Law of Business Association Company Law

Questions: 1.Whether Mr. Palmer can be examined by ASIC, for breach of section 184 of the Corporations Act, or not? 2.Whether Mr. Palmer is liable under section 588G of the Corporations Act, or not? Answers: 1. Rule: Section 184 of the Corporations Act, 2001[1] (CA), contains that a director or any other officer of the company would be considered to have committed an offence, when such persons are reckless, as well as, intentionally dishonest, and fails to discharge their duties, and exercise their powers, for the proper purpose[2], and in good faith, which is in the best interests of the company. Further, this section states that a director, an employee, or any other officer of the company would be considered to have committed an offence, if they use their position[3] in a dishonest manner, recklessly, or with the purpose of attaining an benefit for themselves, or for another person, in a direct or indirect manner, or for the disadvantage of the company. When a person, who had access to crucial information relating to the company, by being the director, officer, or employee of the company, uses such information[4] recklessly or with an intention of gaining an advantage for themselves, o r for someone else, in a direct or indirect manner, would be considered to have committed an offence, when such information is used dishonestly. In the case of Grimaldi v Chameleon Mining NL[5], it was established that there is no distinction among a shadow director, a de facto director or a formally appointed director. A director of the company, whether he is appointed as such or not, has the obligation to operate in good faith, as well as in best interests of the corporation. Such director has to apply the necessary diligence, along with care, and has to steer clear of all conflict of interests. Section 9 of the CA, defines the director[6] as an individual who is not truly appointed, although operates in the place of a director; or such an individual according to whose wishes or instructions, the directors of the company act. The Australian Securities and Investments Commission (ASIC) has been given the powers, under section 13(1) (a) of the ASIC Act[7], to investigate[8] any suspected contravention of the CA. These investigative powers include the power to investigate a director for the suspected breach of the duties of the directors as stated in this Act. The enforcement activities as well as the investigative activities of the ASIC ensure fair play by protecting the interests of the shareholders, creditors, and the corporations[9]. As per Section 422 of the CA, a receiver has to file a report to the ASIC when it seems that a member or an officer of the corporation has committed an offence, relating to the corporation[10]. For a liquidator[11], such report has to be filed under Section 533 of the CA. After receiving such a report from a liquidator or a receiver, the ASIC may, at its discretion[12] decide, whether or not, to investigate a matter under the Section 15 of the ASIC Act. As per Section 50 of the ASIC Act, the ASIC has the authority to commence and continue civil proceedings[13] in the name of the company, when during an investigation, the ASIC considers it necessary to be done in the public interest, as well as, in the name of a person after proper consent, in a written manner, has been obtained from such a person. In the case of ASC v Deloitte Touche Tohmatsu[14], the Federal Court emphasized on this discretion of the ASIC. In cases where the corporation fails, the powers of ASIC regarding the investigation and enforcement can be invoked. Such investigations are concerned with the determination of the knowledge of the directors, auditors or the officers of the company regarding the true state of the affairs of the company. Such investigations are carried with the association of the Commonwealth Director of Public Prosecutions (DDP) and the Australian Federal Police (AFP)[15]. When an investigation of carried in the matter of a suspected infringement of the corporations legislations[16], as stated in the Section 5 of the ASIC Act, as well as, the CA[17], or when a report is sent by a liquidator or a receiver, the ASIC prepares a final report[18] on such an investigation as per the section 17(1) of the ASIC Act. When such a report covers a serious contravention of the Commonwealth law, or the State or Territory laws, the ASIC forwards such report to the AFP, DDP or the National Crime Authority for further investigation[19]. Section 49 of the ASIC Act, gives ASIC the powers to lay down the charges against an individual, who has or who seems to have committed an offence[20] under the CA. As per this section, the ASIC prosecutes such offenders who can be dealt by way of a summary prosecution. However, when the offences are serious in nature, the DPP prosecutes in such circumstances. An intentional misuse of the position of a director of a company, in order to obtain financial gains; and the decisions of the directors to carry on the trading even when the corporation is insolvent, are some of the examples of serious offences[21]. ASIC and DPP have an arrangement, through which the DPP carries the prosecution of the serious offences. Section 49(5)[22] clearly states that the prosecution by ASIC, does not influence the operations of the Director of Public Prosecutions Act, 1983[23]. As per the arrangement, the ASIC can continue with the summary prosecutions, after laying down the charges, except for the serious offences. Application: Mr. Palmer was a part of the committee that permitted the expenditures, and he had accepted that he used email alias to communicate with the company[24]. The way Mr. Palmer ran the operations at the Queensland Nickel (QN), determines that he was a shadow director. The fact that Mr. Palmer owned QN through two companies, and that the sole director was his nephew, shows that he had control over the affairs of the company. This is because he was such a person, upon whose wishes or instructions, the directors of the company acted. He controlled the operations of QN through the two companies. So, he was a shadow director of QN. Mr. Palmer acted in a reckless manner which was not in good faith or in the interests of QN. He utilized the funds of the company for his benefits, not once but on various occasions. This holds him liable for a criminal offence, under section 184 of the CA. As per Section 422 of the CA, the receiver of QN would have to file a report with the ASIC for the apparent offence committed by the director of QN. In this case, ASIC can, upon its discretion, investigate against Mr. Palmer, for the suspected breach of the duties of the directors, under 13(1)(a) of the ASIC Act. When the charges have been laid down by the ASIC against Mr. Palmer, the DPP would prosecute these offences, being serious in nature. Conclusion: Being a shadow director, Mr. Palmer can be examined by ASIC for breach of section 184, of the CA. 2. Rule: Section 588G of the CA, states it as a duty of the director to prevent such trading which has the effect of making the company insolvent[25]. A person is considered to have committed an offence[26] when a company incurs a debt[27]; and such person was a director of the company at that time[28]; and as a result of the debt, the corporation becomes insolvent or was already insolvent at the instance of incurring such debt[29]; plus the director had suspected that the corporation was insolvent or would become insolvent; and the failure of such an individual to avert the corporation from incurring such liability, was dishonest. The offence covered under subsection (3)(a) attract absolute liability, as defined under section 6.2 of the Criminal Code, and the offences covered under subsection (3)(aa) and (3)(b) attract strict liability, as defined under section 6.1 of the Criminal Code. Application: QN was trading on January 18, 2016, even after it had become insolvent on November 27, 2015. It has already been established that Mr. Palmer was a shadow director of QN. So, the provisions of section 588G (3) are applicable on Mr. Palmer and this attracts strict liability on Mr. Palmer. Conclusion: So, it can be concluded that Mr. Palmer is liable under section 588G of the Corporations Act. Bibliography Articles/Books/Reports Russell Hinchy and Peter McDermott, Company Law (Pearson Education Australia, 2nd ed., 2009) ch 2 Cases ASC v Deloitte Touche Tohmatsu [1996] 753 FCA 1; (1996) 138 ALR 655; (1996) 14 ACLC 1,486; (1996) 21 ACSR 332 Grimaldi v Chameleon Mining NL (No 2) [2012] FCAFC 6 (21 February 2012) Legislation Australian Securities and Investments Commission Act, 2001 (Cth) Corporations Act, 2001 (Cth) Director of Public Prosecutions Act, 1983 (Cth) Others AEST, Was Clive Palmer a shadow director of Queensland Nickel?, The Conversation (online), 13 April, 2016 https://theconversation.com/was-clive-palmer-a-shadow-director-of-queensland-nickel-57642 Tom Middleton, ASIC's Investigation of Corporate Collapses, 2016 https://www.findlaw.com.au/articles/440/asics-investigation-of-corporate-collapses.aspx