Director’s personal liability – misleading & deceptive conduct

Despite the corporate veil, there are many ways in which a director can be personally liable for activities of the company which they direct.  One such ground is misleading and deceptive conduct pursuant to section 18 of the Australian Consumer Law (Cth) (ACL).  This question of personal liability is of concern to conservative and risk averse directors who attempt to strike the delicate balance between governance and entrepreneurialism.  Misleading and deceptive conduct can occur in a variety of circumstances in business dealings.  From misleading advertising, inaccurate projections to contractual dealings between parties.  It could be as simple as making misstatement regarding a profit forecast or embellishing the outcome of a contract.

The statutory test for misleading and deceptive conduct

Section 18(1) of the ACL provides that:

“A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or likely to mislead or deceive.”

Section 18 is the successor of the much-interpreted section 52 of the Trade Practices Act 1974 (Cth) (TPA).  Therefore, most of the case law interpreting this provision relates to section 52 and not section 18(1).  The phrase “in trade or commerce” appears to have been inserted so as to invoke the Commonwealth’s power in regulate matters in relation to “trade and commerce”.^[1]  Note the inclusion of the words “a person” instead of “a corporation” as previously included in section 52.

How has section 52 and its successor been interpreted by the Courts?

A useful analysis of the elements necessary to establish whether conduct is likely to be misleading and deceptive is contained in the case of Australian Competition and Consumer Commission (ACCC) v Dukemaster^[2] (Dukemaster) where Gordon J interpreted section 52 of the TPA and restated the following principles:

• the “conduct” in the circumstances, must lead, or be capable of leading a person into error;^[3]
• the error or misconception must be caused by the conduct of the corporation;^[4]
• to mislead and deceive there must be a real and not remote chance that the conduct will mislead;^[5] and
• the conduct must be considered in context and not in isolation.^[6]

The test is an objective one which a Court must determine for itself.^[7]

The elements of section 18

When considering the above principles, they must be applied as a two-step test:^[8]

• firstly, making findings of fact about what was said or done and whether any pleaded representation is established; and
• secondly, determining whether the proven representations (or other conduct) are misleading or deceptive.

There is seemingly no end to the types of conduct in business dealings which the Courts have held to be misleading and deceptive.

How can a director be personally liable?

Section 236(1) of the ACL relates to an action for damages, and is as follows:

“(1) If:

(a)        a person (the claimant) suffers loss or damage because of the conduct of another person; and

(b)        the conduct contravened a provision of Chapter 2 or 3;

(c)        the claimant may recover the amount of the loss or damage by action against that other person, or against any person involved in the contravention.

 (2)  An action under subsection (1) may be commenced at any time within 6 years after the day on which the cause of action that relates to the conduct accrued.“

Under section 236 of the ACL a plaintiff can recover damages from both the company and its directors.  A director will be liable for their own conduct as an individual person pursuant to section 18.  However, if their company’s conduct is in question, directors may be liable as a person involved in this contravention.  The key here is if they are ‘involved in’ the contravention.

This definition is notably broad.  Section 2 of the ACL provides that a director will be involved if their conduct satisfies one (1) or more of the elements below:

• aided, abetted, counselled or procured the contravention;
• induced, whether by threats or promises or otherwise, the contravention;
• in any way, directly or indirectly, knowingly concerned in, or party to the contravention; or
• has conspired with others to effect the contravention.

What does it mean for a director to have aided and abetted?

The case of Yorke v Lucas [1985] HCA 65 [9] provides guidance on this point as it involved an appeal from a decision of the Federal Court involving the sale of the business by Ross Lucas Pty Ltd (Lucas P/L) and Mr Ross Melville Lucas (Lucas) that acted for Treasureway Stores Pty Ltd (Treasureway), where in the sale of that business to the Appellants (Yorke), Mr Kevin Thomas Mahoney (Mahoney) was a Director of Treasureway that had dealings with Lucas P/L and Lucas.  The Federal Court found that:

“Treasureway had engaged in conduct which was both misleading and deceptive by falsely representing that the average weekly turnover of the business during a period preceding the sale was $3,500. The necessary consequence was, in the view of the trial judge, that a representation that the gross profit of the business was $1,200 per week was also misleading. He found that the first appellant, Miles Richard Yorke, was induced by that conduct to enter into the contract to purchase the business.”

Because of this, damages were awarded against Lucas P/L and it was held that Mahoney had aided and abetted, or alternatively, was knowingly concerned in the convention of section 52 of the TPA and s75B as he was a person involved in the contravention and therefore, was liable under section 82.  The trial judge held that Lucas was insufficiently aware of the facts for him to be involved in the contravention.  The reason for this was that he was acting in accordance with the instructions and information given to him as a director of Lucas P/L by Mahoney.

