Adams v Australian Securities and Investments Commission

Relevant provisions 9 Section 206B(3) of the Act provides that: A person is disqualified from managing corporations if the person is an undischarged bankrupt under the law of Australia, its external territories or another country. 10 Section 206A(2) of the Act provides that: A person ceases to be a director, alternate director or a secretary of a company if: (a) the person becomes disqualified from managing corporations under this Part; and (b) they are not given permission to manage the corporation under section 206F or 206G. 11 Section 206G of the Act provides that: (1) A person who is disqualified from managing corporation may apply to the Court for leave to manage: (a) corporations; or (b) a particular class of corporations; or (c) a particular corporation; if the person was not disqualified by ASIC. (2) The person must lodge a notice with ASIC at least 21 days before commencing the proceedings. The notice must be in the prescribed form. (3) The order granting leave may be expressed to be subject to exceptions and conditions determined by the Court. Note: If the Court grants the person leave to manage the corporation, the person may be appointed as a director (see section 201B) or secretary (see section 204B) of a company. (4) The person must lodge with ASIC a copy of any order granting leave within 14 days after the order is made. (5) On application by ASIC, the Court may revoke the leave. The order revoking leave does not take effect until it is served on the person. 12 The application as filed seeks, in terms, to invoke the operation of ss 206G(1)(a) and (b) of the Act. 13 There is evidence that Mr Watts has complied with s 206G(2) of the Act. On 15 August 2011 the Australian Securities and Investments Commission (ASIC) advised that it did not intend to appear in the application.

Relevant principles 14 The overarching principle to be applied in determining whether or not leave should be granted, in circumstances such as the present, was identified by Street J in Re Altim Pty Ltd (1968) 2 NSWR 762 at 764 as follows: 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 for leave] 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. 15 In Re Shneider (1996) 71 FCR 69 at 73, Drummond J observed: Given that this is the legislative policy behind the section, it is difficult to see how the Court could properly grant a relaxation of the ban unless it knew something of what the [applicant for leave] proposed to do by way of becoming involved in corporate management, that is, unless the [applicant for leave] put before the Court a proposal for him to take part in the management of a specified corporation or corporations. 16 Although Shneider was a case in which the applicant for leave was disqualified because of a criminal conviction, rather than bankruptcy, Drummond J's observations remain relevant to all cases in which leave is sought under s 206G(1) of the Act. 17 Similarly, in Adams v Australian Securities and Investments Commission (2003) 46 ACSR 68 Lindgren J, in the course of summarising a number of principles that are relevant to the application of s 206G(1), observed (at [8]): … Where, as here, the [applicant for leave] 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 for leave's] assuming positions on the board or in management … 18 It is clear from these observations that it is for the applicant for leave to place before the Court evidence in appropriate form that is capable of satisfying the Court that, in the given case, an exception should be made to the legislative policy underlying the prohibition in the Act. This remains the case even though there is no contradictor before the Court who actively opposes the application. The mere absence of a contradictor does not discharge the applicant for leave from the obligation of satisfying the Court, on an appropriate basis, that leave, as sought, should be granted. The fact that ASIC has not appeared is not a matter on which I place any significant weight: see Re Australian Limousin Breeders Society Ltd (1989) 7 ACLC 426 at 429-430. 19 Furthermore, the requirement to establish an appropriate case for the exercise of the discretion that is sought is not lessened by the opportunity afforded to ASIC by s 206G(5) of the Act to apply to the Court to revoke any leave that might be granted under s 206G(1). As Brooking J observed in Re Ansett (1990) 3 ACSR 357 at 359, if the Court is not persuaded on the evidence before it that the discretion should be exercised in the applicant for leave's favour, "it cannot stretch a point on the basis that a mistake can always be set right by a subsequent revocation". 20 It should also be noted that hardship, in the form of disqualification, is not, alone, a persuasive ground for granting leave: see Adams at [8]; Chew v National Companies and Securities Commission (No 2) [1985] WAR 337 at 340-341; Re Maelor Jones Pty Ltd (1975) 1 ACLR 4 at 13; Murray v Australian Securities Commission (1993) 12 ACLC 11 at 14. This is because that particular form of hardship is implicit in the legislative prohibition. The legislative policy of protecting the public, reflected in the prohibition itself, remains in the forefront of considerations: Altim at 764; see also the cases cited in Adams at [8]. 21 The general principles informing the exercise of the discretion under s 206G(1) of the Act were recently noted in Carey, in the matter of Carey [2011] FCA 235. Mr Watts has placed particular reliance on that case. While that case concerned a plaintiff who was an undischarged bankrupt who successfully obtained leave, the facts of the case, and the particular grant of leave that was sought, are removed from the present case. 22 Mr Watts has also placed reliance on the summary of the general principles in Duffy; Re Westgate Ports Pty Ltd (2010) 79 ACSR 267 at [19]. This case, however, concerned disqualification by reason of conviction of an indictable offence. Once again, the facts of the case, and the particular grant of leave that was sought, are removed from the present case.

