The Federal Court’s recent judgment in ASIC v Vocation Limited (in liq)[1]highlights the importance of directors challenging information provided to them by management. In this case, directors were unable to justify the failure to disclose price sensitive information to the ASX, based on advice received from management.
Background
In July 2014, Vocation Limited, a then ASX listed company, failed to advise the market that a key customer was withholding payments on a major contract due to a dispute.
The information was only disclosed to the ASX a month after the payments were withheld, following a newspaper article about the dispute. When Vocation responded to the media queries, it advised that the dispute had no material impact on the company.
In October 2014, when responding to an ASX Aware Notice, Vocation revealed that it had lost almost $20 million in revenue due to the withholding of payments. When the information was released to the market, it triggered a significant fall in Vocation’s share price.
ASIC started proceedings against three of Vocation’s directors in late 2016, for breaching their directors’ duties. ASIC alleged that the directors failed to ensure full disclosure of the correct information when it was available to them. The directors defended their actions on the basis that they relied on information from management in updating the market, which showed the withholding of payments was not material.
The Court’s decision
The Court rejected the directors’ defence, finding that if they had properly tested the management information, they would not have relied on it. The Court considered that the management information was poor and should have been questioned by the directors. The failure to exercise proper care and diligence in assessing this information constituted a breach of their directors’ duties.
Takeaway
This case highlights the importance of directors testing the accuracy of information provided to them by management, particularly if the quality of the information is poor.
[1]Australian Securities and Investments Commission v Vocation Limited (in liquidation) [2019] FCA 807.
