Adams v Australian Securities and Investments Commission [2006] NSWSC 99 | Case summary

1 The plaintiff seeks an order under s.206G of the Corporations Act 2001 (Cth) granting him leave to manage a particular corporation, that is to say, The Marketing Store Worldwide Pty Limited, which I shall call "the Company". 2 The plaintiff became a director of the Company's predecessor in 1988. It carried on a promotions agency business, principally involved in marketing promotions for large companies. The business of the predecessor was acquired by the Company in 1999. The Company was and is a wholly owned subsidiary of a United States corporation called The Marketing Store Worldwide LLC. The plaintiff became a director of the Company at the time of the business acquisition. 3 The plaintiff's disqualification arose under s.206B(4) of the Corporations Act upon his executing a deed of arrangement under Part X of the Bankruptcy Act 1966 (Cth). This occurred on 15 September 2004. Shortly afterwards, the plaintiff's creditors approved a composition, details of which are set out in the report of the controlling trustee pursuant to s.189A of the Bankruptcy Act. The significant feature, for present purposes, is that the effect of the composition was to produce an estimated dividend of 89 cents in the dollar for creditors - that being, needless to say, a much better result for creditors than is obtained in most bankruptcies or analogous administrations. The plaintiff is continuing to meet his obligations under the composition. 4 The plaintiff explains in his affidavit that the composition into which he entered and his decision to make an arrangement with his creditors were the product of two factors. One was the break down of his marriage and consequential financial problems, including those arising from a final binding financial agreement under the Family Law Act 1975 (Cth) in proceedings which involved transfer of substantial assets to his former wife in order to support their children, coupled with a requirement to pay an amount of $1,300 per week for a period that will not end until 1 October 2007. The plaintiff has married again and has two small children. There are thus financial obligations from that source as well. 5 The second matter leading to the decision to invoke Part X of the Bankruptcy Act was a requirement that the plaintiff meet a guarantee he had given in respect of a commercial loan to a joint venture company with which he had previously been associated. That matter appears to have been an isolated one and not part of any pattern of financial risk-taking or financial irresponsibility. 6 The plaintiff did not realise for some time that the Part X arrangement had brought about an automatic disqualification from managing corporations pursuant to s.206B(4). When he did realise that, however, he acted promptly in seeking advice and in taking steps to give effect to and recognise the disqualification. Advice he sought at that time led him to make the present application. 7 The considerations that apply in cases of this kind have been dealt with in a number of cases. In Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203, Bowen CJ in Eq said (at p.205): "The court in exercising its discretion will have regard to the nature of the offence of which the applicant has been convicted, the nature of his involvement, and the general character of the applicant, including his conduct in the intervening period since he was removed from the board and from management. Where, as here, the applicant seeks leave to become a director and to take part in the management of particular companies the court will consider the structure of those companies, the nature of their businesses and the interests of their shareholders, creditors and employees. One matter to be considered will be the assessment of any risks to those persons or to the public which may appear to be involved in the applicant's assuming positions on the board or in management." 8 In Re Ansett (1990) 3 ACSR 357, Brooking J said (at pp.358-359): "There is no dispute about the principles to be applied by me. In Re Altim Pty Ltd (1968) 2 NSWR 762 at 764 Street J said: "The section under which this application is made proceeds upon the basis that a person who is an undischarged bankrupt is prima facie not to be permitted to act as a director or to take part in the management of a company. The court is given jurisdiction to grant leave for such activities to be carried on, but an applicant who comes to the court seeking leave must bear the onus of establishing that the general policy of the legislature laid down in this section ought to be made the subject of an exception in his case. It should be borne in mind that the section is not in any sense a punishment of the bankrupt. Nor should a refusal to grant leave under the section be regarded as punitive. The prohibition is entirely protective, and the power of the court to grant leave is to be exercised with this consideration in the forefront": see further Zuker v Commissioner for Corporate Affairs [1981] VR 72 at 78 (a case under the predecessor of s 227(2), dealing with convicted persons); Re Alford (1984) 2 ACLC 815 at 819,; on appeal (1984) 2 ACLC 820 at 822 and 826; Poyser v Commissioner for Corporate Affairs [1985] VR 533 at 537 Commissioner for Corporate Affairs (Vic) v Bracht (1988) 14 ACLR 728 at 731 The subsection is concerned to ensure that directors act in accordance with proper commercial standards, as it has been put. The earliest reported application under the subsection seems to be Re Kingsgate Rare Metals Pty Ltd [1940] QWN 30, where the failure to pay any dividend was viewed as a relevant matter and the applicant's connection with a number of companies was considered." 