Directors are under a continuing obligation to keep informed about the activities of a corporation (ASIC v Flugge).
On 15 December 2016, the Supreme Court of Victoria issued its judgment in the latest round of AWB proceedings in which ASIC commenced an action against the former Chairman of AWB Limited (AWB).
The case involved the payment by AWB of $223 million to Government of Iraq, disguised as transportation fees, in contravention of United Nations (UN) sanctions.
The Court found that it had not been established that the former Chairman knew that AWB was making payments to Iraq contrary to UN sanctions or that it was well known within AWB that the payments were not authorised by the UN and therefore a breach of s181 of the Corporations Act in this regard was not established
However, the evidence established that:
- the former Chairman had attended a meeting in Washington in March 2000 where an Australian trade commissioner told him the UN were investigating whether AWB was making improper payments to Iraq
- AWB’s managing director had informed the AWB board of the payments in mid-2000 and said they were authorised by the UN.
As a consequence, the former Chairman was found to have breached his duties as a director in contravention of s180(1) of the Corporations Act for failing to investigate the payments after the conversation with the Australian trade commissioner and the Court found that he had failed to make adequate enquiries about the propriety of the payment of inland transportation fees and as a consequence, failed to stop AWB engaging in improper conduct in paying the fees to the Government of Iraq.
The case reinforces the duty of a director to inquire. Directors are required to take reasonable steps to place themselves in a position to guide and monitor the company’s management and are under a continuing obligation to keep informed about the corporation’s activities.
The case follows a long line of authority that a director is not entitled to shut his or her eyes to what is going on around them, however if nothing has come to the director’s knowledge to awaken suspicion that something is going wrong, ordinary attention to the institution’s affairs is likely to be sufficient.
For advice on director and board liability and governance please contact our Corporate Advisory team.
The judgment can be found on the ASIC website.