Securities Investments Commission: Vines v ASIC (Case Study Sample)

VINES V ASIC (2007)
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Table of Contents TOC \o "1-3" \h \z \u 1.0 Case introduction PAGEREF _Toc482979439 \h 32. Outline the duties/responsibilities breached and explain why PAGEREF _Toc482979440 \h 43. Discuss and critically analyse the court decision and the reason PAGEREF _Toc482979441 \h 54.0 Conclusion PAGEREF _Toc482979442 \h 7References PAGEREF _Toc482979443 \h 8
1.0 Case introduction
Directors have enormous powers in the running of their companies, and they influence the conduct of their companies since they are involved in decision-making process. Due to their exceptional position of authority, directors are lawfully viewed to have a fiduciary relationship with the companies they lead. Therefore, they are subject to certain duties that arise from this relationship (Baxt, 2012: 118).
The fact about the case as explained by Farrand (2007:1) states that Geoffrey Vines, a chartered accountant and an experienced auditor was employed by GIO Australia Holdings Limited (GIO) as the Chief Financial Officer in 1995. In 1998 AMP limited insurance announced a hostile takeover for the shares held by GIO. Since it was hostile takeover, the board of GIO resisted the takeover.
GIO in December of 1998 presented its financial report that contained profit projection for the financial year of 1998-1999. In this report a projection of AUD$80 million was included for GIO Re, which is a division of the GIO ltd. This profit projection was considerable amount in a view of a hostile takeover fight. Later in September 1999, Hurricane Georges struck the US Virgin Islands, parts of Gulf of Mexico and Puerto Rico causing a lot of damage. As a result of this hurricane, GIO Re was liable to considerable claims (Farrand (2007:1).
Accordingly, (Australian Securities & Investments Commission) AISC took this matter to the courts where it started civil penalty lawsuit against Mr. Vines together with other two executive directors. In regard to the financial report, AISC claimed that Mr. Vines had breached section 232 of the corporate law. The main argument about the case was rationality of including $80 million in profit projection in view of the exposure to GIO Re after Hurricane Georges.
In his ruling the Judge Austin found that Mr. Vines as the Chief Financial Officer (CFO) breached four different provisions of the Corporate Law when he failed to disclose appropriate information to GIO. Yet, he was required to disclose that information. According to the judge, the Mr. Vines was in contravention of section 232 (4) of the corporate law as argued by the AISC. Accordingly, the court ruled that Mr. Vines be fined $100,000 and at the same time disqualified from holding his position for a period of three year (Farrand, 2007:1). In his defense, Mr. Vines sought relief based on section 1318 of Corporation Laws which underlines that the court should not hold a person liability in cases where the person acted in an honest way. However, the court dismissed this plea when giving out its ruling.
2. Outline the duties/responsibilities breached and explain why
Directors govern their companies as behalf of the stakeholders of those companies. Baxt (2012: 118) underlines that the Corporation Act 2001, stipulates in section 198 A (1) that directors will manage the business of the company. Accordingly, all each director has particular basic legal responsibilities and duties. As such, there in the above case of Vines v ASIC (2007), Vine, breached some duties.
Under the Corporation Act 2001, Mr. Vine breached the care and diligence responsibilities spelt under section 180. This duty requires that the director should observe business judgment rule when reaching business judgment and he/she ought:
* Make judgment based on good faith and for suitable objective
* Avoid material personal interest when making the business judgment
* Get informed about the matter under judgment to the level that they can reasonably to be suitable
* Reasonably believe that the business judgment is the best for the company.
More so, Loughrey (2014: 998) explains that the Corporation Act expects the directors together with other company officers to apply power they have and perform their duties and responsibilities in good faith, for proper motive and for the best interests of the company. Accordingly, the Act prohibits them from inappropriately using their position in the company to gain undue benefits themselves, to another person, causing damage to the company. These provisions result in civil obligation that has to be observed by the directors. Failure to observing this regulation could result in penalty provided in the Act.
According to section 180, under care and diligence duty the directors are expected to act with great level of care and diligence expected from a reasonable person when performing their roles. (Comino, 2014: 229) Indeed, in a recent case of ASIC v Healey & Ors [2011] FCA 717, duty of care was stressed in regard to approving financial statements. This case is similar to the Vines v ASIC (2007) hence underlines the manner in which Vine breached the duty of care by not carefully examining the financial report that was presented to him. In addition, duty of care can be breached by causing a corporation to get into risky business transactions without the possibility of benefiting the corporation. A breach also occurs where the managing director does not inform the board of directors of issues which certainly should have been made known to the directors. This is what happened with Mr. Vine has he did not provide critical information to the directors on the financial matters that were clearly necessary to be passed to the directors.
Another duty that was expected of Mr. Vine is good faith. Under this act, the directors are expected but the best interests of the company in their actions and this include avoiding conflict of interest and disclose and manage conflicts in case they occur. Accordingly, this entails duty of fidelity and trust (fiduciary duty) (Liau, 2014:181) Whereas it can be argued that Mr. Vines observed the duty of good faith, the fact that the court decline is honesty defense show that he breached this duty but not performing is fiduciary duty.
3. Discuss and critically analyse the court decision and the reason
The case of Vine v ASIC underlines the statutory duty of care and diligence, which demands that the directors and though senior officers have to apply their powers when performing their duties in a way that a reasonable person. The fact that Mr. Vines failed to investigate on the report he received, which he presented to the board, he did not act like a reasonable person. Indeed, the judge in his ruling observed that the Mr. Vines had special skills that required him to show a certain level of care, but he failed. This agrees with the court’s ruling that observed that Mr. Vines was in contravention of section 232 (4) of the Corporation Act
It was important that Mr. Vine should have carefully considered disclosing the material information that he knew. The court found that in each of the four cases, Mr. Vine had acted in a way that prevented disclosing material information. As such, the failure by Mr. Vine to provide material information to the directors of the company led to them making decision without significant facts that were not provided by Mr. Vine.
The court as well held Mr. Vine accountable for depending on another top manager who gave him inaccurate financial reports. That top manager was in charge of operational duty in the matter that was before the court. Nonetheless, the court held that Mr. Vines had the responsibility of investigating reports he received for him to be satisfied through his individual investigation that is necessary. The court held that the many responsibilities of Mr. Vine, related pressures, and huge workload he had, was not enough reason for him to fail to discharge his duties as expected. This ruling also underlines the importance of section s190 under Corporation Act 2001 that requires directors to make decision based on reasonable grounds (Austin 2012).
Mr. Vines failed to uphold due care and diligence under section 180 of Cooperate law, by misleading the board of directors or providing insufficient disclosure of material information to the board (an offense under section 190). Indeed, the board was depending on him as a professional in that area to provide proper information, but Mr. Vine provided defective disclosure and this touched on matters within his personal knowledge. He therefore, failed to provide accurate and timely disclosure to the board on all material matters. The decision reached by the court that found Mr. Vine liable is a clear reminder to senior officers of consequences they will face when found to have breached the statutory duty of care and diligence.
The case as well underline that honesty alone is not enough to justify relief from lack duty of care. Just like in this case, in another case of Williams v Scholz the judge ...