Australian Securities and Investments Commission v Flugge and Geary (Ruling No 11)
[2015] VSC 797
•8 December 2015
| IN THE SUPREME COURT OF VICTORIA AT MELBOURNE | Not Restricted |
COMMERCIAL COURT
CORPORATIONS’ LIST
S CI 2007 10077
IN THE MATTER OF AWB LIMITED (ACN 081 890 459)
BETWEEN:
| AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION | Plaintiff |
| v | |
| TREVOR JAMES FLUGGE | Defendant |
- AND -
S CI 2007 10081
IN THE MATTER OF AWB LIMITED (ACN 081 890 459)
BETWEEN:
| AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION | Plaintiff |
| v | |
| PETER ANTHONY GEARY | Defendant |
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JUDGE: | ROBSON J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 8 December 2015 |
DATE OF JUDGMENT: | 8 December 2015 |
CASE MAY BE CITED AS: | ASIC v Flugge & Geary (Ruling No 11) |
MEDIUM NEUTRAL CITATION: | [2015] VSC 797 |
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EVIDENCE — Whether an experienced chairman of public companies was entitled to give expert evidence on what would be reasonable conduct of a director in the circumstances alleged by the plaintiff under s 79 of the Evidence Act2008 (Vic) (the Act) — Relevant principles to apply — Whether the evidence was relevant — Whether such opinion evidence usurps the role of the Court — Evidence allowed — Section 80 of the Act.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr N J O’Bryan AM SC with Mr J P Moore QC, Mr C H Truong and Ms C E Klemis | Australian Securities and Investments Commission |
| For the Defendant in S CI 2007 10077 | Mr S K Dharmananda SC, with Mr R F R Pintos-Lopez | Corrs Chambers Westgarth |
| For the Defendant in S CI 2007 10081 | Mr I D Hill QC with Mr A Tragardh | Galbally Rolfe |
HIS HONOUR:
Mr Flugge seeks to lead expert evidence from Mr Martin Kriewaldt[1] on two issues in the case as pleaded against him by ASIC. First, ASIC alleges in the third further amended statement of claim (the statement of claim), that by reason of Mr Flugge’s position as a director and chairman of AWB and the matters alleged in paragraphs 4 and 5 of the statement of claim (about Mr Flugge and the positions he held in AWB during the period from 1 May 1998 to 15 March 2002) that Mr Flugge’s responsibilities relevantly included inter alia to lead the AWB board in the oversight and monitoring of AWB’s senior management and officers, including the consideration and implementation of appropriate policies and procedures to enable the board to detect and assess any materially adverse development affecting, or potentially affecting AWB.
[1]Mr Kriewaldt’s qualifications include being a partner for 25 years in the firm now Allens><Linklaters; a professional company director since 1990 and chairman of companies and committees since 1996. Full qualifications and positions are set out in CB 14/11059.
Secondly, ASIC alleges that during the period from 1 May 1998 to 15 March 2002, as a director of AWB, Mr Flugge owed a duty to AWB to exercise his powers and discharge his duties with the degree of care and diligence that a reasonable person would exercise, if they (a) were an officer of a corporation in AWB’s circumstances; and (b) occupied the office held by Mr Flugge and had the same responsibilities as Mr Flugge. The duties are alleged to arise under s 180 of the Corporations Act 2001 (Cth).
It is submitted on behalf of Mr Flugge that s 180 generates an objective test that requires consideration of what a reasonable person would do and analysis of the corporation’s circumstances. It is submitted that this is the background against which Mr Kriewaldt is providing his expert evidence.
