In ASIC v Vocation Ltd (in liq)  FCA 807, Justice Nicholas of the Federal Court found that Vocation Ltd breached its continuous disclosure obligations under s 674(2) of the Corporations Act and that, pursuant to the stepping stone approach, the chief executive officer (Mr Hutchinson) and the non-executive chair (Mr Dawkins) were liable under s 180(1) by causing or permitting Vocation’s breach of its disclosure obligations.
Importantly, the court held in Vocation that the non-executive chair was found to some extent to be a victim of breaches of duty by the CEO and the failings of other members of the company’s senior management team to improve the quality and flow of information to him.7 Crucially, such important factors, however, were held to be insufficient for the court in Vocation to excuse Mr Dawkins for breach of law nor from the imposition of civil penalties.
The court also found Vocation Ltd contravened s 104H(1) by making misleading and deceptive statements to the ASX and, subsequently, to the underwriters (UBS) preceding an equity capital raising. Pursuant to the stepping stone approach, the CFO and company secretary (Mr Grawel), and the CEO were also held liable under s 180(1) by causing or permitting Vocation’s breach of s 1041(H) in both instances.
The events leading to the liability decision, followed by the results in the civil penalty decision, is discussed next before considering the key issues and potential implications of the Vocation case for corporate governance.
Liability decision: ASIC v Vocation Ltd (in liq)
Vocation Ltd, a publicly listed company with a short history on the ASX until its spectacular collapse into liquidation in November 2015, was incorporated in November 2013. It provided vocational education, training and assessment activities offered by registered training organisations. The business was heavily dependent on revenues from government funding, with the Victorian government funding representing 80 per cent revenue in the 2014 financial year.
On 3 July 2014, based on concerns on delivery of services by Vocation Ltd, the Victorian Department of Education and Early Childhood Development (DEECD) informed Vocation Ltd of their decision to withhold payment of funds until such time their concerns were satisfactorily resolved. Another letter was issued by DEECD to Vocation Ltd on 24 July 2014 announcing their decision to continue to withhold funds and to suspend commencement of any new enrolments (Withholding and Suspension Information).
On 25 August 2014, in response to media speculation on the status of funding contracts, Vocation Ltd issued an ASX announcement which included the following statement: ‘Vocation’s funding contracts with the DEECD have not been suspended and are continuing.’ On 26 August 2014, DEECD wrote to Vocation Ltd reaffirming their concerns with compliance issues and decision to continue to withhold funding and to suspend any new enrolments. From this date onwards, the non-executive chair acted beyond his normal duties and became involved in negotiations with DEECD to secure the release of funds to Vocation Ltd.
Due to the stop in funding, on 10 September 2014 Vocation Ltd issued an ASX announcement of a ‘fully underwritten placement to institutional and sophisticated investors to raise approximately $74 million.’ Vocation Ltd, however, did not fully disclose all relevant information in a due diligence questionnaire (DDQ) issued to UBS, the underwriter.
It was only in October 2014 when Vocation Ltd fully disclosed to the ASX the concerns of DEECD and all other material information dealing with the Withholding and Suspension decision and its financial impact on the company which resulted in a loss of approximately $20 million in funding.
In ASIC v Vocation Ltd (in liq)  FCA 807, Justice Nicholas found that Vocation Ltd breached its obligations under continuous disclosure law and under the misleading and deceptive provisions in s 104H(1). Having established corporate fault, ASIC used the stepping stone approach and successfully argued that the CEO, non-executive chair and the CFO and company secretary (combined position) breached s 180(1) and, subsequently, obtained civil penalties.
The result in the Vocation case puts all company officers on notice.
Civil Penalty decision: ASIC v Vocation Ltd (in liq)(No 2)
Following the liability decision, only the non-executive chair (Mr Dawkins) applied for judicial relief under the statutory excuse provisions in ss 1317S and 1318. Supporting arguments for this outcome were based on:
- the honest belief that the Withholding and Suspension Information was not material in the relevant sense and that Vocation was not required to disclose it. Significantly, this honest belief held by Mr Dawkins was not disputed by ASIC.8
- Until 26 August 2014, he was heavily reliant on information provided to him by the CEO and other members of management for the purpose of deciding whether Vocation was required to make disclosure. That information turned out to be very poor and led the non-executive directors (including Mr Dawkins) to believe there was a routine delay in obtaining payment of the withheld funds.
- Thereafter, acting beyond the scope of his normal duties, he assumed direct responsibility for negotiations with DEECD and made diligent efforts to secure the release of funds and the relaxation of the enrolment suspects.
