Overview of the Corporations Act, 2001

The Corporations Act, 2001 is an important piece of legislation in Australia through which the lifecycle of the corporations is governed and it acts as a guide on what can be done in an organization and the manner of doing the same (Cassidy, 2006). An important part of this legislation is the duties which are imposed on the directors of the company, in context of applying good faith, using the information of the company in a proper manner, and working in the best interest of the company, amongst the other things (Baxt, 2007). There are different criteria laid down under this act where a person can be deemed as a director, thus, making these duties apply on the individual being deemed as a director pursuant to this act (Paolini, 2014). The case of Idylic Solutions Pty Ltd – Australian Securities and Investments Commission v Hobbs [2012] NSWSC 1276 is the focus of this discussion. This shows the measures which courts adopt for recognizing the people holding de facto director post. It also is an example for the directors breaching their duties (Plessis and Koker, 2017). 

In this case, action was brought by ASIC against 15 defendants as they had indulged in the promotion of the un-regulated investment schemes in which the money which was raised amounted to $AUD50 million and the same amount had been invested in offshore funds. This case had allegations being made by the ASIC in 14 of the schemes. They stated that there had been selling of the investments made to unsophisticated investors. This was possible through the investment meetings and seminars which had been convened by the promoters. This was particularly because these individuals lacked the requisite license (Carter Newell Lawyers, 2013).  

Particularly for the context of this case, David Hobbs had started marketing in 2002 in thee Australia investment funds which he had held offshore. He targeted the investors of the nation, along with self managed superannuation funds in such a successful manner that by the year of 2008, huge amount had been invested in the funds for the 14 individual investment funds in nations like the Turks and Caicos Islands, United States, Anguilla, the Bahamas, Vanuatu, Hong Kong, and New Zealand. The false representations were given to the Australian investors regarding the scheme at financial education presentations or the investment ones, where it was stated that the offshore investments had been lawful; there was no risk for losing the money being invested as this was guaranteed through capital; the return on investment would be nearly 4% for each month; and the redemption of investments could take by giving a notice after certain lock in period (Cordato, 2013).

The Case of Idylic Solutions Pty Ltd – Australian Securities and Investments Commission v Hobbs

Corporations Act, 2001 imposes different duties on the directors and the officers of the company. But before these duties are imposed on a person, the person has to be shown as to be the director of the company (Latimer, 2012). Under section 9 of this act, any individual who is not appointed in validly or per se as a director of company would be deemed as a de facto director; as they acted in the manner as if they held this position; and where people act on the wishes or instructions of such person, the person would be deemed as a shadow director of the company (Austlii, 2017).

Once a person is established as the director of the company, the duties covered under Part 2D.1 of this act, becomes applicable on the person. Under section 180 of this act, the directors of the company have the duty of applying care and diligence when they use their powers and fulfil their obligations (WIPO, 2015). This has to be done in a manner as would be done by a prudent person holding the same office, having same powers, and facing the same circumstances as the director of the company. Under section 181 of this act, the directors have been imposed with the duty off using their powers and discharging their duties for proper purpose, in the best interest and good faith of the company. Under section 182 of this act, the directors of the company are barred from using the position in the company for their personal or someone else’s personal benefit, or for the detriment of the company (Federal Register of Legislation, 2017).

Where any of these civil obligations are not met, the directors are liable under section 1317E. As per this section, the court has the power of making a declaration of contravention in which it is clearly stated that the director breached the duties and the reasons for the same. Once the court passes this declaration of contravention, the ASIC gets the power of applying for disqualification order against the director based on section 206C of this act, or to seek pecuniary penalties based on section 1317G of this act (ICNL, 2017). 

In this case, sections 180 and 181 were deemed to have been contravened by Hobbs due to the corporation being placed in a position which led to the violation of several statutory provisions. The key requirement in this case was for the company to go forward with the investment scheme by taking the relevant licenses and also by taking the requisite steps in making certain that the company was conducting its business in the jurisdictions in a lawful manner. But the directors failed in doing so. No care or diligence, or working for the best interest of the company was present in this case. Due to the misrepresentations made to the Australian investors, again these two sections were breached as the directors caused or permitted the company to go forward with the issuance of such misrepresentations (Austlii, 2013).

Director Duties under the Corporations Act, 2001

Causing the corporation to be engaged in such conduct which resulted in violation of law involved the failure of director in exercising reasonable skill and care, along with the failure in acting in the best interest of the company as per the meaning given under section 181 of this act. Hobbs breached section 180 in context of the financial services business being carried on without the requisite license and allowing the participation in the operating of unregistered managed investment scheme, which exposed the company to penalties (Austlii, 2013).

Section 182 was particularly breached due to the defendant, i.e., Hobbs, causing the detriment to the company, along with the breaches related to misrepresentation. The unlawful promotion of unregistered schemes was seen as an addition to the misconduct of the defendants. Section 182 was also breached due to the evidence which showed the payment of benefits from the investors’ pooled funds to the associated ones with one or more schemes, or for the clear benefit of the defendants. Again, payments of money in between the funds for enhancing position of funds or payments of moneys from the pooled funds for meeting with the expenses related to, or off Hobbs, was clear breach of section 182 (Austlii, 2013). 

