Australian Securities and Investments Commission v Flugge (No 2)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE
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

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JUDGE:	ROBSON J
WHERE HELD:	Melbourne
DATE OF HEARING:	14 March 2017
DATE OF JUDGMENT:	10 April 2017
CASE MAY BE CITED AS:	ASIC v Flugge (No 2)
MEDIUM NEUTRAL CITATION:	[2017] VSC 117	First Revision 3 May 2017: para [124]

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CORPORATIONS – Penalties for breach of officer’s duties of s 180 of the Corporations Act 2001 (Cth) (Corporations Act) – Declaration of contravention – Whether disqualification orders should be made – Whether pecuniary penalties orders should be made – Factors to be considered in imposing penalties – Considerations of penalties imposed on other officers of AWB – Whether conduct serious – Sections 206C, 1317E and 1317G of the Corporations Act.

CORPORATIONS – Application for exoneration from liability for contravention of s 180 of the Corporations Act – Factors to be considered in exercising discretion to grant relief – Whether declaration of contravention must be made – Application refused – Sections 1718S and 1318 of the Corporations Act.

PRACTICE AND PROCEDURE – Costs – Exercise of discretion as to costs in a complex case involving many issues – Where separate and discrete issues – Plaintiff won some issues but lost others – Order that there be no order as to costs – Rule 63.04 Supreme Court (General Civil Procedure) Rules 2005 (Vic).

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M J Colbran QC with Ms C M Harris and Mr C H Truong	S Mirillis
For the Defendant	Mr K Dharmananda SC with Mr F R Pintos-Lopez	Corrs Chambers Westgarth

TABLE OF CONTENTS

Introduction.......................................................................................................................... 1
Relevant considerations for imposing a civil penalty................................................... 2
The circumstances of the breach of duty.......................................................................... 3
Relevant provisions............................................................................................................ 9
Pecuniary penalty.............................................................................................................. 12
Disqualification.................................................................................................................. 12
The relevant penalty principles...................................................................................... 13
Exoneration......................................................................................................................... 15
Parity19
Contrition............................................................................................................................ 24
Personal circumstances of Mr Flugge............................................................................ 26
Declaration.......................................................................................................................... 27
Disqualification.................................................................................................................. 28
Monetary penalty.............................................................................................................. 30
Costs. 31
Orders.................................................................................................................................. 36

HIS HONOUR:

Introduction

The Australian Securities and Investments Commission (ASIC) brought a civil proceeding against Mr Flugge under the Corporations Act 2001 (Cth) (Corporations Act) alleging that, whilst chairman of AWB Limited (AWB), he breached his duties under ss 180 and 181 of the Corporations Act, arising out of AWB’s conduct in selling wheat to Iraq under the United Nations (UN) Oil-for-Food Program (OFFP).

I have found that Mr Flugge breached his duty under s 180 of the Corporations Act but that Mr Flugge did not breach his duty under s 181 of the Corporations Act. In substance, I found that Mr Flugge, as chairman and a director of AWB, failed, and continued to fail, to make any inquiries into the propriety of AWB’s payment of inland transportation fees to the Iraqi Grain Board (IGB) in circumstances where he had a duty to do so and he had the means of doing so.

I have found that the duty was enlivened by Mr Flugge being present when a complaint was conveyed by the UN, that AWB may have been making inappropriate transportation payments to Iraq in circumstances where Mr Flugge was aware of the payments and was aware of the circumstances surrounding the introduction of those payments, including the OFFP and the UN sanctions. ASIC also alleged that Mr Flugge knew the inland transportation fee payments were being made by AWB to Iraq in breach of UN resolutions, that they were a sham, and were improper and evil conduct. I found that this allegation, and that he acted contrary to s 181 of the Corporations Act, were not proved.

ASIC seeks a declaration of contravention relating to the breach of duty by Mr Flugge, the maximum monetary penalty of $200,000 for the breach of s 180, and disqualification of Mr Flugge from managing corporations for a period of 10 years. ASIC also seeks an order that Mr Flugge pay 70 per cent of ASIC’s costs.

Mr Flugge, for his part, applies to be relieved from liability for the breach under ss 1718S and 1318 of the Corporations Act. Failing exoneration, Mr Flugge resists the pecuniary penalty that ASIC seeks and resists disqualification for any period.

On the issue of costs, in the event his application for exoneration is successful, Mr Flugge seeks an order that ASIC pay Mr Flugge’s costs of the proceeding on a party/party basis. Alternatively, if Mr Flugge’s application is unsuccessful, that ASIC pay 10 per cent of his costs, on the basis that 12 per cent of the trial was dedicated solely to issues concerning Mr Geary, and that ASIC pay 75 per cent of Mr Flugge’s remaining costs, on the basis of proportion of the allegations against Mr Flugge that ASIC lost (having won the balance).

For the reasons that follow, I have found that Mr Flugge is not entitled to be exonerated under either s 1718S or s 1318 of the Corporations Act. I make a declaration relating to the breach of s 180 I have found against Mr Flugge. I have decided, in my discretion, to impose a pecuniary penalty of $50,000 on Mr Flugge for his breach of s 180 of the Corporations Act. I have decided, in my discretion, to impose a period of disqualification of five years.

Relevant considerations for imposing a civil penalty

Two of the main elements taken into account in imposing criminal sentences are the circumstances of the offence and the circumstances of the offender. The Court of Appeal in this Court in Elliott v ASIC[1] said that, in imposing a penalty under the Corporations Act, similar factors to that taken into account in sentencing are relevant to the court’s consideration.
[1]Elliott v ASIC; Plymin v ASIC [2004] 10 VR 369 [137] (‘Elliott v ASIC’).

There are, however, major differences between criminal proceedings and civil penalty proceedings. First, the proceedings are civil, not criminal, with all that entails. A significant difference is that the civil rules of evidence apply. The plaintiff must establish its case on the balance of probabilities and not beyond reasonable doubt, although the Briginshaw v Briginshaw[2] principle applies in considering whether or not the court is comfortably satisfied of the elements of the breach. Importantly, the evidentiary rule of Jones v Dunkel[3] applies in civil proceedings, but not in criminal proceedings. The rule, in substance, is that a tribunal of fact can more readily draw an inference adverse to a party if that party does not give evidence to rebut that inference where that party would be expected to be able to rebut the inference.
[2](1938) 60 CLR 336.
[3](1959) 101 CLR 298.

In this case, ASIC relied on the rule in Jones v Dunkel. It was relevant to the finding that Mr Flugge knew of and understood the complaint conveyed by the UN about AWB making inappropriate transportation payments to Iraq. Mr Flugge did not give evidence to deny hearing or understanding the complaint. The Court, however, was able to more readily draw the inference that Mr Flugge did hear and understand the complaint, by his failure to give evidence to deny that he did hear or understand the complaint. In any event, the report of Mr Nicholas the Australian Trade Commissioner of the meeting wherein the complaint was raised, referred to Mr McConville and Mr Flugge indicating they would respond to the UN’s concern.

The circumstances of the breach of duty

The full description of Mr Flugge’s breach is contained in my judgment in ASIC v Flugge & Geary.[4] Anything I say in this judgment is not intended to add to, or qualify, my reasons for finding Mr Flugge did breach his duty under s 180 of the Corporations Act.
[4][2016] VSC 779 (the liability judgment).

ASIC maintained two cases against Mr Flugge that he breached his duties as a director. The main case was based on Mr Flugge’s alleged knowledge of the impropriety and fraudulent nature of the payment by AWB to the IGB of inland transportation fees, and failing to make out that case, an alternative case was made, being that if Mr Flugge did not have knowledge of the impropriety of the inland transportation fees, he had the means of knowledge, and breached his duties as director by failing to inquire, using those means of knowledge, when he ought to have done so.

On the first case, ASIC alleged that at all material times Mr Flugge knew the purpose and effect of the payment of the inland transportation fees by AWB to the IGB was to enable the government of Iraq to obtain payments of internationally traded currency from AWB, disguised as amounts payable by AWB in respect of IGB fees, which payments the UN had called on member states to prevent. In other words, Mr Flugge knew that the payments were being made in breach of the UN sanctions. ASIC alleged that Mr Flugge knew that the purported payment of the inland transportation fees were a sham, the real purpose of which was to improperly convey internationally traded currencies to Iraq in breach of UN sanctions, that he knew that the transactions constituted a fraud on the UN, and that he was knowingly a party to improper and evil conduct.

I found that ASIC failed to make out this case. I did, however, find that ASIC had made out its alternate case, in that Mr Flugge had the means of knowledge and in breach of his duty as a director failed to, and continued to fail to, avail himself of the means of knowledge available to him and inquire into the propriety of the payment of the inland transportation fees.

