ASIC v Rich [2003] NSWSC 328 | Case summary

5934/01 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION V JOHN DAVID RICH & ORS JUDGMENT 1 HIS HONOUR: In this proceeding the Commission as plaintiff contends that the defendants have, in various ways, breached their statutory duty of care and diligence, as directors and officers of One.Tel Ltd. The Commission seeks declarations of contravention, disqualification and compensation orders, under the civil penalties provisions of the companies legislation. 2 The case relates to events that occurred after March 2000 (when the statutory duty of care of directors and officers, and the civil penalty provisions, were re-formulated) and up to about May 2001. At that time statutory company law was found in the Corporations Laws of the States and Territories. In July 2001 the Corporations Laws were replaced by a single Commonwealth enactment, the Corporations Act 2001 (Cth). By virtue of some peculiar transitional provisions in the Corporations Act (especially ss 1399 and 1400), the proceeding is to be conducted under the Corporations Act rather than the Corporations Law of New South Wales, and the Court is required to assume that the Corporations Act was in force at all relevant times, but that its terms were identical with the terms of the Corporations Law applicable at the time of occurrence of the events in contention. Since the substantive provisions of the statutory duty of care and diligence, s 180(1), and the civil penalty provisions in Part 9.4B did not change upon the enactment of the Commonwealth statute, the transitional provisions have effect as if this case were conducted under the Corporations Act in its present form. For convenience, therefore, I shall refer to the provisions of the Corporations Act. 3 Pursuant to an interlocutory application filed on 10 February 2003, the Commission seeks an order that the first, third and fourth defendants give general discovery in this proceeding, and an order fixing a date for the service of a verified list of documents by those defendants. The interlocutory application also seeks a direction fixing a date for the filing of affidavit evidence of any witnesses (including, without limit, expert witnesses) upon which the defendants intend to rely. The intention is that the direction should cover the provision of witness statements by the three defendants themselves, to the extent that they may intend to give evidence at the hearing. Thus, two questions are raised, which I shall call "the discovery issue" and "the witness statements issue". 4 The application also seeks an order provisionally fixing a date for the commencement of the trial of the proceeding. I have decided, without opposition, that the question whether to fix a hearing date, provisionally or otherwise, should be deferred for further consideration on 23 June 2003, when the proceeding comes back to me for further mention after various interlocutory steps have been taken pursuant to orders I made on 8 April 2003. The civil penalty provisions of the Corporations Act 5 The present provisions of Part 9.4B of the Corporations Act evolved out of provisions first introduced into the Corporations Law by the Corporate Law Reform Act 1992, partly modelled on provisions of the Trade Practices Act 1974 (Cth) and partly influenced by the report of the Senate Standing Committee on Legal and Constitutional Affairs, Company Directors' Duties: Report on the Social and Fiduciary Duties and Obligations of Company Directors (November 1989). The provisions were substantially amended by the Corporate Law Economic Reform Program Act 1999, which came into effect on 13 March 2000. Recently the Australian Law Reform Commission has released its Report No 95 (December 2002), Principled Regulation: Federal Civil and Administrative Penalties in Australia. 6 Part 9.4B operates in respect of provisions of the Corporations Act identified by number in s 1317E (1). The provisions so identified are described as "civil penalty provisions" throughout Part 9.4B. The defendants seek to place some emphasis on the description. They say that an application for any order made under Part 9.4B is necessarily an application for the imposition of a penalty, for the purposes of the privilege against exposure to a penalty. They submit that the amendments which introduced Part 9.4B, which were entitled "Civil Penalty Proceedings", must be taken to have occurred with knowledge of, and not seeking to abrogate, the established rules in relation to procedural protections given to an individual who is subject to a proceeding for the imposition of a penalty. 7 In my opinion that submission should not be accepted. The expression "civil penalty provisions" is used as a convenient designation of a number of provisions of the Act, but it is made crystal clear in Part 9.4B that a contravention of a civil penalty provision may lead to any of a variety of orders, namely compensation orders, disqualification orders and pecuniary penalty orders. The defendants' submission would imply that an application for a compensation order under s 1317H would be an application for the imposition of a penalty to which the privilege would apply, even though the application may be made by the corporation, and not only by the Commission. An application for a compensation order seems to me to be quintessentially a civil proceeding not involving the imposition of a penalty. The classification of an application for a disqualification order is more difficult, and I shall deal with it later, but my conclusion is that it, too, is a civil proceeding and not a proceeding for the imposition of a penalty for the purposes of the privilege. 8 It appears that contravention of the statutory duty of care and diligence does not give rise to a criminal offence, given that the heading of s 180 is "Care and diligence - civil obligation only" (the heading being part of the Corporations Act, according to the Acts Interpretation Act 1901 (Cth), s 13 - although the position is rendered unclear by s 1311). Section 180(1) is a civil penalty provision for the purposes of s 1317E. Consequently, by the terms of the latter provision, if the Court is satisfied that a person has contravened s 180(1), it must make a "declaration of contravention" conforming to s 1317E(2). The Commission seeks various declarations of contravention of s 180(1) in the present case. Once made, a declaration of contravention is conclusive evidence of the matters required to be contained in it: s 1317F. 9 The making of a declaration of contravention is a prerequisite to orders of two other kinds, namely a pecuniary penalty order under s 1317G or a disqualification order under s 206C. 10 Under s 1317G(1), the Court may, on application made by the Commission, order a person to pay the Commonwealth a pecuniary penalty of up to $200,000 if a declaration of contravention of (inter alia) s 180(1) by that person is made, and the contravention: (i) materially prejudices the interests of the corporation or its members; or (ii) materially prejudices the corporation's ability to pay its creditors; or (iii) is serious. 