The first and foremost step undertaken by the court was to hold if Hobbs was to be deemed as the director of the company. After taking into consideration the statutory definitions of the officer and director based on the governing act, it was concluded by the court that a de facto director or a show director includes any such individual who had not been appointed in a valid manner as a director or acts in the position of the director. This includes a person who makes or participates in the decision making which affects the substantial or entire part of the business of the company and who holds the capacity of majorly affecting the financial standing of the company or as per the instructions or wishes of such persons (Austlii, 2013).

In holding Hobbs as a director, the court used the test which had been provided under the case of Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296, particularly for clarifying on what has to mean by a person acting in position of director. This case provided that a person could be deemed as a director even when they have not been appointed to this position at any point of time; there needs to be contemplation of shadow director to some degree, to be carrying on the work of company’s director. In an alternative manner, it has to be shown that the shadow director was acting in role/ roles within the company, along with performance of functions which one would be reasonably expected to be performed by company director based on the situation. This case also provides that there is a possibility for the individual’s role to evolve over time in one of de facto and a person can also be a de facto director for a certain period of time; and lastly, the titular names like consultant cannot deny the fact that a person is a director or not. Thus, this case denotes that the role of a person has to be looked in its substance to hold a person as de facto factor (Carter Newell Lawyers, 2013).

Contraventions and Liabilities under the Corporations Act, 2001

In this case, the court held that Hobbs had been the mastermind behind the scheme which had been presented and had the effective control over all the funds of the scheme. This was in addition to the ample amount of evidence to show that improper payments were made out of fund monies which included ponzi payments, the payment of private expenses of Hobbs, and the payments to the family of Hobbs, with some scheme administrators. As a result of these issues, and the points covered in the previous segment, Hobbs was deemed to have contravened the director duties, which led to the court passing the declaration of contravention (Austlii, 2013). 

Thus, disqualification orders were passed against Hobbs due to his involvement in operation of unregistered managed investment schemes; making false and misleading representations regarding financial products using improperly his position as director for gaining financial advantage for self; and for providing financial services in the nation without the requisite Australian Financial Services Licence. Due to these reasons, Hobbs was permanently disqualified from managing any company based on section disqualified from managing any company based on section 206C of this act. Along with this, specific orders were made for restraining Hobbs in a permanent manner from being involved in the management of investment schemes, along with the financial services business (Cordato, 2013).

The decision given in this case is not something new in context of law, or something which can be deemed as a leading decision or a landmark one for that matter. The only significance was that the ASIC focused on individuals behind the scheme companies for holding the individuals liable, so that they cannot escape their personal liability through making a claim that they were not the director of the particular scheme companies. Any search on ASIC’s Banned and Disqualified register would show that Hobbs would show that he had been disqualified in a permanent manner (Cordato, 2013).    

References

Austlii. (2013) In the matter of Idylic Solutions Pty Ltd – Australian Securities and Investments Commission v Hobbs [2012] NSWSC 1276 (24 October 2012). [Online] Austlii. Available from: https://www.carternewell.com/page/Publications/Archive/De_Facto_Directors_-_Lurking_in_the_Company_s_Shadow/ [Accessed on: 10/12/17]

Austlii. (2017) Corporations Act 2001. [Online] Austlii. Available from: https://www6.austlii.edu.au/cgi-bin/viewdb/au/legis/cth/consol_act/ca2001172/ definitions [Accessed on: 10/12/17]

Baxt, R. (2007) Duties and Responsibilities of Directors and Officers. 19^th ed. Sydney, New South Wales, Australia: The Australian Institute of Company Directors.

Carter Newell Lawyers. (2013) De Facto Directors – Lurking in the Company’s Shadow. [Online] Carter Newell Lawyers. Available from: https://www.carternewell.com/page/Publications/Archive/De_Facto_Directors_-_Lurking_in_the_Company_s_Shadow/ [Accessed on: 10/12/17]

Cassidy, J. (2006) Concise Corporations Law. 5^th ed. NSW: The Federation Press.

Cordato, A.J. (2013) How badly must a company director behave to be banned from corporate life permanently?. [Online] Lexology. Available from: https://www.lexology.com/library/detail.aspx?g=7216432f-3e66-4e08-b19f-f3e0338d81e8 [Accessed on: 10/12/17]

Federal Register of Legislation. (2017) Corporations Act 2001. [Online] Federal Register of Legislation. Available from: https://www.legislation.gov.au/Details/C2013C00605 [Accessed on: 10/12/17]

ICNL. (2017) Corporations Act 2001. [Online] ICNL. Available from: https://www.icnl.org/research/library/files/Australia/Corps2001Vol4WD02.pdf [Accessed on: 10/12/17]

Latimer, P. (2012) Australian Business Law 2012. 31^st ed. Sydney, NSW: CCH Australia Limited.

Paolini, A. (2014) Research Handbook on Directors Duties. Northampton, Massachusetts, United States: Edward Elgar.

Plessis, J.J.D., and Koker, J.N.D. (2017) Disqualification of Company Directors: A Comparative Analysis of the Law in the UK, Australia, South Africa, the US and Germany. Oxon: Routledge.

WIPO. (2015) Corporations Act 2001. [Online] WIPO. Available from: https://www.wipo.int/wipolex/en/text.jsp?file_id=370817 [Accessed on: 10/12/17