ASIC v Elm Financial Services [2004] NSWSC 859 | Case summary

2313/04 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION V ELM FINANCIAL SERVICES PTY LTD & ORS JUDGMENT (Revised to correct typographical errors, 17 September 2004) 1 HIS HONOUR: This is an interlocutory application raising two questions: · whether Part 3 of the Australian Securities and Investments Commission Act 2001 (Cth) ("ASIC Act") empowers ASIC to continue to use its statutory powers of investigation after it has commenced a civil penalty proceeding in relation to the matter under investigation; and · if it does, whether the court will constrain ASIC from using those investigatory powers for certain purposes or in certain ways, in the interests of fairness to the defendants. 2 I have deferred completion and publication of these reasons for judgment so as to take into account the decision of the High Court in Rich v ASIC [2004] HCA 42, which was handed down last Thursday. As it happens, the reasoning in the majority judgments, while generally relevant in the way noted below, does not bear on the issues in the present case sufficiently directly to warrant recalling the parties for further submissions. Outline of Facts 3 The first defendant, Elm Financial Services Pty Ltd ("Elm"), holds a financial services licence and conducts the business of a financial adviser. The second to seventh defendants are companies through which Elm conducts its financial services business. They are all either subsidiaries of Elm, or companies with directors common to Elm or its subsidiaries. The eighth to eleventh defendants are individuals who are the directors of the first to seventh defendants. The twelfth defendant is an individual who does not appear to be a director of any of the corporate defendants, and it is not clear at this stage in what capacity ASIC's claims against him are made. However, that is not critical for the purposes of this application. 4 ASIC commenced the present proceeding by originating process filed on 6 April 2004. Its case against the defendants relates to a number of investment products promoted and/or managed by the corporate defendants. The investment products are: · debentures in various property developments known as the Stirling Apartments Debenture Note, the Port Heritage Resort Debenture Note Issue, and the Elm Property Developments Debenture Note Issue; · debentures issued as trustee for a unit trust known as Elm Financial Services Unit Trust No 1; · notes known as Elm Nominee Service Notes; · promissory notes issued by Ann Street Mezzanine Pty Ltd. 5 In relation to these investment products ASIC alleges that the corporate defendants: · engaged in various forms of misleading conduct in relation to financial services in breach of s 12DA and 12DB of the ASIC Act and ss 1041E, 1041F and 1041H of the Corporations Act; · distributed application forms for offers of securities that required a current disclosure document, in breach of s 727(1) of the Corporations Act; · provided advice that was inappropriate to a client, in breach of s 945A(1) of the Corporations Act; and · operated an unregistered managed investment scheme that was required to be registered, in breach of 601ED(5) of the Corporations Act. 6 Against the eighth to twelfth defendants, ASIC alleges misleading and deceptive conduct under the provisions stated above, and, in the case of the eighth to eleventh defendants, breaches of their duties under ss 180, 181 and 182 of the Corporations Act. Sections 180 to 182 are civil penalty provisions for the purposes of the Corporations Act, for breach of which the court may make a variety of orders under Part 9.4B of the Corporations Act. 7 It appears that disqualification orders under s 206E will be sought against the eighth to 11th defendants. I say "appears" because the originating process, which is not a pleaded document, seeks "an order that the Eighth, Ninth, Tenth and Eleventh Defendants be permanently restrained from being directors of any corporation". Once a disqualification order is sought, and a fortiori once an order for "permanent" disqualification is sought (whatever may be the precise basis, if any, for making such an order), the proceeding is to be treated as one for imposition of a penalty, for the purposes of application of the privilege against exposure to a penalty, according to the High Court's judgment in Rich v ASIC, supra. 8 As principal relief, ASIC seeks orders that the corporate defendants be wound up in insolvency, and orders disqualifying the individual defendants (except the twelfth defendant) from managing any corporation. 9 The investigation which has led to the present proceeding began on 29 May 2003. ASIC initiated the investigation under its general power of investigation in s 13 of the ASIC Act, in response to information it received from an anonymous source in relation to certain of Elm's products. In October 2003 ASIC began to receive complaints from investors regarding some of the defendants' activities and decided, eventually, to widen the scope of the Elm Investigation to encompass all of the investment products stated above. 10 By March 2004 ASIC had significant concerns about the defendants' conduct and decided to commence this proceeding. It also applied for and obtained Mareva orders to restrain the defendants from dealing with or disposing of funds received from or held on behalf of any client or investor who had invested in any of the securities or trusts the subject of the proceeding. Those orders, as subsequently varied, are still in place. 11 Notwithstanding the commencement of the proceeding, ASIC continued its investigation. It issued a notice under s 19 of the ASIC Act for the examination of Mr Terrence Stokes, and a notice under s 32A to the first defendant for production of a specified client file. 12 Section 19, relevantly, allows ASIC to serve a notice on a person "to appear before a specified member or staff member for examination on oath and to answer questions". Section 32A, relevantly, allows ASIC to serve a written notice on a person requiring the person to produce, at a specified place and time, specified books relating to the financial services or the supply of financial services, for the purposes of Division 2 Part 2 of the Act, which deals with "Unconscionable Conduct and Consumer Protection in Relation to Financial Services." 