In this case, the Federal Court has imposed personal liability on 3 directors of Vocation Limited (In Liquidation) (Vocation) under section 180 of the Corporations Act 2001 (Cth) (Corporations Act) on the basis that they caused or permitted Vocation to commit breaches of its continuous disclosure obligations and the misleading and deceptive conduct prohibitions. The case reflects ASIC’s focus on market disclosures and a growing trend for ASIC to use section 180 in a ‘stepping stone manner’ to seek orders against directors personally even where there are not otherwise direct liability provisions for directors in the Corporations Act.
The relevant contraventions of the Corporations Act 2001 (Cth) in this case arose from the following:
- an announcement which Vocation (a vocational education and training provider) made to the ASX on 25 August 2014. The announcement conveyed the impression that Vocation’s funding arrangements with the Victorian Department of Education and Early Childhood Development (DEECD) were operating normally despite the fact that the DEECD had withheld recent payments and was considering suspending the funding arrangements;
- a due diligence questionnaire completed by Vocation which formed the basis for a share placement in September 2014 that raised $74 million from investors. In the questionnaire, Vocation misstated the scope of the DEECD’s review into Vocation’s operations and the risk to future ongoing funding; and
- Vocation’s failure to disclose the DEECD’s withholding of funds, a matter which clearly would have had a material impact on the price of Vocation’s securities in the mind of a reasonable investor and which was not generally known in the market (within the meaning of the continuous disclosure obligations in the Corporations Act).
Under the terms of settlement reached between Vocation and DDECD, Vocation lost almost $20 million in government funding and its 2 main registered training organisations relinquished their funding contracts. The adverse DEECD review findings triggered a significant fall in Vocation’s share price, earnings and market value.
In a key ‘win’ for ASIC, Nicholas J in the Federal Court found that:
- Vocation breached its continuous disclosure obligations under section 674(2) of the Corporations Act and the ASX Listing Rules and also engaged in misleading and deceptive conduct under section 1041H of the Corporations Act; and
- three of Vocation’s directors were also personally liable for various contraventions of section 180 of the Corporations Act (to exercise due care and diligence) in causing or permitting Vocation to commit those breaches.
Nicholas J’s comments in relation to the liability of Vocation’s directors under section 180 are particularly instructive. His Honour affirmed that:
- the standard of care expected of directors is high – directors must still pay attention to, and be actively involved in, the company’s affairs, even in areas outside their primary expertise; and
- the ‘business judgment’ defence in section 180(2) of the Corporations Act does not apply where a director simply misrepresents a matter or omits to disclose something – that is because there is no specific action on a matter relevant to the business operations of the company.
The decision reflects a trend of ASIC instituting proceedings against individual directors even in cases where the company is the entity responsible for contravening a primary obligation imposed by the Corporations Act (typically in the areas of continuous disclosure and misleading and deceptive conduct). In each case, ASIC relies on section 180 of the Corporations Act as a ‘stepping stone’ to render directors personally liable in an indirect way – the argument being that a reasonable person in the position of the relevant directors would not, exercising proper care and diligence, have allowed the company to breach the Corporations Act.
ASIC has sought declarations of contravention in this case, along with pecuniary penalty orders and disqualification orders against the three directors. The directors have until 4 July to make submissions as to why they should be excused from liability on the basis of honesty and fairness considerations under sections 1317S and 1318 of the Corporations Act and bring other evidence as to declaratory relief and penalty.
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