in company, as the officer or the director held (Austlii, 2018).

This section provides that a breach of this section would attract civil penalty covered under section 1317E of this act. Section 1317E relates to the declaration of contravention. Upon the court becoming satisfied that the civil provisions have been breached, they make a declaration of contravention. One of the civil penalty provisions is the director/ officers duties. Under subsection 2 of this section, the contents of declaration of contravention have been covered. This section also provides that once a declaration is made, the ASIC can seek a disqualification order as per section 206C of this act, or they can seek pecuniary penalty order as per section 1317G (Federal Register of Legislation, 2018).

In this case, the basis of claim of ASIC regarding the contravention of the director duties was related to the misleading and deceptive announcements made by the company, which were a contravention of section 1041H of this act. As per the ASIC, the Quinn and Stokes had failed in discharging their duties in a diligent and careful manner, which were required on their part, which led to the company making funding representations which breached section 1041H. This was also due to the breach of section 672(2) of this act, which was related to the continuous disclosure requirements, as the company had not notified the ASX regarding the announcement that there had been conditions precedent to funding, along with the parties not being identified, which were responsible for providing the required funding (Narushima, 2016).

This case saw the companies admitting to the contraventions of the ASX continuous disclosure requirements in their failure in disclosing the conditions precedents and in identifying the individuals who had the responsibility of providing the funding. They also admitted that this information had the possibility of influencing the individuals who commonly invested in the securities in making the decision regarding whether to acquire shares in the company or not; and that a reasonable individual would have the expectation that the information had to have major impact on the value or price of the shares of the company, where the same was available in a general manner (Narushima, 2016).

ASIC Claims of Contravention

Both the directors had admitted that through the authorization of the ASX announcement release, there had been a contravention of section 180(1) of the Corporations Act, regarding the director duties. This was due to their knowledge regarding the announcement made by them would be harmful for the company. They knew that by doing so, the company would be contravening the continuous disclosure obligations. Further, there was a misleading or deceptive nature of the announcement. This meant that the same would be harmful to the reputation of the company, which had an adverse impact over the ability of the company in procuring the funding for developing the project. This resulted in the company being exposed to regulatory action and litigation (Narushima, 2016).

In this case, the parties tendered a minute of consent orders and an agreed upon statement of facts, where the proposed orders for the submissions of each of the parties were made. In this case, Justice Siopsis of the Federal Court of Australia established that there had been a contravention of section 1041 H (1) of the act as the announcements made by the company had been deceptive and misleading. Further, this had likelihood of misleading or deceiving as the funding was entirely dependent on the conditions precedent being satisfied, in context that the company was not in a position of satisfying these at the time when the announcement had been made. Siopsis J further stated that the company had also been in breach of the continuous disclosure obligations which were covered under section 674(2) of this act as there was no notification to the ASX regarding the announcement covering conditions precedent to the funding and also by failing in identifying the parties responsible for providing the funding. The judge further stated that both Quinn and Stokes had been in breach of section 674(2) of the Corporation Act, as they had been involved in the company breaching this very section. Lastly, Justice Siopsis provided that both Quinn and Stokes had been in breach of section 180(1) of this act as they did not discharge the duty which they owed to the company, of being diligent and careful in their work, as would have been done by a prudent individual in their similar situation through the authorization or otherwise for approving the announcement release. This caused the company in making the funding representation, which was in breach of section 1014H of this act (ASIC, 2016).

Court’s Decision

In context of the director duties being contravened in this case, which have been covered under section 180(1) of this act, Justice Siopsis noted that for both of the directors, there had been an admission of different aspects. This included that while they had approved the announcements, they had to be reasonably aware that where the company made this announcement, this would be deemed as misleading or deceptive and that there would be a failure in disclosure of information. They clearly knew about this being possibly harmful for the company, owing to the risks associated with these breaches, and where these would be revealed, they would be harmful for the reputation of the company (Austlii, 2016).

