Just Cases | Season 2 | Episode 3 | Why the world's wealthiest baby shouldn't be a company director

In 1886 a sensational banking scandal hit the headlines in Great Britain. It involved the world's richest man, John Patrick Crichton-Stuart, the 3rd Marquess of Bute, and it led to an absurd decision.

More than a century later, the current Banking Royal Commission in Australia continues to expose stories of banks behaving badly.

But it remains rare for the people at the helm of banks and other major corporations - the company directors - to be held legally responsible for what goes on at their company.

When things go wrong at a company who should cop the blame? And how far has the law come since the case of the Marquess of Bute and the Cardiff Savings Bank?

Music in this episode:
- 'Swoon' by Inaequalis
- '35 'C' by King Imagine
- '2 AM' by Kenney Floreat

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Just Cases | Season 2 | Episode 3 | Why the world's wealthiest baby shouldn't be a company director

Melissa Castan: [00:00:00] Welcome. I'm Melissa Castan, and this is just cases

for years we've heard of Scandal after scandal at Major Corporations. The global financial crisis brought into start views some of the catastrophic consequences of corporate misbehavior a decade on from the GFC. The current banking Royal Commission in Australia is highlighting how little has changed in some of our largest financial institutions.

Today we're talking about the people at the helm of major corporations, the company directors, and we're gonna rewind to another banking scandal of over a hundred years ago and how it's got us to where we are today.

Steve Carabas is a corporations law expert at Monash Law School, and I'm here with James. Hello, and Steve.

Steve Kourabas: Hi.

Melissa Castan: Legally speaking, Steve, what [00:01:00] is a company? Why do we have them?

Steve Kourabas: Initially corpora, the corporations that we understand today really started because you had this growth and exploration that was taking place during I guess when England and the Netherlands were going out and exploring the world and people were going to really far off parts of the world and they wanted to know how they can do this and they didn't have enough money.

And so they wanted to get people to invest in companies. So we created this idea of a corporation which people can invest shares in. And people did do that, and it allowed for a lot of exploration of the world and a lot of what we know today exists because of that. And nothing went wrong, A lot went wrong.

So we've always overlooked that. And that's been the real big debate. How much do we value the. Economic prosperity that we've gone from this economic vehicle that we created versus the harm that we've created because of this economic vehicle. And there are people that argue we can change it slightly to improve it, and there are people that take more radical approaches and say, we need to think of something completely new.[00:02:00]

Melissa Castan: So can I take you to the case that we are looking at today, the Re Cardiff Savings Bank case? Yeah. Can you tell us a little about this? About this character, the Marquess of Bute?

Steve Kourabas: So this character, he seems like a very interesting man. He comes from a long line. I. Of, aristocrats I was about to say Aristocats the Disney movie, but no aristocrats.

How's that Next week? That's the next week's podcast. So he comes from a long line. I think that he was from a illegitimate line of, a royalty. His family derived from that line of royalty, Scottish royalty. And his father seems to have been a Prime Minister for King George iii, I think.

Yes. It's a very illustrious line of of family. And in essence, this guy came to the. I don't know how you would pronounce a Mark Marqui set. Yes. When he became the marquee. You could say anything right now. You are the scholar, so it's certainly fine with me.

But he this inherited he inherited the title at six months old. What year is this? [00:03:00] That was in the 1840s or the 1850s when he was six months old. He was 38 at the time of the case, which was 1892. So many, his old man has just, he died, so the title passed on to him,

Melissa Castan: and with the title came the title of being the company director of this big Holding.

Steve Kourabas: This is a slight little confusion here with the case. It's a very yield type of case. And they weren't really talking about directors in this instance, he became the president.

Melissa Castan: Okay.

Steve Kourabas: And the funny thing about this case here, he was never really officially declared.

The president of the company, they just referred to him as president. As the president because he inherited the title. And that's an interesting little quirk as well, which shows a bit of a difference now. He just became it because he was the son.

Melissa Castan: So I guess in what you could say is it was.

Like a paper title because he took it on according to the documentation. Yeah. But he took it on as a six month old. Yeah. And really had no involvement with the running of the company at all.

Steve Kourabas: Not at all. And in fact, they call him a figurehead in the company. And that was in essence, his defense.

He wanted [00:04:00] to be a figurehead.

James: If we look at the, what was he called? President. The president. He called the president of the company and the company was the Re Cardiff Savings Bank. But I think it's also worth noting about this was not a small portfolio that this guy. Inherited. Who was his dad?

Like how much did this guy inherit as a six month old? So

Steve Kourabas: I think that it was either his father or grandfather that, in essence, founded Cardiff, right? So he came from a pretty famous FA family, and what he inherited, I think at the time, made him the richest man in the world. At the time. Oh, why on?

