ASIC v Adler & Ors

Supreme Court of NSW|2001-05-31|Before: Santow J, Austin J

INTRODUCTION 1 Though ASIC's application for asset preservation orders under ss1323 and 1324 of the Corporations Law has for the moment been resolved by undertakings without admissions, to the court, it is important that I give brief reasons for earlier declining to make the orders sought on an ex parte basis and for now accepting the undertakings proffered. Given that the matter has settled, I do not deal with issues earlier disputed but concentrate on the ex parte application and its outcome. I do so in part because it is important that there be some judicial guidance in a context where other such applications may be expected to be made at short notice. I do so in circumstances of the present ASIC investigation into the failure of HIH Insurance Limited, a failure with far-reaching ramifications on creditors, contributories and the public. There is also the likely possibility of other public investigations or official enquiries. 2 For present purposes, I do not need to give an elaborate statement of the facts, given the consensual outcome that has been reached. It suffices that I record first that there are two bases upon which s1323 of the Corporations Law was invoked for asset preservation orders including receivership and surrender of passports. The first was that there was an investigation on foot (s1323(1)(a) of the Corporations Law and the second was that a civil proceeding had begun (s1323(1)(c) of the Corporations Law). The investigation is in relation to HIH Insurance Limited ("HIH"). The breaches of the Corporations Law contended for by ASIC were in relation to the Chief Executive Officer of HIH, Mr Raymond Williams, the Chief Financial Officer of HIH, Mr Dominic Fodera, and against Mr Rodney Adler a non-executive director of HIH. Those breaches have been denied. 3 The alleged contraventions were of ss180(1), 181(1), 182(1), 183(1) and s209. ASIC have filed an Originating Process but not a pleaded Statement of Claim which seeks to substantiate these contraventions by reference to material concerning certain transactions between Adler Corporation Pty Limited and an entity called Pacific Eagle Equities Pty Limited ("PEE") a wholly owned subsidiary of Adler Corporation. PEE subsequently became a trustee of a trust called the Australian Equities Unit Trust ("AEUT") in which units were issued giving a related company of HIH certain entitlements and also Adler Corporation. Since then, ASIC have foreshadowed an intention to seek the Court's leave to join Adler Corporation to the proceedings alleging contraventions by it of ss181(2), 182(2), 183(2) and 209(2) by reason of being "involved" within the meaning of s79 of the Corporations Law. 4 When the matter came to the Court as an ex parte application on 23 May 2001, no such extension had yet been foreshadowed. 5 The general practice of this Court is not to make ex parte orders, so depriving the party affected of the opportunity to be heard, save in exceptional circumstances justifying that course. This is exacerbated in a situation where no undertaking as to damages is given (by ASIC) and where the making of such orders may itself affect other creditors. I concluded in relation to the ex parte application that it was not appropriate to make any orders without first hearing the parties and seeing whether undertakings might be proffered which would obviate the need for further contest at this point of the allegations made, noting that any such undertakings would likely be made without admissions. That course was based on my conclusion on the evidence before me that the materials did not indicate a sufficient risk of dissipation of assets as to justify orders being made without hearing the parties. It is important to note that the orders sought were extraordinarily far reaching, including not only the freezing of the assets of the three individuals but also the appointment of a receiver to their assets as well as affidavits setting out the extent and nature of the assets of each individual, though it is fair to say that ASIC would in the end have been content with lesser orders on an ex parte basis simply designed to preserve the status quo. 6 When declining to make the ex parte orders, I did not then give reasons but do so now, noting what has since transpired. The particular issue which requires explanation is the relative weight to be given to what may be perceived to be a lesser risk of dissipation of assets, in proceedings brought by ASIC in the context of an investigation into HIH in its early stages, involving catastrophic business failure.

PRINCIPLES APPLICABLE TO ASSET PRESERVATION ORDERS SOUGHT BY ASIC 7 By way of background to my earlier declining to make asset preservation orders ex parte, I explain what I consider to be the proper approach to the exercise of the discretion to make asset preservation orders under s1323 of the Corporations Law:

(a) A distinction needs to be drawn between the power or jurisdiction to make asset preservation orders and when, as a matter of discretion, that power is ordinarily to be exercised. The Court has power to make such orders under s1323 of the Corporations Law , once there is as here a corporate investigation, a prosecution under the Corporations Law or, also as here, a civil proceeding under the Corporations Law ; see s1323(1)(a), (b) and (c). That suffices to enliven the jurisdiction to make such orders. That jurisdiction therefore arises even absent strong evidence of dissipation of assets and even absent a prima facie or at least reasonably persuasive case against the individual concerned.