13 On 5 May 2004 the defendants' solicitors wrote to ASIC seeking an undertaking that information obtained through the continuing investigation would not be used against the defendants in the proceeding. ASIC declined to give the undertaking and so the first and tenth defendants made the application presently before the court. ASIC has undertaken not to pursue the investigation pending the outcome of the application. In response to a direction from me made on 15 June 2004, ASIC advised that it proposed to proceed with the examination of Mr Stokes and two further authorised representatives of the first defendant, Graham Huckel and Graham Flegg. The present application 14 By their interlocutory process filed 25 June 2004, the first and tenth defendants ("the applicants") seek to restrain ASIC from: · enforcing the s 19 notice to attend for examination issued to Mr Stokes on 3 May 2004; · issuing the two proposed s 19 notices to Mr Huckel and Mr Flegg; · enforcing the s 32A notice to produce documents served on the first defendant on 3 May 2004. 15 The applicants contended that: · the subject matter of the notices that ASIC has issued overlaps directly with the subject matter of the proceeding; · ASIC is pursuing the notices for the purpose of obtaining material to assist in the proceeding; · obtaining information by enforcement of the notices will have the effect of giving ASIC and unfair advantage not available to it by the normal procedures of court; · the use of ss 19 and 32A is spent once a proceeding has been commenced for a declaration of a contravention of a civil penalty provision; and · the notices constitute an improper exercise of ASIC's investigative powers in circumstances were ASIC has already instituted a proceeding against the applicants. 16 The applicants relied on a line of cases in which legislation has been held, on its proper construction, not to authorise the continuation of investigations after a proceeding has been commenced: Huddart, Parker & Co Pty Ltd v Moorehead (1909) 8 CLR 330; R v Associated Northern Collieries (1910) 11 CLR 738; Melbourne Steamship Co Ltd v Moorehead (1912) 15 CLR 333; and Brambles Holdings Ltd v Trade Practices Commission (No 2) (1980) 44 FLR 182 (supported by dicta in Pioneer Concrete (Vic) Pty Ltd v Trade Practices Commission (1982) 152 CLR 460, 467-8 per Gibbs CJ). Particular emphasis was placed on the Brambles Holdings case. 17 ASIC's response was to submit that neither of the applicants has any right or privilege that could excuse compliance with the notices by the persons to whom they are addressed. It contended that there was no statutory or general law principle that impliedly restricted ASIC's powers so that they ceased to be available against anyone as soon as a proceeding was commenced. ASIC relied on Environment Protection Authority v Caltex Refining Co Pty Ltd (1993) 178 CLR 477. It pointed out that the s 19 notices were not directed to any defendant. As to the s 32A notice directed to the first defendant, it had no privilege against self-incrimination or exposure to a penalty by disclosure of that document in legal proceedings or otherwise, according to the Caltex case. ASIC could compel the first defendant to produce the documents subject to the s 32A notice pursuant to a subpoena or notice to produce, and could then gain access to the documents and make use of them against all of the defendants. In ASIC's submission, there is no real risk to the proper administration of justice in the proceeding merely because ASIC, in the course of its wider investigation, obtains information from non-parties which may be relevant. ASIC relies on Hak Song Ra v Australian Crime Commission [2004] FCA 416 and De Greenlaw v National Companies and Securities Commission (1989) 7 ACLC 789. The cases 18 The starting point is Huddart, Parker & Co Pty Ltd v Moorehead (1909) 8 CLR 330, in which the High Court considered s 15B of the Australian Industries Preservation Act 1906 (Cth). This section empowered the Comptroller-General to "require any person whom he believes to be capable of giving any information in relation to the alleged offence to answer questions and to produce documents to him or some person named by him in relation to the alleged offence". There was no apparent temporal restriction on this power, and on its face it was subject only to the condition precedent that the Comptroller-General "believes that an offence has been committed…or if a complaint has been made in writing…". 19 In the context of considering the validity of s 15B, and specifically whether it purported to confer judicial power on the Comptroller, O'Connor J said (at 379): "When the Comptroller makes his requirement under 15B there can be no proceeding pending in a Court. He is not empowered to use the section with reference to an offence when once it has been brought within the cognisance of the Court." 20 The idea that the power could not be used once the matter was within the cognisance of the court suggests that the decision may have been referable to some form of contempt of court, which would prevent the misuse of an otherwise available power. But the conclusion that the Comptroller was not "empowered" to use the section after commencement of a proceeding seems to be derived from the construction of s 15B. The proposition that emerges appears to be that a generally expressed provision conferring investigative powers on a public authority for the purposes of or as a prelude to prosecution will not be construed, in the absence of clear language, to permit continued use of the power once the prosecution has commenced. Perhaps the reason for implying a limitation into general statutory language is that a power of investigation capable of being exercised against the defendant after the commencement of a prosecution against him or her might abrogate the defendant's privilege against self-incrimination. 21 The High Court revisited the section in Melbourne Steamship Co Ltd v Moorehead (1912) 15 CLR 333. Proceedings had been brought against certain persons but not the appellant, although the appellant was nevertheless suspected of committing offences. The Attorney-General sought to examine the appellant, who refused to answer questions. The question for the High Court was whether the appellant had been properly convicted by magistrates for refusing to answer those questions. By a majority (Isaacs J dissenting) the High Court held that the conviction could not be sustained. 