The duty to exercise the means of knowledge available was enlivened following the meeting in Washington in March 2000. The liability judgment covers in detail the meeting in Washington. In substance, Mr Flugge was informed that the UN were making inquiries of AWB as to whether AWB was making inappropriate payments to Iraq for discharge/trucking. I found that a reasonable director in the circumstances of Mr Flugge, exercising reasonable care and skill, knowing what Mr Flugge knew, would have made inquiries. I was not satisfied that Mr Flugge made any inquiries as to whether or not the payment of the inland transportation fees were irregular; why it was suggested that they were irregular; and why the UN would make inquiries about irregular payments of the inland transportation fees if the UN had approved the payment of the inland transportation fees.[5]
[5]Liability judgment [1916].

I found that his failure to make inquiries, and his continuing to fail to make inquires, constituted a breach of his duty of care and diligence under s 180(1).

The breach of duty by Mr Flugge must be seen in the context of Mr Flugge’s existing knowledge. Mr Flugge knew of the importance to AWB of the wheat sales to Iraq and the Iraqi market. Mr Flugge was aware of the UN sanctions imposed on Iraq after the First Gulf War. Mr Flugge knew of the relaxing of those sanctions with the OFFP in 2006. Mr Flugge had gone to Iraq after the OFFP was introduced to assist AWB to reopen its dealings with Iraq. Mr Flugge knew that AWB had successfully begun to export wheat to Iraq under the OFFP, which was supervised by the UN in New York. Mr Flugge was aware that AWB had a representative in New York dealing with the UN over AWB exports of wheat to Iraq. Mr Flugge knew that AWB obtained moneys from the UN escrow account, held by the UN under the OFFP, for contracts for the sale of wheat to Iraq by AWB approved by the UN.

Mr Flugge knew that in 1999 the IGB had, for the first time, insisted it be paid a fee for the purported inland transportation of wheat. Mr Flugge was aware that AWB officers were discussing the IGB’s request for payment of the inland transportation. Mr Flugge discussed the request by Iraq with Mr Officer. Mr Flugge had accompanied Mr Rogers and Mr Hogan to Baghdad, in August 1999, where Mr Rogers discussed with the IGB, in Mr Flugge’s presence, issues surrounding the payment of the inland transportation fees by AWB to an Iraqi entity nominated by the IGB.

Mr Flugge knew that AWB came to the conclusion that it had no alternative but to pay the fees. Mr Flugge was aware that payments of the inland transportation fees were not made directly to the IGB in Baghdad but were made through a company called Ronly Holdings Limited (Ronly).

AWB, including the board of AWB, was well aware that Iraq had poor distribution facilities to distribute wheat throughout Iraq. Most of the AWB officers who were called to give evidence believed that the UN had approved the payment of the inland transportation fees. There was no evidence led that Mr Flugge believed anything different to that believed by these AWB officers.

The AWB board, chaired by Mr Flugge, was expressly informed by the CEO and managing director, Mr Lindberg, in mid-2000, following the Washington meeting, of the payment of the inland transportation fees to Iraq, and that they had been approved by the UN. The OFFP did permit the use of moneys in the UN escrow account to be used for humanitarian purposes in Iraq.

I have discussed in my liability judgment how the UN did approve the first contracts that expressly provided for AWB to pay the transportation fees and how the Australian government also approved the contracts. I have also discussed how the UN was not fully informed of the implications of the contracts that it approved and that the UN was not expressly informed: of the new term that was sought; of the negotiations about paying the fees; of the discussions about paying the fees so it would not be impeded by USA sanctions; that there was no contractual obligation on either AWB or the IGB to transport the wheat within Iraq; and of the use of Alia to make the payments to Ronly.

The context of Mr Flugge’s breach of duty should also include the fact that during the period that Mr Flugge breached his duty, or even beforehand, ASIC did not establish that anybody in AWB, including any member of the board (which had been informed of the payments in mid-2000), its legal department, senior officers, or the Australian government, made any contact with the UN to confirm that the UN had in fact approved the payment of the inland transportation fees with full knowledge of all the circumstances surrounding the payment of the fees.

It is necessary to acknowledge that it was the duty of those managing AWB, such as the managing director, the legal department, the Corporate Risk Review Committee, and the Executive Leadership Group within AWB, to ensure that AWB was conducting its international trade with probity, including ensuring that it was observing UN sanctions when trading with Iraq. It appears that these people and bodies may not have properly carried out their duties. One would have expected, at the least, some correspondence informing the UN fully of what the IGB had requested, particularly as the fees involved the payment of internationally traded currencies to Iraq.

Mr Flugge might be excused, as the chairman of the board, and a person not responsible for the management of AWB, for not taking it upon himself to make inquiries when those around him had not informed him of any issues with AWB’s contracts with Iraq and the UN supervision of the UN sanctions against Iraq.

Mr Flugge had no management or executive responsibilities within AWB. These rested with the AWB executives. Mr Flugge’s trip to Washington was part of his duties of ‘showing the flag.’

But, and it is a significant ‘but’, Mr Flugge was present when the Australian Trade Commissioner, Mr Nicholas, passed on to the AWB officers, present at the Washington meeting, that the UN was inquiring about whether AWB was making inappropriate payments to Iraq for discharge/trucking. Mr Nicholas reported that Mr McConville and Mr Flugge expressed the view that this complaint would be taken seriously by AWB and that a full response would be forthcoming for the UN.

The fees were unusual, as Mr Flugge knew. As discussed above, Mr Flugge was aware of the circumstances surrounding their introduction. As I have found, the complaint would have raised, in a reasonable director, knowing what Mr Flugge knew, concerns about the propriety of the payments to the IGB and would have prompted a reasonable director, in Mr Flugge’s position, to inquire as to why the UN was inquiring into the propriety of the payment of the fees.

I have found that a director in Mr Flugge’s position, knowing what Mr Flugge knew, exercising reasonable care and diligence, would have inquired why the UN was making such an inquiry if the UN was already fully informed that AWB was making such payments to Iraq. I have inferred that Mr Flugge would have understood the inquiry suggested that the UN may not be fully aware of what AWB was doing. A director in Mr Flugge’s position, exercising reasonable care and diligence would, in my opinion, have made appropriate inquiries, particularly one with the background knowledge that Mr Flugge had about the introduction of the fee and the consternation that caused within AWB. As stated in my liability judgment, I have found that such inquiries should have been made and that Mr Flugge’s failure to do so continued up until he ceased to act as director. As stated in my reasons, I am satisfied adequate inquires would have unearthed the full story, and the conduct in breach of sanctions would have ceased.

What comes out of this analysis of the context is the fact that Mr Flugge was not alone in failing to make inquiries or in failing to carry out his duties. The evidence suggested that Mr Snowball already had more than an inkling that something was amiss. The government affairs officer, Mr McConville, also should have known something might be amiss, as he had received a similar complaint in Melbourne earlier. Both Mr Snowball and Mr McConville were also present at the Washington meeting. They might be criticised for not informing Mr Flugge, or anyone else, of their concerns.

It is relevant that Mr Flugge has been left to face the accusations of ASIC almost alone, when many other AWB executives have avoided being proceeded against. The Australian community, however, has every right to be profoundly disappointed in AWB’s conduct and the ignominy that it brought on Australia and the damage suffered by its shareholders.

Nevertheless, the Court should be circumspect in not adding onto Mr Flugge the sins of others within AWB who have escaped being penalised.

Mr Flugge’s actions in failing to make inquiries were not motivated by any personal concern for monetary gain. I have measured Mr Flugge’s conduct against the objective standard required of him under s 180(1) and found that he failed, and continued to fail, to exercise the required level of care and skill by failing to act as a reasonable director would have acted. I made no findings as to his state of mind in relation to not making inquiries.

I am satisfied that Mr Flugge has contravened a civil penalty provision. Mr Flugge, however, seeks to be relieved from liability for contravention of civil penalty provisions.

ASIC rejects Mr Flugge’s application for exoneration. ASIC seeks a declaration of contravention, a pecuniary penalty and a period of disqualification against Mr Flugge, and submits that due to the serious nature of the contravention and the exceptional gravity and extent of the harm which followed from the contravention, justifies the making of all orders sought, as set out below.

Relevant provisions

Mr Flugge seeks relief from liability pursuant to s 1317S or s 1318 of the Corporations Act, on the grounds that at all times he acted honestly, and Mr Flugge submits that he ought fairly be excused from any further liability beyond that which he has already suffered.

Section 1317E provides:

(1)If a Court is satisfied that a person has contravened a civil penalty provision, it must make a declaration of contravention. The provisions specified in column 1 of the following table are civil penalty provisions.

Item 1 of the table includes s 180(1) officers’ duties.

(2) A declaration of contravention must specify the following:
(a)the Court that made the declaration;
(b)the civil penalty provision that was contravened;
(c)the person who contravened the provision;
(d)the conduct that constituted the contravention;
(e)if the contravention is of a corporation/scheme civil penalty provision–the corporation or registered scheme to which the conduct related.

