Warning for directors

On Monday, the Supreme Court of Victoria ordered that Trevor Flugge, the former chairman of AWB Limited, pay a fine of $50,000 and be disqualified from managing corporations for five years. These penalties were imposed in consequence of the Court’s finding that Mr Flugge had breached his duty of care by failing to make adequate inquiries about the propriety of certain payments by AWB to the Iraqi Government.

Background

The allegations against Mr Flugge arose out of AWB’s wheat trade with Iraq under the United Nations (UN) ‘Oil-for-Food Program’ (OFFP). ASIC alleged that AWB made payments indirectly to the Iraqi Government for inland transportation fees (purportedly for the wheat to be distributed within Iraq). The corporate regulator argued that the payments were a scam to allow Iraq to obtain foreign currency, in contravention of UN Sanctions.

ASIC also alleged (and the Court accepted) that in March 2000, Mr Flugge attended a meeting with the Australian Trade Commission in Washington DC during which attendees were informed that the UN had concerns about irregularities in AWB’s contracts and dealings with Iraq under the OFFP.

In turn, Mr Flugge submitted (and the Court accepted) that in mid-2000, Mr Flugge and other members of the AWB Board were informed by the Managing Director that the payments had been approved by the UN. The evidence also established that Mr Flugge had told a number of other people that he had believed the Managing Director’s statements.

After the allegations of AWB’s misconduct became public, AWB suffered “financial harm” (including a loss of market capitalisation and trade, legal costs, class action settlements, redundancy costs and restructure costs) and “intangible or immeasurable harm” (including a “shattered” reputation, loss of corporate knowledge and employee morale, and reduced credit ratings).

Claims against Mr Flugge

ASIC claimed Mr Flugge had breached his duty of care under section 180(1) of the Corporations Act 2001 (Cth) by failing to:

  • ensure AWB did not breach UN sanctions;
  • ascertain whether AWB had sought and gained UN approval for the payment of inland transportation fees; and
  • make inquiries of AWB’s senior management about the propriety of the payments;
  • ensure the AWB Board and/or Board Committees were properly informed of, and responded appropriately to, the matters in issue.

ASIC also alleged that Mr Flugge knew the fee payments were being made by AWB to Iraq in breach of UN sanctions, were a sham, and were improper. Accordingly, argued ASIC, Mr Flugge had breached his section 181 duty to act for a proper purpose and in good faith in the best interests of AWB. The Court, however, found that these allegations were not proved.

The Court’s findings

The Court held that following the Washington meeting, Mr Flugge was duty bound to make inquiries as to whether the inland transportation fee payments were irregular, why it was suggested they were irregular, and why the UN would raise the issue of irregular fee payments if the UN had approved the payment of those fees. The failure to make these inquiries amounted to a breach of Mr Flugge’s duty of care under section 180(1).

The Court further held that Mr Flugge’s reliance on the assurances of the Managing Director did not relieve him of his duty to make proper inquiries, noting that “a director is not excused from making his own inquiries by relying on the judgment of others.”

Additionally, the Court held that the duty to make inquiries is an ongoing obligation and so Mr Flugge’s breach continued until he lost his position on the board.

Penalties

The Court has ordered that Mr Flugge pay a $50,000 penalty and be disqualified from managing corporations for a period of five years. Although the Court found that Mr Flugge had acted honestly, the Court denied his application to be relieved from liability on the basis that the breach of duty was “not a minor or accidental breach of duties that could be excused”.

Proceedings against other AWB officers

ASIC brought similar proceedings against five other directors and executives of AWB. The proceedings against two of those individuals were discontinued and another two were settled.

The case against the former AWB Group General Manager of Trading, Peter Geary, did proceed to a hearing, however the Court dismissed the proceedings. Unlike the chairman, Mr Geary had not been put on notice about AWB’s possible misconduct in relation to the inland transportation fees as he was not present at the Washington meeting.

The Flugge decisions can be accessed here: ASIC v Flugge & Geary [2016] VSC 779 (Main judgment) and ASIC v Flugge (No 2) [2017] VSC 117 (Penalty judgment).


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