22 Griffith CJ said (at 341): "…when the Attorney-General has formally instituted a prosecution in this Court in respect of an alleged offence, the power as well as the purpose of s 15B is exhausted so far as regards the persons whom the Attorney-General alleges to have committed the offence for which he prosecutes, whether they are made parties to the suit or not. … It is true that the words 'if the Comptroller believes ' may be literally capable of including cases where he bases his belief on the fact that the Attorney-General has brought a suit, but they are so inapt to express that meaning that such a construction should be rejected." 23 Barton J reached a similar conclusion. Isaacs J dissented on the ground that the power could be exercised against a person who had not been charged, though he agreed that it could not be exercised against a person who had been charged. 24 The observations of Griffith CJ, in particular, reinforce the view that the restriction, that prevented the section from being used after the commencement of a proceeding, was a restriction on power, arising out of the proper construction of the section in its context. 25 Franki J applied both Huddart Parker and Melbourne Steamship in Brambles Holdings Ltd v Trade Practices Commission (No 2) (1980) 44 FLR 182. The section under consideration in that case was s 155 of the Trade Practices Act 1974 (Cth), which empowered the Commission to serve notices requiring the examination of certain persons. Again, there was no explicit temporal restriction on the face of the legislation. 26 The Commission sought to exercise the power against the defendants for the purposes of a proceeding that had been commenced against them for contraventions of s 45 of the Trade Practices Act. The applicant Brambles, one of the defendants, filed a notice of motion charging the Commission and its chairman with contempt of court. Franki J observed (at 183) that the information sought by the notice was "clearly relevant" to the proceeding. He said that three questions arose for determination, namely (1) whether s 155 empowered the chairman of the Commission to serve the notice upon a defendant in proceedings that had already been commenced by the Commission; (2) if it did not, whether service of the notice constituted a contempt of court; and (3) if it did, what penalty should be imposed. Significantly, his Honour segregated from one another the question of power and the question of contempt of court. 27 As to the question of power, he carefully considered the two High Court authorities, and said (at 189): "I consider those decisions are conclusive and so I am satisfied that s 155 of the Act does not vest power in a member of the Commission to serve notice under it after proceedings have been commenced in a court for a penalty, where that notice is directed to obtaining answers from a defendant which are relevant to the court proceedings against it." 28 Section 155 was different from s 15B in three respects. It did not require the person giving the notice to have any belief that an offence had been committed; it applied to both criminal and non-criminal contraventions; and both the power to issue the s 155 notice and the power to prosecute in penalty proceedings were vested in the Commission. Franki J said (at 189), without elaboration, that these were not "significant difference[s] in any relevant sense". Perhaps an underlying reason for this conclusion was that s 155, if available to be used against the applicant after the commencement of a proceeding against it, would interfere with the applicant's privilege, in penalty proceedings, against exposure to the penalty. At several points in the judgment (some noted below) Franki J appears to assume that the privilege would be available to the applicant even though it was a corporation. 29 The second question identified by Franki J was whether service of the notice constituted a contempt of court in circumstances where the Commission had no power (according to his Honour's answer to the first question) to issue the notice. He did not have to consider the circumstances in which a public authority would commit a contempt of court by exercising a power lawfully conferred on it. 30 The proceeding before Franki J was for the imposition of a penalty. His Honour proceeded on the basis that the applicant could decline to give discovery or answer interrogatories by relying on the privilege against exposure to a penalty (at 189). His Honour found (at 192), on the facts, that the notice had been served for the purpose of obtaining information from the defendant which could not be obtained by the discovery and interrogatory processes of court. The giving of the notice was "an attempt to achieve by threats an advantage in proceedings already before the court which could not otherwise have been obtained". The issue of the notice was "a clear interference with the ordinary course of justice" (at 194), and "a clear attempt to procure an advantage by threatening a party with criminal proceedings [for failure to answer questions] if it did not do something which the law did not require it to do" (at 194). 31 The High Court itself considered s 155 in Pioneer Concrete (Vic) Pty Ltd v Trade Practices Commission (1982) 152 CLR 460. In that case, there was a civil proceeding to which the Commission was not a party. It invoked the s 155 procedure against one of the parties to the proceeding. The High Court held that as the Commission was not a party to the proceeding, the s 155 power was capable of being used. 32 Gibbs CJ observed (at 465) that there was nothing in the words of s 155 themselves that would suggest that the power came to an end once a proceeding had been commenced by some person unconnected with the Commission, even if in those proceedings there was a claim of contravention of the Act. He continued: "If the power were denied to the Commission simply because someone else had commenced proceedings in respect of the matter sought to be inquired into, the proper exercise of the Commission's functions might easily be frustrated." 