3138/01 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION V GEOFFREY WILLIAM VINES & 2 ORS
JUDGMENT
1 HIS HONOUR: My judgment in ASIC v Vines [2003] NSWSC 1095 (25 November 2003) dealt with two out of three general objections taken by the defendants to the admissibility of affidavits that the plaintiff, ASIC, wished to tender as expert opinion evidence. The other objection, taken by the first defendant to the admissibility of the affidavit of Mr Hogendijk, is that his evidence is irrelevant because it addresses the wrong question. Under s 55(1) of the Evidence Act 1995 (NSW), the evidence that is relevant in a proceeding is evidence that, if it were accepted, could rationally affect (directly or indirectly) the assessment of the probability of the existence of a fact in issue in the proceeding.
2 On 25 November 2003 I informed the parties that the first defendant's contention was unsuccessful, for reasons to be published. I did so in order to allow the hearing to proceed as expeditiously as practicable. I now publish my reasons for judgment.
3 ASIC asserts against Mr Vines that, in various ways, he breached s 232(4) of what was, at the time of the relevant events, the Corporations Law. That subsection was as follows:
"232(4) In the exercise of his or her powers and the discharge of his or her duties, an officer of a corporation must exercise the degree of care and diligence that a reasonable person in a like position in a corporation would exercise in the corporation's circumstances."
4 The word "corporation" was defined in s 57A(1) to include any body corporate and a company. The word "officer" was defined in s 232(1)(a), in relation to a corporation, to include "a director, secretary or executive officer of the corporation". "Executive officer" was defined in s 9, in relation to a body corporate, to mean "a person, by whatever name called and whether or not a director of the body …, who is concerned, or takes part, in the management of the body …".
5 The listed holding company of the GIO Group at the material times was GIO Australia Holdings Limited ("GIO Australia"). The reinsurance business, which is the subject of the proceeding, was conducted by a wholly-owned subsidiary called GIO Insurance Limited ("GIO Insurance"). In its second amended statement of claim, paragraph 4, ASIC alleges that Mr Vines was at all material times:
"(a) a director of GIO Insurance;
(b) the Chief Financial Officer of the GIO Group having overall executive responsibility for co-ordinating the financial reporting of GIO Australia and GIO Insurance;
(c) required in the course of his duties to attend meetings of the board of directors of GIO Australia and report to the board on, inter alia, matters concerning the affairs of GIO Australia and GIO Insurance; and
(d) an executive officer of GIO Australia and GIO Insurance within the meaning of ss 9 and 232(1) of the Law (as taken to be included in the Corporations Act 2001 by section 1401 of that Act)".
6 At paragraph 104, ASIC alleges that in contravention of s 232(4), Mr Vines, being an officer of GIO Australia and the GIO Insurance, failed to exercise the degree of care and diligence that a reasonable person in a like position in each of those corporations would exercise in that corporation's circumstances, for the reasons set out in paragraphs 104A to 127 of the pleading.
7 ASIC proposed that Mr Andy Hogendijk, who has been CFO of several large corporate groups, be permitted to give evidence on its behalf in answer to the following "initial" question, which Mr Hogendijk set out in his affidavit:
"On the basis of my experience as a CFO and my knowledge of the practices ordinarily adopted by a competent CFO, and the assumptions set out below, I have been asked to state my opinion as to whether [Mr Vines] failed to act in any way as would a competent CFO in the position of Mr Vines acting reasonably in the circumstances, and to state my reasons. For the sake of simplicity where I use the expression 'competent CFO' below, I mean to refer to the conduct of a competent CFO in the position of Mr Vines acting reasonably in the circumstances."
8 Counsel for Mr Vines drew attention to the fact that s 232(4) referred to "care" and "diligence" only, and omitted the word "skill" and the word "competence". He contended (relying on some observations by me in ASIC v Rich (2003) 44 ACSR 341 at [32]) that the omission of these words is important, and that the subsection should be construed literally and in its context, having regard to the omission (citing DCT v Clark (2003) 45 ACSR 332 at [115]). Properly understood, he submitted, the subsection did not impose on a CFO any legal duty to which an opinion about what a reasonably competent CFO would do could have any relevance. The submission raises the question whether s 232(4) imposed on an officer of a company occupying a position such as chief financial officer, any objective standard of reasonable competence that might be measured by expert evidence as to what a reasonably competent officer of that designation would do in stated circumstances.
