Adams v Australian Securities & Investments Commission

Statutory framework and principles 4 Section 206A of the Corporations Act provides that a person who is disqualified from managing corporations under Part 2D.6 of the Act (in which s 206A appears) commits an offence if: (a) they make, or participate in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or (b) they exercise the capacity to affect significantly the corporation's financial standing; or (c) they communicate instructions or wishes (other than advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation) to the directors of the corporation: (i) knowing that the directors are accustomed to act in accordance with the person's instructions or wishes; or (ii) intending that the directors will act in accordance with those instructions or wishes. 5 Section 206B(3), which is also in Part 2D.6, relevantly provides that a person is disqualified from managing corporations if the person is an undischarged bankrupt under the law of Australia. Under that provision, Mr and Mrs Frigger were automatically disqualified from managing corporations when the sequestration orders were made on 20 July 2018. 6 A person who is disqualified from managing corporations under Part 2D.6 may only be appointed as director of a company if the appointment is made with permission granted by the Australian Securities and Investments Commission (ASIC) under s 206GAB, or leave granted by the court under s 206G: s 201B(2). 7 Section 206G of the Corporations Act empowers the court to grant leave for a disqualified person to manage corporations. It does so in the following terms: 206G Court power to grant leave (1) A person who is disqualified from managing corporations 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. 8 In Re Altim Pty Ltd [1968] 2 NSWR 762 at 764, Street J identified the fundamental principles which informed the court's discretion under a statutory predecessor to s 206G 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 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. 9 Even in the absence of a contradictor it is for the applicants 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. ASIC's absence is not necessarily to be given significant weight: Watts, in the matter of Watts [2011] FCA 1185; (2011) 284 ALR 403 at [18] (Yates J). 10 Generally, before it can lift the disqualification the court needs to know what the applicants propose to do by way of corporate management, although this may not be necessary if the application is for leave to take part in the management of a specified corporation or corporations: Re Shneider (1996) 71 FCR 69 at 73 (Drummond J). In those cases the court will consider the structure of the companies, the nature of their businesses and the interests of their shareholders, creditors and employees, and any risks to those persons or to the public which may be involved in the applicants assuming positions on the board or in management: Adams v Australian Securities & Investments Commission [2003] FCA 557; (2003) 46 ACSR 68 at [8] (Lindgren J). 11 As one would expect, the attitude of the shareholders to the application can be a relevant factor: see e.g. Jansen v Australian Securities & Investments Commission [2003] FCA 1564 at [12], [14] (Mansfield J). 12 The court will also look to the circumstances in which the debts giving rise to the bankruptcy were not paid, and the extent to which an applicant has cooperated with the trustee in bankruptcy: GRD v BJD [2018] WASC 374 at [12] (Master Sanderson), applying Chye v Australian Securities and Investments Commission [2012] FCA 1405 (Bromberg J). 13 Turning to the SIS Act, its object is to make provision for the prudent management of certain superannuation funds (among other funds and trusts) and for their supervision by certain regulators, one of which is the Commissioner of Taxation: s 3(1). In return for such regulation, the funds and trusts may become eligible for concessional taxation treatment: s 3(2). 14 Section 126K(4) of the SIS Act relevantly provides that a person commits an offence if he or she is a disqualified person and, knowing that, 'is or acts as a responsible officer of a body corporate that is a trustee, investment manager or custodian of a superannuation entity'. A superannuation entity includes a regulated superannuation fund: s 10. A regulated superannuation fund includes a fund which has a trustee, where the sole or primary purpose of the fund is to provide old age pensions, and the trustee has given the relevant regulator an election that the Act is to apply in relation to the fund: s 19. A responsible officer in relation to a body corporate, means a director, secretary or executive officer of the body: s 10. 15 Under s 17A of the SIS Act, a superannuation fund (which is not a fund with one member) is a self managed superannuation fund (SMSF) only if it satisfies certain conditions including, if the trustee of the fund is a body corporate, that each director of the body corporate is a member of the fund. A fund that ceases to be an SMSF may be subject to a more stringent regulatory regime. For example, it may then come within the definition of a registrable superannuation entity (which excludes SMSFs - s 10) so that the Company would need to hold an RSE licence in order to be permitted to act as trustee of the fund: s 29J(1). 