The evidence 23 The evidence in support of the plaintiff comprises two affidavits affirmed by Mr Watts on 14 July 2011 and 9 August 2011, respectively. 24 A substantial part of Mr Watts' first affidavit is devoted to dealing with the background to the making of the sequestration order against his and his wife's estates and the subsequent proceedings to which I have referred, culminating in the refusal of his application for special leave to appeal to the High Court. 25 The sequestration order was made on the petition of Adelaide & Bendigo Bank Limited (the Bank). That petition was based on a debt arising from guarantees given by Mr and Mrs Watts in respect of the indebtedness of BMG Poseidon Corp Pty Ltd to the Bank under two loan agreements entered into in 2004. 26 It appears that the Bank served a number of bankruptcy notices on Mr and Mrs Watts. This led them to commence a number of proceedings seeking to set aside the notices. They were unsuccessful in setting aside the third, and last, of the notices. Their failure to comply with that notice provided the respective acts of bankruptcy on which the Bank ultimately relied in filing its creditor's petition against them. 27 Mr Watts says that he refused to pay his debt to the Bank because he "strongly believed that the Bank was extremely harsh and unfair in its dealings with me and my wife". He also expresses the belief that he "could have won over the Bank had I hired a competent lawyer". 28 In his first affidavit Mr Watts deposes to his compliance with s 206G(2) of the Act, requiring him to lodge a notice with ASIC in the prescribed form of his intention to commence proceedings for leave. The notice that was lodged contained an annexure identifying 13 companies which, in this proceeding, Mr Watts says are "supportive" of his application. These companies are identified in the annexure as either public companies limited by guarantee or proprietary companies limited by shares. Extracts from searches of ASIC's publicly-available database in respect of all but one of these companies have been annexed to Mr Watt's affidavit. One could be forgiven for thinking that, by identifying these companies in the notice lodged with ASIC, Mr Watts was seeking leave to manage these particular corporations: see s 206G(1)(c) of the Act. It is plain, however, that Mr Watts' application to this Court is not so limited. As I have noted, in filing his originating application for leave, Mr Watts specifically relies on ss 206G(1)(a) and (b) of the Act. 29 Beyond some very limited corporate details to which I will refer below, the evidence does not reveal anything about the business, activities or affairs of these companies. There is no evidence about how or by whom they are managed or about the role that Mr Watts has played or intends to play in their management. There is, indeed, no evidence about why it is necessary for Mr Watts to play any role in the management of these or any other companies. 30 In his first affidavit Mr Watts describes himself as "a well respected, honest, diligent, trustworthy, responsible and competent person" who has been actively involved in community and social work, who has received various international awards and who is a "highly senior" executive, experienced in "not for profit" organisations. He says that he is currently: the Executive Chairman of Bharatiya Vidya Bhavan Australia (one of the 13 companies referred to in the annexure to his notice to ASIC, which he also describes in his affidavit as "an international NGO"); a Director of Sydney Community Foundation (another of the 13 companies); and a Director of Advocacy for Inclusion, Canberra (which he describes in his affidavit as "an NGO for Disability"). 31 He also says that he was: a Commissioner of the Community Relations Commission for a Multicultural NSW and Chair of the Northern Regional Advisory Council from December 2006 to December 2009; and National Treasurer of the Australia India Business Council (which he describes in his affidavit as "the most influential organisation promoting two way business between Australia and India") from 2006 to 2008. 32 Finally Mr Watts notes his academic qualifications and professional affiliations, and refers to the fact that he acquired Australian citizenship in 1995 and that he is currently married with two adult children, Moksha Watts and Govinda Watts, who are "very close" to him. 33 In his second affidavit Mr Watts deposes to his compliance with an order of the Court made on 27 July 2011 requiring him to notify ASIC of the making of his application to this Court, in which he was to request ASIC to indicate whether it wished to be heard in opposition to the application. As I have noted, ASIC replied by stating that it did not intend to appear.

