3138/01 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION V GEOFFREY WILLIAM VINES & 2 ORS
JUDGMENT
1 HIS HONOUR: In my judgment published on 22 August 2005 (ASIC v Vines [2005] NSWSC 738; (2005) 55 ACSR 617), which I shall call "my August judgment", I found that each of the three defendants, Mr Vines, Mr Robertson and Mr Fox, had contravened the statutory duty of care found, at the relevant time, in s 232(4) of the Corporations Law. I also found that Mr Fox had contravened the statutory duty of honesty then found in s 232(2) of the Law.
2 After a further hearing directed towards the contentions of Mr Vines and Mr Robertson that they should have the benefit of the "honesty defence" then contained in ss 1317JA and 1318 of the Law, I delivered another judgment on 23 December 2005 (ASIC v Vines [2005] NSWSC 1349), which I shall call "my December judgment", in which I held that they should not be relieved from liability under either of those provisions.
3 The next and final stage of the proceedings was to conduct a hearing on penalties, in accordance with the procedures set down by the Court of Appeal in Forge v ASIC [2004] NSWCA 448; (2004) 52 ACSR 1. That hearing took place on 24 and 27 March 2006. No oral evidence was heard, but affidavits were read and extensive written and oral submissions were made on matters of fact and law. These are my reasons for judgment on penalties.
Statutory provisions
4 The contraventions occurred in the second half of 1998 when the Corporations Law was in force but the amendments to statutory directors' duties made by the Corporate Law Economic Reform Program Act 1999 (Cth) ("the CLERP Act") had not been made. At that time s 232(2) and s 232(4) were civil penalty provisions, for the purposes of Part 9.4B, by virtue of ss 232(6B) and 1317DA. A person who contravened either of those provisions was not guilty of an offence, unless the contravention was knowing, intentional or reckless, and either dishonest and intending to gain an advantage, or intending to deceive or defraud (s 1317FA). But a contravention of either provision gave rise to the consequences set out in Part 9.4B.
5 Those consequences were prescribed by s 1317EA, which said:
"(1) This section applies if the Court is satisfied that a person has contravened a civil penalty provision, whether or not the contravention also constitutes an offence because of section 1317FA.
(2) The Court is to declare that the person has, by a specified act or omission, contravened that provision in relation to a specified corporation, but need not so declare if such a declaration is already in force under Division 4.
(3) The Court may also make against the person either or both of the following orders in relation to the corporation:
(a) an order prohibiting the person, for such period as is specified in the order, from managing a corporation;
(b) an order that the person pay the Commonwealth a pecuniary penalty of an amount so specified that does not exceed 2,000 penalty units.
(4) The Court is not to make an order under paragraph (3)(a) if it is satisfied that, despite the contravention, the person is a fit and proper person to manage a corporation.
(5) The Court is not to make an order under paragraph (3)(b) unless it is satisfied that the contravention is a serious one.
(6) The Court is not to make an order under paragraph (3)(b) if it is satisfied that an Australian court has ordered the person to pay damages in the nature of punitive damages because of the act or omission constituting the contravention.
(7) Section 91A defines what, for the purposes of this section, constitutes managing a corporation."
6 In s 9 of the Law, "civil penalty order" was defined to mean a declaration or order made under s 1317EA. Part 9.4B imposed no restrictions on the making of civil penalty orders in this case, other than the restrictions contained in s 1317EA. Since ASIC did not contend that the contraventions in this case have given rise to offences, and no relevant criminal proceedings have been taken, the restrictions on the making of such orders imposed by Division 4 of Part 9.4B have not been attracted.
7 Section 1317HA(1) was as follows:
"Where, on an application for a civil penalty order against a person in relation to a contravention, the Court is satisfied that:
(a) the person committed the contravention; and
(b) the corporation in relation to which the contravention was committed has suffered loss or damage as a result of the act or omission constituting the contravention;
the Court may (whether or not it makes an order under subsection 1317EA(3)) order the person to pay to the corporation compensation of such amount as the court specifies."
8 The effect of subsequent changes to statutory company law was dealt with in my August judgment at [1033]-[1034]. To summarise, the CLERP Act of 1999 replaced ss 232(2) and (4) with other provisions and substituted a new Part 9.4B, but the operation of the former provisions in respect of contraventions occurring before 13 March 2000 was preserved by s 1473(1) of the 1999 Act. Although the Corporations Law was wholly repealed by the Corporations Act 2001 (Cth), the substance of ss 232(2) and (4) and Part 9.4B, in the form in which they stood in the second half of 1998, was "carried over" into the Corporations Act by ss 1400 and 1401, as regards the liabilities and obligations of the defendants in respect of the events of the second half of 1998. In effect, the provisions now applicable to the defendants are provisions of the Corporations Act modified to correspond with the relevant provisions of the Corporations Law in force in 1998. In this judgment, as an my August judgment, I shall for convenience refer to the old Corporations Law provisions, as in force in 1998, as if they were directly applicable, without making expressly the qualification that arises from this analysis.
9 It is worth bearing in mind, when considering other cases, not only that the 1999 amendments changed the content of the statutory duty of care and replaced the statutory duty of honesty with a duty of good faith, but also that the 1999 Act altered Part 9.4B in important respects. In particular, s 1317EA(4) was removed (see now s 206C(1)(b) and (2)).
10 For reasons given in my August judgment, I am satisfied that each of the three defendants has contravened a civil penalty provision, namely s 232(4), and that Mr Fox has contravened another civil penalty provision, namely s 232(2). Therefore, by virtue of s 1317EA(1), s 1317EA applies.