16 Part 15 of the SIS Act provides for standards for trustees, custodians and investment managers of superannuation entities. The object of Part 15 is to set out rules about the eligibility of trustees, custodians and investment managers of superannuation entities: s 119. Relevantly, a person becomes a disqualified person for the purposes of Part 15 if the person is an insolvent under administration: s 120(1)(b). However s 126J provides for the court to revoke or vary the disqualification, as follows: (1) A disqualified person, or the Regulator, may apply to the Federal Court of Australia for: (a) if an individual is a disqualified person only because he or she was disqualified under section 126H - a variation or a revocation of the order made under that section; or (b) otherwise - an order that the person is not a disqualified person. (2) If the Court revokes an order under paragraph (1)(a) or makes an order under paragraph (1)(b), then, despite section 120, the person is not a disqualified person. (3) At least 21 days before commencing the proceedings, written notice of the application must be lodged: (a) if the disqualified person makes the application - by the person with the Regulator; or (b) if the Regulator makes the application - by the Regulator with the disqualified person. (4) An order under paragraph (1)(b) may be expressed to be subject to exceptions and conditions determined by the Court. 17 In Re Porter, Application under the Superannuation Industry (Supervision) Act 1993 [2012] FCA 1431 at [29], Foster J made the following observations about s 126J: … I think that s 126J(1)(b) should be interpreted as conferring a broad discretion upon the Court to decide whether to make the order contemplated by the subsection and, if so, on what terms. In considering whether to exercise the discretion and, if so, how, the Court must take into account the purpose or object of the SIS Act and, in particular, the purpose or object of Pt 15 of that Act. The object of the SIS Act is set out in s 3. The object of Pt 15 is specified in s 119. Therefore, in any given case, when the Court's jurisdiction under s 126J(1)(b) is engaged, the Court is obliged to determine the application by paying due regard to the fact that: (a) Part 15 of the SIS Act is intended to set out rules governing the eligibility of persons to take up positions of responsibility with superannuation entities; and (b) The principal object of the SIS Act generally insofar as superannuation entities are concerned is to make provision for the prudent management and supervision of such entities. 18 His Honour held (at [31]) that in applying s 126J the court was entitled to have regard to the jurisprudence developed in relation to the disqualification and reinstatement of officers of corporations pursuant to the Corporations Act, including in relation to s 206G of that Act. I will take the same approach here.

The evidence 19 As I have said, since around the time of the bankruptcy, the Company has operated as trustee of the FSF. The evidence is that it has no other activity and never has had. Jessica and Michael are the directors of the Company. There is evidence that they support their parents' application for leave to manage the Company. 20 According to Mrs Frigger's evidence, the Company has no creditors and no employees. A company extract shows that its current shareholders are Wolfgang and Helga Popitz, whose address is a place in Germany. They are Mr Frigger's sister and brother in law. There is evidence that they have been informed of the application and support it. 21 The original members of the FSF were Mr and Mrs Frigger. Initially it had a corporate trustee, Serenity Holdings Pty Ltd, of which they were the directors. That company is now called Computer Accounting & Tax Pty Ltd (in liquidation) (CAT) and is in liquidation. According to an extract from the Australian Business Register, Mr and Mrs Frigger and Jessica and Michael Frigger are the current members of the fund. 22 The trust deed for the FSF is in evidence. It provides that the sole or primary purpose of the fund is to provide old age pensions and other benefits to members on their retirement. Mrs Frigger confirmed in oral testimony that at the inception of the FSF, the then trustee gave the relevant regulator an election that the SIS Act was to apply in relation to the fund. She said that the trustee received a letter from the Australian Prudential Regulation Authority confirming that it was regulated fund: s 19. The FSF is therefore a regulated superannuation fund and a superannuation entity for the purposes of the SIS Act. 23 The circumstances leading up to the sequestration orders are set out in Kitay, in the matter of Frigger (No 2) [2018] FCA 1032. The debt on the basis of which Mr and Mrs Frigger became bankrupt, was the result of an order for indemnity costs in the Supreme Court of Western Australia. The order resulted from an application against them in relation to an affidavit that had been filed in the Supreme Court on behalf of the liquidator of CAT. 24 The affidavit had been ordered to be confidential, but it appears that despite that, Mrs Frigger came into possession of a copy of the affidavit. She swore an affidavit in other proceedings attaching a copy of the confidential affidavit. The liquidator sought orders to the effect that Mr and Mrs Frigger deliver up all hard copies of the confidential affidavit. Mr and Mrs Frigger resisted this, but the application was successful. An order against them for the costs of the application on an indemnity basis was made. This resulted in a certificate of taxation, signed by the taxing officer which was deemed to be and took effect as a judgment of the Supreme Court. 