ASIC v Sigalla

2009/290316 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v ANDREW SIGALLA & ORS JUDGMENT 1 In August 2009, Australian Securities and Investments Commission ("ASIC") made a successful ex parte application for freezing orders against certain persons associated with TZ Limited ("TZL"). These persons included Mr Falconer, a former director of TZL, and Dunbar Associates Pty Ltd ("Dunbar"), Mr Falconer's private company. 2 Each of Mr Falconer and Dunbar, as well as certain other persons, was restrained, for a given period, from dealing with assets except as the orders allowed. The orders affecting Mr Falconer and Dunbar were, by consent and without admissions, extended on several occasions, most recently to 7 December 2010. 3 On that day, I heard ASIC's application for a further extension (until 7 February 2011) and reserved judgment, indicating that judgment would be delivered today. The orders were extended up to today. 4 Extension as sought by ASIC is opposed by Mr Falconer and Dunbar. 5 In seeking renewed freezing orders, ASIC relies on s 1323(1) of the Corporations Act 2001 (Cth). That section begins as follows: "Where: (a) an investigation is being carried out under the ASIC Act or this Act in relation to an act or omission by a person, being an act or omission that constitutes or may constitute a contravention of this Act; or (b) a prosecution has been begun against a person for a contravention of this Act; or (c) a civil proceeding has been begun against a person under this Act and the Court considers it necessary or desirable to do so for the purpose of protecting the interests of a person (in this section called an aggrieved person ) to whom the person referred to in paragraph (a), (b) or (c), as the case may be, (in this section called the relevant person ), is liable, or may be or become liable, to pay money, whether in respect of a debt, by way of damages or compensation or otherwise, or to account for financial products or other property, the Court may, on application by ASIC or by an aggrieved person, make one or more of the following orders: …" 6 Mr Falconer and Dunbar accept that the threshold condition is satisfied because ASIC is carrying out an investigation as referred to in s 1323(1)(a). 7 ASIC's investigation involves other persons as well as Mr Falconer and Dunbar, being Mr Sigalla (a former managing director of TZL), BZI Pty Ltd and ZMS Pty Ltd (companies controlled by Mr Sigalla) and Mr Otten (another former director of TZL). TZL has already commenced civil recovery proceedings against those persons. No such proceedings have been commenced against Mr Falconer or Dunbar. 8 As it affects Mr Falconer (and, through him, Dunbar), the ASIC investigation concentrates on his role in (a) an announcement by TZL to the Australian Securities Exchange ("ASX") on 3 September 2008 regarding purchases by Mr Sigalla and Mr Falconer of shares in TZL; (b) statements by TZL to ASX of cash flows for the quarters ended 30 September 2008, 31 December 2008 and 31 March 2009; and (c) transfers of TZL funds to Mr Sigalla and persons and entities controlled by or associated with him. 9 As to (a), there is evidence apparently consistent with the proposition that Mr Falconer, with Mr Sigalla, played an active part in devising and implementing arrangements under which separate parts together making up a parcel of 1.5 million shares in TZL that an independent party wished to sell were purchased by entities associated with Mr Sigalla and Mr Falconer and moneys of TZL, to the extent of $1 million (ostensibly lent to Mr Sigalla and Mr Falconer), were used for the purpose, which moneys were, in connection with the transaction, remitted from TZL's Australian bank account to a bank in the Netherlands. The instruction to TZL's bank, in this respect, appears to have been signed by Mr Falconer. He also signed an Appendix 3Y advice to ASX about the change in directors' interests. There was no reference in that announcement to financial assistance by TZL. In a contemporary email to Mr Sigalla, Mr Falconer appears to have recognised that it was or may have been illegal for TZL to lend money to someone to enable them to buy shares in TZL. 10 As to (b) above (quarterly statements of TZL cashflows), it appears that each of the three particular quarterly statements (Appendix 4C statements) was signed by Mr Falconer and carried an endorsement to the effect that it gave a true and fair view and had been prepared in accordance with accounting standards. Each recorded a significant sum as deposits at call: $14,806,000 at 30 September 2008, $12,913,000 at 31 December 2008 and $7,176,000 at 31 March 2009. TZL's general ledger records seem to tell a different story: that, at 30 September 2008, there was an actual balance at call of about $10,333,000; that, at 31 December 2008, there was an actual balance at call of about $2,333,000; and that, at 31 March 2009, there was an actual balance at call of about $333,000. The great bulk of the difference, in each case, seems to have related to an "investment account" with an overseas bank but it is indicated by the evidence as it stands that TZL had no account with that bank. However, Mr Sigalla and associated entities had accounts with that bank and it seems likely that it was their balance that was taken into account in the TZL cashflow reports. 11 As to (c) above, the focus is, in part, on a number of transfers of funds in the foreign bank "investment account". Twenty particular payments in the quarters ended 30 September 2008, 31 December 2008 and 31 March 2009 are identified in the evidence, each of which appears to be to an associate of Mr Sigalla. In most of these cases, it appears to have been a document signed by Mr Falconer that caused the foreign bank to make the payment. 