(b) Nonetheless, both evidence of dissipation of assets and at least a reasonably persuasive case are powerful discretionary considerations affecting the Court's willingness to make an order at all and, if willing, affecting the scope of the orders justified in the circumstances. In that regard, the most intrusive order that could be made is the appointment of a receiver. Appointment of a receiver over a person's assets is in any circumstances an extraordinary step for the Court to take, though it may be justified when associated with the allegation of misappropriation of property, particularly, though not necessarily exclusively, fraudulent. Austin J said in ASIC v Burke ([2000] NSWSC 694, Austin J, 10 July 2000, unreported), "The fundamental issue is not the character of the alleged wrongdoing of the Defendants, but the overriding concern to protect assets for the benefit of those entitled to them …" (para [6]). Similarly, in relation to the making of orders to surrender a passport (s1323(1)(j) and (k)), "The Court is required to engage in a balancing exercise which includes a balancing of public and private rights"; Isic v Ivey (1998) 29 ACSR 391 at 394 per Nicholson J.

(c) In the case certainly of a private litigant, absence of appreciable risk of dissipation of assets and of an at least reasonably persuasive case against the individual concerned, should ordinarily lead to the denial of such asset preservation orders as a matter of discretion. Indeed the absence of either one of such factors would ordinarily be fatal. But here there is an ongoing investigation and ASIC as investigator seeks asset preservation orders in pursuit of its public interest role with responsibility to "promote the confident and informed participation of investors and consumers in the financial system". In those circumstances it is possible ASIC may have satisfied the Court that the state of its investigations and the wider public interest justified some such orders, though I expressly make no finding on that. That wider public interest embraces both creditors and those affected by a corporate failure. In appropriate circumstances, speaking generally, such orders may be justified even absent evidence of a significant risk of dissipation of assets, though the potentiality may be there.

(d) It would be unwise to attempt to delineate in advance the future exercise of discretion in such applications by ASIC beyond emphasising that the Court, in giving a reasonable margin of appreciation to ASIC in its public interest role, does not abdicate from its responsibility to make sure that the orders that it makes operate in a matter that is proportionate and not more intrusive than is necessary in the circumstances, recognising that it is inevitable that such orders will intrude upon private rights.

(e) The foregoing principles in turn affect the Court's approach when an urgent ex parte application is made by ASIC. In that circumstance, justification for ex parte relief would ordinarily centre around there being a significant risk of dissipation of assets. There may be exceptional circumstances where the evidence for this may still be in the process of collection and very brief ex parte orders to maintain the status quo may still be justified. That was not the case here. Had orders been made on an ex parte basis they would have had the inevitable effect of an appearance of oppression more especially if the orders had included the appointment of a receiver.

(f) However, when such an application returns on a contested basis, as a matter of principle where ASIC is the moving party there may, based on the principles earlier stated, be a basis for persuading the Court that asset preservation orders proportionate to the circumstances should be made. This is so, though the risk of dissipation of assets remains insignificant. Again, this is because of the requirement that the Commission must act in the public interest rather than self interest. As was said in the decision of ASC v A S Nominees Limited (1995) 13 ACLC 1,822 by Finn J at 1,843: "As a matter of obligation in our system of government the ASC, like all other agents of government, is required to act in the public interest within its spheres of responsibility."

(g) In making such asset preservation orders, or in granting an injunction pursuant to s1324, balance of convenience considerations do enter into the matter. ASIC, unlike the typical litigant, does not give an undertaking as to damages. This will bear upon the appropriateness of the orders made, though that fact need not necessarily override public interest considerations centred round the interests of creditors, contributories and the wider public. 8 In stating these principles, I expressly reach no conclusion either way as to whether asset preservation orders would have been made, had the matter proceeded to a full contest. 9 In all the circumstances, the proffering of undertakings without admission which have satisfied ASIC is to be welcomed. For the future, and recognising that circumstances may change, I have given leave to all parties to approach the Court at short notice.

Last Modified: 02/25/2005 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

(2001) 38 ACSR 266 Reported Decision : (2001) 19 ACLC 1221 [2001] NSWSC 451

A Bannon, SC/D Stack/M Wigney (Plaintiff) COUNSEL : B Walker, SC/D Hammerschlag/I M Jackman (First Defendant) R Heathcote (Solicitor) (Second Defendant) J E Sexton, SC (Third Defendant) Jan Redfern, Solicitor for ASIC (Plaintiff) SOLICITORS : Gilbert & Tobin (First Defendant) Arnold Bloch Leibler (Second Defendant) CATCHWORDS : CORPORATIONS - Asset preservation orders under s1323 and 1324 - The relevant principles applicable to ex parte applications and subsequent contested applications where sought by ASIC - Jurisdictional and discretionary basis - Relevance of dissipation of assets and prima facie case. LEGISLATION CITED : Corporations Law s1323 s1324; ss180, 181, 182, 183 and s209; ASC v A S Nominees Limited (1995) 13 ACLC 1,822 CASES CITED : ASIC v Burke ([2000] NSWSC 694, Austin J, 10 July 2000, unreported) Isic v Ivey (1998) 29 ACSR 391 DECISION : Ex parte orders declined.

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (10 paragraphs)

Parties

Cases Cited (2)