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Nine years after ASIC commenced proceedings against the former AWB Limited (AWB) Chairman, Trevor Flugge, and the former AWB Group General Manager of Trading, Peter Geary, alleging that they had breached their duties as, respectively, a director and officer of AWB, and following a nine-week trial that concluded in December 2015, the Supreme Court of Victoria has handed down its judgment.1 The Court’s decision is an important reminder to directors and officers of their continuing duty to make adequate inquiries in relation to issues that have the potential to harm the company and not to solely rely on the advice and information of others.


In December 2007, ASIC commenced civil penalty proceedings in the Supreme Court of Victoria against six former directors and officers of AWB, alleging that they had contravened ss 180(1) and 181(1) of the Corporations Act 2001 (2001) (Act). The allegations arose out of AWB’s wheat trade with Iraq and its alleged misuse of the Oil-for-Food Program (OFFP) established in 1995 by the UN.

In August 2012, the Supreme Court of Victoria ordered that the former Managing Director of AWB, Andrew Lindberg, be disqualified from managing corporations until September 2014 and pay a pecuniary penalty of $100,000 for contravening s 180(1) of the Act. In March 2013, the Victorian Court of Appeal ordered that the former Chief Financial Officer, Paul Ingleby, be disqualified from managing corporations for 15 months and pay a pecuniary penalty of $40,000. ASIC discontinued its proceedings against Charles Stott and Michael Long in December 2013.

Under the OFFP, moneys from the sale of Iraqi oil were placed in a UN escrow account and could be applied towards the sale of wheat to Iraq (along with other humanitarian uses). Subject to UN approval, AWB could obtain the price of the wheat agreed to be purchased by Iraq from the UN escrow account. ASIC alleged that AWB made payments indirectly to the Iraqi Government in respect of inland transportation fees (purportedly for the wheat to be distributed within Iraq). AWB compensated itself for these payments by correspondingly inflating the price of the wheat to be paid by Iraq and obtaining the inflated price from the UN escrow account.

ASIC alleged the payments were a sham and a means by which Iraq could obtain internationally traded currencies, in breach of UN Security Council Resolutions.

Following the “public revelation” of its conduct, AWB suffered significant financial harm in the form of lost market capitalisation of at least $781 million, lost trade, suspension and debarment from participating in US government programs, significant legal and compliance costs, payments of settlements for class actions, redundancy costs and restructure costs, and in addition suffered immeasurable harm including loss of reputation, loss or corporate knowledge and loss of moral.

ASIC’s claim against Flugge

ASIC alleged Flugge breached ss 180(1) and 181(1) of the Act as a director of AWB in that he took no or no reasonable steps to:

  • ensure AWB did not breach UN Security Council Resolutions, namely by paying internationally traded currency to the Iraqi Government and receiving payment from the UN Escrow Account for improper purposes;
  • ascertain whether AWB had sought and gained UN approval for the payment of inland transport fees; and
  • ensure that the AWB Board was properly informed of, and responded appropriately to, the above matters.

ASIC sought to draw inferences that Flugge had a detailed knowledge of the operation of the OFFP and the financial arrangements in place from a number of letters, records of meetings and other documents. ASIC also sought to rely on the rule in Jones v Dunkel2 to more readily draw this inference, on the basis of Flugge’s failure to provide any evidence.

ASIC also alleged (and the Court accepted) that in March 2000 Flugge and others attended a meeting with the Australian Trade Commission in Washington DC. During the meeting attendees were informed that:

  • the UN had concerns about irregularities in AWB’s contracts and dealings with Iraq under the OFFP;
  • another country had alleged AWB was making irregular payments to the Iraqi Gains Board (IGB); and
  • it was important for AWB to provide to the UN all contractual terms that existed between AWB and the IGB, and that a failure to do so could jeopardise future sales under the OFFP.

Flugge submitted (and the Court accepted) that in mid-2000, Flugge and others members of the board were informed by the Managing Director of AWB, Lindberg, that the payments had been approved by the UN. The evidence also established that Flugge had told a number of other people he believed what Lindberg had expressed to the AWB board.

The Court’s findings regarding Flugge

s 180(1) – duty of care and diligence

A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person (if they were a director or officer or had the same responsibilities) would exercise.

Flugge’s failure to ascertain whether the UN had approved AWB’s payment of inland transport fees was found to be a breach of s 180(1) of the Act. The Court held that following the Washington meeting, Flugge knew sufficient facts such that he was duty bound to take steps to inquire into why the UN considered the payment of inland transport fees inappropriate and whether the UN had knowingly approved of what AWB was doing:

“If facts have come to the attention of a director that has awoken his suspicion that something is amiss or the suspicion of a prudent [director] has been awakened or would have awaken the suspicion of a prudent director, then the director has a duty to inquire into the matter. Further, the director is not excused from making his own inquiries by relying on the judgment of others.”