Section 1317S provides:

Relief from liability for contravention of civil penalty provision
(1) In this section:
eligible proceedings:
(a)means proceedings for a contravention of a civil penalty provision (including proceedings under section 588M, 588W, 961M, 1317GA, 1317H, 1317HA or 1317HB); and
(b)does not include proceedings for an offence (except so far as the proceedings relate to the question whether the court should make an order under section 588K, 1317H, 1317HA or 1317HB).

(2) If:
(a)eligible proceedings are brought against a person; and
(b)in the proceedings it appears to the court that the person has, or may have, contravened a civil penalty provision but that:
(i)the person has acted honestly; and
(ii)having regard to all the circumstances of the case (including, where applicable, those connected with the person’s appointment as an officer, or employment as an employee, of a corporation or of a Part 5.7 body), the person ought fairly to be excused for the contravention;

the court may relieve the person either wholly or partly from a liability to which the person would otherwise be subject, or that might otherwise be imposed on the person, because of the contravention.
(3)In determining under subsection (2) whether a person ought fairly to be excused for a contravention of section 588G, the matters to which regard is to be had include, but are not limited to:
(a)any action the person took with a view to appointing an administrator of the company or Part 5.7 body; and
(b)when that action was taken; and
(c)the results of that action.

(4)If a person thinks that eligible proceedings will or may be begun against them, they may apply to the Court for relief.
(5)On an application under subsection (4), the Court may grant relief under subsection (2) as if the eligible proceedings had been begun in the Court.
(6)For the purposes of subsection (2) as applying for the purposes of a case tried by a judge with a jury:
(a)a reference in that subsection to the court is a reference to the judge; and
(b)the relief that may be granted includes withdrawing the case in whole or in part from the jury and directing judgment to be entered for the defendant on such terms as to costs as the judge thinks appropriate.

(7) Nothing in this section limits, or is limited by, section 1318.

Section 1318 provides:

Power to grant relief
(1)If, in any civil proceeding against a person to whom this section applies for negligence, default, breach of trust or breach of duty in a capacity as such a person, it appears to the court before which the proceedings are taken that the person is or may be liable in respect of the negligence, default or breach but that the person has acted honestly and that, having regard to all the circumstances of the case, including those connected with the person’s appointment, the person ought fairly to be excused for the negligence, default or breach, the court may relieve the person either wholly or partly from liability on such terms as the court thinks fit.
(2)Where a person to whom this section applies has reason to apprehend that any claim will or might be made against the person in respect of any negligence, default, breach of trust or breach of duty in a capacity as such a person, the person may apply to the Court for relief, and the Court has the same power to relieve the person as it would have had under subsection (1) if it had been a court before which proceedings against the person for negligence, default, breach of trust or breach of duty had been brought.
(3)Where a case to which subsection (1) applies is being tried by a judge with a jury, the judge after hearing the evidence may, if he or she is satisfied that the defendant ought pursuant to that subsection to be relieved either wholly or partly from the liability sought to be enforced against the person, withdraw the case in whole or in part from the jury and forthwith direct judgment to be entered for the defendant on such terms as to costs or otherwise as the judge thinks proper.
(4)This section applies to a person who is:
(a)an officer or employee of a corporation; or
(b)an auditor of a corporation, whether or not the person is an officer or employee of the corporation; or
(c)an expert in relation to a matter:
(i)relating to a corporation; and
(ii)in relation to which the civil proceeding has been taken or the claim will or might arise; or

(d)a receiver, receiver and manager, liquidator or other person appointed or directed by the Court to carry out any duty under this Act in relation to a corporation.

(5)This section does not apply to a corporation that is an Aboriginal and Torres Strait Islander corporation.

Pecuniary penalty

ASIC seeks a pecuniary penalty of $200,000 under s 1317G(1) of the Corporations Act.

Section 1317G(1) of the Corporations Act relevantly provides:

Pecuniary penalty orders
Corporation/scheme civil penalty provisions
(1)A Court may order a person to pay the Commonwealth a pecuniary penalty of up to $200,000 if:
(a)a declaration of contravention by the person has been made under section 1317E; and
(aa)the contravention is of a corporation/scheme civil penalty provision; and

(b)the contravention:
(i)materially prejudices the interests of the corporation or scheme, or its members; or
(ii)materially prejudices the corporation’s ability to pay its creditors; or

(iii)is serious.

Disqualification

ASIC seeks a disqualification period of 10 years under s 206C of the Corporations Act.

Section 206C relevantly provides:

Court power of disqualification–contravention of civil penalty provision
(1)On application by ASIC, the Court may disqualify a person from managing corporations for a period that the Court considers appropriate if:
(a)a declaration is made under:
(i)section 1317E (civil penalty provision) that the person has contravened a corporation/scheme civil penalty provision; … and

(b)the Court is satisfied that the disqualification is justified.

(2)In determining whether the disqualification is justified, the Court may have regard to:
(a)the person’s conduct in relation to the management, business or property of any corporation; and
(b)any other matters that the Court considers appropriate.

…

The relevant penalty principles

The approach to be taken in an application for a penalty under the civil penalty proceedings of the Corporations Act was addressed in Rich v ASIC.[6]McHugh J said that the factors that courts take into account when ordering disqualification are not limited to protection of the public. His Honour said, ‘[e]lements of retribution, deterrence, reformation and mitigation as well as the objective of the protection of the public inhere in the orders and periods of disqualification made under the legislation.’[7]
[6](2004) 220 CLR 129.
[7]Rich v ASIC (2004) 220 CLR 129 [41].

His Honour continued:[8]

If the disqualification provisions were purely protective, the only issue for the court would be whether the defendant is now or will in the future be a fit and proper person to manage corporations. If the court were to find that, despite the misconduct, the defendant is now a fit and proper person to manage corporations, the court should refuse to make an order of disqualification. If the court were to find that the defendant would be a fit and proper person to manage corporations in the future, the only issue for determination would be the time when that would occur. Moreover, if the jurisdiction were purely protective, it is hard to see why orders for disqualification should be for fixed periods, as they almost invariably are. Fixed periods of disqualification suggest punishment rather than protection in the same way that disqualification from driving for a period is a punishment rather than an act protective of the public. If the jurisdiction were purely protective, one might have thought that the proper order would be indefinite disqualification with the onus on the defendant to show at some future date that he or she were now a fit and proper person to manage corporations.[9] At all events, if the jurisdiction were purely protective, the defendant should have liberty to apply during the period of disqualification to show that he or she is now a fit and proper person to manage corporations.
In exercising their discretion, however, courts which administer the legislation do not concern themselves solely with the issue of whether the defendant now is or in the future will be a fit and proper person to manage corporations. They take into account a wide variety of factors in addition to determining whether any and, if so, what period of disqualification should be imposed. They consider more than the present and future fitness of the defendant to manage corporations. They take into account factors such as the size of any losses suffered by the corporation, its creditors and consumers, legislative objectives of personal and general deterrence, contrition on the part of the defendant, the gravity of the misconduct, the defendant’s previous good character, prejudice to the defendant’s business interests, personal hardship and the willingness of the defendant to render assistance to statutory authorities and administrators. No doubt some — maybe all — of these matters are relevant in determining whether the defendant ought to be disqualified or the period of disqualification that is required in order to protect the public. But in practice courts do not use these matters merely as evidentiary indicators of the time when the defendant will, if ever, be fit to manage corporations. Rather, they become part of a synthesis from which the judges make a value judgment concerning whether to order disqualification and, if so, the period of disqualification that should be imposed. It is not the practice of judges to say: “On the evidence, I find that after (say) five years, the defendant will be sufficiently reformed to make it safe for him or her to manage corporations.“ This suggests that the disqualification provisions are not purely protective in nature.

[8]Rich v ASIC (2004) 220 CLR 129 [42]–[43].

[9]For example, in ASIC v Hutchings (2001) 38 ACSR 387, 395, Windeyer J ordered that the defendant directors be disqualified from managing corporations for life, with the right to apply on three months’ notice after five years for a variation of the order.

These principles were cited and applied by Barrett J in ASIC v Edwards (No 3).[10]
[10][2006] NSWSC 376.

In Rich v ASIC, McHugh J also approved 15 propositions relating to disqualification that were laid down by Santow J in Re HIH Insurance Ltd; ASIC v Adler.[11]
[11][2002] NSWSC 483 (‘ASIC v Adler’).

Santow J said that:[12]

It is well established that the principal purpose of a pecuniary penalty is to act as a personal deterrent and a deterrent to the general public against a repetition of like conduct (ASC v Donovan; Trade Practices Commission v CSR Limited). In Donovan, the court said:
‘If compliance with the appropriate standards of commercial conduct within the management of corporations by deterrents is the objective, then any penalty should be no greater than is necessary to achieve this objective. Otherwise severity above that figure would be oppressive.’

