In July 2013, the Independent Commission Against Corruption (ICAC) delivered a report on corrupt conduct involving the Mount Penny mining tenement in the Bylong Valley. Aside from findings against Ian McDonald and the Obeids, ICAC made adverse findings against three directors of White Energy Company Ltd – Travers Duncan, John McGuigan and John Kinghorn. Those directors challenged the findings in the Supreme Court of NSW.
The Supreme Court has recently upheld the corruption findings, but thrown out the finding of breaches of directors' duty of good faith. The decision in Duncan & others v ICAC  NSWSC 1018 puts under a microscope the meaning of 'corrupt conduct' by non-public officials and the nature of the duty of good faith under the Corporations Act. Of interest to directors and their insurers is how a Court can disturb ICAC's findings, the scope of a director's duty of good faith, and the breadth of the definition of 'corrupt conduct' – do exclusions in Directors & Officers policies apply to such conduct?
The Court's power to intervene
The Supreme Court has both an inherent and a statutory jurisdiction to supervise the functioning of administrative tribunals, to ensure that they carry out their functions and perform their duties in accordance with law (per Gleeson CJ in Greiner v ICAC (1992) 28 NSWLR 125 at 130). The Court may declare ICAC's determinations a nullity where:
- there is a material error of law on the face of the record, including the reasons for decision;
- the reasoning is not objectively reasonable, in the sense that it was not one that could have been reached by a reasonable person acquainted with all material facts and having a proper understanding of the statutory function, or was not based on a process of logical reasoning from proven facts or proper inferences;
- there is a finding that is not supported by any evidence whatsoever;
- relevant matters have not been taken into account, or irrelevant matters have been taken into account; and
- there has been a material denial of natural justice.
However, there is no right of appeal from ICAC's findings in the sense of a re-hearing in the way the Court of Appeal hears an appeal from the Supreme Court.
Corrupt conduct by a non-public official
The directors asked the Court to intervene on a number of grounds. Chief among them was that ICAC's conclusion on the 'jurisdictional fact' was not soundly based. A jurisdictional fact is a precondition to the exercise of ICAC's statutory power to make findings, namely, that the directors were 'corrupt' within the meaning of the Independent Commission Against Corruption Act (ICAC Act).
ICAC had found that the directors engaged in corrupt conduct because they knew the Obeids were involved in the Mount Penny mining tenement, but they deliberately hid this from White Energy's independent committee formed to consider whether to acquire the shares in the company holding the tenement, Cascade Coal Pty Ltd. The three men were directors of both Cascade Coal and White Energy. Therefore, they removed themselves from White Energy's decision-making, and an independent committee was established by White Energy to consider and decide on the proposed acquisition. ICAC found that they hid the information about the Obeids' involvement from the independent committee for fear that White Energy would withdraw from the proposed acquisition, that it would consequently be made public the Obeids were in fact involved and that this may lead the relevant government department to cancel the tenement. At the time, there was only unconfirmed speculation about the Obeids' involvement, and the independent committee was concerned to find out more.
In other words, the directors' conduct related to the affairs of two companies undertaking a share transaction, with little connection to the exercise of a public function. The directors argued that their conduct could not 'adversely affect, either directly or indirectly, the exercise of official functions by any public official' as required by section 8(2) of ICAC Act. In particular, they argued that ICAC failed to identify the official function with precision. The Court said that the following needed to be identified with precision:
- the relevant official function;
- the conduct said to affect the exercise of the function;
- a rational basis on which that conduct does or could adversely affect the exercise of the function.
ICAC argued that the relevant official functions were, first, reviewing the creation of the tenement, secondly, reviewing the grant of exploration licences over it, and thirdly, the granting of a future mining lease. At the time, Cascade Coal had an exploration licence, but did not yet have a mining lease. ICAC succeeded only in respect of the third function.
After examining the relevant legislation in respect of mining tenements and licences, the Court held that a rational link did not exist between the directors' conduct and the public functions of reviewing the creation of the tenement or reviewing the grant of exploration licences over it. This is because the public official could not have taken the directors' conduct into account, ie the conduct would have been an extraneous factor. However, the public function of determining whether to grant a mining lease (in the future) is different – a consideration in that determination is the public interest. The Court held that the Obeids' involvement becoming public knowledge 'could' adversely affect the granting of a future mining lease, because it could well be considered contrary to the public interest for the government to grant the lease after it discovers that the Obeids' involvement was hidden from the relevant public officials at the time the tenement was created. Therefore, the directors' challenge on this ground failed.
Section 184 of the Corporations Act
The Court affirmed ICAC's finding that the conduct of two of the directors could constitute or involve a criminal offence. Relevant to the directors, section 9(1) of the ICAC Act provides that conduct does not amount to corrupt conduct unless it could constitute or involve a criminal offence or a disciplinary offence (even if section 8, considered above, were satisfied). In this case, one possible offence was fraud under section 192E of the Crimes Act – obtaining a financial advantage by deception. Mr Duncan and Mr McGuigan were shareholders of Cascade Coal, so they would have obtained a financial advantage if the Obeids' involvement in the tenement was kept a secret. Mr Kinghorn, however, would not have gained a financial advantage, so he could not be guilty of an offence under section 192E.
