Home > News > A Reminder to Directors to Act with Care when Performing their Duties: Australian Securities and Investments Commission v Select AFSL Pty Ltd (No 2) [2022] FCA 786

A Reminder to Directors to Act with Care when Performing their Duties: Australian Securities and Investments Commission v Select AFSL Pty Ltd (No 2) [2022] FCA 786

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By Alicia Hill, Principal and Aidan Chu, Darsh Chauhan, and Helena Swidron, Law Clerks.

On 8 July 2022, Justice Abraham of the Federal Court of Australia delivered judgment on the matter of Australian Securities and Investments Commission v Select AFSL Pty Ltd (No 2).[1]

This case serves as a useful reminder to directors of the standard of care that they owe and demonstrates the extent to which directors will be responsible for breaches of their statutory duty of care and diligence.

Background

The first defendant, Select AFSL Pty Ltd (Select), was in the business of offering insurance products and financial advice. Mr Russell Howden, who had been in the insurance industry for over two decades, was the sole director.

The way the Select ran their business was to have staff telephone prospective customers from a call centre with the objective of selling its products and advice. Staff handled both inbound and outbound calls. Training was provided to staff which included questionable sales techniques.

In order to motivate business performance, Select implemented an incentive scheme from which staff could claim rewards if they reached a specific number of sales. These rewards included a Gold Coast cruise, a Vespa scooter, a Las Vegas trip, and a Hawaii trip (the Incentives).

Select also created an aggressively competitive environment with respect to sales performance through tactics such as publicly ridiculing lower-performing staff and creating a performance leader board.

In 2018, Australian Securities and Investments Commission (ASIC) examined Select, amongst other financial service providers, during the Financial Services Royal Commission.

ASIC found that Select’s practices were so egregious, that it commenced Court proceedings against Select.

ASIC’s Allegations

Several allegations were made by ASIC. Most relevantly, it alleged that Select had contravened sections 963E and 963F of the Corporations Act 2001 (Cth) (‘Act’) due to allowing their staff to accept the non-monetary, conflicted remuneration; the Incentives.

Conflicted remuneration includes essentially any benefits given to a financial adviser that could influence the financial products or advice that they are recommending to customers.

It was also alleged that Select failed to take reasonable steps to ensure that their staff did not accept the Incentives.

This flowed into another allegations, that is, the suggestion that Howden had breached his director’s duties found in section 180(1) of the Act. This section requires that directors ‘must discharge their powers and exercise their duties with the degree of care and diligence that a reasonable person would exercise’ if they were a director of the corporation in its circumstances and were assigned the same responsibilities within the corporation as the director.

This section essentially reinforces the responsibility directors have over their companies and aims to maintain an appropriate quality of directorship.

However, in failing to take the reasonable steps, or any steps at all, to prevent Select from contravening sections 963E and 963F, it was alleged Howden did not fulfil his director’s duties. ASIC suggested that this left Select exposed to a foreseeable risk of harm that could potentially arise from the contraventions.

The Proceedings

Howden submitted that even if the Incentives were found to be conflicted remunerations, not every breach of the Act necessarily amounts to a breach of director’s duties. Howden claimed that ASIC’s reliance on the evidence that Howden was personally involved in implementing the Incentives, and that he failed to recognise that the Incentives were conflict remuneration was not enough to evince a breach of section 180(1).

Howden provided several justifications for his actions, and further factors to support his claims, such as:

  • his reliance on Select’s compliance officers;
  • that the Incentives were not “a big deal”;[2] and
  • a lay person could not be criticised for not correctly predicting that the Incentives would be considered conflicted remuneration.

In forming their decision, Justice Abraham commenced by reinstating the well-known principle that this test turns not on Howden’s subjective view of the events, but on what the reasonable person in his position would have made of the circumstances.

Ultimately, the Court had to consider what an ordinary person in the position of the director, with the same experience as Howden, in the context and position of Select, could have been expected to have done in the circumstances.

The Court considered the following objective, situational factors:

  • Howden’s 20 years of experience in the insurance field;
  • Howden’s knowledge of the Incentives;
  • his position at Responsible Manager;
  • Howden’s sole decision-making authority, and his effective complete control over Select;
  • structure of the business;
  • Howden’s knowledge of the relevant legislation of which he was bound to comply with; and
  • Howden’s involvement with staff training, training policies, handling customer complaints, and providing advice to customers.

Given the above factors, the Court found in favour of ASIC that any reasonable director in Mr Howden’s position would have or should have been aware of the conflicted remunerations laws and should have foreseen the distinct and not remote possible risk of harm. Therefore, it was held that Howden had breached his director’s duties owed to Select under s 180(1) of the Act.

Take-aways

This case proves as a reminder to directors that, although they might not be involved personally or have a high level of involvement, it is still possible for liability to fall on them rather than the company. This is due to the statutory duty of care imposed upon them by section 180(1) of the Act.

This duty cannot be delegated or transferred to other individuals, such as Howden attempted to claim, particularly where directors have final decision-making powers or complete control over the company.

Therefore, directors must ensure that they are knowledgeable of the goings-on of their businesses to a reasonable extent. This way, when suspicious or unlawful behaviour arises or is foreseeable, it can be managed and mitigated.

This sort of mitigation is important to avoid a situation like ASIC v Select AFSL Pty Ltd,[3] where the consequences can be serious, both financially and reputationally, for the Director and the company.

Ultimately, turning a blind eye to operations of a business is not an excuse for directors to avoid their duty of care.

[1] [2022] FCA 786.

[2] Ibid [1374].

[3] Ibid.