The 13 identified companies 34 It is necessary to say something more about what the evidence reveals in relation to the 13 companies identified in the prescribed notice lodged with ASIC on 14 June 2011. The information given below is taken from the extracts of the searches annexed to Mr Watts' first affidavit.

Australia India Foundation ACN 118 134 473 35 This is a public company that was registered on 1 February 2006. It is identified as a non profit company. Mr Watts is recorded as the secretary of the company (appointed on 1 February 2006). There are six directors of the company, two of whom appear to be ordinarily resident in Australia. One of these directors is Govinda Watts.

Bharatiya Vidya Bahavan Australia ACN 105 362 561 36 This is a public company that was registered on 1 July 2003. It is identified as a non profit company. Mr Watts is recorded as a director of the company (appointed on 1 July 2003). There are nine other directors, four of whom appear to be ordinarily resident in Australia.

BMG Group Australia ACN 103 286 700 37 This is a public company that was registered on 3 January 2003. It is identified as a non profit company. Mr Watts is recorded as the secretary of the company (appointed on 16 February 2008). The only director appears to be Govinda Watts (appointed on 14 April 2003). No other office-holders are recorded. This company appears to be operating with less than the required number of directors: see s 201A(2) of the Act.

BMGW Pty Ltd ACN 002 231 674 38 This is a proprietary company limited by shares that was registered on 15 July 1981. It is identified as a non profit company. Govinda Watts is recorded as a director of the company (appointed on 1 July 2009). No other office-holders are recorded. In the notice lodged with ASIC, Mr Watts referred to this company as "a tax exempt charity".

Cricket Masala ACN 126 260 053 39 This is a public company that was registered on 28 June 2007. It is identified as a non profit company. Mr Watts is recorded as the secretary of the company (appointed 28 June 2007). Govinda Watts is recorded as a director (appointed 28 June 2007). No other office-holders are recorded. This company also appears to be operating with less than the required number of directors.

Guru 4U Limited ACN 147 556 910 40 This is a public company that was registered on 25 November 2010. Mr Watts is recorded as a director and secretary of the company (in each case, appointed on 25 November 2010). Govinda Watts is recorded as a director of the company (also appointed on 25 November 2010). No other office-holders are recorded. This company appears to be operating with less than the required number of directors. Moreover, Mr Watts was appointed as a director and secretary of the company at a time when he was disqualified from managing corporations. There is no evidence that these appointments were made with permission granted by ASIC under s 206F(5) or by leave granted by the Court under s 206G of the Act: see ss 201B(2) and 204B(2).

BMG Holdings Pty Ltd ACN 128 414 728 41 This is a proprietary company limited by shares that was registered on 12 November 2007. It is identified as a superannuation trustee company. Mr Watts is recorded as a director of the company (appointed on 12 November 2007). Moksha Watts and Govinda Watts are also recorded as directors (also appointed on 12 November 2007). No other office-holders are recorded.