11 Under s 206C(1), on application by the Commission, the Court may disqualify a person from managing corporations for a period that the Court considers appropriate, if a declaration of contravention of (inter alia) s 180(1) is made and the Court is satisfied that the disqualification is justified. 12 Another power to order disqualification is relevant in this case. Under s 206E, on application by the Commission, the Court may disqualify a person from managing corporations for a period that the Court considers appropriate, if either the person has been an officer of a body corporate that has at least twice contravened the Corporations Act and has each time failed to take reasonable steps to prevent the contravention, or the person has at least twice contravened the Corporations Act whilst an officer of a body corporate, and in either case the Court is satisfied that the disqualification is justified. The application of the section requires proof of contraventions of the Act, which may be proved by relying on a declaration of contravention, but a declaration of contravention is not a prerequisite to the application of the section. 13 Under s 1317H, the Court may order a person to compensate a corporation for damage suffered by the corporation, if the person has contravened (inter alia) s 180(1) in relation to the corporation, and damage resulted from the contravention. Although a contravention must be proved, a declaration of contravention is not a prerequisite for recovery of compensation. 14 In the present case the Commission seeks declarations of contravention, disqualification orders under ss 206C and 206E, and compensation orders under s 1317H. It has standing to apply for a declaration of contravention and a compensation order under s 1317J(1). It would have the standing to seek a pecuniary penalty order under that provision, but it does not do so. It has the standing to seek disqualification orders under ss 206C(1) and 206E(1). While only the Commission is given standing to apply for a declaration of contravention, a pecuniary penalty order or a disqualification order, standing to apply for a compensation order is given to the Commission, the corporation, or the responsible entity in the case of a registered scheme. 15 Some procedural provisions of Part 9.4B should be noted: · Section 1317L states that the Court must apply the rules of evidence and procedure for civil matters when hearing proceedings for a declaration of contravention or a pecuniary penalty order. The section is not directly relevant to the issues arising in the present application, because its operation is confined to the hearing of the proceeding, and the wording of the section does not purport to apply to pre-trial procedures. · Under s 1317N a proceeding for a declaration of contravention or a pecuniary penalty order is automatically stayed if a criminal proceeding relating to substantially the same conduct is commenced, and the civil proceeding is dismissed by force of the section unless the person is not convicted of the offence, in which case the civil proceeding may be resumed. · Under s 1317Q, evidence of information given or evidence of production of documents by an individual is not admissible in a criminal proceeding against the individual, if the evidence was previously given in a proceeding for a pecuniary penalty order in respect of substantially the same conduct. That section does not apply, in terms, where (as here) the proceeding is for declarations of contravention, disqualification orders and compensation orders. · Section 1317R is the Commission's power to require a person to give all reasonable assistance in connection with an application for a declaration of contravention or a pecuniary penalty order, or a criminal proceeding for an offence. In the case of a criminal proceeding, ASIC cannot require assistance from a person likely to be a defendant, but no similar constraint is imposed with respect to civil proceedings. The section does not purport to qualify, at any rate expressly, the defendant's privilege against self-incrimination. The discovery issue 16 The defendants resist, in principle, the Commission's application that they give discovery. They say that the law entitles them to refuse to give discovery, because of the principle that a defendant should not be ordered to disclose information or produce documents that may assist in establishing his or her liability to a penalty. 17 The Commission responds by submitting that (a) the proceedings do not seek the imposition of a penalty; (b) insofar as they seek the making of disqualification orders against the defendants, their purpose is to protect the public rather than to punish the defendants. 18 The privilege against self-examination is one of the fundamental protections of the civil liberties of Australians: Reid v Howard (1995) 184 CLR 1, at 14, 17. No person, in any legal proceedings, may be compelled to give evidence if the evidence might tend to incriminate that person. Although the privilege has been eaten away by statutory amendments, it also has statutory reinforcement, in s 128 of the Evidence Act 1995 (NSW). The availability of the privilege enables a defendant to resist giving discovery of documents which might tend to incriminate. When the entire category of documents falls into that category, no discovery is required of any documents in that category. 19 There is another privilege, operating in effect as an extension of the privilege against self-incrimination. This is the privilege against exposure to a penalty. Its origins are less ancient, but nevertheless it is "well-established": Refrigerated Express Lines (Australasia) Pty Ltd v Australian Meat and Livestock Corporation (1979) 42 FLR 204, 207 per Deane J. According to Deane J, the privilege relieves a defendant from the obligation to disclose information or produce documents in proceedings which are solely for the recovery of a pecuniary penalty, if the information or documents may assist in establishing the defendant's liability to pay the penalty. 20 The privilege against exposure to a penalty applies not only to the defendant's evidence, but also to the evidence of other witnesses whom the defendant may call, including expert witnesses: Australian Securities and Investments Commission v Plymin (2002) 4 VR 168. It applies to non-pecuniary as well as pecuniary penalties: Environmental Protection Authority v Caltex Refining Co Pty Ltd (1998) 178 CLR 477, 518-9. It applies to anything in the nature of the penalty: Police Service Board v Morris (1984) 156 CLR 397. 