9 The relevant principles are conveniently collected in the form of six numbered points in the judgment of Lindgren J in Adams v Australian Securities and Investments Commission (2003) 46 ACSR 68 at p.71: "[8] The following principles relevant to an application of the present kind have been consistently recognised and applied in the authorities: (1) The applicant bears the onus of establishing that the court should make an exception to the legislative policy underlying the prohibition: Re Altim Pty Ltd [1968] 2 NSWR 762 ( Altim ) at 764 as applied in Re Ferrari Furniture Co Pty Ltd [1972] 2 NSWLR 790 ( Ferrari ) at 792; Re Macquarie Investments Pty Ltd (1975) 1 ACLR 40 at 42; Re Maelor Jones Pty Ltd (1975) 1 ACLR 4 at 13; Re Magna Alloys and Research Pty Ltd (1975) 1 ACLR 203 at 205; Re Zim Metal Products Pty Ltd (1977) 2 ACLR 553 at 555 ( Zim ); Re Marsden (1981) 29 SASR 454 at 460; 6 ACLR 694 at 700 ( Marsden ); Re Australian Limousin Breeders Society Ltd (1989) 7 ACLC 426 at 429-30; Murray v Australian Securities Commission (1993) 12 ACLC 11 at 13 ( Murray ); Pace v Australian Securities and Investments Commission (1999) 17 ACLC 1674 at [21] ( Pace ); Re Seymour [2002] TASSC 85; BC200206122 at [6]. (2) That legislative policy is one of protecting the public, not one of punishing the offender: Altim at 764, as applied in Ferrari at 791-2; Zim at 555; Murray at 13; Chew v National Companies and Securities Commission [1985] WAR 337 at 340-1; (1985) 9 ACLR 527 at 529-30 ( Chew ); Pace at [21]; Re Seymour at 2; Borsboom v Australian Securities Commission (unreported, SC(WA), White J, No COR295 of 1996, 17 January 1997, BC9700022). (3) Another objective is to deter others from engaging in conduct of the particular kind in question: Chew at 340-1; Zim at 555; Murray v ASC at 13; Pace at [21]; Re Seymour , above, at [6]. (4) A further objective is the more general one of deterring others from abusing the corporate structure to the disadvantage of investors, shareholders and others dealing with a company: Re Marsden above at SASR 459ACLR 699; Zim at 555; Murray at 13; Re Magna Alloys at 205; Pace at [21]; Re Seymour , above, at [6]. (5) The prohibition itself contemplates that there will be hardship to the offender. Therefore hardship to the offender alone is not a persuasive ground for the granting of leave: Chew at 340-1; Re Maelor Jones Pty Ltd (1975) 1 ACLR 4 at 13; Murray at 14. (6) The court in exercising its discretion will have regard to the nature of the offence of which the applicant has been convicted, the nature of his involvement, and the general character of the applicant, including his conduct in the intervening period since he was removed from the board and from management. Where, as here, the applicant seeks leave to become a director and to take part in the management of particular companies the court will consider the structure of those companies, the nature of their businesses and the interests of their shareholders, creditors and employees. One matter to be considered will be the assessment of any risks to those persons or to the public which may appear to be involved in the applicant's assuming positions on the board or in management, per Bowen CJ in Eq in Re Magna Alloys at 205, followed in Zim at 555-6. This passage does not purport to be an exhaustive statement of the matters appropriate to be taken into account by the court as relevant to the exercise of its discretion under the section. Clearly, there can be no such exhaustive statement." 10 I also adopt what was said by Austin J in Didovich v Australian Securities and Investments Commission (1998) 29 ACSR 122 at p.126: "The basic principle was stated by Powell J in Friend v CAC (1988) 7 ACLC 106 at 115. His Honour said: 'It is, I believe, clear - and I believe, generally, if not universally accepted - that the function of s 562A of the Code is to protect the public - not merely the investing public, but ordinary businessmen and tradespeople who might deal with a company - from the depredations of, and from losses which might be caused by the activities of dishonest, unscrupulous, untrustworthy, irresponsible, or merely incompetent, company directors.' This implies that the purpose of s 600 is protective rather than punitive." 