In paragraph 49 of the statement of claim ASIC alleges that:
49.By reason of his positions as a Director and Chairman of AWB, the matters alleged in paragraphs 4 to 8 above, the circumstances pertaining to AWB alleged in paragraphs 9 to 46 above, and his knowledge alleged in paragraph 48 above, at all times from June 1999 to March 2002, Mr Flugge had duties to:
(a)take reasonable steps to ensure that when AWB was selling and exporting wheat to Iraq and obtaining payments from the UN Escrow Account, AWB was not engaging in conduct that the UN resolutions had called on member states to prevent and in particular conduct that would, or would be likely to, result in:
(i)the direct or indirect payment of internationally traded currency to the Government of Iraq or its instrumentalities; or
(ii)the receipt by AWB of payment from the UN Escrow Account other than on account of OFFP humanitarian goods;
(b)take reasonable steps to prevent AWB from entering into or carrying out contracts for the sale of wheat with the IGB where the contract price included an amount in respect of the IGB fees or where the contract enabled AWB to obtain funds from the UN Escrow Account in respect of the IGB fees;
(c)take reasonable steps to ascertain whether or not AWB had informed the UN of, and whether the UN had approved, the payment or proposed payment by AWB of the IGB fees and the obtaining of funds by AWB from the UN Escrow Account in respect of the IGB fees;
(d) take reasonable steps to:
(i)make enquiries of AWB’s senior management, including the managing director, about each of the matters alleged in subparagraphs 48(a) to 48(i) above;
(ii)ensure that he and the AWB Board and/or the Group Corporate Risk Committee and/or the audit committee, were properly informed of those matters;
(iii)ensure that he, and the AWB board and/or the Group Corporate Risk Committee and/or the audit committee, took appropriate action to ensure that the steps described in subparagraph 49(b) above were carried out.
Mr Kriewaldt purports to be an expert in the conduct of directors and chairmen of boards of directors. As set out in his report,[2] Mr Kriewaldt has been asked to answer the following questions:
[2]The report notes that ‘unless otherwise specified, defined terms have the same meaning as defined terms in the Third Further Amended Statement of Claim sated 21 June (sic 23 September) 2013 TFASC [the statement of claim].’
1.If all (or a combination of material matters identified by you) of the matters alleged in the TFASC [the statement of claim] were proven to have occurred, what, in your opinion, based on your experience as a company director would:
(a)a reasonably careful and diligent non-executive chairman have done:
(i) in the period 19 December 2001 to 15 March 2002,
(ii) in the period June 1999 to March 2002; and
(b)a reasonably careful and diligent person in Mr Flugge’s position have done,
(i) in the period 19 December to March 2002;
(ii) in the period June 1999 to March 2002?
in the context of a corporation of the nature of AWB Ltd, and in light of its policies and procedures and business activities?
2.In your opinion, based on your experience as a company director, do you consider that the policies and procedures implemented by the board of AWB Ltd during the period 19 December 2001 to 15 March 2002 were reasonably appropriate by reference to generally accepted Australian corporate practice at that time?
Then it goes on:
‘Matters’ means: factual matters alleged in the TFASC other than paragraphs pleading a contravention.
It will be noted that the two questions relate to obligations and duties that it is alleged Mr Flugge owed as a director and chairman of AWB as I have outlined above.
ASIC submits that question 1 is irrelevant and Mr Kriewaldt’s opinion thereon is wholly inadmissible. As to question 2, ASIC submits that it is also irrelevant to any issue in the case for the reason that the case does not concern the implementation of unspecified policies and procedures by the board of AWB between 19 December 2001 and 15 March 2002.
In Adler v ASIC; Williams v ASIC,[3] ASIC tendered the affidavit of Mr Cameron, who was a chartered accountant and an experienced company director, as expert evidence as to whether Mr Adler’s conduct as a director could be considered to be conduct of a careful and diligent director in the circumstances faced by Mr Adler. The trial judge admitted the evidence.
[3](2003) 46 ACSR 504 (‘Adler v ASIC’).
On appeal against the decision to admit the evidence as opinion evidence, Giles JA, with whom Mason P and Beazley JA agreed, said although the evidence went fairly directly to the contraventions, that did not make the evidence inadmissible and he referred to s 80(a) of the Evidence Act 1995.[4]
[4]Adler v ASIC [622].
In his judgment, Giles JA said as follows:[5]
The phrase ‘specialised knowledge’ is not defined in the Evidence Act, deliberately so, see ALRC 26 at paragraph 743. But it is not restrictive; its scope is informed by the available bases of training, study and experience, in the last mentioned perhaps extending the common law. An ample scope has been suggested in, for example, Yilditz v R (attitude of a member of a community), Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (No 6) (investor behaviour) and Godfrey v New South Wales (No 1) (behaviour of prison escapees). Without going so far, proper professional conduct in the sense of due care and obedience to customary practices and ethical rules is in my view a field of specialised knowledge. That the common law and (now) the Act state directors’ duties of due care and proper conduct itself suggests that a company director should have specialised knowledge and be able to speak of the duties and their application.