11 The effect of s 1317EA(2) is that the court is now under a statutory duty to declare, in respect of each defendant, that the defendant has by specified acts or omissions contravened s 232(4) in relation to a specified corporation or corporations in the GIO Group, and that Mr Fox has by specified acts or omissions contravened s 232(2) in relation to such a corporation or corporations. The only remaining issues about the declarations of contravention, discussed below, relate to drafting and in particular, the extent of specificity that is required.
12 Subsection 1317EA(3) authorises the court to make, against each defendant:
(a) an order prohibiting that defendant, for the period specified in the order, from managing a corporation;
(b) an order for payment of a pecuniary penalty of up to $200,000.
The word "may" in subsection (3) makes it clear that the court has a discretion to make or decline to make orders of either kind. However, the discretion is only available to be exercised if the case falls outside the limitations on the court's power contained in subsections (4), (5) and (6).
13 An order under s 1317EA(3)(a) prevents the defendant, during the specified period, from being a director or promoter of a local corporation (that is, a corporation formed in Australia), or from being in any way (whether directly or indirectly) concerned, or from taking part, in the management of the corporation (s 91A(2)). In the case of a corporation that is not a local corporation, there is a similar restriction but it is generally confined to such conduct in "this jurisdiction" (effectively, Australia). In my August judgment, at [1037]-[1056], I explored the concept of "management" and the meaning of "concerned, or takes part, in", for the purposes of the statutory definition of "executive officer", as it stood in 1998. The cases to which I referred demonstrate the breadth of these concepts. The same concepts are employed in s 91A, and I infer that they have the same meaning. Therefore orders under s 1317EA(3)(a), to which I shall refer as "disqualification orders", impose a very substantial restriction on the business activities of the person subject to the order. ASIC seeks a disqualification order against each defendant.
14 Subsection 1317EA(4) imposes an important qualification on the court's power to make a disqualification order. It requires the court to consider whether, despite the contravention, the defendant is a "fit and proper person to manage a corporation", and the court is not to make a disqualification order if it is "satisfied" that the defendant is fit and proper for that purpose. Once again, "manage a corporation" has the meaning given by s 91A. Importantly for present purposes, the concept is directed to the question whether the defendant is a fit and proper person to manage "a corporation". The application of the statutory language is difficult, because of the very wide range of activities conducted in corporate form. A corporation may be a private shelf company, a private investment company, a corner grocery business, a charitable body, a cashbox, a mining explorer without any present business revenue, an established middle-sized manufacturing business, the parent entity in a massive international group of businesses, and so on, through infinite possibilities. Which of these kinds of activities are encompassed by the expression "manage a corporation"?
15 In my opinion, the words "manage a corporation" refer to the management of corporations generally, not the particular corporation in respect of which the offence occurred, nor any particular subgroup of corporate business activities. It is directed to the overall suitability of the defendant to continue to engage in business management activities in the corporate sphere, encompassing both listed public corporations and unlisted corporate entities. Consequently, a defendant may be a fit and proper person to manage a corporation although the court has concluded that the defendant:
· is not a fit and proper person to continue to manage the corporation in respect of which contraventions occurred, for reasons limited to that particular corporation and not applicable more widely (for example, reasons to do with a bad personal relationship between the defendant and the chief executive of the corporation);
· is not a fit and proper person to manage any corporations pursuing a particular line of lines of business, for reasons to do with lack of expertise in those businesses.
16 However, in my view a conclusion that a defendant has demonstrated some deficiency or inadequacy with respect to a particular corporation or a particular subset of corporations may be a sufficient reason for the court to be satisfied that the defendant is not a fit and proper person to manage corporations generally. The question will be whether the deficiency or inadequacy relates to the defendant's overall suitability to engage in business management activities in the corporate sphere. For example, a finding that a defendant occupying an executive position persistently failed to inform the board of directors of information that the board needed in order to perform its duties might raise a question about that defendant's appreciation of the function of the board of directors of a corporation or willingness to play his or her part in effective corporate governance. Depending on the circumstances, that may be a sufficient basis for the court to conclude that the person was not a fit and proper person to "manage a corporation", even though the deficiency or inadequacy would be relevant to management of certain kinds of corporations (for example, a private investment company of which the person concerned was both sole shareholder and sole director).
17 In my opinion, a finding of deficiency or inadequacy with respect to the operations of a listed public company, of a kind suggesting failure to appreciate or unwillingness to contribute to aspects of corporate governance that are peculiar to listed companies (for example, the continuous disclosure obligation under companies legislation and listing rules) by also mean that the defendant is not a fit and proper person to "manage a corporation", even though the matter concerned has no relevance except for listed corporations. In such a case, a basis for the conclusion that the defendant is not fit and proper to manage any listed corporation is enough to prevent the court from being satisfied that the defendant is fit and proper to manage corporations generally.
18 ASIC also seeks a pecuniary penalty orders against each of the three defendants under s 1317EA(3)(b). The court is not to make such an order unless it is satisfied that "the contravention is a serious one" (s 1317EA(5)). There is another restriction on the court's power, in s 1317EA(6), but it is not applicable on the facts of the present case.
19 In ASIC v Vizard (2005) 54 ACSR 394 at 401 ([25]), Finkelstein J remarked, in passing, that in the case before him, "penalties must be imposed for the contraventions were in the words of the statute 'serious'". The proposition that if the contravention is serious the court must impose penalties would be inconsistent with other authorities, which indicate that the court has a discretion as to whether a pecuniary penalty order should be made (for example, Re One.Tel Ltd (in liq); ASIC v Rich (2003) 44 ACSR 682). Moreover, as senior counsel for Mr Robertson submitted, the language of s 1317EA(5) of the Corporations Law is expressed in terms of a pre-requisite for the making of the order rather than a duty to make it. Perhaps his Honour's point was that if the contravention is found to be serious, the court's discretionary decision will normally be to make a pecuniary penalty order. I intend to proceed on the basis that under s 1317EA(3)(b), the court has a discretion to make or decline to make a pecuniary penalty order when it is satisfied that the contravention is serious.
