Law Essay Sample: The Vrisakis v Australian Securities Commission Case

In 1993, Western Australian Supreme Court, through Ipp J (with whom Malcolm CJ agreed), delivered a judgment on a case that examined the connotation of the statutory care and diligence requirement in what became section 180 of the Corporations Act 2001. Aleco Vrisakis was a popular corporate solicitor off the time. He was appointed to the board of directors at Rothwells Limited. He was part of a rescue package to the company during a time when there was a crisis. The rescue package was an agreed entity between the interested parties which included the National Companies Securities Commission and the government of Western Australia. It composed of a business plan for Rothwells. The Australian Securities Commission (ASC) sued Mr. Vrisakis based on the allegation that he had not exercised a reasonable degree of care and diligence by not taking sensible steps towards ensuring that effect was accorded to the terms of the business plan and management structure (Vrisakis v Australian Securities Commission, 1993).

In the proceedings of the case, ASC provided particulars of the plan it alleged that Mr. Vrisakis had failed to implement. However, it refused to avail the details of what Mr. Vrisakis should have done. ASC successfully saw ensured the conviction of Mr. Vrisakis, but the decision was reversed upon an appeal to the Full Court of the Supreme Court of Western Australia.

Duties or Responsibilities Breached

Mr. Vrisakis was alleged to have breached the directors' duty or responsibility of care and diligence established under section 180(1) of Corporations Act 2001 (Cth). Section 180(1) provides that a director or an officer of a corporation should discharge their duties and exercise their powers with a degree of care and diligence that a sensible person would if they were officer or director of a company in corporation's situations or circumstances and occupied a position held by, and has equal duties within the company, as the officer or director (Corporations Act 2001).

It is true that directors of a company enjoy limited liability. Nonetheless, the law distinguishes specific instances under which the corporate veil is pierced, consequently leading to a director being held accountable (Anderson, 2009). One such law is the section 180(1) of the Corporations Act 2001. As described in the section, directors act given the circumstances or situations of a company (Lacey, 2016). In the case of Rothwells Company, the crucial company circumstances or situations arising from the rescue package. Mr. Vrisakis, according to ASC, ought to have acted based on the presenting circumstances to do anything that would rescue the company even if it was not stated anywhere. ASC supposed that a reasonable director would get out of the way to act in the most reasonable manner to rescue even a dying company.

The duty of care and diligence requires that a director acts responsibly and with care to prevent possible loses to the investors (Lam & Goo, 2015). ASC believed that Mr. Vrisakis acted carelessly, without due diligence, as to allow the company collapse without implementing the proposed business plan. Given the fact that section 180 (1) of the Corporations Act requires a director to act as per the company circumstances informed ASC that Mr. Vrisakis should have acted, at least, in a particular manner to safeguard the business from collapsing (Vrisakis v Australian Securities Commission, 1993).

Discussion and Critical Analysis of the Court's Decision and its Rationale in Light of the Corporations Act

Upon the closure of the Vrisakis v Australian Securities Commission (1993) case, the judge, Ipp J in concurrence with Malcolm CJ, apprehended that although the statutory duty of care and diligence would be breached if an executive failed to exercise a reasonable degree of care and diligence in discharging duties, or even if there was no actual damage, that could only be so if it was logically probable that the pertinent conduct might hurt the interests of the company, which means the corporate entity itself, the shareholders, and, where the financial position of the corporation is uncertain. Essentially, when determining whether the duty of care and diligence has been breached, a court should balance the risk of harm against the potential benefits that could accrue to the company from the conduct. As to whether a breach of duty of care and diligence has occurred should be established through a determination of the balance between the foreseeable risks of harm against the potential benefits that could logically have been expected to accrue to the business from the conduct in question given a successful scenario (Vrisakis v Australian Securities Commission, 1993).

To better apprehend the reasoning of the court that led to the decision as issued requires a further examination of two concepts; harm and balancing. According to Ipp J, the notion of harm to a corporation should be interpreted narrowly. Instead, it should be considered in a broad context of harm to any of the interests of the company, but not just limited to the harm to financial matters suffered by the corporation (Vrisakis v Australian Securities Commission, 1993). In establishing this, an account of the probable risk against any latent benefit the corporation could have sustained should be balanced. This leads to a consideration of the intrinsic risk of company decisions and does not robotically make a probable harm which should be accredited to the director as a contravention. The mere outcome of harm occurring does not involuntarily constitute an infringement of section 180 (1) of the Corporations Act by a director (Vrisakis v Australian Securities Commission, 1993).

