Supreme Court Ruling Refers Directors to ASIC

Justice Robert McDougall recently handed down his judgment in proceedings brought by Resource Equities Limited (REL) against two former directors. The judgement puts Directors on notice as in addition to imposing civil penalties under the Act, the courts can refer matters to ASIC and criminal proceedings may be considered.

Case summary

REL alleged that the directors:

• grossly overpaid themselves
• made improper unsecured loans to their business associates
• lost a significant sum of money from a $2.5 million loan to a related technology company in which both directors had material interests.

REL also alleged that the directors’ failure to act in accordance with their duties was a significant cause of REL’s financial difficulties and a factor which led to REL being forced into administration. On that basis, REL sought orders that the directors indemnify or compensate REL for the losses incurred during their directorship and which came about as result of the directors’ alleged breaches.

In a damning judgment, Justice McDougall found the directors guilty of gross breaches of their statutory duties. His Honour also found that the directors:

• were not credible witnesses and that their evidence was marked by persistent evasion and fabrication
• did not act in good faith or in the best interests of REL during the term of their directorship
• misused their positions to obtain advantages for themselves or their associates and cause detriment to REL.

REL sought an indemnity costs order which was the subject of the second judgment by Justice McDougall. On that application, the directors argued that any orders for indemnity or contribution of losses should be made subject to s 35 of the Civil Liability Act (NSW) (2002) (CLA), which limits liability to an amount reflecting a just proportion of the overall loss, having regard to the extent of the directors’ overall responsibility for the loss.

His Honour rejected that argument on the basis that the CLA did not apply to offences under the Act and he made orders that the directors pay in excess of $2.2 million in indemnities or compensation for their breaches. His Honour also awarded indemnity costs in favour of REL and found that in light of the culpable nature of the breaches and having regard to the public interest, it would be appropriate for the Australian Securities and Investments Commission (ASIC) to consider possible criminal proceedings against the directors.

Implications

The REL case is unique in that it was brought by a company subject to a Deed of Company Arrangement. More importantly, the case:

• shows that companies can make claims against former directors and seek monetary compensation for losses incurred during their directorships, if breaches of duties are established
• reinforces the fact that if breaches of duties are established against company directors, the Courts can and will impose orders requiring the directors to pay indemnities or contributions towards losses incurred by companies
• puts directors on notice that in addition to imposing civil penalties under the Act, the Courts can and will refer matters to ASIC and request that consideration be given to possible criminal proceedings against directors.