Notwithstanding that there was no suggestion to show that the non-executive chair acted dishonestly, for an improper purpose or for personal gain, Justice Nicholas declined to offer judicial relief for several reasons, including the following:9
… [his] contravention was … serious … it involved a significant departure from the standard of care that would ordinarily be expected of a chair of a listed public company. It was not the result of what might fairly be characterised as a momentary lapse of reason in attention or judgment but was the product of a continuing failure to exercise care and diligence throughout the relevant period …
The court accepted that the non-executive chair took on additional responsibilities but rejected the argument that the liability and penalty decision, in this case, would discourage directors from taking on extra responsibilities and that the result, in this case, will be contrary to public interest. According to his Honour:10
… this is not a case in which Mr Dawkins was found liable … based on a lack of care and diligence associated with the performance of additional work outside the scope of his usual responsibilities … [it is based on the fact] that he became aware that important decisions made by the board in relation to the materiality of the Withholding and Suspension Information had been made based on inaccurate and incomplete information provided to the board by management. In spite of this, Mr Dawkins continued to accept and act upon information provided to the board by [the CEO] uncritically, without making any sufficient attempt to analyse or evaluate that information in light of new information that became available …
Other relevant factors which the court held supported the denial of judicial relief included:11
- the fact that a very large number of Vocations shares, valued at approximately $97 million, were publicly traded in the relevant period during which the market was not properly informed of material information.
- the consequences of allowing shares in Vocation to trade during the relevant period when the market was not adequately informed of material information and allowing Vocation to undertake the equity capital raising in such circumstances. The impact of these events, according to his Honour, exposed the company to ‘a very significant risk of serious harm.’12
Powerful written character references provided by the former Prime Minister (Paul Keating), the former Governor-General (Bill Hayden) and the former Premier of Victoria (Steve Bracks) failed to carry sufficient weight to alter the court’s decision to decline judicial relief, but, were nevertheless very influential in the penalty decision — discussed below.
Pecuniary penalties and disqualification orders
Based on the contraventions and level of culpability found in the liability decision, significantly higher civil penalties were imposed on the Chief Executive Officer of Vocation Ltd (Mr Hutchinson) and the Chief Financial Officer (Mr Grewal), compared to the Non-Executive Chair (Mr Dawkins).
Following liability for breach of s 180(1), Mr Dawkins was disqualified from managing corporations for a period of two years and a pecuniary penalty of $25,000 was imposed. The court held that his breach of duty was serious and flowed from his uncritical acceptance of information and advice provided to the board by the CEO and other members of that team.13
The court intended to double the amount of the pecuniary penalty and the disqualification period but, due to mitigating factors, reduced these civil penalties by fifty per cent. The court took into account the widespread publicity generated by the case, Mr Dawkin’s distinguished record of public service, as a parliamentarian and government minister, and his good character – as attested to in the many written references provided by luminaries who have also made substantial contributions to public life in Australia.
Chief executive officer
Following liability in respect of three contraventions under the Corporations Act, the Chief Executive Officer was disqualified from managing corporations for a period of six years and a pecuniary penalty of $70,000 was imposed. This was due to a ‘glaring failure’ on his part to discharge his duties and responsibilities as the company’s CEO14 and that the three contraventions under s 180(1) was considered to be ‘extremely serious.’15 The court observed:16
[the CEO’s] breaches of duty involved a persistent and continuing failure to properly turn his mind to the task of understanding the nature and scope of Vocations’ dispute …, the effect of relevant correspondence, the effect of relevant contractual provisions, and the reliability of his management team’s assessment of the extent of the potential financial impact of the Withholding and Suspension Information on Vocation.
Justice Nicholas found it ‘remarkable’ that the CEO failed to provide the board with any legal advice for the board to consider before the 25 August Announcement was approved and released to the market.17 Similarly, the conduct of the CEO in the preparation for, and during, the board meeting on 7 September 2014 when the board voted in favour of an equity capital raising was found to be ‘especially disturbing’ due to the CEO’s failure to objectively determine whether the advice given to the board was well-founded.18
In determining the civil penalties for the CEO, the court considered general deterrence to be a weighty factor given the seriousness of Mr Hutchinson’s three contraventions.19 But for mitigating factors and discounting for totality, the court was prepared to impose a disqualification period of five years for each contravention (total of fifteen years) and a pecuniary penalty of $50,000 for each contravention (total of $150,000).20
Chief financial officer and company secretary
Following liability for breach of s 180(1), held to be ‘serious’,21 Mr Grewal was disqualified from managing corporations for a period of three years and a pecuniary penalty of $30,000 was imposed. In relation to the misleading due diligence questionnaire [DDQ], the court did not consider Mr Grewal any less culpable than the CEO for the following reasons:22
… each of them was well placed to recognise and understand, were they to have exercised due care and diligence, that the DDQ was likely to mislead and deceive … [both] understood the importance of the DDQ. The terms of the declaration made by the [CFO and company secretary] should have brought home to him the importance of exercising due care and skill in relation to the preparation and review of that document.