21 In the Refrigerated Express case, the applicant sought injunctive relief and damages for alleged contraventions, and involvement in contraventions, of provisions of Part IV of the Trade Practices Act 1974. Under ss 76 and 77 of that Act, if the contravention were established, the respondents would be exposed to liability for a penalty at the suit of the Minister or the Trade Practices Commission. They argued, unsuccessfully, that they ought to be excused in limine from giving discovery of documents or answering interrogatories. 22 Deane J noted that the proceeding did not involve any allegation of criminal conduct against the respondents, nor was it a proceeding for recovery of a pecuniary penalty. He noted, however, that the applicant would be entitled to injunctive relief or damages only if it established a contravention or involvement in contravention. 23 Having stated the "well-established" principle noted above, he said (at 207-8): "Even where, as in the present case, the proceedings are not for recovery of a penalty but to prevent and redress civil injury, a party to litigation ought not to be compelled to provide information or produce documents for inspection by the other party if the result thereof will be to provide evidence against him which may be used to establish his liability to a penalty in other proceedings ( Mayor of the County Borough of Derby v Derbyshire County Council [1897] AC 550, at 552). "In the former case, that is to say in a mere action for a penalty, a court should, in the absence of statutory provision to the contrary, refuse to make any order at all against the defendant for discovery or production of documents or provision of information for the reason that the whole and avowed object of the proceedings being the imposition and the recovery of a penalty, an order for the production of documents or provision of information against the defendant can, insofar as the prosecutor of the action is concerned, properly have no other intended consequence (see R v Associated Northern Collieries (1910) 11 CLR, at 742). This is a broad and unqualified rule whose origins are apparently to be found in a reluctance on the part of the Court of Chancery to lend the aid of its discovery proceedings to the common informer (see Mexborough (Earl of) v Whitwood Urban District Council [1897] 2 QB 111, at115 and Heimann v Commonwealth (1935) 54 CLR 126, at 130). "In the latter case, that is in a case such as the present where the proceedings are not for the recovery of a penalty, there is no general rule precluding the making of an order for discovery or interrogatories and there will ordinarily be no proper ground for objecting to an order for production of documents or provision of information being made. The party against whom such an order is made is left to object to producing particular documents or providing particular information on the ground that such production or provision made tend to expose him to a penalty (see Mayor of the County Borough of Derby v Derbyshire County Council [1897] AC, at 553)." 24 In my opinion, this is a comprehensive statement of the relevant law, applied by his Honour in circumstances indistinguishable from the present case, except possibly in one respect. There, as here, the applicant had to establish a contravention of the statute as a prerequisite for obtaining the civil relief that it sought. The statute empowered the Minister or the Commission to seek a pecuniary penalty order, but there was no application for any such order before the Court. The fact that in the present case the Commission is the plaintiff, whereas in Refrigerated Express the plaintiff was a private corporation, seems to me to be immaterial, for in both cases the establishment of a contravention exposes the defendant to the risk of a pecuniary penalty order based upon the foundation of that contravention. The fact that the Corporations Act makes formal provision for declarations of contravention is, in my opinion, not a point of distinction, given that Deane J made it clear that the applicant would not be entitled to the civil relief that it sought unless a contravention (or involvement in a contravention) were established. The one possible point of distinction is that in the present case the Commission seeks disqualification orders, which the defendants seek to classify as penalty orders for the purposes of the privilege. I shall consider that issue later. 25 Unless the principles stated by Deane J in the passage extracted do not reflect current Australian law (and subject to the issue raised by the fact that the Commission seeks disqualification orders), those principles are applicable in the present case. They lead to the conclusion that the Commission is entitled to orders against the defendants for discovery, subject of course to the defendants' right to object to production of particular documents on grounds relating to the privilege against exposure to a penalty or other available grounds of objection. 26 In my opinion, Deane J's principles are an accurate statement of the current Australian law. They were referred to and applied by the majority of the High Court (Mason ACJ, Wilson and Dawson JJ, Murphy and Brennan JJ dissenting) in Pyneboard Pty Ltd v Trade Practices Commission (1983) 152 CLR 328, 336. In that case the appellant argued, unsuccessfully, that a person or corporation served with a notice under s 155 of the Trade Practices Act requiring the person to furnish information and produce documents to the Commission could refuse to comply with the notice on the ground that the information or documents might lead to exposure to civil liability to penalties under ss 45 and 76 of the Act. The majority judges (at 336) regarded Deane J as drawing "a distinction between discovery in a mere action for a penalty and discovery in an action which was not for a penalty the result of which might be used to establish a party's liability to a penalty in other proceedings". The fact that the Commission is the plaintiff in the present case and might in theory move to amend the statement of claim to add claims for pecuniary penalties does not seem to me to take the present case outside the second category, notwithstanding the High Court's reference to "other proceedings". 