20 Thus, s 1317EA presents the following issues for determination:
(1) the proper form of the declarations of contravention;
(2) whether the court is satisfied, in the case of each defendant, that he is a fit and proper person to manage a corporation;
(3) if not, whether, in the exercise of its discretion, the court should make a disqualification order in respect of each defendant, and if so, the period of disqualification;
(4) whether the court is satisfied, in the case of each contravention by each defendant, that the contravention is a serious one;
(5) if so, whether, in the exercise of its discretion, the court should make a pecuniary penalty order against each defendant, and if so, the amount of the pecuniary penalty.
21 ASIC seeks a compensation order against Mr Fox, but not against the other two defendants. The amount sought is $489,069, plus interest from 3 June 1999. I am satisfied, for the reasons given in my August judgment, that Mr Fox has contravened civil penalty provisions in the way that I identified in that judgment. ASIC has applied for civil penalty orders (a disqualification order and a pecuniary penalty order) in relation to those contraventions. Therefore the court's power to make a compensation order under s 1317HA(1) arises if the court is satisfied, in respect of any such contravention, that the corporation in relation to which the contravention was committed has suffered loss or damage as a result of the act or omission constituting the contravention. If so, the subsection gives the court a discretion, whether or not it makes a civil penalty order, to order that compensation be paid, of such amount as the order specifies.
22 Section 1317HA(1) therefore raises the following additional issues:
(6) whether the court is satisfied, in relation to any of Mr Fox's contraventions, that the corporation in relation to which the contravention was committed has suffered loss or damage as a result of be contravening conduct or omission;
(7) if so, whether the court should order Mr Fox to pay compensation to that corporation, and if so, the amount of compensation to be ordered.
23 While it is convenient to set out separately the considerations relevant to ASIC's applications for disqualification orders, pecuniary penalty orders and (in the case of Mr Fox) a compensation order, it is important to bear in mind that decisions concerning an order of one kind have a potential impact on the exercise of the court's discretion with respect to orders of another kind. For example, as will be explained, the making of a disqualification order needs to be taken into account when deciding whether to make a pecuniary penalty order. Effectively, the decisions need to be taken together in the realisation that each kind of order is a factor influencing the discretion to make another order. This is not dissimilar to what Santow J described as the "totality" principle, namely that "where a penalty is being imposed for a number of offences, it is necessary to ensure that the penalties in aggregate are just and appropriate" (Adler at [128] to [134], citing Mill v R (1988) 166 CLR 59 at 63).
The form of the declarations of contravention
24 All of the defendants accepted the court should now make declarations of contravention in respect of its findings. In the case of Mr Vines, acceptance of that proposition was expressed to be subject to any decision by the High Court of Australia in the appeal in ASIC v Forge. The appeal was heard on 7 and 8 February 2006 (see [2006] HCA Trans 22 and 25) and judgment is reserved. In light of the constitutional challenge in that case, senior counsel for Mr Vines formally submitted that the transitional provisions of the Corporations Act 2001 (Cth) are invalid and that any liability Mr Vines may have had under the Corporations Law ceased to exist when the state law was repealed, and no corresponding liability was created under the Commonwealth law. On the present state of the law I reject Mr Vines' formal submission.
25 Senior counsel for Mr Robertson submitted, extending the reasoning in the dissenting judgment of McColl JA in Rich v ASIC (2003) 183 FLR 361 at 426, and citing the decision of Bergin J in One.Tel Ltd (in liq) v Rich (2005) 190 FLR 443 at [35], that a declaration of contravention made under s 1317EA is at least in part intended to operate in a penal manner. I do not find it necessary to decide whether that is so as a matter of law. There is ample evidence before me that the findings of contravention in my August judgment have had a very detrimental effect on each of the defendants. Consequently the making of declarations of contravention confirming those findings will perpetuate that effect. The significance of the point is that the court must consider whether, in addition to declarations, ASIC has made out a case for the other relief that it seeks against the defendants.
26 ASIC's proposed draft declarations conform closely to my summary of contraventions, given in the December judgment with respect to Mr Vines and Mr Robertson (at [82]). Senior counsel for Mr Vines criticised the proposed first declaration, on the ground that it omitted an important aspect of the summary in a manner that significantly distorted the summary. My summary said that Mr Vines had failed to inform the DDC that the achievement of the $80 million profit forecast was improbable, "given the unavailability of the American Re agreement, unless the unders and overs analysis that had been considered at the PwC meeting and the estimate of Hurricane Georges liability made by Mr Fox, were correct". The quoted words are missing from the draft declaration. But the quoted words are a statement of the context in which the contravention occurred rather than a qualification of the contravention. They are explanatory material. If explanatory material were to be included, the orders would come to approximate the length of the August judgment. In my view there is no distortion in ASIC's proposed first declaration.
27 Senior counsel for Mr Vines drew attention to my observations in my December judgment (at [82]), about the danger of attempting to summarise detailed factual findings of the kind made in my August judgment. He submitted that it was not appropriate for the court to make declarations by way of an attempted summary of the contraventions. He relied on Warramunda Village Inc v Pryde (2001) 105 FCR 437 at 440, where the Full Federal Court said that "the remedy of a declaration is not an appropriate way of recording in a summary form conclusions reached by the court in reasons for judgment". Mr Vines' submission was that the preferred form of declaration would simply be that "the First Defendant contravened s 232(4) in the manner set out in the court's reasons for judgment in ASIC v Vines [2005] NSWSC 738". He said that the court's reasons for judgment are freely available and the best and fairest approach is to give the reader of the declaration a reference, in the court's orders, to the document where the full and accurate statement of the contraventions is to be found, rather than adopting a necessarily imperfect summary. In oral submissions, senior counsel for Mr Vines suggested a modification, by which the orders would referred not only to the judgment but also to the paragraphs of the judgment which explain or describe the contravention that has been found to exist.