12 Another matter under investigation by ASIC (in substance, an aspect of (c) above) concerns a "mandate agreement" of July 2004 between TZL and ZMS (Mr Sigalla's private company). The mandate agreement was, it seems, the source of substantial payments by TZL to ZMS. In the proceedings brought by it against Sigalla and ZMS, TZL makes a number of claims in respect of the mandate agreement and moneys paid under it. The "mandate agreement" was not disclosed in the related party sections of TZL's annual reports of 2007 and 2008. Mr Falconer appears to have been a signatory of the agreement for TZL. 13 There is, in relation to these several matters, a plausible contention that Mr Falconer might be found liable to make good significant sums to TZL. He is, at the least, someone who "may … become liable" to pay money to TZL. Counsel for ASIC submitted that he "may become liable" also to persons who dealt in TZL shares on the stock market at a time when the market was operating on the basis of information forming part of, in particular, the Appendix 4C statements for the quarters ended 30 September 2008, 31 December 2008 and 31 March 2009. For reasons canvassed at paragraph [30] of my judgment of 10 November 2009 (Australian Securities and Investments Commission v Sigalla [2009] NSWSC 1205; (2009) 74 ACSR 710) concerning Mr Sigalla, that possibility is real. 14 On that basis, I am satisfied that, in relation to Mr Falconer (and, derivatively, Dunbar), the "person aggrieved" concept extends not only to TZL but also an as yet undefined group of persons who dealt in shares in TZL. In saying this, I am concentrating on the words "may … become liable" in s 1323(1). In addressing the "may … become liable" question, one must look to both theoretical bases of liability (the matter addressed above) and the practical possibility of liability being alleged. As to the latter, a letter from TZL's solicitors to ASIC dated 16 November 2010 outlining the status of proceedings already commenced by TZL against Mr Sigalla and others says that it is still the intention of TZL to commence proceedings against Mr Falconer and Dunbar "early in the New Year (2011)". Also, ASIC's evidence is that it expects to be in a position to decide whether to make recommendations in respect of proceedings against Falconer "by the first week of March 2011". Realistic possibilities of steps aimed at establishing liability of Mr Falconer and Dunbar are thus shown. 15 The next question, therefore, is whether I should conclude that it is either "necessary" or "desirable" to make an order "for the purpose of protecting the interests of" any such "person aggrieved". As posed by the legislation in the present case, this question relates to "an order appointing … a receiver" of property of Mr Falconer and Dunbar, given that the order actually sought is a freezing order which, in the particular context, is permitted as an "alternative or lesser order": see Re Richstar Enterprises Pty Ltd; Australian Securities and Investments Commission v Carey (No 3) [2006] FCA 433; [2006] 57 ACSR 307; Australian Securities and Investments Commission v Krecichwost [2007] NSWSC 948; (2007) 64 ACSR 411; Australian Securities and Investments Commission v Banovec (No 2) [2007] NSWSC 961; (2007) 214 FLR 33; Australian Securities and Investments Commission v Burnard [2007] NSWSC 1217; (2007) 64 ACSR 360. 16 There was discussion in the course of submissions about the fact that a receivership order is characterised in some of the cases as more "drastic" with the result, perhaps, that, in order to characterise the "alternative or lesser" freezing order as "necessary" or "desirable", the court must first be satisfied that the "drastic" remedy of receivership be awarded. 17 While that may be, in theory, the correct approach, the central inquiry remains the same for both the "drastic" and the "alternative or lesser" orders: is it "necessary" or "desirable" that the court impinge upon the freedom of disposition that the person concerned enjoys in relation to his, her or its property and impose a regime that denies that freedom? The court's ordinary jurisdiction to appoint a receiver aims to protect assets that may turn out to belong to someone else. The purpose is protective. The same protective purpose is served, for the same reason, by a freezing order. 18 In addressing the "necessary or desirable" question in relation to the "alternative or lesser" freezing order, the court is dealing with an explicit statutory criterion. The approach is not the same as that adopted in relation to an application in equity for a freezing order of a Mareva kind. But factors typically taken into account in the exercise of equitable jurisdiction may well be relevant to questions of what is "necessary" or "desirable" in the interests of aggrieved persons. 19 The court may thus take into account all relevant discretionary factors, including those identified by Santow J in Re HIH Insurance Ltd; Australian Securities and Investments Commission v Adler (2001) 38 ACSR 266; [2001] NSWSC 451 at [4] to [7]. Santow J there observed that the public interest role of ASIC may warrant an order in circumstances where it might be denied to a private litigant. At the same time, however, any order the court makes must, as Santow J said "operate in a manner that is proportionate and not more intrusive than is necessary in the circumstances, recognising that it is inevitable that such orders will intrude upon private rights". Santow J also pointed to the significance of the legislative exemption that ASIC enjoys from the requirement to give an undertaking as to damages. 