[12][2002] NSWSC 483, [125] (citations omitted).

His Honour went on to list the relevant principles to be taken into account when determining whether it is appropriate to impose a pecuniary penalty.[13]
[13][2002] NSWSC 483, [126].

Reference may also be made to the observations of the Court of Appeal in Elliott v ASIC and ASIC v Ingleby (No 2).[14] In ASIC v Ingleby (No 2), Weinberg JA said:[15]

Pecuniary penalties have been described as ‘a hybrid between the criminal and the civil law.’[16] They are founded on the notion of preventing or punishing public harm.[17] Often, the contravention that they are intended to meet is itself similar to a criminal offence, and many of the ordinary principles that govern sentencing for such offences are equally applicable to such civil penalties.[18] In some cases, civil penalties can be more severe than criminal penalties for the same or similar conduct.

[14]ASIC v Ingleby [2013] VSCA 49 (‘ASIC v Ingleby (No 2)’).

[15]ASIC v Ingleby(No 2) [2013] VSCA 49 [5].

[16]Australian Law Reform Commission, Principled Regulation – Federal Civil & Administrative Penalties in Australia, Report No 95 (2002) [2.47] (‘ALRC Report’).

[17]ALRC Report [2.47].

[18]These would include deterrence, both specific and general, totality and parity. Courts imposing pecuniary penalties would have regard to aggravating and mitigating factors, in the same way as they do when sentencing criminal offenders: see ASIC vAdler (2002) 42 ACSR 80, 114–17 (Santow J).

I have considered these factors and the specific circumstances of the breach I have found against Mr Flugge and discuss the pecuniary penalty to be imposed below. I will firstly deal with Mr Flugge’s application for exoneration.

Exoneration

Mr Flugge applies for exoneration from any form of penalty being imposed against him.

There is a question as to whether Mr Flugge can be exonerated from a declaration of contravention being made against him.

Mr Flugge relies on comments of Mandie J in ASIC v Plymin (No 2),[19] to the effect that the court’s power to grant exoneration ‘may operate in relation to all or any of the orders which the court may make, including a declaration.’[20]
[19][2003] VSC 230.
[20]ASIC v Plymin (No 2) [2003] VSC 230 [7] (Mandie J).

ASIC submits that the better view is that a declaration of contravention is not a liability and that the mandatory provisions of s 1317E provide that, once liability has been found, the court must make the declaration.

ASIC concedes that the authorities on this point are somewhat ambiguous. ASIC acknowledges the above comments of Mandie J and notes that in the case of ASIC v Whitlam (No 2),[21] (before being overturned on appeal) relief was granted but the declaration remained.
[21]ASIC v Whitlam [2002] NSWSC 591.

An application for relief under ss 1317S and 1318 involves three stages of inquiry:[22]
[22]ASIC v Healey (No 2) (2011) 196 FCR 430 (‘Healey’) [84]. See also ASIC v Australian Property Custodian Holdings Limited (receivers and managers appointed) (in liquidation) [2014] FCA 1308 (‘ASIC v APCH’) (Murphy J) [57]–[58], citing Healey (Middleton J).

(a) whether the applicant for relief has acted honestly;

(b) whether, having regard to all the circumstances, the applicant ought fairly to be excused; and

(c) whether the applicant should be relieved from liability wholly or in part, and if partly, to what extent.

It is for the director to satisfy the Court under each of those limbs.[23] Mr Flugge has the burden of persuading me in relation to this evaluative judgment.

[23]Dominium Insurance Company of Australia Limited (in liquidation) vFinn (1989) 7 ACLC 25 (‘Dominion’) 33–34 (Powell J); ASIC v APCH [2014] FCA 1308 [68]; Vines v ASIC (2007) 73 NSWLR 451 [7].

ASIC submitted that the Court could not be positively persuaded that Mr Flugge had acted honestly when contravening s 180(1), because he gave no evidence that he did so in failing to carry out his duties.

Gzell J held in ASIC v MacDonald (No 12)[24] that a person acts honestly, for the purposes of s 1317S(2) or s 1318(1), if that person’s conduct is without moral turpitude in the sense that it is without deceit or conscious impropriety, without intent to gain improper benefit or advantage and without carelessness or imprudence at a level that negates the performance of the duty in question. His Honour said:[25]

That conclusion may be drawn from evidence of the person’s subjective intent. But a lack of such subjective intent will not lead the court to conclude that a person acted honestly if a reasonable person in that position would regard the conduct as exhibiting moral turpitude.

[24] [2009] NSWSC 714 [22].

[25]ASIC v MacDonald (No 12) [2009] NSWSC 714 [22].

As was said in ASIC v McDonald (No 12), ‘a finding that a person acted honestly for the purposes of ss 1317S(2) and 1318(1) is not determined by a self-serving statement to that effect by the person seeking exoneration. The court will determine the matter on the evidence.’[26]
[26]ASIC v McDonald(No 12) [2009] NSWSC 714, [189].

I am satisfied that Mr Flugge acted honestly in the sense required by ss 1317S(2) and 1318(1). I do not consider that he acted with moral turpitude in the sense that I find that his conduct was without deceit or conscious impropriety; I find that it was without intent to gain improper benefit or advantage, and I find that it was without carelessness or imprudence at a level that negates the performance of the duty in question.

If a finding of honesty is made, a broad range of matters are relevant to whether an applicant for relief ‘ought fairly to be excused’ and also to whether to exercise the discretion to grant relief.[27] The authorities set out a broad range of factors, many of which are set out by Austin J in Vines v ASIC.[28] This can be seen as a ‘value judgment rather than an exercise in discretion.’[29]
[27]ASIC v APCH [2014] FCA 1308 [39]–[41].
[28](2007) 73 NSWLR 451. See also Gillifillan v ASIC [2012] NSWCA 370 [175]–[176].
[29]Morely v ASIC (No 2) (2011) 83 ACSR 620 (‘Morley’) [16] (Spigelman CJ, Beazley and Gilles JJA); ASIC v APCH [2014] FCA 1308 [72] (Murphy J); Vines v ASIC (2007) 73 NSWLR 451 [558] (Spigelman CJ with whom Ipp JA agreed); [802] (Santow JA).

As was said in ASIC v APCH, the Court is bound to consider all of the circumstances of the case when determining whether the defendant ought fairly to be excused and whether to exercise the discretion; ‘it must be the case that if a matter is relevant to be considered by the court in deciding on the questions of disqualification and pecuniary penalty it must be relevant in deciding whether to grant relief from liability. Accordingly the factors that may be considered include the lists of considerations in [ASIC v] Adler.’[30]
[30][2014] FCA 1308 [74] citing Morley (2011) 83 ACSR 620 [50]; Maelor Jones (1989) 54 SASR 285, 292; Re Turner Barker v Ivimey [1897] 1 Ch D 536, 542 (Byrne J); ASIC v Adler [2002] NSWSC 483 [56], [125]–[126]; Healey (2011) 196 FCR 430 [91]; Vinesv ASIC (2007) 73 NSWLR 451 [50].

Although I do not find that Mr Flugge acted dishonestly, the breach of duty was serious and had serious adverse consequences. His conduct was a significant departure of the conduct required of a director. It was not a minor or accidental breach of duties that could be excused, particularly having regard to the circumstances of the appointment of Mr Flugge. The payment of the inland transportation fees was unusual. The payments arose in any area where AWB had to be particularly careful as wheat was being exported to Iraq under the OFFP, that modified the existing sanction regime. The payments warranted a trip to Iraq by the CEO, Mr Rogers, with Mr Hogan. The complaint conveyed to Mr Flugge went to the propriety of AWB’s actions and had led to the UN raising the matter, via Mr Nicholas, with Mr Flugge, who was the chairman of the board.

The evidence did not establish why Mr Flugge did not make the inquiries that he ought. His conduct in not doing so seems at odds with his standard of conduct that is borne witness to in the many fine character references tendered on his behalf.[31] ASIC pressed that Mr Flugge has not offered an explanation for his failure to carry out his duties and suggests that that somehow must tell against him. As I have said, I made no findings as to his state of mind.
[31]The character references provided in support of Mr Flugge’s application for exoneration and are listed below.

I consider that the breach of duty was serious. In the scale of breaches it was certainly not egregious, but it was not the sort of breach for which a director, knowing what Mr Flugge knew, should be excused.

Mr Flugge has not satisfied me that he ought fairly to be excused for the breach of s 180(1), or that he ought be relieved, wholly or in part, from liability for the breach of s 180(1). I have found that Mr Flugge should receive a civil penalty.

In determining the appropriate penalty to be imposed, it is important to bear in mind principles of sentencing.[32]
[32]As discussed above, these would include deterrence, both specific and general, totality and parity. Courts imposing pecuniary penalties would have regard to aggravating and mitigating factors, in the same way as they do when sentencing criminal offenders: see ASIC v Adler [2002] NSWSC 483 [125]–[134] (Santow J).

