In a recent decision, the Federal Court of Australia found that several directors of Vocation Limited (the Company), including the Chairman of the Company, former Federal Treasurer the Honourable John Dawkins AO, and the CFO/Company Secretary Manvinder Gréwal, breached their duties to exercise care and diligence in their roles as directors and officers of the Company.
- In circumstances where a director should be on notice that management cannot be relied upon to provide accurate or reliable information, directors who accept advice provided by such management uncritically and without challenging the correctness of the advice are at risk of breaching their directors’ duties to exercise care and diligence in their role.
- Officers and directors also need to ensure that documents and representations made to investors, such as those contained in due diligence questionnaires, that are within their sphere of responsibility, are not likely to mislead or deceive.
Australian Securities and Investments Commission v Vocation Limited (In Liquidation)  FCA 807 concerned Vocation Limited (now in liquidation) which listed on the Australian Stock Exchange on 9 December 2013. It delivered, through several subsidiaries, vocational education and training (VET) services. Several of the company’s subsidiaries were training organisations registered with a federal or state regulator (RTOs) to provide VET services.
During the relevant time, the State of Victoria paid RTOs subsidies for training students. This was administered in accordance with funding agreements between the Department of Education and Early Childhood Development (DEECD) and the RTO. The funding agreements imposed numerous obligations on the RTO with respect to its delivery of VET services and provided that DEECD’s payment of funds was conditional on DEECD being satisfied that the VET services were being provided by the RTO in accordance with the funding agreement.
The funding agreements also gave DEECD the powers to:
- withhold, suspend, cancel or terminate payment of any part of the funds as DEECD determined appropriate;
- suspend enrolments; and
- direct the RTO to suspend part or all of the provision of VET services until any issues raised by DEECD were resolved.
In 2014, approximately 80% of the Company’s revenue was derived from funds paid by DEECD.
In June 2014, a unit of the DEECD carried out an investigation of two programs provided by a subsidiary of the company, BAWM Pty Ltd (BAWM) and found that BAWM was not complying with provisions of its funding agreement relating to course quality. On 3 July 2014, DEECD notified BAWM that it was withholding payment of subsidies to BAWM due to a suspected breach by BAWM of the funding agreement. For a period of almost two months from 3 July 2014, DEECD and management of BAWM exchanged correspondence relating to the dispute and steadily the issues for the Company escalated. Management briefed the CEO of the company (Mr Mark Hutchinson) on the issues who then advised the board of the dispute.
Until late August 2014, management and the board of the Company operated under several misapprehensions as to the seriousness of the dispute. They thought that the suspensions of enrolments were confined to a small number of courses and that the estimated potential effect on revenue would be minor.
On 25 August 2014, the Australian Financial Review (AFR) published an article which raised concerns about DEECD’s continual funding of BAWM. Later that day the board met and agreed that an announcement to the ASX should be made. The announcement noted that DEECD was reviewing specific courses conducted by Vocation for which Vocation received funding, but it considered “that neither the review nor its anticipated outcomes are material to Vocation”. Around this time, BAWM management sought legal advice in relation to the funding agreements, the first time lawyers were engaged by the Company to provide advice as to the parties’ rights and obligations under the funding agreements. In this advice, the lawyers confirmed that DEECD was entitled to withhold all funding in relation to all courses by virtue of the dispute. Also around this date, DEECD by letter reiterated to BAWM that BAWM had been subject to a direction since 24 July 2014 to suspend all commencements and new enrolments. DEECD then widened the scope of its investigations.
Despite the legal advice and the letter received, management and the board continued to believe that DEECD’s review related only to a small number of courses and the potential impact on revenue of that review was still minimal. Mr Gréwal and a member of management provided the board with financial analysis of the dispute that indicated the “worst case scenario” was a loss of $7.6 million in revenue. That analysis suffered from a number of deficient assumptions which were contradictory to the clarification provided by the legal advice and the letter from DEECD. Justice Nicholas’s opinion was that “there was no reasonable basis for concluding as at 27 August 2014 that $7.6 million represented the “worst case scenario” for BAWM in revenue terms.”1
On 10 September 2014, the Company announced it would raise approximately $74 million through a private placement fully underwritten by UBS AG. The placement process included the provision of a due diligence questionnaire (DDQ) by the Company to UBS signed by Mr Hutchinson and Mr Gréwal. The DDQ contained a declaration that by signing the document the authorised representative of the Company undertakes and represents to UBS that, amongst other things, the answers provided to the DDQ are true and correct and not misleading or deceptive.
By mid-September 2014, the AFR published another article discussing the state of relations between DEECD and the Company. It stated that they had attempted to clarify whether the funding being withheld related to specific courses or all of BAWM’s funding and commented “if it’s the latter we’d call that fairly material!” Vocation made a further announcement to the ASX on 18 September 2014 reiterating that DEECD’s review related only to three of the courses conducted by Vocation for which Vocation received funding.
ASIC alleged a number of breaches on the part of the Company, Mr Hutchinson, Mr Gréwal and Mr Dawkins relating to the announcement made by the Company to the ASX on 25 August 2014, the Company’s compliance with its continuous disclosure obligations and breach of directors’ duties in relation to the provision of the capital raising DDQ answers to UBS.
For the purposes of this note we will focus on the potential breaches by Mr Dawkins which relate to the 25 August 2014 ASX announcement and the Company’s continuous disclosure obligations, and the potential breach of section 180 of the Corporations Act 2001 (Cth) (Corporations Act) by Mr Gréwal which relates to the provision of the capital raising DDQ answers to UBS.
Justice Nicholas found that Mr Dawkins had not breached his duty under section 180(1) of the Corporations Act by approving the 25 August 2014 announcement but found that, during the succeeding period of 28 August 2014 to 18 September 2014, Mr Dawkins had breached his duty under section 180(1) of the Corporations Act.