So yeah, as he was a, I would've loved to have been a six month old inherited that. He's so six month old Bill Gates? Yes. Basically, yes. That's how I like to think about it.

Melissa Castan: So he becomes part of this c corporate structure, which runs the. Re Cardiff Savings Banks and a number of other things.

Steve Kourabas: Yeah.

Melissa Castan: And then what happens from then on?

Steve Kourabas: So I guess he doesn't really pay very much attention. As James said, he had a lot of other things that he was doing, and he was much more interested in those. He [00:05:00] was a, a reluctant businessman. He was more in interested in architecture and a lot of other things like that.

I think he was at St. Andrew's and he helped hire the first female lecturer in medicine at St. Andrew's. So he had a lot of other. Philanthropic interests. And this was just the thing that he inherited. And he only ever went to one meeting. One, I guess what we would now call a board meeting.

When he was 21 years of age and. From what it sounds like in the case, he just signed off on the minutes. What happened was you had a kind of a board structure. So other people that we were now called directors and they were looking after the company, they were managing it, but they had hired someone to do some of the everyday business.

And this guy had worked there for about 30 years, I think, and he was defrauding the company. I think he took a lot of money from the bank. Who

Melissa Castan: knew? Yes, I

Steve Kourabas: know, right? It seems like they relied on him a lot.

Melissa Castan: Yeah.

Steve Kourabas: And he was engaging in some I guess shady business. He took some money and then he be the bank became.

Unable to [00:06:00] pay its debts and a paid deposit. So we went bust what we would call insolvent.

Melissa Castan: Okay. So that happens when the Marques now 38 years old and a proper adult. Yes. So the liquidator step in. And they wanna what? Chase him? Yes. For the, for liability for all the debts and the lost money, right?

Steve Kourabas: Yeah. So in the liquidators, when they go in, they try to get as much assets. Usually we think of money, they try to get as much of that back so that they can. Pay off generally the company's creditors. So the company will owe someone money and the liquidator is there to get as much of the money back that they can and then divide it up equally.

And what the liquidator said here was that the directors should be personally liable the directors including. The monkey of boot.

Melissa Castan: I can see why, because he's holding onto this great fortune.

Steve Kourabas: Yeah.

Melissa Castan: And so he actually has assets. He's got a lot of money that could be put to paying back all the creditors and the little people Yes.

Who put their money in the bank.

Steve Kourabas: Yeah. And that's generally, often in commercial cases you look for the [00:07:00] money. And in this instance you've got the richest guy in the world at the time potentially liable. And the liquidator didn't just go for after him, though. They went after every director.

And this was, I think the second case that came about out of this insolvency. And in the first case, they actually found the director liable. And the difference here was that, the marquee had no involvement in the running of the company and they found that because he had no involvement, he couldn't be liable.

He didn't know what was happening. So he's off gallivanting the world, I assume, and engaging in his philanthropic interest. He sounds like a really serious guy and a guy that we benefited off a lot. Yeah. But he wasn't interested in the bank's

James: operation, was that? Held to be good enough that you can be in charge of a company, even if you're just a figurehead and not pay attention to what's going on day to

Steve Kourabas: day.

In fact, back then a lot of the companies, the directors were figureheads. There weren't that many directors around [00:08:00] if you like, we're all very used to companies like they, they really penetrate every aspect of our lives now, but companies weren't as. I guess prevalent then There weren't as many people that could be directors then.

And often you had a director that, I, I know someone, someone is working as a director in other companies, and so they'll just be a director here as well. It was a limited pool of directors and you often had these figureheads that were I guess managing the company but not really managing the company.

Melissa Castan: You are listening to just Cases, and today we're talking about the Cardiff Savings Bank case, how it shaped corporate responsibility and how directors are held liable even today. And if you like just cases, you might also like Thought Capital, a podcast that challenges the way we think about business.

Thought capital explores ideas like why companies should embrace whistleblowers rather than shun them. And how can Donald Trump teach us to be better leaders? I don't actually know. Thought Capital is hosted by [00:09:00] senior business journalist Michael Pasco. You can find it wherever you usually listen to podcasts.

James: So what exactly did the court say in their decision?

Steve Kourabas: So there was a, there's a whole load of yield speak in this case. It's a bit of a hard one to follow. I'll just lay it on. Yeah I'll get really into that. No I have to skip over a lot of that myself because it talks about a lot of old legislation, law and stuff.

But in essence, the court says even though you are arguing that you are not. What we would now call a director. You are a director, but the thing is that you had no involvement in this company, and therefore we can't hold you liable for the bad behavior of others or the negligent behavior of your fellow directors because you weren't there if you were.

