26 Sep 2013

Directors' liability for corporate conduct: false information and the reasonable diligence defence

by Randal Dennings, Graeme Howatson

A director will not be able to establish that they have exercised reasonable diligence to prevent the commission of an offence if they have supplied the person who committed the offence with false information.

As some readers will be aware, the collapse of the Westpoint group of companies was the subject of a major investigation by the Australian Securities and Investments Commission. This article though concerns the prosecution of Mr Carey by the Western Australian Commissioner for Consumer Protection.

While the decision in Carey v Commissioner for Consumer Protection [2013] WASCA 195 is unsurprising given the facts, the judgments discuss the due diligence defence and provide a useful analysis of the relevant principles.

Westpoint sells apartments too cheaply

Mr Carey was a director of Westpoint Realty Pty Ltd. He was also a director of Lanepoint Enterprises Pty Ltd, a subsidiary of Westpoint.

Lanepoint had acquired a parcel of land in a suburb of Perth for the purpose of redeveloping the land by constructing apartments on it. Westpoint was engaged by Lanepoint to sell apartments in the first stage of the redevelopment off the plan.

Sometime after these apartments had been sold, Mr Carey decided that they had been sold too cheaply. He instructed that the contracts for the sale of the apartments should be terminated, and the apartments should be resold to other purchasers at significantly higher prices. Mr Carey was aware that agents employed by Westpoint were to be instructed to give effect to that decision.

Charges under section 12(2)(b) of the Fair Trading Act 1987 (WA) (now section 30(1) of the Australian Consumer Law (WA)) arose from representations made by Westpoint's agents to the purchasers of five apartments which resulted in the purchasers agreeing to terminate their contracts for the purchase of an apartment in first stage of the redevelopment. The representations, which the agents knew to be untrue, were that the project was not going ahead, or might never be finished, and that the purchasers' only option was to agree to terminate their contracts and obtain a refund of all the moneys that they had paid.

Was Mr Carey liable for the conduct of the agents?

The agents and Westpoint were convicted of making a false or misleading representation concerning the use to which land was capable of being put, contrary to section 12(2)(b) of the Act. Under section 81(1) of the Act, Mr Carey was also guilty of breaching section 12(2)(b) unless he could establish the defence included in the section.

Section 81(1) provides that:

"Where a corporation … is convicted of an offence against this Act, each person who, at the time of the commission of that offence, was a director of the corporation or was the manager, secretary or other similar officer … is also guilty of an offence unless he proves:

(a) that the offence was committed without his knowledge, or that he did not authorise or permit the commission of the offence; and

(b) that he was not in a position to influence the conduct of that corporation or body or, being in such a position, could not by the exercise of reasonable diligence have prevented the commission of the offence".

The magistrate found that Mr Carey had failed to establish the defence provided by section 81 of the Act and convicted him of five counts of breaching section 12(2)(b). Mr Carey appealed to the Supreme Court, and following the rejection of this appeal, (see Carey v Commissioner for Consumer Protection [2012] WASC 8), he appealed to the Court of Appeal.

Appeal dismissed

Chief Justice Martin (with whom Justice Newnes agreed) observed that Mr Carey did not dispute that he was in a position to influence the conduct of Westpoint. As a result, Mr Carey had to establish, on the balance of probabilities, that by the exercise of reasonable diligence he could not have prevented the commission of the offence. That was a question which was materially different to the question which arose in the cases relied upon by the appellant, which was whether the accused had in fact taken reasonable precautions and exercised due diligence to prevent the offence. Nevertheless, the cases were of assistance because:

"Notwithstanding the differences between s 81 and the statutory provisions applicable in the cases to which I have referred, there are similarities between the various provisions … In particular, each of the provisions, like s 81, poses the defence in terms of reasonable diligence and does not require or impose standards of perfection."

Given that the findings of fact made by the magistrate were not in dispute, the issue raised by the appeal was whether, on the basis of those facts, the only reasonable conclusion was that Mr Carey "could not by the exercise of reasonable diligence have prevented the commission of the offences". After examining the evidence, Chief Justice Martin concluded that, by exercising reasonable diligence, there was much that Mr Carey could have done to prevent false and misleading statements being made by the agents, including:

  • correcting his false statement that he had received legal advice that Lanepoint had a right to terminate the contracts. It was reasonable to infer that this false assertion may well have encouraged the agents to advise purchasers that they had no option other than to accept the termination of their contract.
  • in exercising reasonable diligence, Mr Carey should have instructed the agents precisely what purchasers were to be told when they were approached to surrender their contracts, preferably after obtaining independent legal advice. It was very likely that such an instruction would have prevented the commission of the offences.

As the defence had not been made out, Chief Justice Martin concluded that the appeal should be dismissed. In a separate judgment, Justice Pullin agreed that the appeal be dismissed.


Although the Australian Consumer Law is a law enacted by the Commonwealth and applied by State and Territory legislation, the content of the Fair Trading Acts differ between the States and Territories. In Western Australia, the Fair Trading Act 1987 has been repealed and replaced by the Fair Trading Act 2010, but section 95(1) of the 2010 Act is the same as section 81(1) of the 1987 Act. No other State or Territory Fair Trading Act has a provision that is identical to section 95(1).

Nevertheless, due diligence defences are common in State and Territory legislation. The inclusion of such defences is provided for by the principles and guidelines for the imposition of personal criminal liability on directors agreed to by a meeting of the Council of Australian Governments held on 23 July 2012. The terminology of the defence varies between jurisdictions, but as Carey illustrates, differences in the wording of the defence are not usually regarded by the courts as being significant.

What does seem clear though is that if a director is to establish a due diligence defence, he or she must not supply false information.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.