…
Whether an opinion has been shown to be based on the specialised knowledge is a question of fact, and s 79 provides that it is sufficient that it is substantially based on that knowledge. What is required by way of the explanation of which Heydon JA spoke in Makita (Australia) Pty Ltd v Sprowles will depend on the circumstances. The disconformity in HG v The Queen to which his Honour referred was gross, in that the psychologist’s evidence went to when the complainant was abused and who abused her, outside a psychologist’s expertise and based on matters other than a psychologist’s expertise. Other circumstances will be quite different. And, as was said in Sydneywide Distributors Pty Ltd v Red Bull Australia Pty Ltd, absolute certainty that the opinion is based on the specialised knowledge is not required and many of the stated qualities of the opinion evidence by Heydon JA ‘involve questions of degree, requiring the exercise of judgment.’
A solicitor shown to have specialised knowledge of conveyancing practice can give opinion evidence of general conveyancing practice without spelling out the links between his training, study and experience and his opinion. The links are apparent from the nature of the specialised knowledge. If an exotic matter of conveyancing practice were in issue, it may be necessary for a satisfactory link to be made apparent. Mr Cameron’s opinions and the reasons for them were not of an exotic kind, and the trial judge was entitled to take the view that they were based in his experience as a company director and auditor; no doubt more the former, but the later could contribute. I do not think that error has been shown in the admission of Mr Cameron’s evidence.
[5]Adler v ASIC [629], [631]–[632] (citations omitted).
Giles JA accepted that a company director could have specialised knowledge and be able to give a relevant opinion on whether Mr Adler’s conduct as a director was conduct that a careful and diligent director would have done in the circumstances faced by Mr Adler.
Although many cases subsequent to Adler v ASIC were cited,[6] none have thrown any doubt on the correctness of the decision in Adler v ASIC.
[6]These cases including ASIC v Vines (2003) 48 ACSR 291 (‘ASIC v Vines’), ASIC v Rich (2005) 218 ALR 764, Tim Barr Pty Ltd v Narui Gold Coast Pty Ltd [2008] NSWSC 1263, Eric Preston Pty Ltd v Euroz Securities Limited [2009] FCA 213, Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588, Dupas v The Queen, (2012) 40 VR 182, and Honeysett v The Queen, (2014) 253 CLR 122.
Accordingly, I find that there is nothing in principle preventing the Court from permitting Mr Kriewaldt to give opinion evidence on the issues in this case identified above so long as he has established that he has specialist knowledge within the meaning of s 79 of the Evidence Act2008 (Vic) (the Act) of the matters that he expresses his opinion on.
Section 79 of the Act provides:
Exception — opinions based on specialised knowledge
(1)If a person has specialised knowledge based on the person’s training, study or experience, the opinion rule does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge.
(2) To avoid doubt, and without limiting subsection (1)—
(a)a reference in that subsection to specialised knowledge includes a reference to specialised knowledge of child development and child behaviour (including specialised knowledge of the impact of sexual abuse on children and their development and behaviour during and following the abuse); and
(b)a reference in that subsection to an opinion of a person includes, if the person has specialised knowledge of the kind referred to in paragraph (a), a reference to an opinion relating to either or both of the following—
(i) the development and behaviour of children generally;
(ii)the development and behaviour of children who have been victims of sexual offences, or offences similar to sexual offences.
ASIC also objects to the admission of the expert report on the ground that the evidence is irrelevant as it does not go to any fact in issue. The evidence goes to pleaded facts. ASIC says that the evidence as to how a reasonable chairman would carry out his or her duties is not a specialised body of knowledge. As discussed above, Adler v ASIC is authority for the proposition that evidence of how a reasonable director would carry out his duties is capable of being specialised knowledge. I therefore reject that submission.
ASIC also objects on the basis that the opinion does not expose the reasoning process by which Mr Kriewaldt’s specialist knowledge led to the opinions he has expressed.
