Australian Corporation Law

Australian Corporation Law

                The Corporations Act 2001[1] defines as “defective” all sorts of documents or statements, or any part thereof, that is “misleading or deceptive.”  There is also a defect in a transaction if there is an omission of a material information from the prospectus.  In this case, AUS and NAN issued a defective prospectus that was designed to deliberately trick people and investors into believing that the move of FIN to buy 70 percent of SM was a wise move that was expected to bring in benefits and profits for the joint venture.

            There also are relevant personal circumstances involved, which make the advices given by Peter and by Brown far from being objective.[2]  As heads of financial companies, they are in no way capable of giving fair and objective opinions about FIN, a company that they formed.  A prospectus on FIN, to be more reliable, would have to include the professional opinion of an entity that is totally independent of it – AUS and NAN cannot be considered as such.

            Financial services licensees such as AUS and NAN are mandated by law to do all things necessary to render financial services in ways that are efficient, honest and fair.  All possible avenues where conflict of interests could get in the way of their professional delivery of services should be eliminated.  As the law says, there should be adequate arrangements for possible factors leading to conflicts of interests to be accordingly addressed.[3]  The interlocking directorates of AUS, FIN and NAN would naturally give rise to conflicts of interests amongst its officers.  AUS and NAN may have managed to reap huge profits sale the sale of the SM shares and to, as well, generate revenues in the form of their services fees at the expense of FIN; but such undertaking, as accomplished, did not stick to ethical standards that ought to have been upheld all throughout the transactions.

            AUS and NAN are guilty of the “offense of failing to give a disclosure or statement.”  The law states that an entity is required to include in disclosure statements all information that may affect the decisions of people concerned.[4] (Corporations Act 2001 258)  AUS and NAN were, therefore, required to provide sufficient information in the disclosures that form part of FIN’s prospectus regarding the fact that SM was already floundering financially – in terms of liquidity and profitability – during the months immediately before the purchase of its shares from AUS was accomplished by FIN.  Other than the unstable financial condition that SM was in, another fact that should have also been disclosed was that the SM shares that AUS sold to FIN at $900,000 happened to have been purchased only at $200,000 just three months earlier.

            The AASB Standard amended in April 2009 stipulates that quantitative liquidity risks are among the material disclosures that must not be omitted when presenting the financial condition of an entity. [5]   Likewise, the fair market values of investments would have to be disclosed for transparency of the financial statements to be achieved.  The fact that AUS purchased SM shares only recently would have to be disclosed.  The price at which such purchase was made would also have to be cited in its financial statements.  It goes without saying that its profits in its sale of such SM shares to FIN are, likewise, figures that would have to be named in its financial statements and updates for regulatory agencies like the Securities and Exchange Commission. [6]

            Transactions as those undertaken by AUS and NAN are of the type that eventually lead to the loss of investors’ confidence in the financial markets.  Financial bigwigs such as the heads of AUS and NAN are responsible for the toppling down of conglomerates that have turned out to be worth well below their proclaimed values.

            In the end, there is a lot that can be fixed if only there would be more ethical leaders in the financial industries of the world’s major economies.  Ethics would have led Peter and Brown to think twice before hiding the true conditions of SM and worse, passing on all the losses related to its acquisition to a newly formed company – FIN – that they were purporting to be another financial success.

            For their failure to adequately disclose all the facts that they had primary knowledge of, Peter and Brown are liable for the losses incurred by investors who, in good faith, bought into the entire show that they staged.


“Corporations Act.”  Commercial Law.  Available from <


            ps2001Vol4WD02.pdf >  [02 July 2009]

“Amendments to Australian Accounting Standards – Improving Disclosures about Financial

            Instruments.”  AASB Standards.  Available from <


            e/AASB20092_0409.pdf> [03 July 2009)

“Related Party Disclosures.”  AASB Standards.  Available from <


            25751B00131624/$file/AASB124_1205_COMPjun08_0607.pdf> [03 July 2009]

[1]  “Corporations Act.”  Commercial Law.[2]   Ibid, p. 11[3]   Ibid, p. 174.[4]  Ibid.[5]  “Amendments to Australian Accounting Standards – Improving Disclosures about Financial

            Instruments.”  AASB Standards.  P. 12[6]   Ibid; p. 4