9 To understand the scope of s 232(4) it is necessary to put the subsection in its historical context. Although the subsection purported to state the duty of care and diligence of an "officer", its ancestors were directed to the duty of a company director.
10 As Malcolm CJ explained in Vrisakis v ASC (1993) 11 ACSR 162, 169, the duty of a director under the general law was generally expressed as a duty to use a reasonable degree of diligence, skill and care in the discharge of the duties of the office of director. The first of the three famous propositions enunciated by Romer J in Re City Equitable Fire Insurance Co [1925] Ch 407 at 428-9 was that a director "need not exhibit a greater degree of skill than may reasonably be expected of a person with his knowledge and experience". (The second and third propositions, not directly relevant here, related to diligent attention to the affairs of the company and delegation to corporate officers.) His Lordship said, by way of example of the first proposition, that a director of a life insurance company does not guarantee that he has the skill of an actuary or a physician.
11 These remarks led Professor HAJ Ford to say, in the early editions of his work (see Principles of Company Law, 4th edition, 1986, p 417):
"Thus, there was no common law standard of the reasonably competent company director analogous to the reasonably competent member of a particular profession or trade, such as architect, solicitor, physician or builder, against whom the conduct of a defendant can be measured when determining whether reasonable care was used."
12 Section 107 of the Companies Act 1958 (Vic) introduced into the law of that State statutory duties of honesty and diligence for directors. It was the first legislation of its kind in any Australian State. It was adopted by other States in s 124(1) the Uniform Companies Act of 1961, which stated:
"124(1) A director shall at all times act honestly and use reasonable diligence in the discharge of the duties of his office."
13 It will be noted that s 124(1) was confined to directors and did not purport to apply to other officers of the company, the duties of honesty and diligence were put together in a single provision, there was no reference to "care" or "skill", and contravention gave rise to a criminal offence. The latter aspect of the provision led the Full Court of the Supreme Court of Victoria to hold, in Byrne v Baker [1964] VR 443, 453, that the statutory concept of reasonable diligence had reference to identifiable acts or omissions, rather than any general characterisation of the conduct of a director over a selected period.
14 As to the content of "reasonable diligence", the Full Court said that the statutory words introduced "one aspect of the concept of negligence, as known and acted upon for many years by the courts on misfeasance summonses against directors" (at 453). They observed (at 450) that the statutory language was "inspired by" the common law as stated by Romer J in the City Equitable case. They said that the omission from the subsection of all reference to "skill" was significant, and therefore "what the legislature by the subsection is demanding of honest directors is diligence only; and the degree of diligence demanded is what is reasonable in the circumstances and no more".
15 During the period 1973-1975 the Commonwealth Government proposed national legislation to govern corporations and the securities industry. The Corporations and Securities Industry Bill was introduced into the Parliament and widely debated, but its sister Bill, the National Companies Bill, was not ready to be proposed until shortly after the Government was dismissed in 1975, and was introduced into the Parliament as a private member's Bill. It was nevertheless influential as a law reform proposal. It proposed "a more objective test of diligence", based on the Ontario Business Corporations Act 1970 s 144 and the Canada Business Corporations Act s 117(1)(b) (Explanatory Memorandum to the National Companies Bill 1975, paragraph 90).
16 The drafting of the National Companies Bill was precisely replicated in the first draft of the Companies Bill 1980, which was part of the proposed national co-operative companies and securities legislation, developed after the proposal to enact Commonwealth legislation had been abandoned upon a change of national government (Explanatory Paper on Proposed New Australian Companies Code, 28 March 1980, p 129). The first version of the Companies Bill 1980 (the March 1980 version) contained the following provision:
"124(2) An officer of a corporation shall at all times exercise, in relation to the business or affairs of the corporation, a degree of care, diligence and skill that is not less than the degree of care, diligence and skill that a reasonably prudent person would exercise in relation to his own business or affairs in comparable circumstances."
17 Like its predecessor, the clause would have established a statutory criminal offence. There were no civil penalty provisions until much later. If enacted, the clause would have:
· extended the statutory duty beyond directors to all officers (defined to include directors and executive officers but not employees);
· imposed an objective test not unlike the standard of care of a trustee; and
· imposed as a statutory standard of "care" and "skill" as well as "diligence".