25 Mr and Mrs Frigger nevertheless refused to pay the costs. When the application for sequestration orders came before this court, they continued to refuse to pay, and sought to resist bankruptcy on several bases, all of which were unsuccessful. In his reasons for making the orders, Colvin J found that by reason of the funds available to Mr and Mrs Frigger from the FSF, they were able to pay their debts, although his Honour declined to dismiss the bankruptcy petition on that basis. 26 In this application, Mrs Frigger has deposed to her belief that there are several errors of law and fact in Colvin J's reasons, and that there is a good chance that the sequestration orders will be set aside. It is not appropriate or necessary for me to evaluate that belief, or to otherwise look behind the sequestration orders. Mrs Frigger's affidavit also annexes a copy of a statement of claim in separate proceedings in this court against the petitioning creditor. But as a mere set of allegations, unsupported by evidence, I give it no weight, even if it were somehow relevant to the present application. 27 For the purposes of the present application I will proceed on the basis, as is the fact, that the sequestration orders are in effect. I will assume that the Friggers will remain bankrupt for such time as is determined as a result of the relevant provisions of the Bankruptcy Act 1966 (Cth), including, but not necessarily limited to, the automatic three year discharge for which s 149(4) of that Act provides. 28 Mrs Frigger's affidavit says that since the sequestration orders she and her husband have fully complied with their obligations to their trustees in bankruptcy, including the completion and lodging of the statement of affairs on 28 July 2018. While that evidence is at a high level of generality, I take into account that I ordered the trustee in bankruptcy be served with the application and supporting affidavits and submissions, and the trustee does not wish to appear on the application and did not express any disagreement with the contents of the affidavit. 29 At the hearing of the application I explained to Mr and Mrs Frigger, as self-represented litigants, their obligation on an application such as this where there is no contradictor to ensure that all relevant matters are brought to the attention of the court. They indicated that there was nothing relevant which they had not raised, so there is nothing before the court to suggest that Mrs Frigger's statement as to their cooperation with the trustees in bankruptcy is untrue, or that the automatic discharge will not apply. 30 Mrs Frigger has also put into evidence correspondence with the Supreme Court of Western Australia which suggests that if leave to manage the Company is given, she and Mr Frigger will apply for the Company to be substituted as the plaintiff in proceedings which are currently on foot between Mr and Mrs Frigger and CAT and its liquidator. It appears that those proceedings were originally commenced by Mrs Frigger, for orders that certain parcels of land registered in the name of CAT are assets of the FSF, although since then the issues have multiplied, including by commencement of a counterclaim: see e.g. Frigger v Kitay (No 9) [2016] WASC 92 at [2]-[7].

The positions of the regulators 31 Notices in the prescribed form of Mr and Mrs Frigger's application were lodged with ASIC on 29 July 2019. On 26 August 2019 ASIC wrote to Mr and Mrs Frigger saying that it does not oppose them managing the Company on the basis that the Company does not engage in any trading activity in any capacity other than as trustee of the FSF. In subsequent correspondence ASIC indicated that its 'consent to the application is based on the fact that the conditions it suggests will ensure that there is a low risk to the public in [the applicants] managing [the Company]'. 32 Section 126J(3) of the SIS Act requires an applicant for an order under s 126J to lodge written notice of the application with 'the Regulator' at least 21 days before commencing the proceedings. For the purposes of the FSF, the Regulator is the Commissioner of Taxation. These proceedings were commenced on 27 August 2019, but at that stage the application only sought orders under s 206G of the Corporations Act. It appears that no notice of the application was given to the Commissioner until 20 September 2019, when, according to Mrs Frigger's evidence, she sent notice to two fax numbers for the Australian Taxation Office (ATO), one of which was a general fax number and one, she says, was for the ATO's SMSF section. On 23 September 2019 she re-faxed the notice to the ATO with a copy of two letters from ASIC setting out its position on the application. No response has been received. 33 Leave to amend to add the claim under s 126J of the SIS Act was only granted at the hearing on 15 October 2019. I ordered that the amendment take effect from 15 October 2019. It follows that the applicants have complied with s 126J(3), as the proceedings under s 126J were not commenced until the amendment on that date, and they lodged the requisite notice with the ATO more than 21 days before that.

