Fraudulent changes to ASIC register can lead to company liability

A recent case has highlighted the importance of correcting incorrect information found on a company's public record on the Australian Securities and Investments Commission’s (ASIC) register.

In this case, a man represented himself as a sole director, secretary and shareholder of a company by submitting false changes to a company’s details on the ASIC register. He then used the ASIC register information to commit fraud. The court found that the company was liable for his actions as they failed to correct the register within a reasonable time of being made aware of his actions This case serves as a cautionary tale for all companies to ensure that their ASIC records are accurate and up-to-date once they are put on notice of incorrect information, or risk being held responsible for a fraudster’s actions.

What happened in 183 Eastwood Pty Ltd v Dragon Property Development & Investment Pty Ltd  [2023] NSWCA 72?

The appellant, 183 Eastwood Pty Ltd (183 Eastwood) was established in 2016. It was a trustee of a unit trust where unitholders could invest in developing a property in Eastwood into 23 residential apartments.

In January 2018, Scott Chan lodged two false form 484s (changes to company details) with ASIC, stating that he was the sole director, secretary and shareholder of 183 Eastwood. Also around this time, Mr Chan opened up a Westpac bank account in the name of 183 Eastwood which only he controlled. These steps were done without the knowledge or approval of 183 Eastwood’s true officeholders.

In late February 2018, the true office holders of 183 Eastwood became aware that Mr Chan made changes to the ASIC register and used the Eastwood property as security for a loan of $4 million.

In April 2018, Mr Chan (purportedly on behalf of 183 Eastwood) and Dragon Property Development & Investment Pty Ltd (Dragon Property), the respondent, entered into a contract for 19 units to be transferred to Dragon Property. Dragon Property paid $1,672,000 for these units to the Westpac bank account. The units were never transferred to Dragon Property and Mr Chan misappropriated the funds.

In June 2018, the ASIC register for 183 Eastwood was corrected and Mr Chan was reported to the police.

In March 2019, Dragon Property commenced proceedings against both Mr Chan and 183 Eastwood seeking recovery of $1,672,000. Mr Chan became bankrupt in May 2019 and the claim against Mr Chan was discontinued due to his bankruptcy.

Primary proceedings

In the primary proceedings, the Court found that 183 Eastwood was liable for Mr Chan’s fraud, as in failing to correct the ASIC register, 183 Eastwood held Mr Chan out as possessing authority to bind the company. The Court ordered 183 Eastwood to pay Dragon Property $1,672,000 plus costs.

183 Eastwood appealed to the Court of Appeal.

Did Mr Chan have authority to bind 183 Eastwood?

The principal challenge on appeal was to the primary Judge’s findings on ostensible authority. Ostensible authority is where:

• a representation is made that an agent has the company’s authority to enter into a contract of the kind sought to be enforced. A representation may be by words or conduct, including by acquiescence (acceptance through inactivity or silence)
• such representation was made by someone who had actual authority to manage the company’s business either generally, or in respect of those matters which relate to the contract
• the other party was induced by the representation to enter into the contract.

Where those circumstances are satisfied, the agent binds the company by ostensible authority.

The Court of Appeal found there was no error with the primary Judge’s reasons, and found that 183 Eastwood’s real officeholders’ failure to correct the ASIC register within a reasonable time after becoming aware constituted a representation that Mr Chan had authority to enter into contracts for the company involving its property.

183 Eastwood argued that there was no “duty” on it to correct the ASIC register outside of narrow circumstances set out in the Corporations Act 2001 (Cth). The Court stated that describing this as a “duty” may be a distraction from the crucial question about whether it was a “duty”, or “circumstances which called for action to be taken”, or circumstances where it would be unjust for Dragon Property’s assumption about Mr Chan’s authority to be departed from.

On this issue, President Ward stated that a reasonable person would have ‘expected’ the real officeholders to correct the false information on the ASIC register within a reasonable time. Justice Leeming stated that even assuming there was a duty, this was a clear case where those who knew about the falsified information had a duty or obligation to speak out.

Key takeaways

If you become aware of incorrect information on your company’s public ASIC records, you need to take steps to rectify the register. A failure to take such steps may result in you being liable for an agent’s fraud, where the agent has been recorded as an officeholder on the ASIC register.

If you need any assistance with how ostensible authority or fraud might affect your clients or property, please get in touch with our team below.

Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

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