20 In the end, the court's task is as described, in relation to an application under s 1323(1)(j) and (k), by Nicholson J in Australian Securities and Investments Commission v Ivey (1998) 29 ACSR 391: "The Court is required to engage in a balancing exercise which includes a balancing of public and private rights." 21 In relation to the matter of risk of dissipation, reference was made in submissions to a desire of Mr Falconer, expressed in the past, to help pay off a house mortgage debt owed by a domestic partner. Application of funds in that way would, on the face of things, result in dissipation. Later evidence suggests, however, that his relationship with the woman in question has ended, even though both still live in her house. The desire to assist her financially may also have ended. 22 In addition, ASIC points to the role Mr Falconer seems to have played in moving funds of TZL to offshore bank accounts. This, it is said, shows a familiarity with processes for causing money to leave Australia and is relevantly to be taken into account. 23 On the other side of the coin, there is evidence that Mr Falconer has left Australia on several occasions since becoming aware of ASIC's investigation but has always returned. 24 Little weight should be attached to these matters although, on balance, I think the role Mr Falconer played in shifting funds offshore is a relevant consideration. Threat of dissipation is not a predominant consideration in cases of this kind. It is merely one of the factors to be taken into account in the balancing of public and private rights. 25 I turn next to matters particularly identified by counsel for Mr Falconer and Dunbar as relevant to the balancing exercise. 26 First, it is pointed out that the ASIC investigation concerning TZL has been in progress for almost sixteen months and that freezing orders have been in place for the same period, yet ASIC has not commenced any proceedings. An explanation is that ASIC - which no doubt has only limited resources to devote to any particular case - has been significantly hampered by the need to deal with proceedings involving other aspects of the TZL matter, principally contempt of court charges against Mr Sigalla which, as counsel for Mr Falconer and Dunbar points out, do not directly relate to the subject matter of the investigation involving them. 27 Second, Mr Falconer and Dunbar have co-operated with ASIC's investigation. Mr Falconer has attended six compulsory examinations and produced numerous documents (most recently in November 2010). He has also provided two affidavits disclosing assets. 28 These, like the dissipation aspect, are no doubt matters to be taken into account in the exercise of discretion. But in the end, the court must decide whether it is "necessary or desirable" for the purpose of "protecting the interests of" aggrieved persons that a freezing order should be made. 29 The allegations against Mr Falconer are serious and involve large sums. The possibility that he will be found liable to compensate TZL is real. It is too early to make any firm assessment of liability to persons who traded in TZL shares. Balancing the rights of TZL as a "person aggrieved" and other persons aggrieved against the rights of Mr Falconer and Dunbar to free enjoyment of their property, I am satisfied that freedom of Mr Falconer and Dunbar from restraint continues to be outweighed, at this stage, by the desirability of providing some measure of assurance for TZL and other "persons aggrieved". It is at least desirable and arguably necessary that the restraint continue for the purpose of protecting the interests of persons aggrieved. 30 In saying this, I note in particular that ASIC seeks continuation of the orders for a limited period only, being until February 2011. That is a factor in my decision. The matter can be addressed again then, as needed. The date nominated by ASIC is 7 February 2011. However, these proceedings are to be before Pembroke J on 11 February 2011 for other purposes. I will extend the orders until that date. The position of Mr Falconer and Dunbar can then be assessed along with other aspects of these proceedings, as may be necessary. 31 I should add that counsel for ASIC expressly said, in the course of submissions, that, to the extent that the evidence identifies issues that should be addressed by way of "carve-outs", ASIC is "content for suitable carve-outs to be given in respect of those matters". Because argument was directed almost exclusively to the wider question whether there should be freezing orders at all, attention was not given specifically to possible carve-outs. I may need to hear further submissions on that matter. 32 There is one final matter. The principal "person aggrieved" is TZL. It is giving close consideration to commencing proceedings against Mr Falconer and Dunbar (see paragraph [14] above) and may accordingly be in a position to make a successful application for freezing orders, either under s 1323(1) (an "aggrieved person" is a competent applicant) or by way of equitable relief of a Mareva kind. That in no way diminishes the right or ability of ASIC to seek s 1323 relief: see Australian Securities and Investments Commission v Sigalla (above) at [25] to [27]. **********

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