Parity

As stated by Weinberg JA in ASIC v Ingleby (No 2), parity is a relevant factor in determining the appropriate penalty. In considering parity, the Court would be entitled to consider the penalty imposed in any other cases with material common elements.

Some of the authorities in relation to parity were helpfully set out by Gzell J in ASIC v MacDonald (No 12) as follows:[33]
[33][2009] NSWSC 714 [319]–[322] (approved in Healey (2011) 196 FCR 430 [126]) (citations omitted).

In Postiglione v R it was held that the parity principle of sentencing requires that there should not be a marked disparity between sentences imposed on co-offenders which gives rise to a justifiable sense of grievance.
In Lowe v R Gibbs CJ said it was obviously desirable that persons who have been parties to the commission of the same offence should, if other things are equal, receive the same sentence. But other things are not always equal and such matters as the age, background, previous criminal history and general character of the offender, and the part which he or she played in the commission of the offence, have to be taken into account.
As Finkelstein J said in Australian Competition and Consumer Commission v ABB Transmission and Distribution Ltd (No 2):
Next there is the parity principle. The principle is that “[w]here other things are equal persons concerned in the same crime should receive the same punishment; and where other things are not equal a due discrimination should be made”: R v Tiddy. The principle requires little explanation. Consistency in punishment is an attribute of a rational and fair system of justice.

Other things being equal, there must be, as Austin J said in Vines, a persuasive rationale for any difference in the disqualification periods for each of the defendants.

The Court has imposed penalties in relation to the scandal over the payment by AWB of inland transport fees to Iraq in contravention of UN sanctions in two case: Mr Lindberg, the former managing director and CEO of AWB; and Mr Ingleby, the former CFO of AWB.

The principles of parity in relation to co-offenders are not relevant, as the AWB officers were not found to be involved in a joint enterprise. The penalties imposed are relevant however to the extent that they reflect comity and common sentencing practice.

The authorities make clear that a sentence is not obliged to achieve parity between an offender sentenced pursuant to an agreed statement of facts and a co-offender who did not receive the benefit of such an agreement.

In R v Mielicki the Victorian Court of Criminal Appeal said:[34]

It would, in our view, be an extraordinary situation for a court to interfere to reduce the sentence for one offender which has been artificially confined by an agreed statement of facts by reference to the sentences passed on co-offenders who have not received such a benefit. The concept of parity, which is designed to remedy perceived injustice where co-offenders have received excessively disparate sentences for the same criminal activities would be totally distorted if it were to be applied to the artificial situation here confronting a sentencing court to confer yet further benefits upon an offender in the applicant’s position. It cannot be said that the interest of justice require such an approach.

[34](1994) 73 A Crim R 72, [85]; see also R vSimmons [2008] VSCA 185.

ASIC and Mr Ingleby agreed to a penalty of a fine of $40,000 and disqualification of 15 months on an agreed statement of facts. On appeal, the Court agreed with the trial judge that he was not bound by the agreement as to penalty but was obliged to impose what he considered the appropriate penalty giving due consideration to the agreed penalty.

Harper JA said that the agreed penalties may not have reflected the true level of Mr Ingleby’s culpability.[35] However, as Mr Ingleby did not appear at the appeal, likely on the assumption that ASIC would not seek a higher penalty, the Court felt constrained not to increase the penalty.[36]
[35]ASIC v Ingleby (No 2) [2013] VSCA 49 [41].
[36]ASIC v Ingleby (No 2) [2013] VSCA 49 [42]–[43].

The Court held Mr Ingleby’s conduct constituted a serious breach of his obligations under s 180(1) of the Corporations Act. The Court imposed a financial penalty of $40,000 and a period of disqualification of 15 months, as agreed between ASIC and Mr Ingleby. Harper JA queried why, on the facts before the Court, ASIC did not seek a finding of wilful blindness, suggesting an appeal against the finding that Mr Ingleby’s actions and inactions did not also constitute a breach of s 181 may have been appropriate.

Mr Ingleby, as the CFO, sat at the heart of the administration of the contracts of AWB with the IGB. Harper JA said that Mr Ingleby held a position which the statement of agreed facts suggested (but did not explicitly spell out) placed him with the authority and, perhaps the responsibility, to inquire into AWB’s conduct of its very significant trade with Iraq.[37] Harper JA noted that:[38]

Between 2000 and 2003 Mr Ingleby’s responsibilities included risk management and compliance and, between 2000 and 2002, legal. The head of Trade Finance reported to him, as did the Treasurer. Mr Ingleby was a member of the AWB Group’s executive committee and its corporate risk review committee. He attended meetings of the Boards of AWB and AWB International Ltd, as well as meetings of the audit, risk and investment committees of one or other or both of those entities.

[37]ASIC v Ingleby (No 2) [2013] VSCA 49 [74].

[38]ASIC v Ingleby (No 2) [2013] VSCA 49 [78].

Mr Ingleby was a senior executive who was aware of the sanctions. On the agreed facts, he had information available to him that raised questions as to the legitimacy of the inland transportation fees. His contravention included failing to make proper inquires as to whether the fees were ultimately being paid to the government of Iraq.

Thus, on one side, there is the suggestion that with a free hand the Court of Appeal may have imposed greater penalties on Mr Ingleby than had been agreed with ASIC, but on the other hand, Mr Ingleby’s position as the chief financial officer imposed on him management duties that go beyond the duties of the chairman of AWB to make inquiries, particularly in view of the information available to Mr Ingleby.

Mr Lindberg, the former CEO and managing director of AWB, also reached agreement on a statement of contraventions, facts and penalty with ASIC. Mr Lindberg agreed to a fine of $100,000 and disqualification for approximately two years. Mr Lindberg held the ultimate responsibility for ensuring AWB conducted its trade with Iraq in compliance with the UN sanctions.

He had agreed to and admitted four contraventions. In substance, they were that Mr Lindberg failed to make inquiries and ascertain whether the recovery of the Tigris Debt[39] from the UN escrow account was contrary to the UN resolutions and that Mr Lindberg failed to tell the board, or delayed in telling the board, relevant information.
[39]The Tigris Debt and Tigris transaction are fully discussed in my liability judgment in relation to the case against Mr Geary.

The parties had agreed that it was not possible to establish a causal link between the harm suffered by AWB and the contraventions admitted to by Mr Lindberg.

I found, when hearing that case, that the penalty agreed fell within the permissible range, but at the upper end of the permissible pecuniary penalties.

Similarly to Mr Ingleby, his duties as the person in charge of the managing of AWB clearly included duties to ensure that AWB was trading in accordance with the UN sanctions. One of the contraventions agreed to by Mr Lindberg did involve a failure to make inquiries as is found against Mr Flugge. The breaches of duty by Mr Lindberg, in breach of s 180(1) of the Corporations Act, were held to be serious.

A significant difference with the contravention made out against Mr Flugge is the issue of the consequences of his breach of duty. As mentioned, I found that if Mr Flugge had made proper investigations, he would have discovered that the UN had not knowingly approved of the payment of the inland transportations fees and would not have permitted them to be made. I found that Mr Flugge would have informed the board and stopped the payment of the fees.

My finding on the consequences of Mr Flugge’s failure to inquire was based on rejecting ASIC’s case that Mr Flugge had been acting dishonestly in not stopping the payment of the inland transportation fees.

As I did not find Mr Flugge to be dishonest, I drew the conclusion that if he had found out the true state of affairs he would have stopped the improper payments of inland transportation fees. If he had known all along, as ASIC alleged, that the payments had not been knowingly approved by the UN and that the payments were in breach of UN sanctions, then it is unlikely that he would make any inquiries, as he already knew the true state of affairs, and it was unlikely that he would tell the board.

ASIC sought to argue that Mr Flugge’s failure to make inquiries (and therefore stop the payments) led to the Cole Royal Commission, the loss of the single desk, and the collapse of AWB. That argument overlooks the fact that the main contribution to the harm was the actions of AWB management in not properly ensuring that the UN had knowingly approved the payment of the inland transportation fees.

As is submitted by Mr Flugge, his omission was but one of many; there could have been innumerable acts or events which could have prevented or diminished the harm that flowed. It is further submitted that the degree of harm ultimately suffered should be given little weight in determining the seriousness of Mr Flugge’s omission.[40]
[40]Mr Flugge submissions dated 27 February 2017, 35–36.

I consider ASIC’s argument that the Cole Royal Commission, the collapse of AWB and the loss of the single desk is a consequence of Mr Flugge’s failure to make inquiries is an unwarranted conclusion. All that can be concluded is that if Mr Flugge had made proper inquiries, it is likely that some of the damage that followed may have been mitigated and the payments would have stopped sooner. In the circumstances, Mr Flugge cannot be held responsible, to the extent suggested by ASIC, as even if Mr Flugge had stopped the payments after the Washington meeting, there is every likelihood that ASIC would have taken proceedings against AWB executives; the single desk may still have been lost; Australia’s reputation internationally would have been tarnished; shareholder class actions may have been instituted; and AWB may have collapsed.