At the meetings, if you knew that something may be going wrong and you did nothing, then you may be liable. And in fact, that's what they found with the previous director in the previous case. He was called the trustee and manager, but they said you were [00:10:00] actually involved in the management of the company.

You knew that things were a bit iffy and you didn't do your job and therefore you're liable. Whereas this guy. The marquee was not involved. He had received some letters and annual statements saying the business is running as it should, and the court said, that's enough. You can rely on that.

Melissa Castan: That's a really weird result because that actually gives an incentive to to a marquee or a Lord or whoever. Yeah. To turn a blind eye to the operations that they're. That they're on paper. Yeah. Running. And so actually, strategically, you're better off turning a blind eye, not knowing than actually participating.

I receive

James: parking infringements in mail and speeding fines and yeah,

Steve Kourabas: they don't go away. I always wanted to look behind this case because I felt there may be something else going on because the marquee said I went to a meeting. I don't remember the meeting. I have been told that I got annual statements and that never saw them.

I was always overseas. But even though he said that the court assumed that he had [00:11:00] received these letter, these notices. Yeah. And looked at them. And then from that assumed that the co the company was running. As it should. Yeah. When in essence he had said no. I just don't remember any. I don't know anything.

So there may have been something else going on in the background. I'm not sure about that. It seemed that seems like a little bit of a novelly, a little quirk in the case. And in fact, the the opposing side said this is going to encourage people to not be actively involved. And the court again, gave a bit of a vague answer in this area.

Saying that's not really what happened in this case. And it seems like that's exactly what happened so it's a little bit of a weird one in terms of the outcome, but it did for a very long time. Form one example of how we used to treat the directors who are in what we call the managers of the company.

It used to treat them in on a substantive basis. We say it looked at them individual, what's your knowledge and involvement in the company? And if you have no. Involvement in the company. If you have very little [00:12:00] knowledge in the company, then you are in a better situation than if you were involved in the company or had a lot of knowledge.

Melissa Castan: So it's what we call a subjective test. It is, it's a test of what I have in my mind Yes. Going on, not what the evidence in front actually says. Is there or what I should do.

Steve Kourabas: Yeah. And that was that was in, this is a UK case, but it was also what we adopted in Australia and it was exactly that.

So they, you had a lot of directors that maybe shouldn't have been directors that were getting away with this kind of stuff. I guess

James: there, there's a particular. Passage in the judgment. I'm gonna call it a passage, and I'm sure that the two of you will not call it a passage. I'm fine with you calling it a passage.

I won't object. Let's go with passage. There's a particular passage in the judgment that that kind of highlights the court's approach here to the marquee. And to company directors in general, are you able to read us that passage?

Steve Kourabas: Okay, so the passage is where the court is now explaining why the Marques is not liable, and it begins here, the marquee of, but [00:13:00] took no part in the conduct of the business of the bank.

It may be that the neglect, as he certainly omitted to attend the meetings to which he was summoned, but neglect or omission to attend meetings is not, in my opinion, the same thing as neglect or omission of a duty, which ought to be performed at those meetings if indeed he had knowledge or notice either that no meetings or trustees or managers were being held, or that a duty which ought to be discharged at those meetings was not being performed.

It might be right to hold that he was guilty of neglect or omission of the duty

James: that hey, I've got my bullshit radar is just going crazy right now. It should be, yeah. So they say basically you have a number of duties as a director of a company, but if you're not at the meeting, then you couldn't have known that you were supposed to exercise those duties.

Is that kind of what the saying but attending a meeting be, let's

Steve Kourabas: so we need to I guess maybe narrow it so that we can limit the bullshit essence factor. [00:14:00] This is really a case that looks at one of the director's duties, what we call care skill and diligence or what I like to call having some level of competence.

There are other duties, good faith acting in the best interest of the company that this case doesn't necessarily look at. Today you may have a different outcome, but this case, really the proposition stands for a really low standard of competence or care, skill and diligence. And in essence, what they're saying is if you've been hired or you exist as a figurehead, then we're gonna take that into account.

And if you don't go to the meetings, then we're not gonna attribute liability to you. And that's not the standard that we would necessarily want today,

Melissa Castan: so that takes us to today. Is Australian law still consistent with this old case from nineties, the

Steve Kourabas: 1890s? No, it's been almost completely reversed.

Which I think I'm

Melissa Castan: glad to hear that. Yes.

Steve Kourabas: In a way we may have lost the positives of the marquee of Butte if he had to take on a very managerial role of the [00:15:00] bank. He did a lot of very other important things

Melissa Castan: Yeah, but come on. He could have said, I no longer wanna be a director or a president, and I'll often do my, definitely important things and leave the job to someone who actually wants to do this job.

Steve Kourabas: Although, I should also say, I don't think he was really being paid for this.

