On 31 May 2019 the Federal Court of Australia handed down its judgment in the case of ASIC v Vocation Limited (in liquidation)  FCA 807, providing important insights into the expanded ambit of stepping stone liability. Stepping stone liability refers to the process of finding a director liable for permitting a primary breach of the law (usually the Corporations Act) by the company. More information on stepping stone liability can be found in our previous article here.
Vocation Ltd (Vocation) was a listed entity which provided vocational education, training and assessment services and operated under a series of contracts with the Victorian Department of Education and Early Childhood Development (the Department).
In July 2014 the Department notified Vocation of various concerns regarding the way Vocation was managing its contracts with the Department. The Department subsequently withheld payments to Vocation pursuant to the contracts. Vocation made an announcement in August 2014 stating that the contracts with the Department had not been suspended and that any actions taken by the Department would not have a material impact on the company.
In 2016 ASIC commenced proceedings against Vocation as well as Vocation’s former Chief Executive Officer, former Chair, and former Chief Financial Officer (and Secretary), alleging that Vocation had breached its continuous disclosure obligations under s674(2) of the Corporations Act 2001 (Cth) (the Corporations Act). Specifically, that Vocation had failed to make full and proper disclosure of the nature and extent of the Department’s concerns and the withholding of payments, as this information could materially impact the company’s share price. Hence, the announcement made by Vocation in August 2014 was allegedly misleading.
Justice Nicholas found that:
- Vocation contravened its continuous disclosure obligations under s674 of the Corporations Act; and
- Vocation engaged in misleading or deceptive conduct in contravention of s1041H of the Corporations Act through its August announcement, in which the company stated that actions by the Department would not have a material impact on the company, when it would (in fact) have a considerable impact on the company’s share price.
His Honour also found that:
- the former CEO and Chair of Vocation contravened s180 of the Corporations Act which obliges directors to act with due care and diligence as they caused or permitted Vocation’s contravention of its continuous disclosure obligation; and
- the former CEO and CFO contravened s180 of the Corporations Act by causing Vocation’s contravention through its misleading announcement.
- Vocation’s contraventions of the Corporations Act were used as the stepping stones to draw liability back to the company directors, for ‘causing or permitting’ Vocation to breach these provisions.
- Decisions relating to continuous disclosure are not business judgements and so the business judgement rule is not a defence to a failure to comply with continuous disclosure obligations.
- Directors will not be permitted to rely on the advice of management and advisers when the directors know or should know any facts that would deny reliance.
- Directors must adequately inform themselves as to the nature and scope of the relevant business issues, and boards must analyse information that is provided to them, in a critical manner.