The Court therefore held that Flugge’s reliance on the assurances of Lindberg did not relieve him from his duty to make proper inquires.

The Court made two further findings. First, if Flugge had made proper inquiries he would have learned the true nature of the IGB payments, that AWB had not informed the UN or DFAT about the inland transport fees and that AWB had not sought any legal advice about what it was doing. Second, that the duty to make inquiries is an ongoing obligation and Flugge’s breach continued until he lost his position as a director. The Court explained that:

“If the inquiries related to a single isolated transaction with no continuing consequences, then s 180 may not require the director to make the inquiries after the transaction has been completed, because the horse has bolted, so to speak. If, however, the inquiries relate to an ongoing relationship, transaction, activity, problem etc., I think the duty in s 180 would continually require the director to make those inquiries until he/she did in fact make them or until he/she ceases to be a director (whichever occurs first).”

The Court will hold a hearing about penalties in respect of Flugge on 16 February 2017.

s 181(1) – duty of good faith

A director or other officer of a corporation must exercise their powers and discharge their duties in good faith in the best interests of the corporation, and for a proper purpose.

Flugge was found not to have breached s 181(1) for two reasons.

  • Flugge’s failure to make proper inquires was not done for an improper purpose.
  • Flugge did not turn his mind to making an inquiry and therefore did not make a decision not to make an inquiry. It was found s 181(1) could not be enlivened because its test analyses the exercise of power or the discharge of a duty, both being absent in this case. The Court distinguished this case from the situation where a director consciously elects not to make an inquiry.

ASIC’s claims against Geary and the Court’s findings

ASIC made similar allegations against Geary, and also alleged he breached ss 180(1) and 181(1) of the Act in relation to two additional transactions.

Each of ASIC’s allegations against Geary were dismissed because ASIC failed to establish that Geary knew, believed or suspected that the UN had not knowingly approved payment of the inland transport fees.

Unlike Flugge, Geary was not found to be aware of the UN inquiry into these payments (having not been present at the Washington meeting), and thus was not put on notice giving rise to a duty to make proper inquiries. The Court held he acted honestly and reasonably believed he had discharged his duties in accordance with AWB’s best interests and for a proper purpose.

The Court accepted that if Geary had become aware of any wrong doing by AWB he would have been duty bound to inform senior management and to take other such reasonable steps as required of a reasonable officer in his position.

Implications for directors

Reliance on the advice and information of others

Despite Flugge’s reliance upon the information of Lindberg in mid-2000, the Court held he should have made proper inquiries following the Washington meeting. This finding is similar to the comments made by the Court in relation to AWB’s Chief Financial Officer, Paul Ingleby, who was said to have breached his duties as an office when he “failed ‘to join the dots'” in relation to the payments. This reinforces the importance for directors and officers of keeping informed of any matters which may stand to adversely affect a company notwithstanding reliance on the advice and information of others. This is particularly so when circumstances arise that may alert a director to a potential risk of harm to the company. Directors and officers should be aware of any risk assessments undertaken by the company (or if no risk assessments have been undertaken consider whether they should be undertaken) so that they can fully understand the potential implications of any issues raised with them.

Continuing obligations

The Court held that a director’s duty to make proper inquiries may continue from the time they are put on notice of potential wrongdoing to the time they cease to be a director. This is especially the case where the transaction or event has a lasting effect beyond its conclusion. Directors and officers should commit to making such inquiries as early as possible, and should re-evaluate their obligations and corresponding efforts when circumstances change.

Importance of harm

The Court accepted ASIC’s submission that the revelation of AWB’s conduct caused significant harm to its reputation and financial standing. Although no direct nexus was found between this loss and Flugge’s conduct, this case provides a timely reminder to directors to ensure they actively, accurately and continuously monitor their company’s activities, especially those that may result in any potential financial exposure or reputational damage, noting that a failure to do so can have far reaching consequences.

1. ASIC v Flugge & Geary [2016] VSC 779 (15 December 2016).
2. Jones v Dunkel (1959) 101 CLR 298.


Elizabeth Seddon joined Baker McKenzie´s Dispute Resolution Group in Melbourne as special counsel in December 2014. Prior to joining Baker McKenzie, Elizabeth was a senior associate in the commercial litigation and dispute resolution group of another leading Australian law firm for 12 years.


Georgie Farrant is a partner in Baker McKenzie's Dispute Resolution Practice Group in Sydney and head of the Firm's Compliance & Investigations team in Australia. She has over 20 years of experience in disputes and compliance matters, including working for a regulator and an in-house compliance team.


Hoda Nahlousis an a member of the Dispute Resolution team at <a Hoda Nahlous is a senior associate in Baker & McKenzie´s Sydney office, where she advises on equity capital markets and on securities law issues. She also has extensive experience advising on public and private M&A in both local and cross-border transactions. Prior to joining Baker & McKenzie, Hoda was part of a leading equity capital markets and M&A practice at a top tier international law firm.