The other possible offence was the offence under section 184 of the Corporations Act. This is where all three directors were successful as the Court disagreed with ICAC's finding that there was a breach of duty. Section 184 creates an offence if a director failed to exercise their powers and discharge their duties in good faith in the best interests of the corporation or for a proper purpose, and did so either recklessly or dishonestly. The Court's decision focused on the scope of the duty of good faith and proper purpose – ie the duty in section 181 of the Corporations Act. If the directors did not breach that duty, there was no offence under section 184, regardless of whether their conduct was reckless or dishonest.
The Court held that the duty did not require 'proactive disclosure' to inform White Energy's independent committee of the Obeids' involvement in the tenement. First, the directors were not acting in their capacity as directors – an independent committee had been established and they had removed themselves from the decision-making for White Energy (because they were also directors of Cascade Coal). Secondly, the general law fiduciary duties they owed to White Energy did not oblige them to inform the committee. The fiduciary duties are proscriptive in nature, not prescriptive. They had an obligation not to put themselves in a position of actual or potential conflict between their duty to the company and their personal interests, and an obligation not to make a profit by reason of or in the course of their fiduciary position without the company's fully informed consent. Their fiduciary obligations did not require them to proactively disclose the Obeids' involvement. They had removed themselves from the decision-making with respect to the proposed acquisition, and that was sufficient.
The final result was that the Court affirmed ICAC's findings that the directors (other than Mr Kinghorn) engaged in corrupt conduct given they could be guilty of an offence under section 192E of the Crimes Act. However, none of the directors could be guilty of an offence under section 184 of the Corporations Act. As Mr Kinghorn could not be guilty of either offence, the Court made a declaration that ICAC's determination against him is a nullity.
Both ICAC's findings and the Court's decision highlight the breadth of the meaning of 'corrupt conduct' under the ICAC Act. Directors' conduct in relation to company business which 'could' indirectly affect the exercise of public functions may be corrupt conduct, if the conduct also involved 'company violations' (see section 8(2)(s) of the ICAC Act). While the Court clarified that at least a rational link between conduct and exercise of public function must exist, this test does not appear as stringent as the balance of probabilities.
Nor is the definition of 'corrupt conduct' bounded by the requirement that the conduct could be a criminal offence. Conduct could be corrupt if it could be a disciplinary offence (section 9(1)(b) of the ICAC Act). 'Disciplinary offence' is defined as including any misconduct, irregularity, neglect of duty, breach of discipline or other matter that constitutes or may constitute grounds for disciplinary action. Disciplinary action would seem to include, for example, ASIC taking action in relation to a breach of director's duties. On the face of it, this is a broad definition - irregularities and breaches of duties would not in every day language be spoken of as if they are corrupt conduct.
This raises the question of how conduct exclusions in Directors & Officers policies might apply to findings of corrupt conduct by ICAC. Typical conduct exclusions exclude cover for claims arising from fraud, dishonesty, wilful breach of the law and breaches referred to in section 199B(1) of the Corporations Act, provided there has been a final adjudication by a Court or Tribunal that the director engaged in that conduct. Leaving aside for the moment whether ICAC's findings are an adjudication by a Tribunal, one can immediately see that the definition of 'corrupt conduct' is broader than what is excluded under a typical Directors & Officers policy. In other words, a finding of 'corrupt conduct' may not necessarily trigger the exclusion, and directors may be covered. This is something for both directors and their insurers to bear in mind.
As for whether ICAC's findings are an adjudication, this question is not settled in case law. It is a difficult question. On the one hand, ICAC does make findings and determinations as to facts following an investigation, and ICAC is an administrative tribunal to which administrative law applies. On the other hand, ICAC's findings and determinations do not have any legal consequence, and do not create or affect legal rights or obligations (Greiner, at 148). Section 74B(2) of the ICAC Act states that a finding that someone has engaged in corrupt conduct is not a finding that the person is guilty of or has committed an offence. Perhaps, in the wake of the recent ICAC inquiries in NSW, we may have NSW case law that decides the issue.
What is also interesting about the decision is the Court's view on whether the directors had an obligation to tell the independent committee what they knew about the Obeids' involvement. The Court's insistence that the general law fiduciary duties are proscriptive rather than prescriptive is in accordance with the preponderance of Australian judicial and academic thinking. But the conclusion that the duty to act in good faith in the best interests of the company, which is a statutory, non-fiduciary, prescriptive duty, did not imply an obligation to inform the committee, is much more controversial. The directors had stood aside from the decision-making with respect to the Cascade Coal shares by appointing an independent committee, but it is (with respect) questionable to take the additional step of saying that in those circumstances, they no longer had a duty of good faith that would require them to tell the committee what they knew. Such a duty is a consequence of the prescriptive statutory duty of good faith, which continued to apply to them as long as they held the office of directors. On a proper analysis, a duty to inform the committee arose from the statutory duty of good faith, not the proscriptive fiduciary duties.
It is, therefore, suggested that directors and their insurers would be well advised to treat the decision cautiously on this point. Even if the directors are not the decision-makers on a particular issue because they have appointed an independent committee in order to avoid a conflict, they may still have a duty to the company of proactive disclosure of information material to the committee's decision. It would be dangerous to think that in such circumstances, the way directors can discharge their duties is to say nothing. How directors resolve a conflict of duties owed to two different companies is complicated and depends on the precise facts – it is possible that they would have to resign from one or both boards.
We may not have heard the last of the directors' challenges. There may be appeals and cross-appeals against this decision. If so, we will be monitoring the appeal with interest and will update readers once any appeal decision is delivered.