28 The Warramunda Village case was not a case about declarations of contravention under civil penalty provisions. It was a case about the Federal Court's general power to make binding declarations of rights. The trial judge's declarations did not declare the rights of the parties, but merely resolved a point along the way to ascertaining their rights, giving no determination from which an appeal could be brought. The case has subsequently attracted some controversy (see ACCC v Francis (2004) 142 FCR 1 at [95]-[96]), although as Gray J remarked in the Francis case (at [97]), "it is hard to see that a declaration that a person, by engaging in certain conduct, has contravened a provision of a statute can amount to a declaration of rights". The problem in those cases is quite different from the problem facing the court in the present case.
29 Under the civil penalty provisions of the Corporations Law, when the court is satisfied that a person has contravened a civil penalty provision, it is required by s 1317EA(2) to declare that the person has "by a specified act or omission, contravened the provision in relation to a specified corporation". The subsection requires the declaration to identify the specified act or omission and the specified corporation, and to declare a contravention by the specified act or omission in relation to the specified corporation. A declaration of contravention in the form propounded in Mr Vines' written submissions would not identify any specified act or omission (or even any specified corporation in relation to the contravention, given that there is more than one relevant corporation), and it would not identify a contravention of contraventions by a specified act or omission. A declaration in such a general and uninformative terms might be objectionable per se (see Rural Press Ltd v ACCC (2003) 216 CLR 53 at [89]-[90]), and at least it would fail to comply with the statutory requirement. The modification proposed on behalf of Mr Vines in oral submissions would go too far the other way, because in many cases the paragraphs of my August judgment containing findings of contravention also contain expressions of reasons for my conclusions. What is necessary is for the declaration to set out the matters prescribed by subsection (2), without drifting into an explanation of the reasons for the finding of contravention. That appears to be the practice of this court, as indicated by such recent cases as ASIC v Loiterton (2004) 50 ACSR 693 (where the text of various declarations of contravention, made at an earlier hearing, is set out in the judgment). In my view ASIC's approach to the drafting of the declarations in this case conforms to the court's practice and more importantly, complies generally with the statutory requirement.
30 Senior counsel for Mr Vines criticised ASIC's draft declarations on the ground that a reader of the bed declarations would not be able to assess the importance or lack of importance of the matters to which they refer. But as I understand the requirements of s 1317EA(2), the declarations are not intended to provide a full explanation of the circumstances surrounding the contraventions but merely a statement of the specified acts or omissions constituting the contraventions in relation to the specified corporation. I agree with the submission that, in it cases such as the present one, attempting to specify the ingredients of contravening the acts or omissions in a manner that is succinct, accurate and misleading is a task fraught with difficulty, but that is the task that the legislation requires to be performed.
31 I have reviewed ASIC's draft declarations by reference to my reasons for decision in the August and December judgments. My view is that in the draft is adequate and I am prepared to make declarations in accordance with it, subject to resolving some matters with respect to Mr Robertson, upon which alternative formulations were presented. Senior counsel for ASIC informed me in submissions that ASIC's intention is to remove the footnote references to the judgments from the draft before the orders are made.
32 Senior counsel for Mr Robertson proposed some amendments to ASIC's draft declarations are affecting him. I was handed a marked up version of the draft and counsel for ASIC gave me his comments. I have reviewed the proposed changes and considered those comments. My decisions are:
· the amendments to draft paras 1 and 11 should be made;
· subparas (i)-(iii) of paras 5 and 15 should be made but the final 5 lines of the drafts of those paras should be restored;
· the amendments to paras 6 and 16 should not be made;
· the amendments to paras 10 and 20 should not be made.
33 My reason is that the drafts that I have preferred identify, more clearly and accurately than the alternatives, the specified acts or omissions that constitute the contraventions that I have found against Mr Robertson.
Disqualification orders - principles
34 In Re HIH Insurance; ASIC v Adler (2002) 42 ACSR 80, Santow J (as his Honour then was) reviewed the case law with respect to disqualification orders, observing (at [56]) that the courts had made disqualification orders ranging from life disqualification to three years. He continued ((2002) 42 ACSR 80 at 97-99):
"The propositions that may be derived from these cases include:
(i) Disqualification orders are designed to protect the public from the harmful use of the corporate structure or from use that is contrary to proper commercial standards: ASIC v Hutchings (2001) 38 ACSR 387 at 395; ASIC v Pegasus Leveraged Options Group Pty Ltd [2002] NSWSC 310; ASC v Forem-Freeway Enterprises (1999) 30 ACSR 339 at 349-350; ASC v Donovan (1998) 28 ACSR 583 at 602; ASC v Roussi (1999) 32 ACSR 568 at 570-571; Re Strikers Management Pty Ltd; ASC v Dimitri (Burchett J, Federal Court of Australia, 7 May 1997, unreported);
Re Tasmanian Spastics Association; ASC v Nolan (1996) 23 ACSR 743 at 751.
(ii) The banning order is designed to protect the public by seeking to safeguard the public interest in the transparency and accountability of companies and an the suitability of directors to hold office: ASC v Roussi (supra) at 570; Re Gold Coast Holdings Pty Ltd; ASIC v Papatto (2000) 35 ACSR 107 at 112.