33 Later (at 467-8), he approved of the decision in Brambles, stating: "I incline to think that if the power were used to assist a party in proceedings already pending, in a way that would give such a party advantages which the rules of procedure would otherwise deny him, there would be a contempt of court." But he added (at 468): "In the present case it was not shown that the person who gave the notice had any intention to interfere with the course of justice, or that there was a real risk that the exercise of the powers under s 155 would in the circumstances have that effect. The power is a drastic power and is capable of abuse and must be exercised with care. However it was not shown that its exercise in the present case would amount to a contempt of court." 34 The judgment confirms that there are, relevantly, two questions to be considered, namely the question of construction of the statutory provisions conferring investigatory power, and the question whether the use or purported use of those powers constitutes a contempt of court. His Honour's observations show that contempt of court may be an issue not only where (as in Brambles) the public authority purports to exercise the powers when, as a matter of construction, they are not available, but also where the powers are available and the question is whether their use was intended to, or would in the circumstances, interfere with the course of justice. 35 Mason J (at 473) drew the same distinction between the question of power and the question of contempt of court. He acknowledged that on one view, a purported exercise of a power in contempt of court would not (as a matter of construction) be authorised by the empowering provision, but he preferred the view that the section under consideration conferred power on the Commission to act in accordance with its terms, though the Commission's exercise of the power would be subject to the surveillance of the court for contempt of court. Brennan J expressly reserved his opinion as to whether s 155 empowered the Commission to obtain information for use in proceedings already commenced against the person to whom the notice was directed (at 475). Murphy J (at 475) said that the question was not raised and did not address it. 36 In Environment Protection Authority v Caltex Refining Co Pty Ltd (1993) 178 CLR 477, a majority of the High Court held that a corporation could not invoke the privilege against self-incrimination. The Court considered the validity of a notice issued to the corporate defendants under s 29(2)(a) of the Clean Waters Act 1970 (NSW), which empowered an "authorized officer" to require the production of documents in certain circumstances. The notice was issued after a prosecution had been commenced. The majority (Mason CJ, Brennan, Toohey and McHugh JJ; Deane, Dawson and Gaudron JJ dissenting) held that the notice was valid. 37 Mason CJ and Toohey J took the view (at 507) that, once it was accepted that the documents could be obtained under a notice to produce (there being no privilege against self-incrimination for corporations), there could be no objection to the production under the statutory notice. Brennan J considered (at 517-8) that it was not an abuse of the court's process to take advantage of a "legitimate means of obtaining evidence". Seizure under a valid search warrant would be a legitimate means of obtaining evidence, and likewise obtaining production of documents under a statutory notice. McHugh J also found (at 509, citing the judgment of Gibbs CJ in Pioneer) that there was no contempt, but contemplated that there might be, "if the exercise of a statutory power would give such a party advantages which the rules of procedure otherwise deny him". 38 The Caltex case exposes the link between, on the one hand, the want of power issue and the contempt of court issue, and on the other hand, the question of availability of privileges to a defendant in criminal or civil penalty proceedings. The majority judgments make it clear, though in different ways, that the objection to issuing a statutory notice to a defendant after commencement of proceedings against it was undermined by the finding that the defendant had no available privilege. That finding meant that any implied limitation on the statutory power, as a matter of construction, would be irrelevant because the limitation could only prevent the section from being used to override a privilege. It also meant, absent any other circumstances suggesting the obtaining of an advantage through the use of the power, that there was no contempt in using the statutory provisions to achieve something that could also be achieved by other means, such as by search warrant or under the rules of court. 39 Hak Song Ra v Australian Crime Commission concerned the Australian Crime Commission's coercive powers of examination and production for the purposes of special investigations, under ss 25A and 28 of the Australian Crime Commission Act 2002 (Cth) ("ACC Act"). The ACC was conducting a special investigation into South East Asian Organised Crime. It purported to use its compulsive powers to investigate the crew of a ship called the Pong Su, members of which had been separately charged with criminal offences under the Criminal Code Act 1995 (Cth) and the Customs Act 1901 (Cth). Merkel J of the Federal Court of Australia held the power was validly invoked. His Honour distinguished Huddart Parker and Melbourne Steamship stating (at [21]): "Those cases are distinguishable from the present case because, unlike the investigatory power conferred under the [ACC Act], they are concerned with an investigatory power that is to be exercised for the purpose of determining whether the person being investigated should be charged with committing an offence." 40 In De Greenlaw v National Companies and Securities Commission, Southwell J of the Supreme Court of Victoria considered the coercive power of the former NCSC to conduct an investigatory hearing. Mr de Greenlaw had been charged with a breach of s 128(2)(a) of the former Securities Industry Code. Subsequently, Mrs de Greenlaw was summoned to attend an examination which arose out of the same facts as Mr de Greenlaw's prosecution, but which was conducted ostensibly for the purpose of investigating whether she had committed an offence herself, rather than for the purposes of obtaining evidence for the case against Mr de Greenlaw. 