Australian Securities and Investments Commission v Flugge

The Federal Court of Australia was asked to determine whether Flugge, the chairman of AWB Limited, and Geary, an officer of AWB, breached their duties under sections 180 and 181 of the Corporations Act 2001 by failing to prevent AWB from engaging in conduct that violated United Nations Resolutions. The Australian Securities and Investments Commission (ASIC) brought the case against Flugge and Geary, alleging that AWB supplied hard currencies to Iraq as part of its sale of wheat, which was contrary to the United Nations resolutions prohibiting such transactions. ASIC further alleged that AWB used proceeds from the Oil-for-Food Programme to pay for non-humanitarian goods and services supplied to Iraq, which caused significant damage to AWB’s reputation and assets.

The court had to address whether Flugge and Geary breached their duties by not inquiring into and stopping AWB's conduct. Specifically, it examined whether these duties imposed on them a continuing obligation to inquire into possible wrongful conduct by AWB while they remained in their positions. The court also had to consider the application of the six-year limitation period in the context of these duties and whether it applied to Flugge’s conduct as long as he continued to serve as a director. Additionally, the court examined the use of inferences to establish a breach of the Act in a civil penalty proceeding, referencing the principles from Jones v Dunkel.

In its reasoning, the court found that Flugge and Geary did breach their duties under sections 180 and 181 of the Act by failing to take reasonable steps to prevent AWB from engaging in the prohibited conduct. The court determined that the duty to inquire into possible improper conduct by officers of AWB imposed on Flugge continued while he was a director, meaning his conduct fell within the six-year limitation period. The court also allowed the use of inferences to establish a breach of the Act in a civil penalty proceeding, applying the principles from Jones v Dunkel. Consequently, the court found Flugge and Geary liable for the breaches and ordered them to pay penalties.