(iii) Protection of the public also envisages protection of individuals that deal with companies, including consumers, creditors, shareholders and investors: ASC v Roussi at 570; Re Gold Coast Holdings Pty Ltd (supra) at 112; Re Tasmanian Spastics Association (supra) at 751.
(iv) The banning order is protective against present and future misuse of the corporate structure: ASC v Donovan (supra) at 603.
(v) The order has a motive of personal deterrence, though it is not punitive: Re Magna Alloys & Research Pty Ltd (1975) ? ACLR 203 at 205; ASIC v Pegasus Leverage Options Group Pty Ltd (supra); ASC v Donovan at 607; Re Tasmanian Spastics Association at 751.
(vi) The objects of general deterrence are also sought to be achieved: ASC v Donovan at 602.
(vii) In assessing the fitness of an individual to manage a company, it is necessary that they have an understanding of the proper role of the company director and the duty of due diligence that is owed to the company: ASC v Donovan at 607.
(viii) Longer periods of disqualification are reserved for cases where contraventions have been of a serious nature such as those involving dishonesty: ASC v Donovan at 605-607.
(ix) In assessing an appropriate length of prohibition, consideration has been given to the degree of seriousness of the contraventions, the propensity that the defendant may engage in similar conduct in the future and the likely harm that may be caused to the public: ASIC v Pegasus Leveraged Options Group Pty Ltd ; ASIC v Parkes (2001) 38 ACSR 355 at 386; ASC v Forem-Freeway Enterprises ; ASC v Roussi at 570-571.
(x) It is necessary to balance the personal hardship to the defendant against the public interest and the need for protection of the public from any repeat of the conduct: ASC v Donovan at 607; ASIC v Parkes (supra) at 386.
(xi) A mitigating factor in considering a period of disqualification is the likelihood of the defendant reforming: ASC v Forem-Freeway Enterprises at 351.
(xii) The eight criteria to govern the exercise of the court's powers of disqualification set out in Commissioner for Corporate Affairs v Ekamper (1987) 12 ACLR 519 have been influential. It was held that in making such an order it is necessary to assess:
· Character of the offenders;
· Nature of the breaches;
· Structure of the companies and the nature of their business;
· Interests of shareholders, creditors and employees;
· Risk to others from the continuation of offenders as company directors;
· Honesty and competence of offenders;
· Hardship to offenders and their personal and commercial interests; and
· Offenders' appreciation that future breaches could result in future proceedings;
ASC v Roussi at 570-571; Re Gold Coast Holdings Pty Ltd at 111.
(xiii) Factors which led to the imposition of the longest periods of disqualification (that is disqualifications of 25 years or more) were:
· Large financial losses;
· High propensity that defendants may engage in similar activities or conduct;
· Activities undertaken in fields in which there was potential to do great financial damage such as in management and financial consultancy;
· Lack of contrition or remorse;
· Disregard for law and compliance with corporate regulations;
· Dishonesty and intent to defraud; and
· Previous convictions and contraventions for similar activities;
ASIC v Hutchings ; ASIC v Pegasus Leveraged Options Group Pty Ltd ; ASIC v Parkes .
(xiv) In cases in which the period of disqualification ranged from 7 years to 12 years, the factors evident and which led to the conclusion that these cases were serious though not 'worst cases', included:
· Serious incompetence and irresponsibility;
· Substantial loss;
· Defendants had engaged in deliberate courses of conduct to enrich themselves at others' expense, but with lesser degrees of dishonesty;
· Continued, knowing and wilful contraventions of the law and disregard for legal obligations; and
· Lack of contrition or acceptance of responsibility, but as against that, the prospect that the individual may reform;
ASC v Forem-Freeway Enterprises ; ASC v Donovan ; ASC v Roussi ; Re Strikers Management Pty Ltd ; Re Gold Coast Holdings Pty Ltd . The difficulty with Roussi's case is that disqualification for 10 years was ordered, as this was the period of disqualification that the ASC had sought. Had a longer period been applied for, Einfeld J may have considered giving a longer period: ASC v Roussi at 571.
(xv) The factors leading to the shortest disqualifications, that is disqualifications for up to 3 years, were:
· Although the defendants had personally gained from the conduct, they had endeavoured to repay or partially repay the amount misappropriated;
· The defendants had no immediate or discernible future intention to hold a position as manager of a company; and
· In Donovan's case, the respondent had expressed remorse and contrition, acted on advice of professionals and had not contested the proceedings;
ASC v Donovan ; Re Tasmanian Spastics Association ."
35 Santow J's 15 propositions must now be reconsidered in light of Rich v ASIC (2004) 220 CLR 129. The High Court's decision, that proceedings in which an application is made for a disqualification order are proceedings for the imposition of a penalty, for the purposes of the privilege against exposure to a penalty, has very little effect on the propositions. It directly affects only proposition (v), to the extent that a disqualification order should now be regarded as involving the imposition of a penalty.
36 The majority judges in the High Court did not directly consider the principles to be applied by the court when considering whether to make a disqualification order, and if so, the period of disqualification. However, McHugh J considered that topic at some length. His general thesis, expounded at [41], was that although judges frequently said that the purpose of the disqualification provisions is protective, what they did in practice was little different from what judges do in determining what orders or penalty should be made for offences against the criminal law.
37 His Honour enumerated some factors that the courts take into account, in what he referred to as a "synthesis from which the judges make a value judgment concerning whether to order disqualification and, if so, the period of disqualification that should be imposed" (at [43]):
· whether the defendant now is or in future will be a fit and proper person to manage corporations;
· the size of any losses suffered by the corporation, its creditors and consumers;
· legislative objectives of personal and general deterrence;
· contrition on the part of the defendant;
· the gravity of the misconduct;
· the defendant's previous good character;
· prejudice to the defendant's business interests;
· personal hardship; and
· the willingness of the defendant to render assistance to statutory authorities and administrators.