41 Mr and Mrs de Greenlaw challenged the NCSC's exercise of power. They relied on the Pioneer and Brambles Holdings cases. The NCSC acknowledged that evidence may come to light in Mrs de Greenlaw's examination that might be relevant to the proceedings against Mr de Greenlaw, but it claimed the subpoena to attend was not issued to her for that purpose. Southwell J held that the power was validly exercised. 42 His Honour stated (at 793): "It is to be observed that neither of [ Pioneer or Brambles ] dealt with an investigation of one who is or might become a mere witness in other proceedings. They do not, in my opinion, stand as authority for the proposition for which Mr Sher contends. As it seems to me, Mr Sher's argument, if correct, would lead to absurd results. If an investigation into the alleged insider trading activities of 100 people had revealed apparent proof that X had committed an offence, it would no doubt be proper to charge X promptly rather than to defer the charging until all the other suspects had been investigated. Once X had been charged, so it is said, it would be a contempt of court for the NCSC to conduct a hearing in relation to any of the other 99 suspects if it appeared that evidence might come out having relevance to the subject matter of the charges against X. I do not accept that proposition." 43 His Honour expressly found that the evidence did not support the inference of any ulterior purpose, such as the purpose of assisting the Commission in relation to the charges against Mr de Greenlaw. He said (793): "I have been referred to no authority which suggests that a person who may become a mere witness in proceedings against X is entitled to protection from inquiry at a hearing such as is here proposed or that X is entitled to prevent such a hearing." 44 It seems to me, in light of these authorities, that I must consider two questions in this case: · first, whether, as a matter of statutory construction, ASIC's power to employ ss 19 and 32A was extinguished once the proceeding (which is, in part, a civil penalty proceeding) was commenced, so that it would be a contempt of court for it to attempt to achieve advantages by using or threatening to use powers that are not available; and · secondly, if ASIC has the power to proceed with the notices, it should be restrained from doing so because its purpose is to use its powers to obtain information for use in a proceeding to which it is a party, in a manner that will give it an advantage beyond what is permitted to a litigant by the rules of court, and therefore in contempt of court, or there is a real risk that the continuing use its powers will have that affect. 45 Before dealing with these questions, however, I should say something about the jurisdiction of this court to deal with the application, as the matter was raised the argument. Jurisdiction of the Supreme Court to determine the application 46 To the extent that the application is for the purpose of restraining a contempt of court, in respect of a proceeding that has been commenced in this Court, this Court has inherent jurisdiction to deal with the application. To the extent that the application rests on the contention that ASIC has no power to enforce or issue notices under ss 19 and 32A of the ASIC Act, the application challenges the powers of a Commonwealth authority under Commonwealth legislation. Such a challenge could be raised in a proceeding under the Administrative Decisions (Judicial Review) Act 1977 (Cth) ("AD(JR) Act"). Under s 1337B of the Corporations Act, the Supreme Courts of the States have jurisdiction with respect the matters arising under the AD(JR) Act, but there is a statutory obligation to transfer such a proceeding to the Federal Court under s 1337H. 47 In the present case, there is no obligation to transfer the interlocutory application or the proceeding to the Federal Court, and in my judgment it would be undesirable to do so. While issues concerning ASIC's power might be raised under the AD(JR) Act, there is no application under that Act in the present case. If there were, this Court would have jurisdiction to deal with it by virtue of s 1337B(3). There would be no obligation to transfer the application to the Federal Court under s 1337H(3), because the matter for determination relates to a proceeding pending in this Court that arises under the corporations legislation and is not a subsection 1337B(3) proceeding. It would be undesirable to transfer the proceeding because it is well under way and none of the parties has suggested to the Court that such a transfer should occur. Construction of ss 19 and 32A of the ASIC Act 48 Sections 19 and 32A are each expressed in general terms, in words that are capable of applying after a proceeding has commenced. The applicants' position rests on the context in which the two sections are found. Counsel for the applicants submitted that Part 3 draws a distinction between the pre-litigation and post-litigation stages of the investigatory process. He drew attention to the heading of Part 3 of the ASIC Act, "Investigations and Information Gathering". That itself is neutral, but the headings of the Divisions of Part 3 are interesting. Division 1 is headed "Investigations", Division 2 is headed "Examination of Persons", Division 3 is headed "Inspection of Books" and Division 5 is headed "Proceedings after an Investigation". Headings to Parts, Divisions and Subdivisions of the Corporations Act are deemed to be part of the Act: Acts Interpretation Act 1901 (Cth), s 13(1); Corporations Act, s 5C. 49 In my opinion, the headings do not support the submission that Divisions 1, 2 and 3 are confined to information-gathering before the commencement of a civil penalty proceeding. Division 5 does not purport to deal comprehensively with all kinds of proceedings that ASIC can initiate, but only with prosecutions commenced by ASIC (s 49) and a special kind of representative civil proceeding (s 50). It may be (although it is unnecessary for me to decide) that ASIC's investigatory powers under Part 3 Divisions 1, 2 and 3 are spent once it commences a criminal prosecution under s 49, and thereafter its entitlement to assistance is governed by ss 49(3) and (4) - under which, though it is entitled to receive assistance from eligible persons (including officers, employees and certain agents of a body corporate), the defendant in the criminal proceeding is not required to assist. But there is no basis for concluding that the presence of the heading in Division 5 implies that the powers in Divisions 1, 2 and 3 are spent when a civil proceeding begins. The argument would work only if a proceeding under s 50 were the only civil proceeding possible. 