He had also confirmed in writing that on at least “three occasions” that the turnover figures made orally by Mahoney to Yorke were correct.  In essence, the trial Judge found that Mr Lucas had no reason to suspect that the representations made regarding the turnover figures by Mahoney were incorrect and he could prove that he had taken reasonable steps to confirm the accuracy of the statements.

The Full Court of the Federal Court dismissed the appeal against the judgement favouring Lucas.  It was that decision that was appealed to the High Court.  The essential question for the High Court was:

“whether Lucas ‘aided, abetted, counselled or procured the contravention within the meaning of s75B or was indirectly, knowingly concerned in, or party to the contravention.”

The Appellant’s argument

It was said by the majority of the High Court that the first hurdle to be overcome was that the words “aided, abetted, counselled or procured” were taken from criminal law where they are used to designate involvement in a crime, either as principal or as a secondary participant that commits a separate offence.

“The Appellants submitted that s.75B(a) should not be construed in accordance with the requirements of the criminal law and that no intent was necessary in order to constitute a person an aider, abettor, counsellor or procurer within the meaning of that paragraph.  A contravention of s.52, it was said, requires no intent and it follows that there is no reason why intent should play any part in secondary participation in a contravention of that section.”

The Appellants argument failed.  A person will only be liable under this limb if they “intentionally” participate in the misleading and deceptive conduct.  It follows that to form the necessary intent a person must have “knowledge” of the matters that comprise the offence.^[10]  It further also follows that a person must have knowledge, in this case, of the misleading and deceptive conduct which is alleged.

Other cases involving director’s personal liability

We have discussed above how the ACL replaced the Trade Practices Act 1974 (Cth) though the interpretation of misleading and deceptive conduct and personal liability provisions remains largely the same.  This means there is case law that considers the doctrine under both statutes, the principles of which have largely not changed although the digital era means that new fact scenarios seem to appear more frequently.  There are many examples involving personal liability of directors, some of which include:

• In ACCC v Safety Compliance Pty Ltd (in liq) [2015] FCA 211 two (2) directors were held to have aided and abetted in the contraventions of their company because they handled complaints that related to their company’s misrepresentations as to the need for workplace health and safety equipment;
• In Hewett & Ors v Court & Ors [1983] 149 CLR 639 a director was knowingly concerned because he knew that his company was involved in the sale of land, which unbeknownst to the purchaser, was affected by an equitable lien; and
• In Australian Competition and Consumer Commission v Joystick Co Pty Ltd [2017] FCA 397 the sole director was knowingly concerned because he knew of and turned a blind eye to his company’s misrepresentations as to the health risks of its e-cigarette products.

Takeaways – prevention is cheaper than cure!

The misleading and deceptive conduct doctrine is used as a “catch all” for various types of corporate misconduct.  To avoid personal liability, directors need to take active steps to ensure that the corporations they direct do not engage in conduct which could lead someone into error.

One of the many lessons from York v Lucas is the importance of confirming in writing any information provided by third parties where that information is likely to be relayed to others who will rely on it.  Some would say that this is just good business practice, however experience shows that it’s something that’s not always done.

Links and further references

Case notes on misleading and deceptive conduct

Australian Competition and Consumer Commission v Allergy Pathway Pty Ltd (No 2) [2011] FCA 74

Approved by ASIC – a $20,000 problem

Misleading conduct costs Coles a lot of dough: ACCC v Coles Supermarkets Australia Pty Limited [2015] FCA 330

Legislation

Competition and Consumer Act 2010 (Cth)

The Australian Consumer Law

Cases

ACCC v Safety Compliance Pty Ltd (in liq) [2015] FCA 211

Australian Competition and Consumer Commission v Dukemaster Pty Ltd [2009] FCA 682

Australian Competition and Consumer Commission v Joystick Co Pty Ltd [2017] FCA 397

ACCC v Telstra Corporation Ltd [2007] FCA 1904

Giorgianni v The Queen [1985] HCA 29

Yorke v Lucas [1985] HCA 65

Further information about director’s duties and misleading and deceptive conduct

If you need assistance with your obligations as a director of a company or misleading and deceptive conduct in business, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

[1] Commonwealth Constitution, s 51(i).

[2] Australian Competition and Consumer Commission (ACCC) v Dukemaster Pty Ltd [2009] FCA 682 at [10].

[3] Hannaford (t/as Torrens Valley Orchards) v Australian Farmlink Pty Ltd [2008] FCA 1591, [252] citing Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177 at [200].

[4] Gordon J in Dukemaster citing Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82, [91].  Note that the Competition and Consumer Act 2011 (Cth) has broadened the definition to include conduct of individuals.

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8] ACCC v Telstra Corporation Ltd [2007] FCA 1904.

[9] Yorke v Lucas [1985] HCA 65 at 3.

[10] Giorgianni v. The Queen [1985] HCA 29.

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