Directors' obligations to be honest are absolute
Author: Tal Williams, Partner
10 August 2012
The NSW Court of Criminal Appeal has recently heard a case in which a director of a company (in which he held 100% of the shares) was found to have breached his obligations under s184 of the Corporations Act and acted dishonestly. The finding was made even though the relevant group of companies was profitable, that the transaction had the approval of the sole shareholder and had been disclosed to the chief financial officer, that the transaction did not directly disadvantage any third party and that the director had obtained advice from PricewaterhouseCoopers on the payment and on how the payment should be properly recorded in the books of the company. The mis-description of the payment, however, had the potential to influence potential investors. The director was sentenced to 3½ years in jail.
A group of companies was created in the early 2000’s. The director in question contributed the sum of $500,000 and paid about $250,000 in startup expenses. The director was, for all intents and purposes, the owner of the group of companies. The group set about acquiring and developing property and obtaining investments from the public by offering secured and unsecured notes through prospectuses issued in 2002, 2003 and 2005. The director in question was either the sole director or one of three directors in each of the group companies.
The director in question had been engaged on a full time basis with the group of companies for over 2 years. Despite his initial investment and the raising of over $50m, he had not received any return nor paid himself any wages in respect of the appointment.
In September 2003, the director used his position as a director to sign a cheque in the sum of $900,000 payable by one company to another within the group for the purpose of that second company paying the director personally a “commission and management fee” for introducing two properties to the Group that were available for acquisition. Ultimately, a cheque for $825,000 was paid to the director.
At the time the director consulted and dealt with the chief financial officer of the group, and with the group’s external auditors PricewaterhouseCoopers, both of whom confirmed and approved the payment. Indeed, additional signatures were required on the cheques for the payments to be effected and these were provided accordingly.
The reality was, however, that the director had not introduced the properties to the group. That had been done by another director.
The finding of the Court was that it was not an answer to the prosecution’s case for the director to assert that it was “fair” that he receive payments because he had paid for and had been working to set up and establish the group without adequate remuneration for two years. An employee cannot justify his or her theft of employer’s money by asserting or establishing that the employee was underpaid previously.
As indicated above, the payment was disclosed in the company’s books as a “spotter’s fee” which the Court found suggested no impropriety in the payment. It implied that the director had been remuneration for work performed in relation to a specific acquisition by the group. But that is not what had occurred. Had the payment been described as what it actually was - a distribution to the director of unrealised capital profits thought to have accrued by the director, but not the subject of any formal evacuation or accounting entries - it would have raised immediate concerns in the minds of potential investors.
The lesson to be learned from the case is that the obligations of honesty owed by a director are absolute. The requirements to comply with the director’s obligations of honesty under s180 to 184 of the Corporations Act must never be disregarded, even in circumstances where a legitismate belief is held that certain conduct is “fair” or that the director has the consent of all (or in this case the sole) shareholder.
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