ASIC V Somerville [2009] NSWSC 1149

1 By amended notice of motion filed on 26 October 2009, the defendant, Mr Somerville, seeks an order staying an order made by Windeyer AJ on 24 September 2009 that he be disqualified from managing companies for a period of six years. That order was made under s 206C of the Corporations Act 2001 (Cth). There is an alternative claim for an order granting leave under s 206G to manage a particular company. 2 In each case, the claim is for a limited period, that is, until determination of the appeal that Mr Somerville has initiated by way of proceedings 40307/09 in the Court of Appeal. 3 The application is opposed by the plaintiff, ASIC. The application has been approached on both sides by reference to well known and well understood principles concerning the stay of orders pending appeal. I do not pause to consider the relevant principles. 4 I am satisfied that aspects of the appeal should be regarded as arguable. But I do not have any sense at all that the appeal has particularly good prospects of success. The list of findings of fact, apparently not challenged in the appeal, as handed up by Mr Stevenson, on behalf of ASIC - although challenged in some areas by Mr Coleman on behalf of Mr Somerville - supports that assessment. 5 Despite that, I approach this application on the footing that the threshold that must be crossed to activate the discretion to grant a stay has been crossed, and that it is appropriate to consider the balance of convenience or balance of hardship. 6 Mr Somerville is a solicitor. He and another legal practitioner together operate an incorporated law practice. Both are directors of the relevant company. The practice is virtually the sole means of Mr Somerville's livelihood. 7 The Law Society, on 29 September 2009, served on Mr Somerville a notice under s 61 of the Legal Profession Act 2004, the import of which is that his practising certificate is in immediate and substantial danger of cancellation. The notice states that the relevant delegate of the Law Society has had "specific regard to" the facts set out in the judgment of Windeyer AJ of 8 September 2009. That was his Honour's judgment on liability. The subsequent judgment of 24 September 2009 dealt with penalty. 8 It has been submitted that Mr Somerville's prospects of averting the threatened action of the Law Society may be greater if one of the orders now sought is granted. There is on the evidence, however, no basis for any such finding. The existence of the appeal and the grounds of appeal might have themselves had some bearing on the Law Society's view of matters, but the fact that a stay or like order had been granted is not shown to be something that would or could or might have an influence. 9 Apart from the incorporated law practice company, there are other companies of which Mr Somerville is a director. These are listed in his affidavit. He does not suggest that there is any strong need for him to be involved in the management of any of those other companies. Indeed, he is content to proffer to the court, upon this application, an undertaking not to be involved in the management of those companies. No prejudice in that direction, therefore, is foreseen by him in the absence of a stay. 10 The balance of convenience or balance of hardship in this particular case where ASIC is the plaintiff falls to be considered by reference to the private and personal interests of Mr Somerville as against the public interest which is, in effect, the public interest in seeing removed from the management of corporations persons who are knowingly concerned in breaches by others of ss 181, 182 and 183 of the Corporations Act. Given the findings that have been made and the consequences of them and the publicity they have received, there must be great confidence that Mr Somerville will not again engage in like conduct in the course of his practice. 11 Mr Somerville has given evidence of practical difficulties with regard to practice management and supervision of staff, in particular, that will follow if he is unable to be involved in the management of the law practice company. He has also given evidence of financial and taxation difficulties that, it is said, would be produced by transition of the practice from corporate form to partnership form. 12 On analysis, however, it does not seem to me that these matters represent significant burdens at all, or sources of any real prejudice. 13 Mr Somerville's co-director already bears the full responsibility imposed by s 140 of the Legal Profession Act. He is, for the purposes of that Act only, responsible for the management of the legal services provided in New South Wales by the particular company; and that is so as a matter of statute and whether he is the sole director or one of several. The burden upon him, in terms of statutory responsibility, will not increase if he is left as the sole director. 14 Added to that is what I regard as the significant point that practice by Mr Somerville of his profession within the context of the legal practice company has not been shown to be dependent on his being a director of that company or being involved in the activities from which the order of disqualification precludes him. Those activities are described in s 206A(1) of the Corporations Act: "A person who is disqualified from managing corporations under this Part commits an offence if: (a) they make, or participate in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or (b) they exercise the capacity to affect significantly the corporation's financial standing; or (c) they communicate instructions or wishes (other than advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation) to the directors of the corporation: (i) knowing that the directors are accustomed to act in accordance with the person's instructions or wishes; or (ii) intending that the directors will act in accordance with those instructions or wishes. Note: Under section 1274AA, ASIC is required to keep a record of persons disqualified from managing corporations." 15 These are the activities from which a person is precluded by a disqualification order under s 206C. Nothing in s 206A(1), in the case of a corporation carrying on a legal practice, extends to the activities of a solicitor employed by or retained as a consultant to the corporation who, in that capacity, takes instructions from clients, gives advice to clients, and otherwise acts for clients and fulfils retainers between the corporation and its clients. That kind of day-to-day practice activity is beyond the scope of s 206A. 16 As to the financial concerns expressed on Mr Somerville's behalf, there is no evidence of his financial connection with the company beyond the fact of his directorship; but then, of course, one does not know whether the directorship itself attracts remuneration. It may be that Mr Somerville is a shareholder. If that is so and dividends are part of his livelihood, then the disqualification does nothing to disturb them. It may be that he is already an employee of the company and that his income is derived by him in the form of salary. Again, there would be no difference if he were not a director. 17 On the whole of the material before me regarding the balance of convenience or balance of hardship, I am not satisfied that the position is such that Mr Somerville suffers relevant hardship or prejudice making it appropriate to exercise in his favour the discretion to grant a stay of the existing orders pending determination of his appeal. The stay application will be dismissed. 18 I should add that the considerations relevant to stay are relevant in the same way and for the same reasons to the application for leave under s 206G. There is there the added point that it is by no means clear to me that leave of limited duration, such as until determination of an appeal, can be granted under that section. The general flavour of s 206G(1) is that the grant of leave is a once-and-for-all thing, even though conditions or exceptions may be attached to it (s 206G(3) says that the order granting leave may be expressed to be subject to exceptions or conditions). It is by no means clear to me that an exception or condition to which the grant of leave was made subject could extinguish the grant. The matter of revocation of leave is another matter. It is dealt with in s 206G(5). But revocation is available only on the application of ASIC. 19 In a real sense, however, these points of construction concerning s 206G are beside the point, given that the substantive question going to the merits of the case and to discretion is the same in relation to the s 206G aspect as in relation to the stay aspect.

At a glance

Court

Decision date

Before

Source

Judgment (13 paragraphs)

Legislation Cited (1)

Cited By (2)