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Forrest v. Australian Security and Investment Commission(ASIC)

Question :

The Corporation law of 2001 regulates the working of the organisations. As companies are the separate legal entity and an artificial personality, the directors are its representatives which manage the working of the company and handle the daily operations. The case of Forrest v. Australian Securities and Investment Commission is a true example of how an announcement may or may not lead to deceptive or misleading conduct.

  • What is the duty of director in a company?
  • What impact the case of Forrest v. ASIC has on duty of directors ?
  • What leads to misleading and deceptive conduct of the director ?
Answer :

The director of the company is entrusted with major roles and responsibilities to which he/she is obliged to adhere. The director is duty bound to act with due diligence and care. Any breach of the duty may lead to legal consequences and liabilities. The case of Forrest v. ASIC is such example which shows how a person is obliged to fulfil its duty.

Facts of the case

Fortescue entered into a framework agreement with three of the state owned entities of People's Republic of China. The agreements were related to construction and financing of the mine, railway and port as a part of proposed Pibara Iron Ore and the Infrastructure project. One such agreement was also with China Railway Engineering Corporation (CREC). During the year 2004- 2005, Fortescue made many communications in the form of letters with Australian Securities Exchange and to the media which includes announcement on 23rd August 2004 that it has entered into a binding contract with China Railway Engineering Corporation in order to build and finance railway component of the project. An article was then published in 2005 which suggested that contracts which Fortescue have made are not binding to finance, build and transfer railway, mine and port. In response to this, Australian Security Exchange requested for the comment so then Fortescue send the copy of agreement. When the agreements were ultimately abandoned, the CREC agreement outlined scope of relevant works which is to be performed by the CREC and also Fortescue's payment obligations. The agreement included the clause that the agreement that the agreement will become binding on the approval of both the party's board.

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Issues raised

Whether the communication by Fortestue and Australian Security Exchange leads to misleading and deceptive conduct?

Allegation of ASIC

ASIC argues that the communication by Fortestue have overstated the effect and substance of agreements and word binding contracts indicates that the agreement was enforceable by the Australian Law. ASIC alleged that-

  • Fortestue have engaged in misleading and deceptive conduct which is contrary to Section 1041H of Corporation Law, 2001 and that he has engaged in fraudulent activity and knew the gap between content of announcement and reality of the contract as their was no genuine basis for making such statement.
  • Mr Forrest have breached the duty of director under Section 180 of the Corporation Act, 2001 which is the duty to act with diligence and care and also breached Section 674 of each of Fortesue's breaches.
  • Fortescue contravened the provision of Section 674 which involves continuous disclosure as it failed to correct the misleading and false information.

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Decision of trail court

The lower court dismissed the claim of ASIC in the year 2009. The Full court of Australia held that Fortescue have engaged In Deceptive And Misleading Contact And Also Contravened The Disclosure Obligations. Mr Forrest Have Also Contravened The Corporations Law, 2001.

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High court decision

An appeal was filed by Forrest to which the High Court found that-

  • ASIC failed to establish that Mr Fortescue and Mr Forrest were fraudulent in respect of the statement given by them and also they were not engaged in any misleading and deceptive conduct.
  • Other findings of ASIC also fell away.
  • The announcement represented that there was a agreement ans the parties have intended the agreement to be binding upon the approval of the board.
  • The agreements have imposed binding obligations on parties and it is not necessary to consider whether the agreement is enforceable under the Australian law for the aim of announcement.
  • Fortescue was also not required to disclose full terms of agreement under Section 674 and the accurate summary is also necessary.

In order to determine whether the announcement was deceptive or misleading, the High court was of the view that it must consider whether a reasonable or ordinary man would understand the announcement as making representation about enforceability of agreement under the Australian law.

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