The date of 25 August 2014 appears to be significant because of the events which occurred around that date. First, legal advice was received relating to the funding agreements. Second, DEECD clarified their position in a letter to BAWM around that date. Finally, from 25 August 2014 Mr Dawkins was provided with all relevant correspondence with DEECD.
Also on that date Mr Dawkins assumed direct responsibility for the negotiations with DEECD, “with the aim of securing the release at least some of the withheld funds [and] a relaxation of the suspensions of enrolments and commencements.”2 Mr Dawkins’ first direct contact with DEECD in relation to those matters was at a meeting on 28 August 2014.
Up until 26 August 2014 Mr Dawkins was, as Justice Nicholas put it:
“highly reliant on information provided to him by Mr Hutchinson and other members of management for the purposes of deciding whether or not Vocation was required to [make disclosure to the ASX]. However, from 26 August 2014 he was in a position to form views and draw conclusions based on his own review of the relevant correspondence and face-to-face meetings that he had with [DEECD] on 28 August 2014 and 8 September 2014.”3
According to Justice Nicholas the information that Mr Dawkins received from management up until 26 August 2014 was very poor. However, by the time the letter of 26 August 2014 from DEECD had been received and considered Justice Nicholas believed that it would have been quite clear to a person in Mr Dawkins’ position exercising reasonable care and diligence that previous decisions made by the board in relation to its disclosure obligations were based on inaccurate and misleading information and management could not be relied upon to provide accurate or reliable information in relation to the dispute with DEECD.4
By 28 August 2014 a person in Mr Dawkins’ position exercising reasonable care and diligence would have been evaluating the information from management relevant to Vocation’s dispute with DEECD relatively critically, especially when it was based on broad and generalised statements or opinions unsupported by any reasoned or sustained analysis provided to the directors in board papers or elsewhere. His Honour was satisfied that from 26 August 2014 through to 18 September 2014 Mr Dawkins:
“accepted what he was told by management much too uncritically, and without challenging the correctness of the advice or the assumptions on which that advice was based. In this regard, I am satisfied that, in doing so, he failed to exercise the care and diligence that could be expected of a person in his position exercising reasonable care and diligence.”5
His Honour’s views of Mr Dawkins’ conduct can be contrasted with his views about Mr Dawkins’ conduct in the period prior to 28 August 2014. In relation to the 25 August 2014 ASX announcement Justice Nicholas found that Mr Dawkins had not breached his duty under s 180(1) of the Corporations Act. This is because on 25 August 2014, Mr Dawkins had not received the legal advice nor had he received the letter from DEECD and in Justice Nicholas’s view Mr Dawkins was entitled to rely upon management’s representation that only specific courses were subject to DEECD’s review.6
Justice Nicholas focused his analysis regarding Mr Gréwal around the representations in the responses to the DDQ and whether they would be likely to mislead or deceive UBS.
The DDQ asked various questions around the suspension of funding from DEECD. In its responses the Company stated that:
- the focus of DEECD’s concerns was the extent to which school leavers were undertaking particular courses;
- the impact of the suspension of funding was being made up through enrolments in other RTOs; and
- DEECD indicated their willingness to pay a substantial part of the withheld funds in the next 7-14 days,
In relation to the first Representation, his Honour found that by early September 2014, correspondence from DEECD had made it clear that “its concerns extended to the relevant RTO’s overall compliance with the funding contracts” and not just specific students or courses. Therefore the first Representation was found to be misleading and deceptive.7
In relation to the second Representation, his Honour stated that payments in respect of the two initial courses of concern to DEECD “comprised the majority of payments made by DEECD to BAWM in the months prior to the imposition of the contractual measures”. Additionally, there was evidence to suggest that following the imposition of suspensions, payments by DEECD to the Company other RTOs reduced steadily. Therefore it was misleading and deceptive to state that the impact of the suspension of funding would be made up through enrolments in other RTOs.8
Finally, in relation to the third Representation, Mr Gréwal argued that it should be read in the context of the DDQ as a whole and, that when this was done, it would be apparent to a reasonable reader in the position of UBS that the willingness of DEECD to pay a substantial portion of the withheld funds in the next 7-14 days would be dependent on the outcome of the review into the specific courses. Mr Gréwal pointed to an email to UBS where he attached a report of a meeting between the Company and DEECD which stated that the outcome of the DEECD review “will inform a decision on the release of withheld funds”.9 His Honour disagreed with this interpretation stating that he thought it would be expecting too much of a reasonable reader in the position of UBS to understand that the third Representation “should be read as being subject to the qualification appearing in the report, especially in circumstances where the report was supplied to UBS as an attachment to an email in which [the Company] expressly represented that DEECD had ‘promised to expedite the early release of a proportion of the $22m owing to [the Company]’”.10 Therefore the third Representation was found to be misleading and deceptive.
Justice Nicholas found that a person in Mr Gréwal’s position exercising reasonable care and diligence would have appreciated that the DDQ was likely to be relied upon by UBS when deciding whether or not to underwrite the proposed $74 million placement of Vocation shares.11 As Company Secretary and CFO of the Company, “the drafting and completion of due diligence questionnaires was a task within Mr Gréwal’s area of responsibility. That responsibility would include, where necessary, reviewing key correspondence and documents for the purpose of drafting and completing the due diligence questionnaire and satisfying himself to the best of his knowledge and belief that the answers given were correct and not likely to mislead or deceive.”12
Therefore his Honour found that Mr Gréwal contravened section 180 of the Corporations Act by causing or permitting the Company’s misleading and deceptive statements in relation to the DDQ.
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