The judge also took into consideration the knowledge of the directors in the need of discharging their duties in a proper manner, for satisfying the conditions laid down under section 674(2) of this act; and they knew that the announcement made by the company clearly lacked this. The directors had given the authorization for releasing the announcement, which meant that they should have known, amongst the various other things, that the shareholders agreement had the guarantee conditions precent. This meant that the directors knew about the company not being able to procure the guarantees and that the company had failed in getting a third party verification regarding the capacity of the funding party, for the purpose of fulfilling the funding obligation (Federal Court of Australia, 2016).

This led to Justice Siopsis passing the order that both the directors of the company, i.e., Quinn and Stokes had to be disqualified from managing the company for three year duration. When this order was passed, the judge noted that this case was not one related to dishonesty on part of Quinn and Stokes. This led to the judge emphasizing that both of them had recognized that their conduct in the approval of announcement was of critical significance to the future of the company and also in context of the market perception. They knew that this was a major departure from the standards which were expected from the public company’s directors in similar situations. Apart from the fact that both of them had given their full cooperation to the ASIC from the initial stages, nothing else was one. Had they not recognized the seriousness of their exhibited contrition and conduct, the judge would have awarded a disqualification period of five years. The judge also ordered both of them to pay a pecuniary penalty of $25,000, along with paying the costs of proceedings to ASIC, which stood at $200,000 (Narushima, 2016).  

Conclusion

Thus, this case involved ASX announcement being made by the company, which was misleading and deceptive. This led to the ASIC initiating a case against the company and its directors. The directors were particularly made liable for breaching their director duties, as they failed in showing diligence and care in performing their role in the company. The directors even agreed to these breaches, in addition to agreeing that they had not made the relevant disclosure requirements and that the company had made misleading and deceptive announcement. This case acts as a salutary reminder of ensuring that the companies prepare the ASX Announcements in a careful manner. Not doing the same not only results in pecuniary penalty being imposed but also in the directors being disqualified from managing the companies.

References

ABC News. (2016) Padbury Mining directors fined over ‘misleading’ $6b Oakajee announcement. [Online] ABC News. Available from: https://www.abc.net.au/news/2016-08-19/padbury-mining-directors-fined-and-banned/7768184 [Accessed on: 15/01/18]

ASIC. (2016) 16-263MR Padbury Mining directors banned for three years due to ‘Oakajee Funding Secured’ announcement. [Online] ASIC. Available from: https://asic.gov.au/about-asic/media-centre/find-a-media-release/2016-releases/16-263mr-padbury-mining-directors-banned-for-three-years-due-to-oakajee-funding-secured-announcement/ [Accessed on: 15/01/18]

Austlii. (2016) Australian Securities and Investments Commission, in the matter of Padbury Mining Limited v Padbury Mining Limited [2016] FCA 990 (19 August 2016). [Online] Austlii. Available from: https://www.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/FCA/2016/990.html?context=1;query=Padbury%20Mining%20Limited;mask_path=au/cases [Accessed on: 15/01/18]

CCH Australia. (2011) Australian Corporations & Securities Legislation 2011: Corporations Act 2001, ASIC Act 2001, related regulations. Sydney, NSW: CCH Australia.

Federal Court of Australia. (2016) Australian Securities and Investments Commission, in the matter of Padbury Mining Limited v Padbury Mining Limited [2016] FCA 990. [Online] Federal Court of Australia. Available from: https://www.judgments.fedcourt.gov.au/judgments/Judgments/fca/single/2016/2016fca0990 [Accessed on: 15/01/18]

Federal Register of Legislation. (2018) Corporations Act 2001. [Online] Federal Register of Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 15/01/18]

ICNL. (2018) Corporations Act 2001. [Online] ICNL. Available from: https://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf [Accessed on: 15/01/18]

Levy, R. (2016) Implications of Padbury’s Misleading ASX Announcement. [Online] Herbert Smith Freehills. Available from: https://www.herbertsmithfreehills.com/latest-thinking/implications-of-padbury%E2%80%99s-misleading-asx-announcement [Accessed on: 15/01/18]

Narushima, H. (2016) Corporate Advisory Update – September and October 2016. [Online] Gilbert Tobin. Available from: https://www.gtlaw.com.au/insights/corporate-advisory-update-september-and-october-2016 [Accessed on: 15/01/18]

WIPO. (2015) Corporations Act 2001. [Online] WIPO. Available from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 15/01/18]