27 The majority's reasoning in Pyneboard was the subject of adverse comment by the High Court in Daniels Corporation International Pty Ltd v Australian Competition and Consumer Commission (2002) 77 ALJR 40, a case holding that s 155 of the Trade Practices Act did not abrogate legal professional privilege. Counsel for the first and fourth defendants placed great weight on some observations by Gleeson CJ, Gaudron, Gummow and Hayne JJ. Having discussed the decision in Pyneboard, amongst others, their Honours said this: "[31] In Naismith v McGovern , Williams, Web, Kitto and Tailor JJ said: 'Originally orders for discovery were not obtainable at common law, except to a limited extent, and a party to a common law action who desired general discovery had to proceed by bill in equity. But the Court of Equity would not make an order for discovery or for the administration of interrogatories in favour of the prosecutor when the prosecutor was the Crown or a common informer or any other person where the proceeding was of such a nature that it might result in a penalty or forfeiture: 'nemo tenetur seipsum prodere'. When discovery and interrogatories were provided for under the rules made under the Judicature Act the same principle was applied.' [(1953) 9 CLR 336 at 341-2] Today the privilege against exposure to penalties serves the purpose of ensuring that those who allege criminality or other illegal conduct should prove it. However, there seems little, if any, reason why that privilege should be recognised outside judicial proceedings. Certainly, no decision of this Court says it should be so recognised, much less that it is a substantive rule of law. Further, it should now be accepted that, as the privilege against self-incrimination is not available to corporations, the privilege against exposure to penalties is, similarly, not available to them." 28 The sentence emphasised by counsel is, " Today the privilege against exposure to penalties serves the purpose of ensuring that those who allege criminality or other illegal conduct should prove it." In my opinion, that sentence is not determinative of any question before me. If it were clear that the present case were one where a person "alleges criminality or other illegal conduct", in the sense intended by their Honours, then I would apply the privilege and decline to order discovery or the filing of witness statements before the trial. But their Honours cannot have intended that their proposition should apply whenever a plaintiff alleges illegal conduct in civil proceedings, otherwise discovery and the filing of witness statements before the trial would not be appropriate in any civil proceedings involving an allegation of contravention of a provision of the Corporations Act, or (say) involving contractual illegality. It seems to me unlikely, in the context in which it appears, that the sentence was intending to broaden the scope of the privilege, or to do anything other than reflect the general availability of the privilege after the Judicature Act. 29 While some aspects of the reasoning in Pyneboard are affected by the Daniels Corporation decision, it does not seem to me that the High Court's approval in Pyneboard of Deane J's principles in Refrigerated Express has been subjected to any doubt by the Daniels Corporation decision. The joint judgment cites Refrigerated Express (at footnote 26) without disapproval. My conclusion is that Deane J's principles retain their force, and are binding upon me. Unless the present proceeding is a proceeding for the recovery of a penalty because disqualification orders are sought, the effect of applying Deane J's principles is that the defendants are not entitled to resist discovery in limine, although they may be able to object to the production of particular documents during the discovery process. 30 I now turn to the question whether the proceeding should be treated as a proceeding for the recovery of a penalty because the Commission seeks disqualification orders. The question is whether, for the purposes of the privilege, the disqualification orders should be treated as punitive orders like penalties, or as protective orders. The protective purpose of disqualification orders 31 There is a line of authorities to the effect that the making of disqualification orders against directors of a company has a protective rather than a punitive purpose. The point is usually made by way of guidance for the setting of an appropriate term of disqualification. Since the purpose of disqualification is to protect the public, rather than to punish, conduct that severely damages the financial interests of investors might attract a long period of disqualification even though it is not culpable conduct in a moral sense. 32 Care must be taken in transposing remarks made for that purpose into the context in which a classification must be made for the purposes of the privilege against exposure to penalties. Even so, it seems to me that the remarks have some utility. The privilege against exposure to penalties is an emination of a concern about certain kinds of criminal and quasi-criminal sanctions - identified by Bowen LJ in Redfern v Redfern [1891] P 139, at 147 as punishment, penalty, forfeiture and ecclesiastical censure. The criterion of classification is not the hardship or other catastrophic effect that the Court's order may have on the defendants, because an order for damages or an injunction can have the most profound effects and yet there is no privilege from exposure to orders of those kinds. The defendants drew attention to the catastrophic consequences that a disqualification order might have upon them, citing some observations by Olney J in Chew v NCSC (1985) 9 ACLR 527, 528 about the "substantial hardship" that may flow to the disqualified person. That submission misses the point. The issue is whether a disqualification order should be placed in the same group as punishment, penalty, forfeiture and ecclesiastical censure. If the courts have consistently treated disqualification orders as protective rather than punitive in nature, one can infer that disqualification orders do not fall within and should not be placed together with those four categories. 33 In Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203, Bowen CJ in Eq dealt with the power to make disqualification orders under s 122 of the Companies Act 1961, saying (at 205): "The policy to which section 122 gives effect is that a person convicted of an offence of any of the types specified in that section is not to be permitted to act as a director or to take part in the management of a company. The section is not punitive. It is designed to protect the public and to prevent the corporate structure from being used to the financial detriment of investors, shareholders, creditors and persons dealing with the company. In its operation it is calculated to act as a safeguard against the corporate structure being used … in a manner which is contrary to commercial standards." 