Protecting your Company’s Confidential Information: Section 183 of Corporations Act

Introduction

What happens when an employee or director uses, or threatens to use, information properly belonging to their employer, or the corporation they direct? The Corporations Act 2001 (Cth) provides some protection against improper use of such information, by way of section 183, which provides that a person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:

1. gain a commercial advantage for themselves or someone else; or
2. cause detriment to the corporation.

The section further provides that the duty continues after the person stops being an officer or employee of the corporation.

The protections and obligations provided for by s 183 means that is essential for employees, directors, officers and employers alike to have a firm understanding of the effect of s 183, to avoid inadvertently breaching it (from the employees’, directors’ and officers’ perspective), and to protect against any potential or actual breaches (from the employers’ perspective).

In summary, the “elements” for contravention of s 183 are as follows:

1. The person was, at the relevant time, a director, officer or employee of the corporation;
2. The person acquired the relevant information;
3. She or he acquired that information by virtue of the position as a director, officer or employee of the corporation;
4. She or he made improper use of that information in order to gain directly or indirectly an advantage;
5. That advantage was either for her or himself or for some other person.
6. Alternatively to (4) and (5), that she or he made that improper use to cause detriment to the company.^[1]

In this way, section 183 effectively reflects fiduciary obligations of confidence and good faith under the general law, such that, if a breach of those general law fiduciary duties are made out, it is likely that there will also be a contravention of s 183 of the Corporations Act.^[2]

Key Concepts

The term “information” covers any information that a person may have acquired because of his or her position with the company.^[3] A breach of s 183 depends on the “improper” use of this information, which is generally established on the basis that it is confidential to the company.^[4] However, a contravention of s 183 may be established even in respect of non-confidential information. As Beach J said in CellOS Software Ltd v Huber, information “does not need to be a company’s confidential information” but “information that has been acquired because of the relevant person’s position in the company.”^[5] There is no limit on the types of information that can ground a breach of s 183, but can include such things internal company staff selection and recruitment lists, client lists, financial information, profit margins and cost prices for goods.^[6]

The purpose to be established is either gaining an advantage themselves or someone else, or causing detriment to the company. It is not necessary to establish that the person accused of breaching s 183 actually attained their objective, only that they believed that the intended outcome would be advantageous for themselves or another person, or detrimental to the company.^[7] The test of whether the conduct is relevantly “improper” is whether the conduct breached “the norm of conduct thought necessary for the proper conduct of commercial life so that people will have confidence that the running of the marketplace is in safe hands”.^[8] This is an objective test, although once again it is neither possible nor desirable to spell out the circumstances in which a breach can occur, as each case depends on its own facts. However, it commonly arises in situations where a former officer or employee diverts business opportunities from their former company, conducts business for a competing company and uses knowledge acquired at the first company to make the new company more competitive, or attains a concealed benefit as a result of the misused information.^[9]

What happens if someone breaches s 183?

Section 183 is a civil penalty provision under the Corporations Act.  If a person has contravened a civil penalty provision, s 1317E requires the court to make a declaration of contravention.  Once a declaration has been made, ASIC can seek a pecuniary penalty order (s 1317G) or a disqualification order (s 206C).

However, private litigants can also seek relief for breaches of s 183. Under s 1317H a party may seek a “compensation order” against a person who has contravened a civil penalty provision, so long as that contravention caused damage (which can include any profits the person made from breaching the civil penalty provision).

If the Court orders a pecuniary penalty against an individual, the amount will be determined as the higher value between 5,000 penalty units (as at the time of this article, equivalent to $1,565,000) and, if the Court can ascertain the benefit gained and/or detriment avoided due to the contravention—this amount multiplied by three (as per subsection 1317G(3)). When determining the pecuniary penalty amount, the Court considers various relevant factors, such as the type and extent of the violation, the circumstances under which it occurred, and whether the individual has previously been found by a court (including a foreign court) to have engaged in similar behavior.^[10]

In addition to pecuniary penalties, on ASIC’s application the Court may also impose a disqualification order, preventing the person from managing corporations.^[11] In ASIC v Vizard [2005] FCA 1037; (2005) 145 FCR 57, Mr Vizard breached s 183 of the Corporations Act by using information that he obtained through his position as a director of Telstra to buy shares in three IT companies which Telstra had also expressed interest in. Vizard admitted the breach and was ordered to pay a penalty of $390,000. He was also disqualified from being a company director for 10 years.

Finally, a breach of s 183 of the Corporations Act may also amount to a breach of a similar criminal offence provided for under s 184:

1. A person who obtains information because they are, or have been, a director or other officer or employee of a corporation commits an offence if they use the information dishonestly:
   1. with the intention of directly or indirectly gaining an advantage for themselves or someone else, or causing detriment to the corporation;
   2. recklessly as to whether the use may result in themselves or someone else directly or indirectly gaining an advantage, or in causing detriment to the corporation.

If found guilty of this offence, the Court can impose a maximum penalty of up to 15 years imprisonment.^[12]

Key Takeaways

Section 183 ensures that those in positions of authority within a corporation act responsibly and in a manner that upholds the integrity of the corporation and protects its interests. Ensuring employees and officers of companies do not misuse confidential information is essential to the running of a business: it provides an assurance that when companies provide their employees and directors with confidential information, sometimes necessary to do their jobs, that information will not be misused afterwards, whether by sharing that information with a competitor or using that information for their own benefit.

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[1] United Petroleum Australia Pty Ltd v Herbert Smith Freehills [2018] VSC 347; (2018) 128 ACSR 324 at [647].

[2] SBA Music Pty Ltd v Hall (No 3) [2015] FCA 1079 at [28]; Southern Real Estate Pty Ltd v Dellow (2003) 87 SASR 1 at [25].

[3] Digital Cinema Network Pty Ltd v Ching (No 3) [2020] NSWSC 1598 at [534]-[544].

[4] Windbox Pty Ltd v Daguragu Aboriginal Land Trust (No 3) [2020] NTSC 21 at [403].

[5] CellOS Software Ltd v Huber [2018] FCA 2069 at [814].

[6] See, e.g., Global Risk Alliance Group Services Pty Ltd v Harmer [2024] NSWSC 79; Techforce Personnel Pty Ltd v Jaffer [2023] FCA 1674; Oliana Foods Pty Ltd v Culinary Co Pty Ltd (in liq) [2020] VSC 693.

[7] Chew v The Queen (1992) 173 CLR 626 at 634.

[8] R v Byrnes (1995) 183 CLR 501 at 515.

[9] See, e.g., CellOS Software Ltd v Huber (2018) 132 ACSR 468; DTM Constructions Pty Ltd (t/as QA Developments) v Poole (2017) 123 ACSR 171; Investa Properties Pty Ltd v Nankervis (No 7) (2015) 333 ALR 193.

[10] See s 1317G(6); Australian Securities and Investments Commission v Ultiq Lifestyle Promotions Ltd (in liq) (No 2) [2022] FCA 1228 at [14]-[15].

[11] Section 206C.

[12] Corporations Act Sch 3.