38 He referred to Santow J's 15 propositions with approval, and set them out (at [49]). He remarked (at [50]) that some of the propositions go to the protection of the public, while others relate to considerations that reduce the period of disqualification and therefore benefit the defendant, and still others (such as propositions (v) and (vi)) recognise that the disqualification provisions also have objectives of personal and general deterrence, strongly resembling sentencing principles under the criminal law.
39 He found in Santow J's list of propositions (and also in the comments of the Victorian Court of Appeal in Plymin v ASIC (2004) 10 VR 369) "indications that the factors taken into account in the criminal jurisdiction - retribution, deterrence, reformation, contrition and the protection of the public - are also central to determining whether an order for disqualification should be made under the Corporations Act and, if so, the appropriate period of disqualification", concluding that the jurisdiction cannot properly be characterised as "purely protective" (at [52]). He drew attention to the special importance of retribution, which, he said, is "as much a factor as protection of the public". This was indicated, according to his Honour, by decisions to the effect that the larger the loss, the longer the period of disqualification that is justified; and decisions placing emphasis on personal benefits obtained by the defendants from their wrongdoing (at [56] to [57]).
40 In his written submissions, senior counsel for Mr Vines sought to distinguish the observations of McHugh J about retribution, on the ground that his Honour was speaking of a later version of the disqualification power, in s 206C of the Corporations Law. The submission was that the earlier jurisdiction to disqualify a person from managing a corporation was purely protective, without any punitive dimension, because the court was prohibited from making a disqualification order if it was satisfied that the defendant was a fit and proper person to manage a corporation (citing Re Tasmanian Spastics Association (1997) 23 ACSR 743 at 751, per Merkel J; and ASC v Donovan (1998) 28 ACSR 583 at 602, per Cooper J). In my opinion, while McHugh J's judgment referred to a later version of the disqualification power, the difference in the statutory provisions does not serve to distinguish his Honour's reasoning. The opinion of the majority judges in the High Court, including McHugh J, was that a disqualification order is necessarily punitive, for the purposes of the privilege against exposure to a penalty. That reasoning applies equally to the civil penalty provisions in force in 1998 and the amended provisions that came into force in March 2000. As McHugh J pointed out (at [42]), in a purely protective regime the only issue for the court would be whether the defendant was or would in future be a fit and proper person to manage corporations. But s 1317EA(4) does not make the defendant's suitability the sole criterion.
41 Retribution, as a factor influencing the exercise of the court's discretion with respect to an application for a disqualification order, was considered by Finkelstein J in ASIC v Vizard (2005) 54 ACSR 394. He said (at [33]):
"While retribution is important as a stamp of society's disapproval of particular conduct, the governing principle of 'sentencing' in cases of the kind with which we are concerned is general deterrence. The sentence must be exemplary and sufficient so that members of the business community are put on notice if they break the trust which has been reposed in them they will receive a proper punishment."
42 Later he added (at [40]):
"Formal retribution is a necessary element in imposing a proper punishment because it ensures the punishment is just and appropriate to the circumstances. Formal retribution takes into account the moral culpability of the offender, having regard to his motive for wrongdoing, his intentional risk-taking, the harm (if any) that has been caused by the offence, and the standard the offender's behaviour."
43 ASIC referred in submissions to other cases decided after Santow J's decision in Adler, on the ground that while other decisions as to penalties should not be applied by factual analogy, they may be used as a guide (Adler at [70]). I have considered those cases: Re One.Tel Ltd (in liq); ASIC v Rich (2003] 44 ACSR 682 (with respect to Mr Keeling); ASIC v Loiterton (2004) 50 ACSR 693; ASIC v Vizard (supra) and ASIC v Rich (2004) 50 ACSR 500 (with respect to Mr Greaves). I have not found them to be of any direct assistance, because of differences in the factual circumstances and the nature of the contraventions.
44 Plymin v ASIC (2004) 10 VR 369 provides some useful guidance at the level of principle. There the trial judge held that the managing director, who had contravened the insolvent trading provisions of the Corporations Law, should be disqualified for 10 years. He found that the defendant was not a fit and proper person to manage a corporation, and said that the protection of the public is the paramount objective. The Court of Appeal reduced the period of disqualification to 7 years. Their Honours acknowledged (at [145]) that deterrence, specific and general, and protection of the public are strong factors to be taken into account. But they decided to reduce the disqualification period having regard to some "mitigating factors" (such as the managing director's unblemished record, his remorse, the assistance he had rendered to the administrators, and the prospect of rehabilitation. It was also relevant that a number of the factors listed by Santow J in his proposition (xiv), for disqualifications ranging from 7 to 12 years, were not present. Additionally, they were influenced by the discrepancy between the disqualification period for the managing director and the periods fixed for other defendants.
45 The last point has particular resonance here. There must be a persuasive rationale for any differences in the disqualification periods for each of the defendants. This reflects the sentencing principle of parity in the criminal law, according to which there should not be a marked disparity between sentences imposed on co-offenders such as would give rise to a justifiable sense of grievance: Postiglione v The Queen (1997) 189 CLR 295; see Adler at [131].
46 Senior counsel for Mr Vines submitted that some guidance could be obtained by considering Santow J's findings in respect of Mr Fodera. I have considered that submission and his Honour's judgment. The facts are so different that I do not find the decision and reasoning in relation to Mr Fodera to have any useful application to the present case, except for the indication (at [174]) that it is relevant, taking into account the protective purpose of the disqualification provisions, to consider whether it is likely that the defendant will in future fail to appreciate the importance of the matter in respect of which contraventions have occurred.
