The article from Weekend Australian (1/06/2019) by Ben Butler “Dawkins faces $1m fine and ban” reveals how directors of Vocation Ltd (In Liquidation) have been found to breach their statutory duties. Vocation Ltd, delivered vocational training under contract with Victorian Department of Education and Early Childhood Development (DEECD). Concerns were raised by DEECD in July 2014 about Vocation’s management of contracts. Vocation announced the contracts are not suspended even though payments were withheld by DEECD. Vocation didn’t release this material information to ASX until October 2014 at which point it surfaced that Vocation had lost government funding worth $20 million which was its major source of income. The serious nature of materiality lead to significant fall in share price and market value. This lead to appointment of Liquidators in 2015. ASIC had initiated proceedings against Vocations and its three directors in 2016.
This article focuses on topics of Directors Statutory duties, Continuous disclosure obligations, business judgement rule and duty of Care and diligence.
The main issues from the article are:
- Vocation hasn’t informed the ASX about the status of their contracts with DEECD. It hadn’t declared that it lost $20 in funding from DEECD and lost contracts of its subsidies which meant it was not disclosing information which potentially affects it share price and market value.
- Vocation made an announcement to ASX that its contracts and funding “have not been suspended and are continuing” despite the DEECD withholding money which was misleading.
- The directors of Vocation failed to take any actions that could have prevented the misstatements to the market by the company . If the directors were unaware of the misleading statements it means that they are not proactively involved in issues related to the company’s business matters which means they could be failing their duty of care and diligence and even recklessness for not taking full responsibility of the company.
S674(1) As vocation is a listed company it is obliged to notify public (investors) of “specific events and matters” for making an informed decision. S674(2) relates to the specific type of information that should be made available such as things that a reasonable person would expect to have “material effect” on the companies share price and valuation if the information was openly available. This meets company’s disclosure obligations (s674). As soon as Vocation was made aware of concerns regarding its operations and DEECD withholding payments, it withheld the information from ASX breaching ASX Listing Rule 3.1 which is part of s674(1) because a reasonable person would expect that any changes in revenue will have a material effect. s674 plays an important role in protecting the market and investors as it makes sure important information is available to the investors to make informed decisions. S1041H was contravened as issued a statement that contracts “have not been suspended and are continuing” and actions by DEECD won’t have material effect on company contrary to DEECD withholding its incoming funding. This meant that they engaged in conduct that is misleading or deceptive. Investors invested $74 million in Vocation on September 2014 based on its previous statements. Vocations market value declined in half after revealing the full extent of its contracts with DEECD and investors lost money on their $74 million investment. Had Vocation been in complying with s674 and s1041H, investors would have waited until company resolved its issues with DEECD before raising money for Vocation. They relied on information given by the company, as a result lost their investment on the company. Directors are also facing up to $1 million fines and bans as s674 is civil penalty provision and an offence.
Under CA s180(1), directors “must exercise their powers and duties with degree of care and diligence that a reasonable person would exercise” if they were a director. As the wording of the law is subjective, precedent such as Daniels v Anderson and ASIC v Citrofresh International Ltd become the guidelines for similar disputes. In Daniels v Anderson, the court of appeal found that directors need to understand their nature of duty they need to perform and be familiar with business of the company.
Vocation revenue was primarily from government funding, any changes to funding will have direct material effect on the company as such it was director’s responsibility to know about the issue instead they relied on other management official. In ASIC v Citrofresh International Ltd, the company contravened s1041H, and “subsequently triggered the ‘stepping stone’ approach in which directors are found to breach their duty of care and diligence in s180(1) for failing to ensure that the contravention did not occur”
. Based on this judgement Vocation’s directors are liable for contravention of s674 and s1041H, all three directors have breached their duty of care and diligence. Stepping Stone approach is important as it makes sure that directors are held liable for their company’s actions. Without the stepping stone approach companies could contravene the corporations act, pay financial fines and directors responsible for the company’s action face no consequences which won’t deter it from happening again. In this case, investors were negatively affected by Vocations contraventions of CA and its directors were held liable for those actions. Directors could possibly use s180(2) business judgement rule to defend themselves about withholding information, but as releasing ‘material effect’ information was a compliance issue (ASX Listing Rule 3.1), the defence doesn’t apply on precedent of ASIC v Fortescue Metals
In conclusion there are steps that directors need to undertake to make sure that the company and themselves are acting within the law. As part of their duties Directors must be proactively involved about its company’s matters and ensure that information received from other management officials are accurate and reliable and make their own enquires. Directors must also make sure their company is not contravening any sections of the corporation’s act as they will held liable under s180(1) duty of care and diligence.