34 Counsel for the third defendant, in a persuasive but ultimately unsuccessful argument, drew attention to the differences between s 122 of the 1961 Act and s 206C of the Corporations Act. Section 122 had no effect unless the individual had been convicted and therefore was already the subject of a penalty. That being so, it was relatively easy to say that the purpose of a disqualification order was protective rather than punitive, in order to make the point that the application for leave did not provide an occasion for further punishment, but rather was an appropriate occasion to consider the question of public interest. I accept that there are important differences between s 122 and s 206C, but it is nevertheless significant that Bowen CJ in Eq made a classification that is capable of extending to the disqualification orders currently available under the Corporations Act, because of their inherent nature as disqualification orders, notwithstanding the different context in which the occasion to make them arises. 35 The Commission also relied on Re Marsden (1981) 29 SASR 454 and Re Harrison (1998) 81 FCR 436. Both of those cases concerned a provision of the kind in the Magna Alloys case, rather than a provision like s 206C, and so in my opinion those cases do not really advance the argument, except by generally reinforcing the classification adopted in Magna Alloys. 36 In CAC (WA) v Ekamper (1987) 12 ACLR 519, Franklyn J at 525 accepted that s 227A of the Companies (WA) Code was a protective provision, but the power to disqualify could be exercised by having regard to factors other than the protective purpose of the provision, including such matters as hardship. The case appears to me to be consistent with Magna Alloys. Although other factors may be taken into account in determining the period of disqualification, the case supports the view that the power to disqualify is given to the Court for a protective purpose. 37 The Full Federal Court referred with approval to Bowen CJ in Eq's statement in ASC v Kippe (1996) 67 FCR 499. In that case a "banning" order had been made by the Commission under s 829, a provision approximately equivalent to the present s 920A. The order prohibited one of the respondents from acting as a representative of a dealer or investment adviser for three years. An appeal was brought against that order to the Administrative Appeals Tribunal. Before the Tribunal, a question arose as to whether statements made by the respondent in a s 19 examination, in respect of which he had claimed the privilege against self-incrimination, were admissible in the Commission's consideration of whether it should make the order. That depended upon whether the proceeding before the Commission was a "proceeding for the imposition of a penalty" within s 68(3)(b) of what is now the Australian Securities and Investments Commission Act 2001 (Cth). 38 The Tribunal made a preliminary decision that the statements were not admissible and an application was made by the Commission for judicial review. The Full Federal Court (von Doussa, Cooper and Tamberlin JJ) set aside the Tribunal's decision on the ground that a proceeding that might result in a banning order by the Commission is protective in character and is not a proceeding for the imposition of a penalty. Their Honours said (at 506-7): "Of course, in one sense it might be said that many statutory provisions which have the purpose of protecting the public, will seek to achieve the protection by imposing a disability or disqualification so that it might be suggested that the provision has a dual purpose. However, the authorities support the view that even where this is so the Court will look to the predominant purpose of the provision under consideration …". 39 They concluded (at 508): "A proceeding which may result in a banning order under s 829, in our view, is to be characterised … as 'protective' in purpose and not as one for the imposition of a penalty. It unduly strains the language enacted by Parliament, to suggest that proceedings directed to the making of a banning order for the reason specified in s 68(1) of the [ASIC Act], should be described as being for the imposition of a penalty." 40 Their Honours reasoned (at 508) that the making of an order excluding an individual from acting as a representative of a dealer or investment adviser is not designed to punish or impose a penalty on the person for an offence or contravention of any norm of conduct. They pointed out that the existence of conduct that may justify a banning order did not itself give rise to an offence, and that an offence arose only if there was a contravention of the banning order. They drew attention to the range of specified grounds which were required to be established before a banning order could be made, including standard "non-blameworthy" grounds such as becoming an insolvent under administration or becoming incapable of managing one's affairs. 41 As counsel for the defendants have pointed out, the present case is distinguishable from Kippe's case because here, the disqualification order is made by the Court, which may do so only where a contravention of certain provisions of the Act has been established. It is noteworthy, however, that those provisions include some, such as s 180, contravention of which is not a criminal offence. It therefore seems to me that this case has substantial significance as regards the proper classification of s 206C, as well as s 206E. 42 In ASC v Donovan (1998) 28 ACSR 583, a company continued to carry on business although it had failed to obtain a market for its product. Eventually the company failed and went into liquidation. The Commission proceeded against the directors of the company, alleging breach of their statutory duty of care (then found in s 232 (4) of the Corporations Law) and seeking relief under the civil penalty provisions of the Corporations Law. Section 1317EA stated that if the Court was satisfied that a person had contravened a civil penalty provision (including the statutory duty of care), it was required to make a declaration of contravention, and was permitted also to make a disqualification order (s 1317EA(3)(a)) or a pecuniary penalty order (s 1317EA(3)(b)). Thus, under the Corporations Law, as under the Corporations Act at the present time, the establishment of a contravention led to a declaration of contravention, and might also lead to either or both of a disqualification order or a pecuniary penalty order. The Commission invited the Court to make disqualification orders, and apparently did not seek any pecuniary penalty order. Disqualification orders were made. 43 Cooper J said that s 1317EA(3)(a) was a protective provision, designed to protect the public and to prevent a corporate structure being used by individuals in a manner contrary to proper commercial standards. He referred to some observations by Merkel J in Re Tasmanian Spastics Association; ASC v Nandan (1997) 23 ACSR 743, 751 where Merkel J said that the protective purpose of the subsection was reinforced by s 1317EA(4), which prevented the Court from making a disqualification order if it was satisfied that despite the contravention, the person was a fit and proper person to manage a corporation. Section 206C of the present Act is not precisely the same, but it requires the Court to be satisfied that the disqualification is justified, and allows the Court to take into account the person's conduct in relation to the management, business or property of any corporation. 