Business Guru Pty Ltd ACN 104 963 537 42 This is a proprietary company limited by shares that was registered on 3 June 2003. Mr Watts is recorded as the secretary of the company (appointed on 28 July 2009). Govinda Watts is recorded as a director of the company (appointed on 5 March 2011). No other office-holders are recorded.

Songs Are People Pty Ltd ACN 138 083 986 43 This is a proprietary company limited by shares that was registered on 3 July 2009. There are two recorded directors, one of whom is Govinda Watts (appointed on 3 March 2011). No other office-holders are recorded. Mr Watts is not recorded as an office-holder.

Taxation Guru Pty Ltd ACN 085 0374 723 44 This is a proprietary company limited by shares that was registered on 30 November 1998. Mr Watts is recorded as a director and secretary of the company (in each case, appointed on 30 November 1998). No other office-holders are recorded.

The Watts Family Pty Ltd ACN 106 941 842 45 This is a proprietary company limited by shares that was registered on 6 November 2003. Mr Watts is recorded as the secretary of the company (appointed on 5 August 2009). Govinda Watts is recorded as a director (appointed on 3 March 2011). No other office-holders are recorded.

Wholesome Multicultural Strategies Pty Ltd ACN 128 491 092 46 This is a proprietary company limited by shares that was registered on 15 November 2007. Govinda Watts is recorded as a director of the company (appointed on 3 March 2011). No other office-holders are recorded.

Sydney Community Foundation ACN 104 436 955 47 No corporate details have been provided with respect to this company.

Mr Watts' submissions 48 Mr Watts filed written submissions on 23 August 2011. At the hearing Mr Watts was content to rely on his written submissions and did not advance any additional submissions. 49 These submissions repeat, substantially, the matters stated in Mr Watts' affidavits, which I have already summarised. Mr Watts also advances, by these submissions, the following additional matters. 50 First, Mr Watts submits that "my very livelihood is dependent on my directorships in the proprietary companies of my family and the clients of my family companies Business Guru Pty Ltd; Taxation Guru Pty Ltd and BMG Group Australia". 51 Secondly, Mr Watts submits that he "will not be able to survive and my family companies will have to be closed thus causing great hardship to my family members as well". In this connection he also submits that, at his age (62 years), he is unable to find another job. 52 These submissions are not supported by any evidence. Specifically, there is no evidence about the following matters: Mr Watts' livelihood; the business, activities or affairs of these companies; how Mr Watts' livelihood is or could be affected by these companies; why Mr Watts "will not be able to survive"; why his "family companies will have to be closed"; how any "closure" of these companies will cause hardship to his family members; or why Mr Watts would be unable to find another job. 53 In this connection I observe that Mr Watts has been disqualified from managing corporations since the date of the sequestration order made against him on 11 August 2010. I also observe that there is no evidence that Mr Watts has ever been a director of either Business Guru Pty Ltd or BMG Group Australia. In any event, any office, as director or secretary, that Mr Watts held in a company registered under the Act, ceased upon his disqualification from managing corporations: s 206A(2). The evidence is completely silent on how these companies have been managed since Mr Watts' automatic disqualification. 54 Thirdly, Mr Watts submits that the shareholders in the proprietary companies are his immediate family members and his "family trust". He submits that they are "supportive" of his application. 55 In this connection the company searches in evidence record the following matters: Business Guru Pty Ltd, The Watts Family Pty Ltd and Wholesome Multicultural Strategies Pty Ltd are wholly-owned subsidiaries of BMG Holdings Pty Ltd; the shares in Songs Are People Pty Ltd are owned by BMG Holdings Pty Ltd and an individual who is not a member of Mr Watts' immediate family; the shares in Taxation Guru Pty Ltd are owned by BMG Holdings Pty Ltd, Mr Watts, Moksha Watts and Govinda Watts, and the shares in BMG Holdings Pty Ltd are owned by Mr Watts, Mrs Watts, Moksha Watts and Govinda Watts. 56 Mr Watts' shareholdings in BMG Holdings Pty Ltd and Taxation Guru Pty Ltd, and Mrs Watts' shareholding in BMG Holdings Pty Ltd, would now appear to be vested, at least in equity, in their trustee in bankruptcy: see s 58 of the Bankruptcy Act. 57 There is no evidence that Mr Watts' immediate family members, the other individual shareholder in Songs Are People Pty Ltd or Mr Watts' trustee in bankruptcy, support his application. 58 Fourthly, Mr Watts submits that "(t)he members of five of the public companies limited by guarantee are my immediate family members". There is, however, no evidence of the membership of any of the public companies identified by Mr Watts. 59 Fifthly, Mr Watts submits that Bharatiya Vidya Bhavan Australia, of which he says he is the founding member and has been Chairman since 1 July 2003, has 13 directors and in excess of 50 members. He submits that "(t)hese directors have complete trust in me and my general character, professional conduct and skills". There is no evidence of any of these matters, beyond Mr Watts' self-serving assertion.