So it's, it's all keen. Our responsibility. Yeah, it's a bit of a weird one. And, but you are right. Today it's changed. And we've got a more objective test in both what we call the common law.

Judge made law and statute, so legislation and this really took off. Particularly in the eighties when we were having a lot of corporate insolvency scandals and people were very unhappy with this type of situation, and they were saying, why aren't these people being held liable? Why aren't we lifting what we call the corporate veil?

At the start of our discussion, we said that the corporation can be treated separately from the people that make it up. And in this instance they were saying if people are acting inappropriately as managers, we may wanna hold them liable. And the law changed as a result. The AWA and Daniel's [00:16:00] cases in particular reversed this finding or this outcome that we would have of care, skill and diligence for directors.

And when was, when's this is in the eighties. This was taking place in the eighties. There was a whole series of cases, not only in Australia. Internationally. And then you are having a lot of commission reports looking into this and saying this doesn't seem to work. And in the court cases, the judges has started to impose an objective test rather than a subjective test.

Melissa Castan: So we've moved a very low threshold of competence to an expectation of very high threshold of competence, higher or higher threshold. Yes. And I guess the point is if a person isn't prepared to take on that responsibility, they shouldn't just. Be on paper.

Steve Kourabas: Yeah.

Melissa Castan: In that role.

Steve Kourabas: And that's one of the key findings of the courts in the AWA cases.

They said, if you don't think that you're suited to this position, don't take the position, reject it. And they said the days of these kind of figurehead directors are over. You have to have a more active. Part in the management of the company. They didn't go [00:17:00] so far as to required day-to-day interaction that wouldn't really be very realistic for a director.

They said, we have executives. CEOs Yeah. And stuff that do that. But directors have to at least have some level of involvement in the running of the company, and most importantly in the finances of the company, the financial documents. So you don't have to be an accountant, but you have to at least look.

At the financial documents. And I don't think that the marquee would've done that.

Melissa Castan: So we can no longer have a sleeping director.

Steve Kourabas: Exactly. That's the terminology that they used. So you can't do that anymore. You have to at least. Have some knowledge of the of the company's workings.

And one of the laws that we have in particular that would've been relevant here relates to insolvency. So when a company goes bust directors can be liable personally if a company goes bust and they've been trading while they've been going, while they've been insolvent, and one of the defenses is.

You, you weren't involved in the management, but you have to have a good reason. So it has to be a really [00:18:00] serious illness or something. It wouldn't be, I've just been out of the country. Like the marquee would've been, doing his other stuff.

Melissa Castan: So everything's fixed now, right?

Steve Kourabas: Not done. Okay.

We're finished here, let's go home. There, there is an improvement I think in terms of the actual laws that we have and what we require in terms of competence. But that doesn't mean as we have been I guess seeing in the past year or so, or the past decade. That there's no problems in terms of directors acting badly.

Melissa Castan: So then can I just take you back what happened at the end of this case?

Steve Kourabas: The Marques was let off, but it was a ri it was a big embarrassment for him at the time. I think that he overcame that and his legacy has been one of amazing architectural design that he worked with in card of some gothic kind of churches and architecture and stuff like that.

He, in his younger days, he caused quite a controversy and he converted to Catholicism and that was a scandal at the time. And he died at a rather young age. I think it was [00:19:00] in 1900. So not very long after this case. And he's heart is now buried at the Mount of Olives. I'm sorry. His heart is buried at the Mount of Olives in Jerusalem.

Melissa Castan: Why not?

Steve Kourabas: So it's a. I had never really heard that until I read the case. I didn't know that you did that. He's the rest of his body is that a thing? Apparently it's, I don't know if other people's hearts are buried at the Mount of Olives. I don't know.

James: I wanna get on board.

In terms of if you could send different body parts to different parts of the world, that's fantastic. Yeah. I read Oh,

Melissa Castan: horrifying. Yes.

James: I read as well that he was Ignite Grand Cross of the Holy Sika. Night of the order of St. Gregory, the great and hereditary keeper of the Road, sea Castle.

Yeah. He sounds like the kind of guy who would have his heart buried at the Mount of Olives.

Steve Kourabas: It sounds all very what is it? Da Vinci code type stuff. I think of that kind of thing when I read his titles. But he sounds like a really interesting guy. I'm hap I'm, I know that it would've been terrible for the people at the time, but I'm [00:20:00] happy that the case happened and I got to find out a little bit about him and all of the good stuff that he's done in.

Addition to the very bad stuff that he did as a director of his bank, join the club. We're

James: very glad to have had you here to tell the story. Thank you. Thank you, Steve. Thank you guys.

Melissa Castan: If you like listening to just Cases, please rate us on iTunes or wherever you do listen to podcasts. I look forward to your company in the next episode.