In considering the penalty to be imposed, the circumstances of the contravention must be considered in light of the factors to be taken into account when imposing a penalty, and penalties imposed for like cases and community expectations.

Contrition

ASIC relied on Mr Flugge’s failure to express contrition. Mr Flugge says that this must be seen in the light of the fact that it is highly likely that ASIC will appeal my finding that ASIC had not made out its case that Mr Flugge knew that payment of the inland transportation fees was being made contrary to the UN sanctions and without the UN’s knowing consent under s 181 of the Corporations Act.

Mr Flugge’s defence was not a complete denial. Mr Flugge made extensive admissions in his defence. Mr Flugge admitted that AWB was paid out of the UN escrow account, amounts that reflected the full contract price between IGB and AWB in respect of each such contract, inclusive of IGB fees (that is, the inland transportation fees and the after sales service fee); that AWB’s sales of wheat to Iraq under the OFFP were subject to scrutiny and authorisation by the UN; that he knew, in the period 19 December 2001 to 15 March 2002 (the period within the limitation period when he was a director), that AWB contracts with the IGB included a component in respect of inland transportation. Although I find that the breach of s 180 by Mr Flugge began earlier, because of the 6 year limitation period, ASIC was not able to complain of any conduct that occurred prior to the 19 December 2001, in circumstances where ASIC’s complaint was not issued until 19 December 2007.

Mr Flugge was not unreasonably obstructive in his conduct of his defence. Mr Flugge did exhibit some degree of co-operation. Perhaps he could have co-operated more, but he cannot be criticised for being cautious in his own defence, particularly in view of the allegations that he, in substance, was aware AWB was engaged in improper transactions and he kept that fact from the board; an extremely serious allegation of dishonesty.

In crime, the Crown can only appeal on sentence. Thus, there is no excuse for a convicted defendant to not show contrition. Under the civil penalty regime, ASIC can, and often does, appeal on issues relating to the alleged misconduct.

ASIC submitted that I ought not to accede to the defendant’s submissions that there was an explanation why there was no evidence of the defendant’s contrition, and that his application for exoneration demonstrates a failure to accept the gravity of the Court’s findings about the nature of the contravention and the significance of his failure to inquire.

ASIC submits that ‘you won’t find any of that kind of contrition which is…a significant factor that can reduce the severity of even an outrageous and egregious contravention. You won’t find that here. No acceptance of responsibility and …, no expression of regret for the harm and suffering that’s been caused to others.’[41]
[41]Transcript of hearing, ASIC v Flugge (No 2), (14 March 2017) T28.

In considering an absence of contrition in ASIC v Soust,[42] Goldberg J said that ‘[h]aving regard to the material placed before me by the defendant’s character witnesses and his evidence itself, I have no doubt that the defendant has a full appreciation of the deleterious consequences of his conduct. As against that, I have no evidence or material before me which enables me to determine whether the defendant has reached any appreciation of the wrongful nature of his conduct and the extent of his dishonesty or whether he has any regrets about it.’ On this basis, Goldberg J was not able to accept that the absence of contrition should not be taken into account because of a prospect of a subsequent proceeding.[43]
[42]ASIC v Soust(No 2) [2010] FCA 388 [39].
[43]ASIC v Soust(No 2) [2010] FCA 388 [42]; wherein there was a prospect of a subsequent criminal proceeding.

Mr Flugge relies on ASIC v McDonald (No 12) in support of his submission that his lack of contrition should not count against him, as the risk of an appeal creates a tension with placing weight on a lack of contrition.[44] In that case, it was relevant that the facts did not disclose ‘a case of a defendant guilty of obvious and palpable wrongdoing maintaining innocence against the overwhelming weight of evidence.’[45] It is relevant to the present case that Mr Flugge was found to have contravened the Corporations Act by way of a continuing omission as opposed to deliberate conduct.
[44][2009] NSWSC 714, [96] citing ASIC v Whitlam (No 2) [2002] NSWSC 718, [16].
[45]ASIC v McDonald(No 12) [2009] NSWSC 714, [95] citing ASIC v Vines [2006] NSWSC 760 [103].

As was accepted in ASIC v McDonald (No 12),[46] I do not accept that great weight can be placed on Mr Flugge’s failure to show contrition.
[46]ASIC v McDonald (No 12) [2009] NSWSC 714, [97].

Personal circumstances of Mr Flugge

Mr Flugge was chairman of AWB in the period from 1995 to March 2002. Mr Flugge had been appointed to the board of AWB (or its predecessor) in 1984. Mr Flugge successfully guided AWB through its transition of a government-owned corporation to a public company. Mr Flugge is an experienced company director, having sat on the board of many civic organisations, including Wesfarmers Limited and Navitas Ltd, and had some standing in the community and particularly with the Australian government.

The witnesses who worked for Mr Flugge had nothing but the highest praise for his conduct as chairman. He was highly regarded within AWB as a man of probity and as a fine ambassador for the company. Mr McClelland, a fellow director, was generous in his praise of Mr Flugge as a director, and as the chairman of AWB. There was no suggestion that Mr Flugge had been found to be dishonest, or to have acted improperly in the past, or otherwise had his high reputation diminished.

Mr Flugge is married with three daughters. His wife and daughters provided evidence of his good character and fine qualities as a husband and father. They provided poignant evidence of the toll these proceedings have taken on him, professionally, financially and emotionally.

Mr Flugge has been of great service to Australian commerce, wheat farmers and the Australian community generally. He is an officer of the Order of Australia. He has the respect of his peers, particularly in Western Australia. He has made a significant contribution to society. I could not but be impressed by the references provided in support of Mr Flugge’s good character and public service.[47] I have sought to give full recognition to Mr Flugge’s service to Australia in fixing the penalties.
[47]Character references were given by Mr Flugge’s wife and three daughters as well as Michael Chaney, Trevor Eastwood, Peter Larsen, Rodney Jones, Brenda Shanahan, Robert Barry, Peter McKeown, Alan Robson, Neil Turner, Michael Poole, William ‘Jim’ Peacock, Anthony Grigson, Timothy Fischer, Hendy Cowan, Oh Siew Nam, Barry Walker and John Lush.

As stated earlier, although ASIC alleged that Mr Flugge acted dishonestly, I found that ASIC did not make out that case, and Mr Flugge’s reputation for honesty has not been tarnished by these proceedings.

Declaration

I am required to make a declaration of contravention.

I find that the appropriate declaration that should be made in view of my findings in the liability judgment is as follows:

Pursuant to s 1317E(1) of the Corporations Act, the Supreme Court of Victoria declares that:
Trevor Flugge, as the chairman and a director of AWB Ltd, contravened s 180(1) of the Corporations Act in that between 19 December 2001 and 15 March 2002, he failed to exercise his powers and discharge his duties with the degree of care and diligence that a reasonable person would exercise if they were an officer of a corporation in AWB Ltd’s (AWB) circumstances, and occupied the office held by, and had the same responsibilities within AWB as Trevor Flugge, in that:
Mr Flugge was informed in Washington DC, in March 2000, that the UN was inquiring into whether AWB was making any inappropriate payments of transportation fees to Iraq, and, thereafter, Mr Flugge failed to make, and continued to fail to make, until 15 March 2002, when he ceased to be a director of AWB, any or any adequate inquiries as to whether the UN, in approving contracts for the sale of wheat to the IGB by AWB, had been fully informed by AWB of the circumstances surrounding AWB’s payment of inland transportation fees to the IGB, when he had the means to do so and in the circumstances where he knew:
(a)of the OFFP and the UN sanctions against Iraq;
(b)that AWB was making payments of inland transportation fees to the IGB under the OFFP; and
(c)that AWB was doing so in the belief that the UN had approved the payments of the inland transportation fees even though they involved the payment of internationally traded currencies to Iraq.

Disqualification

When faced with an application to impose a pecuniary penalty and a disqualification consequent upon a finding of a contravention of the Corporations Act, it has been the practice of the court to consider disqualification before considering whether a pecuniary penalty should be imposed.[48]
[48]ASIC v Soust(No 2) [2010] FCA 388 [20] citing ASIC v Forem-Freeway Enterprises Pty Ltd (1999) 30 ACSR 339, 349–350; Rich v ASIC (2004) 220 CLR 129, 150–151 (McHugh J); ASIC v MacDonald (No 12) [2009] NSWSC 714.

Disqualification is a material aspect of the imposition of a penalty upon an officer of a company who has been found to have breached his duties under s 180(1). An important aspect of disqualification is protection of the public. It is not, however, the sole matter for consideration. Disqualification is an aspect of the penalty that goes to punishment, deterrence, and the other factors of imposing a punishment for the breach.