An agreed penalty agreement between Mr Grewal and ASIC, which called for a disqualification period of five years and a pecuniary penalty of $50,000, was considered to be harsh by the court and rejected. However, but for mitigating factors and genuine remorse shown by Mr Grewal, the court would have upheld the agreed penalty. The court took into account the undertaking given by Mr Grewal that he has enrolled in a Certificate of Governance and Risk Management course with the Governance Institute of Australia with the view to improve his risk management and governance skills.23
Vocation underscores the need for officers to turn their mind to the accuracy of the assumptions underpinning the information supplied to them.
Under the modern approach to the enforcement of the duty of care and diligence, it has been argued that the pendulum has swung too far in the opposite direction with heightened performance standards expected of company officers.24 Coupled with the stepping stone approach to officer liability, aspects of the civil liability decision and the penalty decision in the Vocation litigation centring on the performance expectation of a non-executive chair is capable of adding credence to such concerns.
The salient facts in Vocation does not suggest elevation of directors’ and officers’ duties, though it is reasonably foreseeable for such concerns to gain traction and become valid in other factual situations.
In attracting liability in Vocation, it is important to remember that the non-executive chair acted beyond the scope of his normal duty to genuinely help resolve a protracted corporate funding problem. Had Mr Dawkins not done so, the approach adopted to the litigation in Vocation by ASIC suggests that he would not have been liable under s 180(1). This is because the court would have found it reasonable for the board to have relied upon the CEO and senior management for information if the board was unaware of the poor quality of that information. This conclusion can be supported by the fact that, very significantly, none of the three other non-executive directors in Vocation were pursued for breach of duties. This outcome can be attributed to the following key distinction made by the court in Vocation:25
… it is important to distinguish what I accept were diligent efforts on the part of Mr Dawkins to engage with management and with DEECD for the purpose of securing a release of funds and a relaxation of the suspensions on enrolments and commencements, from his efforts to assess the materiality of the Withholding and Suspension Information in light of the developments occurring on and after 26 August 2014 [when he was provided with all relevant correspondence with DEECD and was in a position to form his own views and draw his own conclusions based on his own review of relevant correspondence and face-to-face meetings].26
It is relevant to note that the other non-executive directors in Vocation were not privy to the additional information which exposed the inaccurate and misleading of information provided by the CEO and senior management to the board.
It is a moot point, however, whether opportunities will always permit a non-executive chair taking on extra duties to go beyond the information supplied by the CEO and senior management and to verify the information. The duty to make further inquiries in a fluid and rapid moving commercial environment often calls for quick decisions which can present practical and real challenges, particularly in large and complex organisations. This point of practical concern was made by Rogers CJ in the AWA litigation where his Honour queried the actual capacity of non-executive directors to make timely responses to fast flowing information.27
The result in the Vocation case puts all company officers on notice. Vigilance is required to critically assess and verify information supplied by senior management, especially when put on notice that reasons exist to doubt the reliability of the information. In such situations, Vocation affirms that an honest non-executive chair cannot simply rely on information provided by the CEO and management. Blind trust will not suffice. Vocation underscores the need for officers to turn their mind to the accuracy of the assumptions underpinning the information supplied to them.
It is also significant to note that the business judgment rule defence in s 180(2) is no saviour in cases involving allegations of officers’ breach of continuous disclosure obligations.28 Vocation affirms that the decision not to disclose the Withholding and Suspension Information to the market, based on an honest belief that it is not material, is a decision related to compliance, and not a business judgement as required by s 180(3).29 Vocation demonstrates that limitations on the operation of the business judgement rule is of cold comfort to company officers.
The key take-way message from the Vocation case is that company officers are exposed to real risk of liability and penalties following the company’s contravention of law. Significantly higher penalties can now be expected due to the recent stiffening of penalties under the Corporations Act. For any breach of continuous disclosure obligations committed after March 2019, the maximum penalty per contravention for individuals is $1.05 million and $10.5 million for companies. Thus, in future, company officers can expect the stepping stone approach to liability to have a much greater bite.