50 Counsel for the applicants referred to s 1317R. Section 1317R(1) says that ASIC may require a person to give all reasonable assistance in connection with an application for a declaration of contravention of a pecuniary penalty order, or criminal proceedings for an offence against the Act. The power to require assistance may be exercised regardless of whether a civil penalty proceeding has actually been commenced: s 1317R(4). But according to s 1317R(2), the power to require assistance may be exercised only in respect of someone other than the person suspected of contravention. 51 In my opinion s 1317R cannot be regarded as a provision covering the field of ASIC information-gathering after commencement of a civil penalty proceeding. The section is based on s 1317EH, enacted by the Corporate Law Reform Act 1992 (Cth). The explanatory memorandum to the Corporate Law Reform Bill 1992 says (at [198]) that the power conferred on the Commission under that provision would be in addition to, and not in derogation of, any of the Commission's powers under Part 3 of the ASIC Act. The wording of s 1317R confirms that this intention on the part of the drafters was achieved. In my opinion s 1317R is simply an additional power of ASIC in civil penalty proceedings, available alongside the investigatory powers conferred by Part 3 of the ASIC Act. 52 I do not agree with the applicants' submission that s 1317R is otiose if ss 19 and 32A are available to be invoked after commencement of a civil penalty proceeding. The powers arise in different circumstances and with different consequences. Section 1317R is available if the conditions set out in 1317R(2) are satisfied. Those conditions are, in their terms, in some respects wider and in some respects narrower than the conditions to be satisfied for exercising the powers under ss 19 and 32A. 53 Sections 19 and 32A may be used across a broad range of regulatory circumstances, not necessarily related to the commencement of legal proceedings. This suggests that the investigatory powers are not extinguished when a legal proceeding begins. Consider, first, s 19. The prerequisites for the use of the s 19 power are that ASIC is investigating or is to investigate a matter under Part 3 Div 1, and that ASIC suspects or believes on reasonable grounds that the person to be examined can give information relevant to that matter. 54 Part 3 Div 1 provides for ASIC to make investigations of its own initiative (s 13), or where the Minister directs it to do so (s 14), or to follow up a report by a receiver or liquidator for the purpose of determining whether a prosecution for an offence against the corporations legislation should be brought (s 15). Under s 13, ASIC's power depends on its having reason to suspect a possible contravention, but once that criterion is satisfied the power of investigation extends to anything expedient for the due administration of the corporations legislation. Therefore, once there is "reason to suspect", ASIC may conduct investigations for a purpose other than the purpose of commencing a proceeding for contravention, such as making a class order or policy statement or initiating the revocation of a financial services licence or commencing a disciplinary proceeding. 55 In the case of an investigation directed by the Minister, the matter to be investigated may relate to anything listed in s 14(2), which includes suspected contraventions but also such matters as the affairs of a corporation or dealings in financial products or the establishment of a financial market. Therefore the Minister may direct an investigation that has nothing to do with any contravention of the corporations legislation. 56 In the case of inspection of books under s 32A, ASIC's power may be exercised only if one of the four components of s 28 is satisfied. Under s 28, the powers of inspection may be exercised: (a) for the purpose of performance or exercise of any of ASIC's functions or powers under the corporations legislation; or (b) for the purpose of ensuring compliance with the corporations legislation; or (c) in relation to an alleged or suspected contravention of the corporations legislation or contravention of certain other laws involving fraud or dishonesty; or (d) for the purposes of an investigation under Part 3 Div 1. 57 In summary, ASIC's investigatory powers under ss 19 and 32A may be exercised for a variety of purposes not dependent upon or connected with the commencement of legal proceedings for contravention. That makes it unlikely that the legislature intended those powers to come to an end upon the commencement of a civil proceeding for contravention. 58 Sections 19 and 32A are in these respects different from the provision considered in the Huddart Parker and Melbourne Steamship cases, where the power was conditioned on the presence of a belief on the part of the Comptroller-General that an offence had been committed. That condition tended to characterise the power as a power of investigation available prior to the commencement of the proceedings for prosecution of that offence. The sections are also distinguishable from s 155, in that they are part of a more detailed and comprehensive investigatory regime. Nevertheless, if the issue before me had been whether s 19 authorises ASIC to examine the persons who are the defendants in a prosecution or civil penalty proceeding already under way, I would be unlikely to hold (in view of Franki J's strong judgment in Brambles) that the section confers power to do so. In an examination under s 19, the privilege against exposure to a penalty is restricted by s 68 of the ASIC Act. The case law to which I have referred supports the proposition that Parliament should not be regarded, except by express words, to have extended that advantage to ASIC once it has become a plaintiff in civil penalty proceedings or a prosecution has commenced. 