44 Cooper J also referred to the Explanatory Paper for the Public Exposure Draft of the Corporate Law Reform Bill 1992, which led to the enactment of the civil penalty provisions. The Explanatory Paper contains the following paragraph, which Cooper J quoted (at 602): "178. It is expected that in settling an appropriate order, the Court would first give consideration to whether it should impose a civil penalty disqualification. The issue should be whether the defendant's conduct, whilst not criminal in nature, was so reprehensible and had such serious consequences as to warrant an order prohibiting the person from managing a corporation. For example, if gross negligence by a director had led directly to massive losses for shareholders, the Court may consider that a director should be disqualified for a substantial period, even where there was no question of a dishonest intent. The emphasis should be on preventing a recurrence of the contravention by the defendant, and providing a deterrent to other persons involved in the management of corporations. It is expected that the Court would consider imposing a pecuniary penalty only if it considered that a civil penalty disqualification provided an inadequate or inappropriate remedy." 45 In ASC v Forem-Freeway Enterprises (1999) 38 ACSR 339, 348-350, Madgwick J regarded it as a "trite" proposition that the purpose of the power of disqualification was protective of the public. He took the view that once the matter of prohibition was determined, deterrence and hardship were relevant matters to take into account in determining the size of the pecuniary penalty. 46 Counsel for the third defendants submitted that Madgwick J misread Merkel J's judgment in the Tasmanian Spastics Association case. It does not seem to me that there is any error in his Honour's reasoning, which appears to me to be consistent not only with the reasoning of Merkel J but also with the reasoning of Cooper J. 47 In Re HIH Insurance Ltd; ASIC v Adler (2002) 42 ACSR 80, Santow J had regard to the protective purpose of disqualification orders, citing (at 97) the Donovan and Tasmanian Spastics Association cases, and many others, later remarking (at 101) that it was "well settled" that the primary purpose of the disqualification power was the protection of the public. He added, before quoting the remarks of Bowen CJ in Eq in Re Magna Alloys which are set out above: "That its object is the need to protect the public, with its corollary of personal deterrence, does not mean that its aim should be punitive though personal deterrence is relevant". 48 The plaintiffs also refer, by analogy, to decisions dealing with the Court's disciplinary powers over its officers (cases acknowledged to be relevant in the Kippe case). They cite NSW Bar Association v Evatt (1968) 117 CLR 177, where the High Court said (at 183-4): "The Supreme Court thought, moreover, that as the exercise of its disciplinary powers was, to some extent, a punishment for wrongdoing, mercy might be shown towards a young man who had not understood the error of his ways. The power of the Court to discipline a barrister is, however, entirely protective, and, notwithstanding that its exercise may involve a great deprivation to the person disciplined, there is no element of punishment involved." 49 In Law Society of New South Wales v Foreman (1994) 34 NSWLR 408, Mahoney JA noted that deterrence was part of the protective purpose of the Court's disciplinary powers. He commented (at 441) that the protection of the public was not confined to the protection of the public against further default by the solicitor in question, but extended also to the protection of the public against similar defaults by other solicitors. 50 The defendants rely on some observations by Bryson J in ASIC v Rich [2003] NSWSC 186, where his Honour referred to Santow J's observations in the Adler case, and in particular Santow J's review of previously reported decisions, and continued (at [26]): "His Honour's review illustrates fully the variety of considerations to which regard has been paid and the wide range of outcomes. His Honour derived from earlier cases propositions to the effect that '(v) The order has a motive of personal deterrence, though it is not punitive: … (vi) The objects of general deterrence are also sought to be achieved: …'. I must respectfully say that I find a distinction between motives of deterrence and a punitive motive as difficult, in practical terms impossible to sustain. The punitive impact of such an order must be recognised; Courts apply punitive measures with care, avoid excessive measures and have regard to the circumstances of individuals. No-one should be sacrificed to the public interest." 51 There is also some academic criticism of the distinction between deterrence and punishment, at any rate in the context of money sanctions: see especially Kenneth Mann, "Punitive Civil Sanctions: the Middleground between Criminal and Civil Law", 101 Yale LJ 1795 (1992). However, in its recent report mentioned above, the Australian Law Reform Commission supports the proposition that the purpose of a disqualification order is protective rather than punitive (see Report, paragraphs 2.148, 3.17, 11.110 and 30.62-30.64), a proposition which even Professor Mann appears to support (at 1838-9). 52 If Bryson J's remarks were intended to undermine the proposition that the provisions of the Corporations Act authorising the Court to make disqualification orders have a protective rather than a punitive purpose, his observations would be contrary to the weight of authority. In my opinion, however, his Honour did no more than to point out that in terms of their practical effects, disqualification orders have a punitive impact, and therefore they should be made with great care. Those propositions are uncontroversial, and they are consistent both with the proposition that the statutory provisions empowering the Court to make disqualification orders have a protective purpose, and the proposition that in determining an appropriate disqualification order the Court should bear in mind the primary purpose of the provisions. In my view the example given in paragraph 178 of the Explanatory Paper shows that these propositions are non-trivial and of real practical significance. 