Duty not to improperly use position at a company

By Vivian Michael | Company

Duty not to improperly use position at a company

Photo credit:  Raw Pixel, Unsplash

A director, secretary or employee must not improperly use their position. 

So this means that directors cannot use their position to gain an advantage for themselves or others or cause detriment to the corporation.

This is a civil duty in section 182 and a criminal duty per section 184 of the Corporations Act.

Now because of this, if there is a breach, civil or criminal penalties may apply.

Civil penalties

Civil penalties may include disqualification, compensation or financial penalties. Financial penalties may be up to $200,000 for individuals.

Importantly, criminal remedies may also apply for the same breach if the conduct was dishonest, intentional or highly reckless.

Next, let's take a look at the criminal penalties. 

Criminal penalties

Criminal penalties may include fines, the lowest being $850. A dishonest breach of good faith may attract a penalty up to $340,000.

Also, market manipulation or insider trading can be fined up to $765,000 or up to 3 times the value of the benefit obtained from the conduct.

Case study - CellOS v Huber

In the case of CellOS Software Ltd v Huber [2018] the court found that Mr Huber, a director, improperly used information to gain advantage for himself and others and to cause detriment to the company CellOS. 

Below are examples of Mr Huber's alleged improper use of his position: 

  • Mr Huber set up offshore companies which he was to control and hide his involvement in a scheme.
  • The offshore companies were set up to hold CellOS shares (Huber controlled entities).
  • From 2012 Huber controlled entities and held shares from early investors in CellOS without disclosing his involvement to the vendors or CellOS. The transactions were entered without CellOS’ knowledge.
  • From 2012, Huber sought potential investors for CellOS to raise funds for CellOS. But instead of CellOS issuing shares to the investors, Mr Huber had the investors purchase shares from Huber controlled entities.
  • Huber had cellOS enter a loan agreement with one of his offshore companies LGA Energy Investments to loan CellOS $25 million without disclosing his interest in LGA.
  • The loan allowed Huber to benefit from funds that were converted to shares.
  • The loan allowed Huber to lend funds to CellOS under the LGA loan and to obtain more shares by exercising the conversion option.
  • Huber directed LGA to transfer shares to Huber controlled entities for no consideration.
  • Huber had CellOS enter into another loan arrangement with another associated company, Pized Management and did not disclose his interest.
  • CellOS alleges the fraudulent scheme made significant profits for Mr Huber.

CellOS claims

Orders were not made in this judgment however, CellOS claims: 

  • account of profits by the sale of shares purchased; and
  • damages for loss of opportunity to issue new shares to investors; and
  • damages in terms of CellOS' loss due to Mr Huber issuing shares under the LGA loan agreement at SG$1.80 when the price for CellOS shares was US$5.00. 

Do you have a question about the improper use of a position at a company?





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About the Author

Vivian Michael is a lawyer and founder of Michael Law Group. Vivian's mission is to make quality business legal services accessible to Australian businesses that would otherwise DIY, rely on legacy contracts or go without.

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