04 July 2019

ASIC v Vocation

This article was written by Miriam Kleiner.

On 31 May 2019, Justice Nicholas handed down his judgement in Australian Securities and Investments Commission v Vocation Limited (in liquidation) [2019] FCA 807.  The case concerned civil penalty proceedings commenced by ASIC against Vocation Ltd (In Liquidation) (“Vocation”) and some of its officers, Mark Hutchinson (CEO), John Dawkins (Chair), and Manvinder Gréwal (CFO).

This case emphasises the importance of directors challenging management on information being presented to the board and also demonstrates ASIC’s new approach to stepping stone liability.

The facts

In summary, Vocation is an ASX listed entity.  Its primary business was providing vocational education and training services.  Vocation had a number of funding contracts in place with the Victorian Department of Education and Early Childhood Development (DEECD) to provide these services.  The DEECD notified Vocation that it had concerns regarding how a number of courses were being run and withheld the payment of certain amounts to Vocation pursuant to the funding contracts.  The DEECD also directed Vocation to suspend any new enrolments. 

The Board determined at various times not to disclose the withholding of various payments and the suspensions.  When disclosure was made, that disclosure stated that the impact of the withholding and suspensions would not be material. This was based on information provided by management. 

Vocation then determined to undertake an underwritten placement.  Vocation disclosed that the purpose of the placement was to raise funds for acquisitions and in answering questions raised by the underwriter, minimised the significance of its dispute with DEECD. 

The decision

Justice Nicholas determined that:

  • Vocation contravened s 674(2) (Continuous disclosure--listed disclosing entity bound by a disclosure requirement in market listing rules) of the Act by failing to disclose certain information relating to various funding contracts to which certain of Vocation’s wholly owned subsidiaries were party in accordance with ASX Listing Rule 3.1;

  • Mr Hutchinson and Mr Dawkins contravened 180 (care and diligence) of the Act by causing or permitting Vocation’s contravention of s 674(2) of the Act;

  • Vocation engaged in conduct that was misleading or deceptive or likely to mislead or deceive in contravention of s 1041H of the Act by making an announcement made on 25 August 2014 which stated that the actions taken by the DEECD would not have a material impact on Vocation (“25 August Announcement”);

  • Vocation made representations that were misleading or deceptive or likely to mislead or deceive and that, by providing certain answers through a due diligence questionnaire to UBS (“DDQ”), Vocation contravened s 1041H (misleading and deceptive conduct) of the Corporations Act (2001) (“Act”);

  • Mr Hutchinson contravened s 180 of the Act by causing or permitting Vocation’s contravention of s 1041H in relation to the 25 August Announcement and the DDQ; and

  • Mr Gréwal contravened s 180 of the Act by causing or permitting Vocation’s contravention of s 1041H in relation to the DDQ.

In making the above decision, his honour made the following observations:

  • In relation to section 674 and Listing Rule 3.1:
    • the fact that an entity with an obligation to disclose may itself reasonably believe that information would not be expected to have a material effect on the price or value of securities, does not answer the question as to whether the material was in fact disclosable; and

    • the hypothetical class of persons to be considered in determining whether a reasonable person would expect the information to have a material effect on the price or value of the entity’s shares is any person (current or prospective investors) who invests in any securities (not just the securities of the entity in question).
  • Importantly, the business judgement rule is no defence to failing to comply with continuous disclosure obligations as decisions relating to continuous disclosure are not business judgements;

  • In relation to section 1041, a person may be found to have engaged in conduct that is misleading or deceptive or likely to mislead or deceive even though the person lacked any intention to mislead or deceive.  Likely means a real and not remote chance; and

  • In relation to section 180 and the relevant findings of breach:
    • A CEO must adequately inform himself as to the nature and scope of relevant business issues;

    • Management must provide the board with appropriate information to enable the board to discharge its duties but equally the board must ask/challenge management to provide appropriate information if the board is not receiving the right type or quality of information; and

    • Boards must analyse the information provided in a critical manner and challenge the assumptions or correctness of the advice provided.

Stepping stones

This was another case where ASIC used the “stepping stone” approach – that is, ASIC alleges that by exposing a company to a breach of law, the directors have breached their duty of care by failing to ‘prevent a foreseeable risk of harm to the interests of the company’.

In this case, ASIC alleged 3 “stepping stones” offences – that various directors caused the Company to breach sections 1041, 674(2) and 708A(10) of the Act.  Section 674(2) contains its own regime for pursuing directors who cause a company to breach that section, with a “reasonable steps” defence (ss674(2A) and (2B)).  However, ASIC chose not to rely on that section and to instead pursue the directors for a breach of section 180, which does not have a “reasonable steps” defence.  This was not noted in the reasons for judgement and it is not clear why ASIC chose to ignore a section clearly intended to apply to directors involved in breaches of s674(2), and instead proceeded under s180.

However, in another “stepping stones” case, ASIC announced on 25 June 2019 that it had commenced proceedings in the Federal Court against Mr Gary Helour and Mr Bradley Hingle, executives of Murray Goulburn, in relation to their involvement in MG Responsible Entity Limited’s breach of its continuous disclosure obligations.  In particular, ASIC is seeking declarations that Mr Gary Helour and Mr Bradley Hingle breached their obligation under both section 180(1) and section 674(2A) by not preventing MG Responsible Entity Limited’s breach of section 674(2). It will be interesting to see whether the executives seek to make out the “reasonable steps” defence in response to the alleged breach of s674(2A), and whether that has any impact on the court’s consideration of the alleged breach of s180.

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