In the above quoted passages, Giles JA notes that it would not be necessary to ‘spell out the links between training, study and experience and the opinion’ save for the circumstances where an ‘exotic matter’ were in issue. In any event, I am of the opinion that the opinion given does expose the reasoning process from Mr Kriewaldt’s specialist knowledge to the opinion he expresses. Mr Kriewaldt explains the role and function of a chairman as recognised in texts and in practice and applies these functions to the alleged conduct, or failure to act, of Mr Flugge. As Mr Kriewaldt explains, the chairman holds a special position and is not an employee of the company. Mr Kriewaldt explains the chairman has no managerial responsibilities or powers and is not able to instruct employees in carrying out of their duties. Mr Kriewaldt explains how a reasonable chairman would react to the facts alleged by ASIC.
ASIC says that the opinion addresses the ultimate issue and usurps the function of the court as the trier of fact and the adjudicator of the law. Section 80 of the Act abolishes the common law rule on this issue. Section 80 is as follows:
Ultimate issue and common knowledge rules abolished
Evidence of an opinion is not inadmissible only because it is about—
(a) a fact in issue or an ultimate issue; or
(b) a matter of common knowledge.
I find that I may be assisted in hearing evidence on how a responsible and diligent chairman would or would not react to the facts alleged by ASIC.
In ASIC v Vines, Austin J said on the issue of expert evidence and the ultimate issue as follows:[7]
My ninth proposition is that, although there is no bar, as such, to the expert giving evidence about the ultimate issue having regard to s 80 of the Evidence Act, expert evidence directed to answering a question of law or fact that is directly before the Court for decision is inadmissible: see, before the commencement of the Evidence Act, ULV Pty Ltd v Scott. This proposition may be not so much a rule as an injunction to take particular care ‘when experts move close to the ultimate issue’ (R v GK; cited in Adler). The evidence is likely to be inadmissible not because it goes to the ultimate issue, but because it will not be wholly or substantially based on the expert’s specialised knowledge, or it will be irrelevant: Allstate Life Insurance Co v Australia and New Zealand Banking Group Ltd (No 6).
The concern about giving evidence of the ultimate issue is manifested in two ways. First, it is said that the expert may not give evidence of the content and application of a legal standard, for these are matters for the judge. Thus, in the Midland Bank Trust case Oliver J said that evidence of the witness’s view of what, as a matter of law, a solicitor’s duty was in the particular circumstances of the case was inadmissible, ‘for that is the very question which is the court’s function to decide.’ Contrast this with expert evidence about professional standards laid down by a professional institute or regularly practised. Evidence of the latter kind leaves it open to the Court to say that the standard is either too low or more exacting than reasonable skill and care requires: Rabelais per Hodgson J.
Evidence as to what a common and careful professional would do in specified hypothetical circumstances is to be distinguished from evidence as to the application of the legal standard, because it remains open for the Court, after receiving such evidence, to reject the opinion or to decide that the opinion does not identify the appropriate measure of the duty: Rabelais per Hodgson J. ‘Separating out the legal standard, which is a matter for the Court, from the question what a competent and careful professional could be expected to do (which may be regarded as one of fact) may be a problem, but not an insuperable one.’
[7]ASIC v Vines [27]–[29] (Austin J) (citations omitted).
In my opinion, bearing in mind those principles, it remains open for the Court after receiving the evidence of Mr Kriewaldt, to reject the opinion or decide that the opinion does not properly identify the appropriate measure of the duty. Also Mr Kriewaldt does not opine on whether or not Mr Flugge knew of all of the matters alleged in paragraph 48, including 48(i), of the statement of claim, which essentially alleges knowledge of wrongdoing. Further, as to the allegation Mr Flugge had means of knowledge and the alleged failures of Mr Flugge alleged in paragraph 52(a), I concede that it will remain open to the Court to reject or accept the evidence of Mr Kriewaldt and apply what the Court considers to be the appropriate legal duty.
Accordingly, I reject ASIC’s submission that to admit the evidence would usurp the role of the court.
I disallow the objections to the admissibility of Mr Kriewaldt’s evidence and find that the opinion is admissible.
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