Pecuniary penalty orders - principles
47 In the Adler case, Santow J reviewed earlier decisions dealing with the discretion to impose a pecuniary penalty, summarising the relevant principles as follows (at [126]):
"(i) the pecuniary penalty has a punitive character, but it is principally a personal and general deterrent to prevent the corporate structure from being used in a manner contrary to commercial standards. The penalty should be no greater than is necessary to achieve this object: ASC v Donovan at 608;
(ii) to determine whether compensation is to be paid and in what amount it is necessary to consider the prospect of the respondent paying such compensation and the hardship to the defendant from such payment. Compensation has been ordered for an amount less than that lost even though there was little prospect of any of it being recovered: ASC v Forem-Freeway at 351;
(iii) the capacity of the defendant to pay is a relevant consideration in determining a pecuniary penalty: ASC v Forem-Freeway at 351-2;
(iv) in assessing a pecuniary penalty it is important to consider the consequences of an associated disqualification order for the defendant. If the making of such an order has significant consequences, they may operate as a factor in favour of a lesser penalty. Where the disqualification order does not have significant consequences for the defendant, the prohibition order is likely to be only marginally relevant: Re Tasmanian Spastics Association at 751-2;
(v) it is important to assess whether the order will prejudice the rehabilitation of the defendant: ASC v Forem-Freeway at 352;
(vi) the size of the penalty is a question of discretion. The circumstances of one case should not dictate the size of the penalty in another case: ASC v Donovan at 608;
(vii) in ASC v Forem-Freeway civil compensation of $200,000 was ordered. This amount was lower than the losses to the company concerned. This amount was ordered, even though it was highly unlikely that the amount would ever be paid as the respondent was bankrupt. In this case it was held that precision in the amount was therefore unnecessary: ASC v Forem-Freeway at 351;
(viii) a fine was not ordered in ASC v Forem-Freeway . However the ASC was given the liberty to apply at a later stage in relation to this matter. The court held that the personal hardship to the respondent, the unintended punitive consequences of the other orders and the lack of capacity to pay, justified such order: ASC v Forem-Freeway at 351-2;
(ix) factors leading to the order of a penalty in the range of $20,000-$40,000 included:
· the defendant was aware of impropriety of actions;
· no intention to deprive company permanently of funds;
· amount in question is not large;
· no deliberate falsification of accounts;
· case classified as being serious misconduct, but not worst case;
Re Tasmanian Spastic Association at 752; ASC v Donovan at 609;
(x) relevant factors leading the court to order the lower range penalties in the range of $4,000-$5,000 included:
· remorse and contrition shown;
· efforts to repay misappropriated funds;
· acted upon the advice of professionals;
· did not contest the proceedings, sought to save costs in proceedings;
· tended not to involve dishonesty, but negligence or carelessness;
· previously unblemished character;
· further contraventions unlikely;
ASC v Donovan at 609; ASC v Spencer (1997) 25 ACSR 143 at 144-5."
48 There are some indications in the case law that pecuniary penalty orders are to be resorted to only if the court concludes that a disqualification order will not do justice. In Rich v ASIC, at [45], McHugh J quoted extensively from the first draft of the Corporate Law Reform Bill 1992 (Cth), in which it was said (at para 178):
"It is expected that the courts would consider imposing a pecuniary penalty only if it [sic] considered that a civil penalty disqualification provided an inadequate or inappropriate remedy."
49 Senior counsel for Mr Robertson cited some observations of Spigelman CJ in Rich v ASIC (2004) 183 FLR 361 at 382 (reversed: Rich v ASIC (2004) 220 CLR 129), where his Honour also referred to the explanatory paper, and observed that "the imposition of a pecuniary penalty was higher in the pyramid of sanctions than an order prohibiting a person from managing a corporation". He said that hierarchy was made clear by s 1317EA(5), which permits the court to impose a pecuniary penalty only if it is satisfied that the contravention is serious. There is no similar requirement in relation to disqualification orders.
50 Counsel for ASIC contended that the pyramid of enforcement was eroded by High Court's decision in Rich, which meant that disqualification orders were not purely protective and both disqualification orders and pecuniary penalty orders are now available for deterrence and retribution.
51 I agree with ASIC's submission, in this sense. If there is a pyramid or hierarchy, it yields where there is a good reason for the court to make a pecuniary penalty order as well as a disqualification order. The explanatory paper contemplated, in the passage quoted by McHugh J in the High Court, that in appropriate circumstances the court might choose to impose both a civil penalty disqualification and a pecuniary penalty in relation to one contravention. Such orders have been made: for example, in ASC v Donovan (1998) 28 ACSR 583 a disqualification order and a pecuniary penalty order were made against each respondent.
52 The approach to be taken by the court in fixing the amount of a pecuniary penalty, once a decision has been reached to impose a penalty, was explained by Santow J in the Adler case, at [127]-[132], [140]. It is appropriate to impose a single penalty against a defendant for all of that defendant's contraventions, but if the penalty is being imposed for a number of contraventions, it is necessary to ensure that the aggregate amount is just and appropriate. Care must be taken to bring into account the differences in conduct which are the subjects of the various findings of contravention, and to avoid artificial claims of disparity between co-contraveners. Santow J said he sought to apply the totality principle in a way that would act as a personal and general deterrent without being oppressive, bringing to bear what the High Court has referred to in sentencing as an "instinctive synthesis" of relevant factors (citing Wong v R (2001) 185 ALR 233 at 252). Inevitably a degree of artificiality is involved in allocating the aggregate amount to the individual contraventions.
ASIC's allegations of dishonesty and impropriety, and adverse publicity
53 It is appropriate to deal separately with this matter, because similar submissions were received from Mr Vines and Mr Robertson and it is necessary to make some findings of fact for the purpose of assessing the submissions.