59 But that is not the issue before me. There is nothing in the cases, and no principle I can discern, that would justify reading down the plain words of s 19 so as to prevent it from being used against a person other than the defendant in a civil penalty proceeding, just because the civil penalty proceeding has commenced. The same analysis applies to s 32A, although it is a more recent addition to the ASIC Act. I agree with Southwell J's observations about the inconvenience of such a conclusion. It would mean, in the present case, that if ASIC wanted to continue its investigations it would have been necessary to desist from commencing the proceeding urgently for the purpose of obtaining Mareva orders for the protection of investors. That cannot have been the legislature's intention. ASIC's purpose in pursuing its investigatory powers 60 The applicants contend that ASIC's purpose is to use its powers obtain information for use in a proceeding to which it is a party, in a manner that will give it an advantage beyond what is permitted to a litigant by the rules of court. That, they say, amounts to a contempt of court. 61 The s 19 notice of examination and the s 32A notice to produce books were each dated 3 May 2004. The s 19 notice was signed by Carolyn Dearing and Philip Thompson, as the persons authorised by ASIC to conduct the examination. The s 32A notice was signed by Carolyn Dearing. The grounds for issue of the notices were stated in identical terms as follows: "in relation to the activities of Elm Financial Services Pty and its representatives between 1 January 2000 to the present and whether there have been contraventions of, or non-compliance with: sections 727(1), 1021C, 708, 912A(1), 945A, 180 and 184 of the Corporations Act 2001; and sections 12CA, 12DA, 64 and 67 of the ASIC Act 2001 in the period between 1 January to the present". 62 At the interlocutory hearing before me, evidence was given on behalf of ASIC by Mr Thompson, who is a Senior Investigator with ASIC, and the leader of the ASIC team conducting the Elm Investigation. He reported to Peter Howard, ASIC's Assistant Director Financial Services. He had delegated authority to carry out the investigation and issue the notices. One of members of the investigation team was Carolyn Dearing, a lawyer employed by ASIC. 63 His evidence was that the investigation began after an anonymous source provided to ASIC some pro forma s 708(10) declarations, which had apparently being used to provide the Elm Property Developments Debenture and the Elm Financial Services Unit Trust No 1. Section 708(10) allows an offer to be made for the issue or sale of securities without a disclosure document such as a prospectus, where the offer is made through a financial services licensee to an experienced investor. The licensee must give the offeree a written statement and the offeree must sign a written acknowledgement that there has been no disclosure document. 64 No investor complaints had been received at that stage, but ASIC was concerned about the adequacy of the pro forma s 708(10) declarations and the level of disclosure in an associated information memorandum and whether, accordingly, the fundraising provisions of the Corporations Act may have been contravened. On 29 May 2003 ASIC commenced an investigation under s 13(1) of the ASIC Act into suspected contraventions by the first second and fourth defendants. It appears from Mr Howard's file note of that day, that the initial concern related to possible contraventions of the provisions of the Corporations Act requiring a disclosure document or product disclosure document (ss 727 and 1021C), and failure to satisfy the requirements of s 708(10) that would establish the knowledge and experience of the investors. 65 In about October 2003 ASIC began to receive complaints from investors about the activities of some of the defendants, relating to difficulties they had encountered in attempting to recover investment funds, including funds invested in the Sterling Apartments Debenture and the Port Heritage Debenture. On 18 November 2003 Mr Thompson decided to extend the scope of the Elm Investigation, to possible contraventions of ss 912A(1) (the general obligations of a financial services licensee) and 945A (the "know your client" rule for financial services licensees and representatives) during the period from 1 January 2000 to 18 November 2003. He also extended the scope of its investigation to cover additional products including the Elm Financial Debentures Stirling Apartments information memorandum and similar investments provided by the Elm group during that period. 66 Mr Thompson extended the scope of the investigation again on 22 January 2004, after receiving material suggesting that the Elm group may have delayed repayment of funds due to investors or used funds raised for a particular project for other purposes, and other matters. The investigation was extended to encompass suspected contraventions of ss 180 and 184 of the Corporations Act (directors' civil duty of care and diligence, and criminal liability for acting in bad faith), ss 64 and 67 of the ASIC Act (giving false information to or concealing books from ASIC) and ss 12CA and 12DA of the ASIC Act (unconscionable, misleading and deceptive conduct in connection with financial services). This extension appears to have envisaged contraventions not only by the corporate entities but also by two groups of individuals, namely the directors or officers of the companies, and the financial services representatives of the first defendant. 67 By late March 2004 it appeared to ASIC that s 708(10) pro formas were being used to market risky investments to inexperienced investors, on a far larger scale than it had previously believed. Information received by ASIC indicated that the second defendant had raised over $11 million from investors in the Elm Note, purportedly in reliance on the s 708(10) exemption. That appeared to be inconsistent with some statements made to ASIC by the eighth defendant. ASIC was concerned that the fourth defendant had failed to repay approximately $5 million in the Elm Property Developments Debenture which was due for repayment on 1 January 2004, that funds raised for the Port Heritage Debenture had not been invested in the Port Heritage Resort, that client files may have been tampered with, and that funds from new investors may have been used to repay interest or principal due to existing investors. 