53 In my opinion the authorities lead to this conclusion: the fact that disqualification orders are a principal component of the relief sought by the Commission does not make it appropriate to classify the proceedings as proceedings for the imposition of a penalty, for the purposes of the privilege against providing information or documents in proceedings for the recovery of a penalty. The witness statements issue 54 The privilege against exposure to a penalty has been held, in a series of cases in the Federal Court of Australia, to protect the defendant not only from being obliged to give discovery, but also from being subject to any direction that affidavits or witness statements be provided to the plaintiff prior to the hearing or at any time prior to conclusion of the plaintiff's case. 55 In Australian Competition and Consumer Commission v Amcor Printing Papers Group Ltd (1999) 163 ALR 465, the Commission instituted a proceeding alleging contravention of a provision of Part IV of the Trade Practices Act relating to arrangements containing an exclusionary provision. Three officers of the company were joined as defendants, and the Commission alleged that they were knowingly concerned in or party to the contraventions by the companies. The Commission sought the imposition of pecuniary penalties against the officers, under s 76 of the Trade Practices Act. The question arose whether the Court should make directions requiring the officers to file and serve statements of evidence prior to the trial. 56 Sackville J applied the principles in Refrigerated Express and Pyneboard. Since the case before him was a "mere action for a penalty", to use Deane J's words in Refrigerated Express, the privilege was applicable so as to protect the respondents from any order to disclose information which might assist in establishing their liability to the penalty that the Commission sought to impose. 57 The question for Sackville J was whether a direction as to the filing and serving of witness statements amounted to an order to disclose information. It was submitted that directions for the filing of witness statements would not oblige the respondents to give evidence or provide information on affidavit, the effect merely being that if the respondents elected to give evidence, they would have to file witness statements in advance of the hearing. That being so, it was contended by the Commission that the directions it sought would not compel respondents to provide information that would or might expose them to the imposition of a penalty. 58 Sackville J rejected this submission, following the reasoning of Heerey J in Australian Competition and Consumer Commission v J McPhee & Son (Australia) Pty Ltd (1997) 77 FCR 217. He found that if the directions sought by the Commission were made, the respondents would not have an unconstrained or free "election" to file or not file statements of evidence. He took into account that, in the circumstances of the instant case: · if evidence was not filed the Court would probably be invited to draw inferences adverse to the respondents, Jones v Dunkel (1959) 101 CLR 298; · if directions were made and evidence was not filed, the respondents might be precluded from giving any evidence at the trial; and · by providing statements of evidence before the trial, the respondents might give the Commission "leads" that would result in other evidence adverse to them being adduced in the very proceeding in which penalties were sought (at 469-70). 59 It is obvious that the foundation premise of Sackville J's reasoning, and the reasoning of Heerey J, is that the proceeding with which they were each dealing was a proceeding for pecuniary penalties. There is no obvious reason for regarding any of the factors that influenced Sackville J as matters of significance in a case where the relief sought by the plaintiff is civil relief not involving the imposition of a penalty. 60 The reasoning in the Federal Court cases has been applied to proceedings brought by the present Commission under the Corporations legislation. In ASIC v ABC Fund Managers Ltd [2001] VSC 92 (6 April 2001), the Commission brought proceedings against various companies seeking winding up orders and injunctions to restrain activities in relation to managed funds, and an accounting for funds received from investors and subscribers. The question was whether the defendant's witnesses should be required to file affidavits or witness statements before the trial. After referring to the Refrigerated Express and McPhee decisions, Warren J noted that the privilege against exposure to a penalty may be claimed by an officer of a defendant, or person having dealings with the defendants. According to her Honour, the Court will permit the witness to refuse to furnish evidence if there is a real and appreciable risk that a proceeding for the imposition of a penalty may be taken against the witness, where the evidence furnished under compulsion could be used in that proceeding. 61 Importantly for present purposes, Warren J noted that the witnesses seeking to invoke the privilege were not persons against whom any civil penalties had been sought by the Commission at that stage. However, referring to the reasoning of Sackville J in the Amcor Printing case, she held that directions for the filing of witness statements would not give the witnesses a free election to give or not to give evidence, and this was in circumstances where there was a real risk that criminal proceedings might be taken against them and that the evidence might be used in those proceedings. She therefore exempted certain of the witnesses from directions to file witness statements. 62 The crucial point of distinction between ABC Fund Managers and the present case is that here, it has not been contended that there is a real and appreciable risk that any of the defendants or their witnesses might become parties to criminal proceedings (and there is no evidence before me on that point), and no penalty is sought against them. There is no basis for contending that there is any risk that this position will change. If the Commission wanted to seek a pecuniary penalty in the present proceeding, it would be necessary for it to make an application to amend the Second Further Amended Statement of Claim. If at the time of any such application the Commission had already received the benefit of discovery by the defendants or the filing and serving by them of witness statements, the fact that such benefit had been obtained would be a weighty consideration against the granting of leave. This is because, if the proceeding had been one for the imposition of pecuniary penalty orders at the time when the plaintiff applied for orders for discovery and the filing of witness statements, it is unlikely that those orders would have been made, on the state of the authorities. 