11 The cases make it clear, first and foremost, that the plaintiff in a case such as this bears the onus of establishing that the court should make an exception to the legislative policy underlying the prohibition, that is to say, that a person who has executed a deed of arrangement under Part X of the Bankruptcy Act should not be concerned in the management of corporations. The legislative policy is one of protecting the public and it is to that consideration that attention must principally be directed, with the plaintiff showing that protection of the public will not be compromised by the grant of the leave sought. There are other objectives which may be regarded as subsidiary. 12 Much of the case law is concerned with persons who have committed criminal offences or been involved in dishonest endeavours. That, of course, is not the case here. The plaintiff in this instance suffered financial stresses from the two sources to which I have referred; but there is nothing whatsoever to suggest that he engaged in any morally reprehensible or unlawful conduct. Indeed, the steps he took to make provision for his creditors and the course of action on which he has embarked since discovering the effect of his status under the Bankruptcy Act bespeak a responsible attitude. 13 One of the matters to which the court is to have regard is the nature of the circumstance that brought about the prohibition. That is of the nature I have already mentioned where marriage breakdown and unexpected calling of a guarantee combined to produce intolerable financial stress. 14 Another matter to be considered is the financial structure of the relevant company. In the present situation, as I have said, the Company is a wholly owned subsidiary of a United States corporation. Search materials in evidence show the United States corporations to be the sole shareholder. It is highly relevant that the chief financial officer of the parent corporation has indicated that corporation's support for the present application. A letter from the chief financial officer testifies to the plaintiff's high standards of performance in his work and the key role he plays in the Australian and Asian operations of The Marketing Store group. The parent company wishes to see him in office and as a director again, given his experience and knowledge of the operations in Australia. The composition with creditors had ramifications under the plaintiff's employment contract. The parent company and, no doubt through it, the Company itself, have seen fit not to seek to enforce the employment contract provision which would have enabled them to bring about a termination of the plaintiff's employment. That of itself is clear confirmation of the attitude of the sole shareholder. 15 Also in evidence is a letter from the trustee of the deed of composition confirming that payments are up to date pursuant to the deed and expressing support for the proposition that the plaintiff should be allowed to hold a managerial position in the company as this would assist his performance in relation to income contributions pursuant to the deed of composition. 16 ASIC has been notified of the application and has indicated that it does not intend to intervene and neither supports nor opposes the application. 17 This case is, to my mind, one in which a grant of leave under s.206G is appropriate, having regard to the several considerations that I have mentioned: in particular the circumstances that gave rise to the composition with creditors, the responsible conduct of the plaintiff in relation to his financial predicament, and the attitude of the sole shareholder of the Company. 18 The board of directors of the Company as presently constituted consists of three directors resident in the United States and one (Mr Cullen, the chief financial officer of the Company) ordinarily resident in Australia. Until his disqualification was recognised, the plaintiff had been one of two signatories on bank accounts of the Company. Although the Company has an auditor and that form of oversight is at work in this case, it seems to me prudent that two conditions be imposed upon the grant of leave under s.206G. It is desirable that there be at least one additional director ordinarily resident in Australia while the disqualifying circumstance continues; also that, during that time, the plaintiff, if he again becomes a signatory on bank and other similar accounts, should not be the sole signatory. 19 I order that David Victor Chapman be granted leave to be a director of and to manage the company known as "The Marketing Store Worldwide Pty Limited" (ACN 085 045 503), such grant being on condition that at all times while disqualification under s.206B(4) continues: (a) at least one director of that company in addition to the said David Victor Chapman ordinarily resides in Australia, and (b) the said David Victor Chapman not be the sole signatory on any account maintained by the said company with any bank or financial institution. **********

Adams v Australian Securities and Investments Commission

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