68 In these circumstances, notwithstanding that ASIC had not completed its investigations, Mr Thompson decided that ASIC should commence proceedings in order to obtain interlocutory orders to prevent any continued contravention of the fundraising provisions of the Corporations Act and to secure the assets of the defendants so as to protect investors. When ASIC obtained interlocutory relief on 6 April 2004 it placed before Campbell J evidence by Mr Thompson to the effect that the investigation was ongoing and had not been completed. 69 Since commencement of the proceedings, the ASIC investigation team has conducted further examinations, which primarily involved interviewing investors. The interviews have been conducted on a voluntary basis without ASIC exercising coercive powers. Some of the investors have sworn affidavits. 70 Those interviews have led Mr Thompson to have concerns that most of the investors who had interviewed were inexperienced and did not meet the requirements for exemption under s 708(10), and that the s 708(10) declarations were not adequately explained to the investors. According to Mr Thompson, most of the investors sought financial advice because they were inexperienced. As a rule, they did not deal directly with the defendants but instead, they relied on recommendations made by financial services representatives of the first defendant including Mr Stokes, Mr Huckel and Mr Flegg. ASIC is concerned that the representatives may not have a reasonable basis for recommending particular investments and may have contravened s 945A. 71 Mr Stokes is an adviser for the first defendant. ASIC has interviewed clients of Mr Stokes who have invested in various financial products of the defendants. Carolyn Dearing of ASIC contacted Mr Stokes by telephone on 3 May 2004. He gave her a statement and she made a file note, but in a subsequent conversation, said he had been instructed by Elm that all notices should go through the company. On the basis of the matters outlined in the file note, Mr Thompson formed the view that Mr Stokes possessed information relevant to ASIC's investigation, and the s 19 notice to Mr Stokes was issued on the same day. The s 32A notice issued to the first defendant on that day required the production of the client file for one of the investors who dealt with Mr Stokes. 72 Mr Flegg is also a representative of the first defendant. ASIC wishes to examine him about the circumstances surrounding an investment of $1 million for one of his clients in the Elm Note in February 2004. The client appears, according to Mr Thompson, to be a novice investor. The funds were invested for a three-month term but the investor has been unable to recover them, and ASIC has evidence which indicates that the money was used to repay another investment. Mr Thompson contacted Mr Flegg by telephone on 12 May 2004. According to his file note of that conversation, Mr Flegg gave him information voluntarily and said he had nothing to hide. However, Mr Thompson gave evidence indicating that Mr Flegg would not voluntarily attend for examination, and so he concluded that it would be necessary and appropriate to issue a s 19 notice. 73 Mr Huckel was formerly a representative of the first defendant. Mr Thompson believes, on the basis of the investigation, that Mr Huckel was "the major introducer for the five in-house schemes" promoted by the first defendant. The eighth defendant has been examined about the procedures used by the first defendant's representatives in dealing with clients, and Mr Thompson now wishes to examine Mr Huckel, and also Mr Stokes and Mr Flegg, with respect to their practices as representatives in relation to s 708(10) offers, the representations they made to investors, their conduct in relation to redemption requests and rollovers, the first defendant's procedures and the training they received, and whether they acted outside their training and authority. 74 According to Mr Thompson's affidavit, the purpose of the proposed s 19 examinations is to complete the investigation being undertaken by ASIC. He says ASIC has no preconceived view on the outcome of the examinations, and that it is possible the examinations may reflect adversely on the representatives. If the s 19 examinations reveal evidence of non-compliance with a financial services law by specific individuals, Mr Thompson says ASIC would consider pursuing financial services banning orders against those individuals under s 920A, and may also seek to suspend the Australian financial services licence held by the first defendant. Its actions in doing so would be quite separate from the current proceedings. He notes that there are aspects of the investigation which may warrant criminal proceedings. 75 ASIC was continuing its investigations up to the time of the interlocutory hearing, including investigations as to a strata unit development referred to as the Foster Street building, suggesting some discrepancies with respect to the valuation of units and other matters. Mr Thompson's evidence was that he could not say when the investigation would be concluded but that there was no direct link between the conclusion of the investigation and ASIC's claims for principal relief in the proceedings. 76 Mr Thompson was cross-examined, inter alia, as to the purpose of the proposed s 19 examinations and the s 32A notice. In the witness box he did not seem to be entirely abreast of the subject matter of the investigation and the scope of the originating process. However, in my view the cross-examination did not undermine the evidence as to purpose given in Mr Thompson's affidavit. What it amounts to is that Mr Thompson's purpose, which in my view equates for present purposes to ASIC's purpose, is to continue and complete the investigation upon which ASIC embarked in response to concerns about the s 708(10) pro formas and complaints received from investors in Elm products. That investigation relates to the matters set out as the grounds for issue of the two notices.

ASIC v Elm Financial Services

At a glance

Court

Decision date

Before

Source

Judgment (14 paragraphs)

Parties

Legislation Cited (13)

Cases Cited (10)

Cited By (7)