As discussed above, there have been a considerable number of cases which have set out the principles, propositions and circumstances to be taken into account in determining whether, and for how long, a person should be disqualified from managing a corporation. Again, as noted above, they were distilled into 15 propositions by Santow J in ASIC v Adler, and are commonly cited and applied with approval.[49]
[49]Rich v ASIC (2004) 220 CLR 129 (above), McHugh J said at [152] that Santow J’s judgment is the leading authority on the reasons for a court exercising its power; ASIC v Soust (No 2) [2010] FCA 388 [21]; ASIC v Adler (2002) 42 ACSR 80.

In imposing a period of disqualification, I have had regard to Santow J’s propositions, whilst considering the particular facts of this case, specific to Mr Flugge.[50]
[50]It must be kept in mind that the Santow J principles are just guidelines and each case must turn upon its own considerations: ASIC v Beekink(2007) 238 ALR 595.

Propositions (xiv) and (xv) of Santow J’s list are relevant for present purposes in determining the period of disqualification, and are as follows:

(xiv)In cases in which the period of disqualification ranged from seven to twelve years, the factors evident included:
-   serious incompetence and irresponsibility;
-   substantial loss;
-   engaging in deliberate courses of conduct to enrich the defendants;
-   wilful contraventions of the law and disregard for legal obligations;
-   lack of contrition or acceptance of responsibility.
(xv)In cases in which the period of disqualifications ranged up to three years, the factors evident include:
-     the defendants had endeavoured to repay the amounts owed;
-     the defendants had no future intention to hold a position as manager of a corporation; and
-     the defendant had expressed remorse and contrition, acted on advice of professionals and had not contested the proceedings.

Mr Flugge submitted that a factor in support of not imposing a penalty is the significant adverse media treatment he has received since the time of the collapse of AWB and the Cole Inquiry.

ASIC accepts that Mr Flugge has suffered due to the media treatment and the long proceedings, however, ASIC submits that Mr Flugge is ‘the author … to his own misfortune.’[51]
[51]Transcript of hearing, ASIC v Flugge (No 2), (14 March 2017) T32.

Mr Flugge submitted that he will not, hereafter, seek office as a director of a public company and says he has no interest in holding future corporate positions.[52] He is now 70 years old. I accept that is his intention and accept that, therefore, imposing a period of disqualification is unnecessary for the purposes of protecting the public. Nevertheless, the imposition of a period of disqualification is an important element of the general deterrence factor in determining a penalty for breach of s 180(1).
[52]Mr Flugge submissions dated 27 February 2017 [154].

It seems apparent, from the cases in which there is material similarity, that a major factor in determining that a longer period of disqualification be imposed is dishonesty. Mr Flugge has not sought to provide any explanation for his failure to carry out his duties, however, I have not found Mr Flugge to be dishonest.

I am satisfied that a period of disqualification is justified. It is important, as a matter of general deterrence, to make it clear that directors occupy a position of trust which, if misplaced, in appropriate cases should disqualify them from further participation in the management of such corporations for significant periods.

In these circumstances, I impose a five-year period of disqualification.

Monetary penalty

The maximum penalty for a contravention of s 180 of the Corporations Act is $200,000. This must be reserved for the most egregious of circumstances. As discussed above, here too I must have regard to principles of comity. Mr Lindberg admitted four breaches of s 180(1). He agreed to a penalty, that I imposed, of $100,000. Mr Ingleby, the chief financial officer of AWB, has also been fined $40,000 for four categories of misconduct that each constituted a breach of s 180(1).

Whilst due regard is to be had to common sentencing practices, I note the comments of the Full Court in ASIC v Beekink,[53] which highlighted the difficulty with quantifying the amount of a pecuniary penalty by reference to other cases and explained:[54]

There are three difficulties in attempting to classify the amounts of pecuniary penalties by reference to common factors in other cases. First, the breaches tend to take a wide variety of forms. Second, the value of money erodes over time.
The third reason is that in recent years the courts have been more concerned with the need for the imposition of higher civil penalties to reflect community expectations of the standards to be imposed on company directors.

[53]ASIC v Beekink (2007) 238 ALR 595.

[54]ASIC v Beekink (2007) 238 ALR 595 [118]–[119] (citations omitted).

It is well established that the principle purpose of a pecuniary penalty is to act as a personal deterrent to the general public against a repetition of like conduct.[55] The size of the penalty is a question of discretion and the circumstances of one case should not dictate the size of the penalty on another case.[56]
[55] ASIC v Donovan (1998) 28 ACSR 583, [125]; Trade Practices Commission v CSR Ltd [1991] ATPR 52-135.
[56]ASIC v Donovan (1998) 28 ACSR 583, 608.

In my opinion, Mr Flugge’s conduct although relatively serious, falls well short of the most egregious conduct that would warrant the maximum penalty. In particular, I again note, that I made no finding that Mr Flugge acted dishonestly.

Bearing in mind all the factors mentioned above, I consider that a pecuniary penalty of $50,000 is appropriate. I realise that this is a very large sum of money and Mr Flugge has his own legal costs to bear. Nevertheless, the breach of duty was relatively serious and leaves a significant blemish on Mr Flugge’s reputation.

Costs

ASIC alleged that Mr Flugge knew that the payment of the inland transportation fees was being made in breach of the UN sanctions and that the UN had not knowingly approved of the payments.

ASIC alleged Mr Flugge was a hypocrite in that Mr Flugge sat on the board ticking off codes of conduct when behind the back of the board he knew of a ‘very big and dark secret, which was behaviour by senior executives of his company, directly contrary to what was in that code of conduct’, and that ‘worse than doing nothing about it, he positively encouraged management to get on and do this dirty work.’[57]
[57]Transcript of hearing, ASIC v Geary & Flugge, (10 December 2015) T2847-2848.

This was a very serious allegation of dishonesty against Mr Flugge. ASIC failed to make out this allegation. Importantly, ASIC did not make out its case under s 181 of the Corporations Act. The alleged s 181 contraventions involve the establishment of a lack of good faith or improper purpose. As Mr Flugge submits, these contraventions stood behind ASIC’s repeated allegations that Mr Flugge was:

(a) involved in a sham;[58]

(b) involved in a fraud,[59] and

(c) party to improper and evil conduct.[60]

[58]Transcript of hearing, ASIC v Geary & Flugge, (12 October 2015) T29, L15-20; T73, L23-29; (12 October 2015) T341, L21-23; (19 October 2015) T491, L19-21; (19 November 2015) T2072, L2-8; T2076, L2-5; T2076, L10-12; T2080, L15-18; T2081, L4-7; T2081, L10-12; (26 November 2015) T2438, L22-25; T2439:L12-18.

[59]Transcript of hearing, ASIC v Geary & Flugge, (12 October 2015) T81, L18-21; (21 October 2015) T771, L16-21; (19 November 2015) T2079, L22-25; T2081, L17; (23 November 2015) T2198, L24; T2199,L8.

[60]Transcript of hearing, ASIC v Geary & Flugge, (12 October 2015) T16, L1-3; T48, L12-14; T78, L3-5; (21 October 2015) T754, L4; (9 November 2015) T1449, L4-8; (19 November 2015) T2079, L8-11; (23 November 2015) T2195, L13-16; T2206, L3-4.

ASIC also failed to make out a significant element of the other findings against Mr Flugge. I refer to my liability judgment, where I have identified the allegations not made out by ASIC.

It is well settled that where a plaintiff fails with respect to discrete issues it may be ordered to bear those costs even though it succeeds in the proceeding. The relevant principles were set out by the Court of Appeal in Chen v Chan[61] as follows:
[61][2009] VSCA 233 [10] (Maxwell P, Redlich JA and Forrest AJA).

(1)       The general rule is that costs should follow the event. Absent disqualifying conduct, the successful party should recover its costs even where it has not succeeded on all heads of claim.[62]
(2)       The Rules of Court[63] permit significant flexibility in determining questions of costs. In particular, the Court is entitled to examine the realities of the case and will attempt to do ‘substantial justice’ as between the parties on matters of costs.[64]
(3)       Where there is a multiplicity of issues and mixed success has been enjoyed by the parties,[65] a Court may take a pragmatic approach in framing the order for costs, taking into consideration the success (or lack of success) of the parties on an issues basis. Generally, if such an order is made, it is reflected in the successful party being awarded a proportion of its costs but not the full amount.[66]
(4)       A Court may, when fixing costs in a claim where there has been mixed success, take into account complications which it considers will arise in the taxation of costs, as part of its consideration of the overall interests of justice.
(5)       Where a Court determines to make an order apportioning costs, then it does so primarily as ‘a matter of impression and evaluation,’[67] rather than with arithmetical precision, having considered the importance of the matters upon which the parties have been successful or unsuccessful, the time occupied and the ambit of the submissions made, as well as any other relevant matter.
(6)       Where a number of parties have had the same representation, there is a ‘rule of thumb’[68] as to the apportionment of costs, namely that, where some of those parties have been successful and others have not, each successful party is only entitled to his or her proportion of the costs incurred on behalf of all, plus the costs, if any, incurred exclusively on his or her behalf. The primary issue for determination in such a case is that of fairness as between the parties, having regard to the manner in which the trial, or appeal, has been conducted.
(7)       Usually, an order for costs will be made on a party/party basis.[69] But an order for costs on a solicitor/client or indemnity basis may be made where special or unusual circumstances have been demonstrated,[70] for example, by establishing misconduct in the proceeding, that the proceeding was brought for an ulterior purpose, or that it was patently unreasonable to institute, or maintain, the proceeding. Special circumstances may also include the making of an allegation of fraud which is not proved.[71]

[62]Ritter v Godfrey [1920] 2 KB 47; Oshlack v Richmond River Council (1998) 193 CLR 72, 97-8 (McHugh J); 124 (Kirby J).