63 In Australian Securities and Investments Commission v Plymin, the action was for pecuniary penalties under the Corporations Law. Not surprisingly, Mandie J declined to order the defendants to file and serve affidavits and statements of evidence before the trial, citing the Amcor Printing and McPhee cases. Being a proceeding for the imposition of pecuniary penalty orders, the case is distinguishable from the present case, just as the Federal Court cases are. 64 In Re HIH Insurance Ltd; Australian Securities and Investments Commission v Adler (2001) 40 ACSR 214 Santow J referred with approval to Warren J's decision in ABC Fund Managers. However, I do not find this instalment of the Adler decisions to be of assistance, since the question before his Honour (whether the Commission, in seeking to rely on certain affidavit evidence, was impermissibly splitting its case) was quite different from the one before me now. 65 It seems to me that the present case falls outside the in limine part of the principle in Refrigerated Express, because this is not a proceeding for the imposition of a penalty. It is therefore also outside the extension of the Refrigerated Express principle to the provision of witness statements before the trial, which has been made only in proceedings for the imposition of a penalty or in cases where there is a real and appreciable risk that the witness will be subject to a proceeding for the imposition of a penalty. It follows that there is no good reason for not directing the defendants to file and serve affidavits or witness statements before the trial, in accordance with the normal procedure in this Division of the Court. 66 The Commission submitted that even if the present proceeding were regarded as a proceeding for the recovery of a penalty, so that an order for discovery would not be made, nevertheless the Court could and should direct the defendants to file and serve witness statements before the trial. The Commission relied for that proposition on Sidebottom v Commissioner of Taxation [2003] VSCA 2. In that case the Chief Executive Officer for Customs took proceedings described as "excise prosecutions" against corporate and individual defendants, in which penalties were sought. The question for the Victorian Court of Appeal was whether directions should be made for the filing of witness statements before the trial. 67 Phillips JA (at paragraph [25]) drew a sharp distinction between cases on the making of orders for discovery and the administration of interrogatories, and the case at hand, where the order was concerned with the timing of disclosure of evidence, rather than with its provision. He said that it was well-established that in a case such as the present, where penalties were sought, orders would not be made for discovery or interrogatories. He continued: "It is a different matter when an order is sought for delivery of witness statements before trial and, despite the appellants' submission to the contrary, I see no real support for the proposition that defendants in excise prosecutions for the recovery of penalties are entitled to resist such an order on the ground that they cannot be compelled, as a matter of principle, to disclose their evidence before trial, or indeed before the plaintiff's case has been closed - at least in this instance where pleadings have closed, further and better particulars have been provided and the plaintiff's witness statements were delivered to all defendants some time ago." 68 This approach is inconsistent with the approach taken in the Amcor Printing decision, in which Sackville J expressly considered and rejected the argument that appealed to Phillips JA. In Australian Competition and Consumer Commission v FFE Building Services Ltd [ 2003] FCA 157, Wilcox J noted the inconsistency between Sidebottom and the Federal Court cases, and although he expressed some sympathy for the reasoning in Sidebottom, he decided that he was bound to follow the Federal Court cases. 69 If it were necessary for me to make a decision, I would hold, with the greatest respect to Phillips JA, that the reasoning of Sackville J is compelling in a case where the proceeding is for the imposition of a penalty. It is unnecessary for me to decide between the two approaches, however, because my view is that the present case is not a case for the imposition of a penalty and so there is no obstacle to giving directions that witness statements be provided before the trial. 70 I should add that as a matter of discretion, it seems to me highly desirable that directions be made in this case for the provision of the defendants' witness statements before the final hearing. I understand that most of the evidence of the Commission has been filed and served, including a very large report and a supplementary report by an expert on financial matters. The first and fourth defendants have foreshadowed that they may wish to provide an expert's report traversing the same ground. It seems to me highly desirable that the defendant's report be furnished in sufficient time to enable the experts to confer and, if possible, reduce any areas of disagreement. More generally, since the principal subject matter of the final hearing is likely to be voluminous and complex financial evidence, it is probable that real advantages will flow to the Court from the provision of witness statements before the trial, because that should enhance the quality of submissions as well as providing the judge with the opportunity to familiarise himself with the case before the trial begins. Conversely, as far as I can see this is not a case where the provision of witness statements before the trial is likely to lead the Commission into new avenues of inquiry leading to new complaints against the defendants. Conclusion 71 I have reached the view that the plaintiff is entitled to orders that the defendants give discovery, and to directions that they provide witness statements before the trial, in accordance with an appropriate timetable. I shall stand the matter over and direct the Commission to bring in draft short minutes of order, hopefully after negotiation with the defendants, to set up a timetable for witness statements and for discovery. I shall also hear the parties on the question of costs. 72 I should point out, as is clear from the body of these reasons, that my decision is on the basis that there is no real or appreciable risk that the defendants, and other witnesses whose statements are provided, will be exposed to a proceeding for a penalty. As far as discovery and witness statements by the defendants are concerned, once the process is in train and the Commission obtains benefits from it, it is most unlikely that any application for leave to amend the statement of claim in the present proceeding to embrace claims for pecuniary penalties would succeed.

ASIC v Rich

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