Furthermore, the Ipp J rejected ASCs submission that in the event of an actual breach, a director or directors would automatically be a contravention of the duties. The Judge, in his view and light of the law, considered such a proposition as a scenario that would make the duty of a director one of strict liability, yet section 180 (1) of the Corporations Act did not make such a provision. In fact, ASC was alluding to strict liability law, a situation in which imposition of liability occurs to a party without a fault finding as long as the claimant has proved the occurrence of a mistake (Miceli, 2017).

Nonetheless, when considering the harm to the reputation of a company under section 180(1) of the Corporations Act, a consideration of an automatic breach by a director may be factored in given the proof of an actual breach. Recently in the ASIC v Cassimatis (2016) case, Justice Edelman established that the potential consequences of harm resulting from directors actions in the actual breach of the Corporations Act were so financially serious that they undoubtedly threatened the existence of the corporation. In such an event, the actual breach of section 180(1) would automatically indicate a breach of the Corporations Act.

On the other hand, balancing requires striking of equilibrium between the inherent risks and challenges that a company should encounter in their decision making, and any probable injury such risks could lead to the corporations business (Vrisakis v Australian Securities Commission, 1993). This is given the nature of running a business or any form of entrepreneurship. The test of balancing the two should be interpreted as evaluation from the angle of what a logical person in the directors position would have done given such circumstances, but not what a sensible person should have done to avert the harm with the benefit of hindsight (Clyde & Co., n.d.). The preference of the term should establishes the basis under which Mr. Vrisakis was set free. This is because according to the facts of the case, ASC failed to establish what a reasonable person in the directors shoes would have done at that particular time, rather they concentrated on what a reasonable person should have done to avert the injury to the company.

Under section 180(1) of the Corporations Act 2001, a breach would be considered based on consideration of all the circumstances relating to the company and foreseeable risk of harm. Arguably, a criminal offense would not result if an omission to take care is not accompanied by a foreseeable risk of harm to the corporation (Vrisakis v Australian Securities Commission, 1993). As such, it is quite straightforward that no act of omission or commission is capable of amounting to a failure to exercise care and diligence under section 180(1) except where it was reasonably foreseeable at the moment that injury to the interests of the company would ultimately occur. This is because the responsibility of a director to exercise due diligence and care to a reasonable degree cannot be considered in the absence of the company circumstances and foreseeable harm. The harm that eventually occurred to Rothwells Company was not foreseeable to Mr. Vrisakis. Also, he did not exercise any duty that led to serious harm to the company as to constitute a breach section 180(1) of the Corporations Act.

The decision by Justice Ipp is in line with the entrepreneurial risk-taking behavior which is an aspect that the law should not ignore or impede as it would interfere with the risk-taking required by entrepreneurs to realize profits. According to Beekes, Brown & Zhang (2015), a modern capitalist society requires that the directors demonstrate entrepreneurial flair which comprises taking a substantial risk in the hope of returning more profits to investors. Although a company would expect its directors to exercise care and diligence when undertaking their duties, it would be unreasonable that the investors expect a guarantee against failure when they consciously understand the risk nature of the entrepreneurial activity. Investors should know that their investments are not secure and that the directors would not be held of the responsibilities without verification of whether they acted in consideration of all the circumstances and foreseeable risk of harm as outlined in section 180(1) of the Corporations Act. Given this position of argument, investors are to understand that there are instances where a director like Vrisakis in the circumstances of the Rothwells Company would have done little or nothing to save the company from collapsing following the adversity of the entrepreneurial activity it had undertaken without a foreseeable injury to the corporation.

Essentially, it is important that when considering the breach of directors duties of care and diligence under section 180(1) of the Corporations Act, all circumstances, and foreseeable harm is dully considered. This is because these are the main factors that would show if a director, who is likely to be wrongly victimized, actually omitted the duty of care or the absence of the duty of care was indeed due to company circumstances or lack of predictability of the eventual harm.

The Relevance of the Court's Decision to the Development of Australian Corporation's Law and its Impact on the Operation of Companies

The Court's determination in the Vrisakis v Australian Securities Commission (1993) case provided significant foundations for the development of the Corporations Act in Australia as well as lessons for the operation of companies. It emphasized the inclusion of the circumstances of the company at the time or the alleged breach of Corporations Act as relevant to the content of the duty to act a reasonable degree of care and diligence. Consequently, a director would not simply be penalized after a proof of actual breach of duty to act with care and diligen...