[63]Supreme Court (General Civil Procedure) Rules 2005 (Vic) r 63.04 at first instance and r 64.24 on appeal.

[64]Spotless Group Limited v Premier Building and Consulting Pty Ltd and Northern Suburban Properties Pty Ltd [2008] VSCA 115, [14] (‘Spotless’).

[65]McFadzean v Construction Mining and Energy Union (2007) 20 VR 250 (‘McFadzean’) [157]–[158].

[66]Spotless [2008] VSCA 115 [15]; Hughes v Western Australian Cricket Association Inc (1986) 8 ATPR 40–748, 48, 136; Pricom Pty Ltd v Sgarioto (Unreported, Supreme Court of Victoria, Eames J, 24 April 1995), McFadzean [2007] VSCA 289, [152].

[67]Major Engineering Pty Ltd v Helios Electroheat Pty Ltd (No 2) [2006] VSCA 114, [5].

[68]Currabubula Holdings Pty Ltd and Paola Holdings Pty Ltd v State Bank of New South Wales [2000] NSWSC 232, [90], [91]-[104]. See also Ellingsen v Det Skandinaviske Compani [1919] 2 KB 567, 569.

[69]PCRZ Investments Pty Ltd v National Golf Holdings Ltd [2002] VSCA 24, [34].

[70]Spencer v Dowling [1997] 2 VR 127; Bass Coast Shire Council v King [1997] 2 VR 5, 29.

[71]Australian Transport Insurance Pty Ltd v Graeme Phillips Road Transport Insurance Pty Ltd (1986) 10 FCR 177. See also Re Talk Finance and Insurance Services Ltd [1994] 1 Qd R 558 and Niml Ltd v Man Financial Australia Ltd (No. 2) [2004] VSC 510.

I have also previously dealt with the relevant principles in GT Corporation Pty Ltd v Amare Safety Pty Ltd (No 3),[72] where I said:
[72][2008] VSC 296 [59].

1.        The award of costs is in the discretion of the Court or Judge;[73]
[73]Section 24 Supreme Court Act1986 (Vic).
2.        The discretion must be exercised judicially;[74]
[74]Donald Campbell & Co v Pollak [1927] AC 732; Cretazzo v Lombardi (1975) 13 SASR 4.
3.        The discretion cannot be exercised arbitrarily or capriciously and it cannot be exercised on grounds unconnected with the litigation;[75] or the circumstances leading up to the litigation;[76]
4.        Costs are compensatory in the sense that they are awarded to indemnify the successful party against the expense to which he or she has been put by reason of the legal proceedings. The order is not made to punish the unsuccessful party.[77]
5.        As a general rule, costs should follow the event, and a successful party should obtain all of the costs of the action even though it failed to establish some of the alternative heads of its claim;[78]
6. Rule 63.04(1) permits the court, in its discretion, to make an order not only as to a distinct question or issue in the pleading sense, but also to any part of the proceeding;[79]
7.        The court may, in its discretion, decline to order costs in favour of a successful party, or may order the successful party to pay the costs of the unsuccessful party, where the plaintiff failed to establish discrete heads of claim or failed to establish issues which it pursued in its claim, although ultimately succeeding on the basis of another discrete head of claim;[80]
8.        It is not necessary that the issue concerned was raised unreasonably by the party.[81] Although, a relevant consideration may include whether the issue was raised unreasonably;[82]
9.        The court may, in its discretion, make an order that is a single order, fixing what proportion of a party’s costs should be paid by another party, thus obviating cross-orders or particular orders as to particular costs;
10.      The caveat referred to by Jacobs J in Cretazzo v Lombardi[83] may have less weight today than when it was decided;
11.      Although the quantum of damages recovered compared to that claimed may be a relevant consideration to the court in exercising its discretion, greater emphasis should be given to the failure or loss on discrete claims or issue and the time occupied in relation to them.

[75]Cretazzo v Lombardi (1975) 13 SASR 4.

[76]Oshlack v Richmond City Council (1998) 193 CLR 72, 97 (McHugh J).

[77]Latoudis v Casey (1990) 170 CLR 534, 543 (Mason CJ), 562–563 (Toohey J) 566–567 ( McHugh J).

[78]Ritter v Godfrey (1920) 2 KB 47; McFadzean v CFMBEU [2007] VSCA 289.

[79]Woolf v Burmon (1939) 13 ALJR 431 (HC); Cretazzo v Lombardi (1975) 13 SASR 4, 12.

[80]McFadzean v CFMBEU [2007] VSCA 289.

[81]Rosniak v GIO (1997) 41 NSWLR 608.

[82]Mickelberg v Western Australia [2007] WASC 140 (S) (Newnes J) [43]–[46].

[83](1975) 13 SASR 4.

As mentioned in Chen v Chan, a successful plaintiff may be deprived of costs where it has failed in a charge of fraud, or may be ordered to pay costs on a solicitor/client basis.[84]
[84]See also Parker v McKenna (18974) LR 10 Ch App 96, 122-125; Lancaster v Fraser (1889) 3 QLJ 197.

I also mention that a proportion of the trial was taken up by matters solely concerning the case against Mr Geary.[85]
[85]Mr Flugge calculates that 12 percent of the trial concerned solely Mr Geary.

A large part of the hearing was taken up with ASIC seeking to establish that it was well known within AWB that the payment of the inland transportation fees was contrary to the UN sanctions. A significant portion of the documents tendered against Mr Flugge to make out this allegation were documents that he did not see, know about, or author. Contrary to ASIC’s allegation, I found that the board of AWB was informed of the payments and that they had been approved by the UN. I found that ASIC did not establish that it was well known within AWB that the payment of the inland transportation fees was contrary to the UN sanctions.

In these circumstances, instead of ordering that each of ASIC and Mr Flugge pay a percentage of each other’s costs, I consider that the appropriate order should be that there be no order for costs.

Orders

Thus the Court orders and declares that:

1. Pursuant to s 1317E(1) of the Corporations Act, the Court declares that:
Trevor Flugge, as the chairman and a director of AWB Ltd, contravened s 180(1) of the Corporations Act in that between 19 December 2001 and 15 March 2002, he failed to exercise his powers and discharge his duties with the degree of care and diligence that a reasonable person would exercise if they were an officer of a corporation in AWB Ltd’s circumstances and occupied the office held by, and had the same responsibilities within AWB Ltd as Trevor Flugge, in that:
Mr Flugge was informed in Washington DC, in March 2000, that the UN was inquiring into whether AWB was making any inappropriate payments of transportation fees to Iraq, and, thereafter, Mr Flugge failed to make, and continued to fail to make, until 15 March 2002, when he ceased to be a director of AWB, any or any adequate inquiries, as to whether the UN, in approving contracts for the sale of wheat to the IGB by AWB, had been fully informed by AWB of the circumstances surrounding AWB’s payment of inland transportation fees to the IGB, when he had the means to do so and in the circumstances where he knew:
(a)of the OFFP and the UN sanctions against Iraq;
(b)that AWB was making payments of inland transportation fees to the IGB under the OFFP; and
(c)that AWB was doing so in the belief that the UN had approved the payments of the inland transportation fees even though they involved the payment of internationally traded currencies to Iraq.

2. Pursuant to s 1317G(1) of the Corporations Act, that Mr Flugge pay the Commonwealth of Australia a monetary penalty of $50,000. Such penalty to be paid 30 days after the conclusion of any appeal by any party from my liability judgment or penalty and costs. If there be no appeal by any party, the penalty shall be paid 30 days after the date upon which the time for all appeals expire.

3. Pursuant to s 206C of the Corporations Act, Mr Flugge be disqualified from managing corporations for a period of five years from the date of this order.

4. There be no order for costs.
5.Otherwise the claims made against Mr Flugge in this proceeding are dismissed.

Citations

ASIC v Flugge (No 2) [2017] VSC 117

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[2017] VSC 117

10 April 2017