18 A second version of the Companies Bill was released in August 1980. The clause dealing with the duty of care, renumbered as cl 229(2), abandoned the adventurous formulation of the first draft, reverting to the Uniform Companies Act approach except in two respects. The two changes were that the statutory duty previously confined to directors was expanded to apply to all officers (including directors and executive officers but excluding employees), and the duty to use reasonable diligence became a duty to "exercise a reasonable degree of care and diligence" in the exercise of powers and the discharge of duties. The Explanatory Memorandum accompanying the August Bill noted these two changes but gave no explanation for the abandonment of the earlier draft. Another Bill and Explanatory Memorandum were released in April 1981, in much the same terms in relevant respects, and then the Companies Code was enacted and made applicable in each State.
19 I shall consider the significance of the introduction of the word "care" later in these reasons for judgment. The other change enacted in 1981 is on its face very significant in the present case. The subsection was expanded to become a statutory statement of a duty of care and diligence for all corporate officers, as defined, not merely directors. Thus, for the first time the statutory provision extended to a person such as a non-director chief financial officer or other senior executive, since such persons are concerned in the management of the corporation though not necessarily holding board positions.
20 At the time of this change, it was well recognised that corporate officers engaged as employees of the company under contracts of service are typically subject to express or implied contractual duties of skill and care. Indeed, one finds in the cases on directors' duties at common law a distinction between the members of the board of directors and the executive officers of the company, in the context of an analysis that seems to assume that the executive officers of the company are duty-bound to exercise the degree of skill and care that a person holding such a position would be expected to have.
21 Thus, for example, in Dovey v Cory [1901] AC 477 the Earl of Halsbury LC observed (at 486) that a director could not be expected to be watching the inferior officers of the company, for "the business of life could not go if people could not trust those who are put in a position of trust for the express purpose of attending to details of management". Similarly, Lord Davey said (at 492) that a director was entitled to "rely upon the judgment, information and advice of the chairman and general manager, as to whose integrity, skill and competence he had no reason for suspicion". If the managers and officers in question were not subject to an objective duty to exercise the skill appropriate to their various offices it is hard to see how their Lordships could have concluded that the directors were entitled to trust and rely on them. Similarly, in the City Equitable case ([1925] Ch at 426-7), Romer J referred to matters that must of necessity be left to managers and accountants, implying that they would be expected deal with those matters according to the standards applicable to the performance of tasks by competent managers and competent accountants. And in AWA Ltd v Daniels (1992) 7 ACSR 759, Rogers CJ Comm Div said (at 868) that a director is "entitled to rely on management to go carefully through relevant financial and other information of the corporation and draw to the board's attention any matter requiring the board's consideration"[emphasis added]. The Court of Appeal gave a more qualified statement of the extent to which the directors of the company may rely on executive officers (Daniels v Anderson (1995) 37 NSWLR 438, at 502-505), but still their reasoning appears to assume that the officers to be relied upon are subject to an objective standard of skill.
22 The significance of extending the statutory duty to officers generally was not much debated in the subsequent cases and academic literature. By and large, the focus of attention was on the position of the non-executive director, and the difficulty of prescribing any objective standard of skill given the wide range of commercial undertakings organised in corporate form (some of the literature was reviewed by Rogers CJ Comm Div in AWA Ltd v Daniels, at 865-6).
23 In November 1989 the Senate Standing Committee on Legal & Constitutional Affairs, under the chairmanship of Senator Barney Cooney, published a report entitled "Company Directors' Duties: Report on the Social and Fiduciary Duties & Obligations of Company Directors". The Report recommended the enactment of an objective duty of care for directors. However, the Corporations Law, which commenced in January 1991, preserved the substance of the wording of the Companies Code. The relevant section was as follows:
"232(2) An officer of a corporation shall at all times exercise a reasonable degree of care and diligence in the exercise of his or her powers and the discharge of his or her duties."
24 Although the Corporations Law preserved the wording of the Companies Code provision, the case law was developing, particularly in the context of applying the statutory provisions concerning insolvent trading. There were several cases, most notably Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 (for other cases, see Daniels v Anderson (1995) 37 NSWLR 438 at 497-500), which suggested that a company director has a duty to understand the financial position of the company, regardless of his or her financial sophistication and training in accountancy. The cases suggested that a basic standard of competence for company directors might be emerging. The former s 229(2) was considered, in light of these case law developments, in AWA Ltd v Daniels (1992) 7 ACSR 759 (Rogers CJ Comm Div), and on appeal, Daniels v Anderson (1995) 37 NSWLR 438.