Consideration 34 The authorities I have cited above make it clear that the interests of third parties are the main consideration for the court in considering any application for leave to manage a corporation under s 206G of the Corporations Act or for an order under s 126J of the SIS Act that an applicant is not a disqualified person. The relevant third parties are the shareholders, creditors and employees of the Company and the public at large. The object of the SIS Act to make provision for the prudent management and supervision of superannuation entities is also relevant. 35 A number of matters weigh in favour of granting the application. 36 First, the Company is a proprietary company which carries on no activity other than to act as trustee of the FSF. The beneficiaries of that activity are the beneficiaries of the FSF, being Mr and Mrs Frigger and their children. That small group of people is the group that will be directly affected by the activities of the applicants after they are given leave to manage the Company. They all support the application. There are no creditors or employees who may be affected. The shareholders support the application and given the nature of the Company's activities as a trustee they are unlikely to be affected in any event. 37 Second, there is nothing in the evidence to suggest that Mr and Mrs Frigger have mismanaged the affairs of the FSF during the two decades or so when they have been either directors of its former corporate trustees or the trustees in their own name. To the contrary, Colvin J's reasons in Kitay, in the matter of Frigger (No 2) refer (at [112]) to evidence suggesting that the Fund has accumulated assets of substantial value. I conclude that the activities of the FSF have been investment in shares and property which have caused its assets to accumulate over time. 38 While Colvin J's finding about the ability of the Friggers to pay their debts concerned their personal positions and not the position of the funds, it tends to support the view that there has been no financial mismanagement of the FSF, especially since the finding was based on the availability of funds from the FSF. 39 Third, the attitude the trustees in bankruptcy took after being served with the application and supporting affidavit suggests that they are not concerned about non-compliance by the applicants with their obligations as bankrupts. The applicants have been engaged in litigation with the trustees in other proceedings in this court, so it would be going too far to characterise the relationship as a cooperative one. But the merits of that litigation will fall to be determined in those proceedings. 40 Fourth, Mr and Mrs Frigger are members of the FSF. So if the FSF is to continue to be an SMSF, they must be directors of the Company (assuming the Company is trustee of the FSF). That follows from s 17A of the SIS Act, which I have outlined above. If the FSF ceases to be an SMSF, adverse consequences may ensue, such as a requirement to hold an RSE licence. The Company, and ultimately the beneficiaries of the FSF, have a legitimate interest in avoiding those consequences. 41 However, while all those matters are in favour of lifting the disqualification in so far as it concerns the Company, there is reason for concern about permitting Mr and Mrs Frigger to manage the Company in whatever way they wish. ASIC has indicated that its consent to the application is on the condition that the Company not engage in any trading activity other than as trustee of the FSF. 42 I agree that a condition of that nature is appropriate. Concerns about the applicants' judgement arise from the circumstances that gave rise to their bankruptcy. They refused to deliver up an affidavit that had been ordered to be confidential, they refused to pay an amount of costs ordered against them as a result of the first refusal, and they maintained the refusal to pay up to and beyond the point of bankruptcy, when all the while they were able to pay. In his reasons in relation to the delivery up of the confidential affidavit, Master Sanderson observed of Mrs Frigger, 'It must be said there are real questions about her conduct': Re Computer Accounting & Tax Pty Ltd (in liq); Ex parte Kitay [No 4] [2014] WASC 169 at [12]. As I have said, though, the Friggers seek to challenge the bankruptcy orders, so in the end it is not appropriate to make any finding here about that aspect of their conduct. 43 Looking beyond that, however, it is a matter of public record that the applicants, and companies associated with them, have been party to an extraordinarily large number of proceedings in various courts over the past 15 years or so. The sheer number of proceedings gives rise to concern that the affairs of the Company could become embroiled in that 'substantial torrent of litigation' (as it was described in Frigger v Kitay (No 2) [2017] WASCA 139 at [13]). Mrs Frigger's answer when I raised that concern at the hearing was say that she and her husband had been the victims of a substantial fraud involving the creation of a deed of company arrangement 'which was put into evidence, which had never been actually approved by anybody'. 44 In the end it is neither necessary, appropriate nor possible for me to make any findings as to that, or as to the wisdom or unwisdom of any given proceedings. To do so would be to trespass on the proper functions of the courts that are seized of those proceedings. But as Adams v ASIC indicates, the exercise of the discretions under s 206G of the Corporations Act and s 126J of the SIS Act involves an assessment of the risk that making the orders sought will undermine the protective purposes of the disqualification regimes. So while I make no adverse findings about Mr and Mrs Friggers' conduct of the many sets of proceedings, the existence of the concerns I have raised means that there is a real risk that the affairs of the Company will not be conducted prudently. In my view, the appropriate way to minimise that risk, and the impact on third parties if it is borne out, is to adopt the condition proposed by ASIC, so that the activities of the Company will be confined to acting as the trustee of the FSF. 45 It appears that if Mr and Mrs Frigger obtain leave to manage the Company, they will seek to have it substituted as plaintiff the Supreme Court proceedings I have mentioned between them and CAT and its liquidator. While that may expose the Company to risks, including the risk of adverse costs orders, I do not consider that weighs against granting leave. Whether the Company should be permitted to prosecute those proceedings, including whether they may represent the Company in the proceedings, are matters for the Supreme Court of Western Australia, not for this court. Also, for this court to determine that it is not appropriate for the Company to become the plaintiff in any given proceedings would bring the court close to usurping the management role itself. An application for leave to manage a corporation is not the occasion for the court to supervise that management. 46 Orders will be made under s 206G of the Corporations Act giving Mr and Mrs Frigger leave to manage the Company, on condition that the Company not engage in any activity other than to act as trustee of the FSF. I will also order under s 126J(1)(b) of the SIS Act that each of the applicants is not a disqualified person in relation to the Company and the FSF. I certify that the preceding forty-six (46) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jackson.