Consideration 60 Mr Watts is disqualified from managing corporations by operation of s 206B(3) of the Act, not by ASIC. He is entitled, therefore, to apply for leave to manage a corporation or corporations pursuant to s 206G(1) of the Act. In that connection he has satisfied the notice requirements imposed by s 206G(2) of the Act. 61 However, the evidence before me provides an inadequate foundation for granting the leave that Mr Watts seeks. In this connection Mr Watts seeks leave, specifically, to act as a director of corporations generally or, alternatively, of particular classes of corporations. I am not satisfied that an exception of that kind should be made to the legislative policy underlying the prohibition in the Act. 62 Even if I were to treat Mr Watts' application as one limited to the particular companies he has identified in the notice lodged with ASIC, I would not be satisfied that leave should be granted to him to manage those particular companies, as a director or otherwise. 63 In this connection I have referred to the deficiencies in the evidence concerning the business, activities and affairs of these companies and of Mr Watts' past or intended role in them. 64 In addition it is a matter of concern that, on the evidence before me, some of these companies appear to be operating with less than the required number of directors. It is also a matter of concern that, on the evidence before me, Mr Watts appears to have accepted, without permission or leave, the offices of director and secretary in one of these companies at a time when he was disqualified from managing corporations, contrary to ss 201B(2) and 204B(2) of the Act. At the very least this evidence shows a clear lack of understanding on his part of the requirements of the Act concerning the management and conduct of companies, and stands as a cogent reason why leave should not be granted, either specifically or generally. 65 I should make clear that, even though the evidence shows that Mr Watts is recorded as a director and/or the secretary of a number of these companies after he ceased to hold office by operation of s 206A(2) of the Act, I have not assumed that he has engaged in activities that are contrary to s 206A(1) of the Act. Nevertheless, Mr Watts has not sought to explain the anomalous position that appears to exist with respect to office-holding in these apparently operating companies, which is revealed by the very evidence on which he relies to support his application. 66 The position is somewhat different in respect of Australia India Foundation (where Mr Watts is recorded as being secretary and there are six directors) and Bharatiya Vidya Bhavan Australia (where Mr Watts is recorded as being one of 10 directors). However, in the absence, once again, of evidence about the activities of these companies and of the attitude of their directors and members to Mr Watts' participation in their management, I am not persuaded that leave to manage in any capacity should be granted in relation to those particular companies. To do so, in the absence of proper evidence, would be (to adopt Brooking J's expression in Re Ansett ) to "stretch a point".

Disposition 67 The application for leave will be refused. I will direct that a copy of these reasons be forwarded to ASIC. I certify that the preceding sixty-seven (67) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.