25 Speaking of the common law, Rogers CJ Comm Div said (864-5):
"Conventional wisdom held that a director need not exhibit, in the performance of his duties, a greater degree of care, skill and diligence than may reasonably be expected from a person of his or her knowledge or experience ( Re City Equitable Fire Insurance Co Ltd [1925] Ch 407 at 428); when the opportunity presented itself to reassess this approach it was declined: Byrne v Baker [1964] VR 443 at 450. More recent wisdom has suggested that it is of the essence of the responsibilities of directors that they take reasonable steps to place themselves in a position to guide and monitor the management of the company: cf Commonwealth Bank v Friedrich (1991) 5 ACSR 115 at 117. A director is obliged to obtain at least a general understanding of the business of the company and the effect that a changing economy may have on the business. Directors should bring an informed and independent judgment to bear on the various matters that come to the board for decision: cf Sir Douglas Menzies, "Company Directors" (1959) 33 ALJ 156 at 164."
26 As expressed by Rogers CJ Comm Div, the duty of a director to put himself or herself in a position to guide and monitor the management of the company appears to be an aspect of the duty of diligence. It is therefore part of the duty imposed on a director by the statutory standard of care and diligence, and not merely by the common law. If his Honour's account of the law is correct, it follows that an objective component of competence had become part of the statutory standard by 1992, when the AWA case was decided at first instance.
27 Later in his judgment, his Honour drew sharp distinctions between the board and management, and between the position of the managing director and the position of non-executive directors (at 866-7), saying:
"The evidence of the non-executive directors developed in quite some detail their understanding and experience of the division of functions between the board and management. The directors rely on management to manage the corporation. The board does not expect to be informed of the details of how the corporation is managed. They would expect to be informed of anything untoward or anything appropriate for consideration by the board. In the context of the present case directors rely on management:
(a) to carry out the day to day control of the corporation's business affairs;
(b) to establish proper internal controls, management information systems and accounting records;
(c) reduce to writing if appropriate and communicate policies and strategies adopted by the board;
(d) implement the policies and strategies adopted by the board;
(e) have a knowledge of and review detailed figures, contracts and other information about the corporation's affairs and financial position and summarise such information for the board where appropriate;
(f) prepare proposals and submission[s] for consideration by the board;
(g) prepare a budget;
(h) attend to personnel matters including hiring and firing of staff and their terms of employment.
"Another division of functions is between the non-executive directors and the chief executive officer or managing director. Generally a chief executive is a director to whom the board of directors had delegated its powers of management of the corporation's business. Usually the chief executive is employed under a contract of service which will either include an express term or, in the absence of an express term, an implied term, that the chief executive will exercise the care and skill to be expected of a person in that position. The degree of skill required of an executive director is measured objectively. In contrast to the managing director, non-executive directors are not bound to give continuous attention to the affairs of the corporation. There duties are of an intermittent nature to be performed at periodic board meetings, and at meetings of any committee of the board upon which the director happens to be placed. Notwithstanding a small number of professional company directors there is no objective standard of the reasonably competent company director to which they may aspire. The very diversity of companies and the variety of business endeavours do not allow of a uniform standard."
28 Thus, in his Honour's view, all directors whether executive or non-executive have a duty to put themselves in the position to guide and monitor the management of the company, and therefore to obtain a general understanding of the company's business, but this does not amount to imposing on directors the objective standard of the reasonably competent company director. On the other hand, the chief executive and other senior executive officers of the company have an objective contractual duty to exercise the skill to be expected of persons occupying the respective positions they hold. For present purposes, it is important that an executive officer, engaged under a contract of service and concerned in the management of the company, has an objective duty of skill referable to his or her position. Rogers CJ Comm Div does not say that the duty of skill is incorporated into the statutory standard.
29 On appeal, Clarke and Sheller JJA made the following observations (at 500-501):
"The insolvent trading cases demonstrate that ignorance is no longer necessarily a defence to proceedings brought against a director. In some respects, at least, the director must inform himself or herself about the affairs of the company.