54 When this proceeding began, ASIC was alleging, in addition to its claim that the defendants failed to exercise reasonable care and diligence (s 232(4)), that they made improper use of their positions in relation to the profit forecasts, and that Mr Vines and Mr Fox made improper use of their positions in relation to the American Re reinsurance contract (s 232(6)). In September 2001 ASIC amended its pleadings to include allegations that the defendants also acted dishonestly in relation to these matters (s 232(2)). The pleadings were amended again in October 2003, with the effect of abandoning the allegations of improper use of position and dishonesty, except for the allegation of dishonesty against Mr Fox.
55 Both Mr Vines and Mr Robertson made submissions referring to ASIC's initial announcement that it had commenced the proceeding. They emphasised the degree of adverse publicity their clients received at that time - in particular, adverse publicity arising out of the allegation of improper use of position. They pointed out that until 10 March 2006, ASIC's initial announcement remained on its website and no announcement was made that ASIC had withdrawn its allegations of dishonesty and propriety against them in October 2003.
56 The initial announcement was made by Media Release 01/217 on 20 June 2001. The announcement said ASIC was alleging that the respondents (identified as the three defendants) improperly used their positions and failed to exercise the duties of care and diligence required by the Corporations Law, when preparing forecasts and other relevant information for consideration by the board and the DDC. The announcement recorded ASIC's allegation that as a consequence of their failure properly to discharge their duties, information was released to shareholders that was seriously defective and misleading. It said ASIC also alleged that Mr Vines and Mr Fox made improper use of their positions as directors of GIO Insurance in respect of (in effect) the American Re agreement.
57 ASIC's announcement was widely reported in the media. The media reports conveyed the idea that there were charges of improper use of position against all defendants.
58 For example, on 21 June The Australian Financial Review referred to "improper conduct by the executives directly involved". On the same day The Sydney Morning Herald referred to ASIC's allegations that "these men" (naming the three defendants) improperly used their positions and failed to exercise the duties of care and diligence required by the Corporations Law when preparing forecasts and other relevant information for consideration by the board and due diligence committee. On the same day, a columnist in The Australian referred to ASIC's allegation, said to be that the "the trio" (who were named) improperly used their positions and failed to discharge their duty of care and diligence when preparing forecasts and other relevant information for consideration by the board and due diligence committee.
59 An article in a publication called "CFO" on 1 August 2001 grouped ASIC's complaints against the defendants with other corporate calamities, some of which had involved allegations of fraudulent conduct. Similar associations were made in an article in The Australian on 7 September 2001, headed "Knott's A-list is one to avoid". In a long article in The Weekend Australian on 4 January 2003 ("Headhunter - Inside David Knott's Trophy Cabinet") the present proceeding was noted in conjunction with discussion of cases involving allegations of insider trading and other criminal activity, with no indication of the nature of the allegations against the present defendants except that they were for breach of duty. It seems to me that if the allegations against Mr Vines and Mr Robertson were confined to failure to exercise reasonable care and diligence, with no allegation against them of dishonesty or impropriety, some differentiation would have been needed between their position and the position of others against whom charges of fraud or dishonesty had been made.
60 In some of the media coverage, an suggestion was implied that according to ASIC's case, the defendants' breaches of duty may have resulted in the reinsurance division reporting a loss for the year ended 30 June 1999 of $759 million. For example, in a program broadcast on the ABC's PM program on 20 June 2001, the presenter said the GIO urged shareholders to resist the takeover bid by the AMP, backing it up with strong profit forecasts; then asserted that by August 1999 GIO's reinsurance losses had blown out to a "shocking" $759 million; and then referred to ASIC's allegation that the three defendants played a key role in preparing the profit forecasts.
61 There were further newspaper articles during the period up to commencement of the hearing, during the hearing, and after publication of my August judgment. But none of them adverted to the fact that the pleadings had been amended to limit the case against Mr Vines and Mr Robertson to a case of breach of duty of care.
62 At the hearing on 15 and 16 December 2005 of the applications by Mr Vines and Mr Robertson for relief under ss 1317JA and 1318, senior counsel for those defendants drew attention to ASIC's website, which at that time still contained the initial announcement without any correction to say that the allegations of improper use of position were withdrawn in October 2003. That meant, as Mr Vines pointed out in his affidavit of 24 February 2006, that anyone using the "google" facility on a computer to search his name would identify the initial media release as well as a number of other reports on the initial allegations in the case. He said the "google" facility is a very public medium used extensively by companies as a source of reference for dealing with new business associates of a considering new applicants for work.
63 No adequate explanation has been given to the defendants or the court as to why ASIC brought claims based on allegations of impropriety and dishonesty and then abandoned them after two years. In their submissions Mr Vines and Mr Robertson emphasised the gravity of those charges and the scope of damage to their reputations, as well as the personal and professional distress to them involved in making and publicising the allegations.
64 Mr Vines' submissions cited Bishopsgate Insurance Australia Ltd (in liq) v Deloitte Haskins & Sells [1999] 3 VR 863 at 867, where the Full Court of the Supreme Court of Victoria observed that if a claim is made against individuals in relation to their probity or competence, it is not hard to infer that the defendants are under a heavy burden, and added:
"But where a claim extends beyond mere casual negligence to acts which reflect upon the competence or probity of a defendant, especially when that competence or probity is critical to the defendant's future livelihood, then the delay in bringing an action on for hearing will probably be held to impose severe additional prejudice on a defendant."
65 Mr Vines' submissions also referred to Eva v Southern Motors Box Hill Pty Ltd (1977) 30 FLR 213 at 222-3, where Smithers J said that in assessing appropriate punishment for a crime, the court is required to take into account a variety of associated circumstances including adverse publicity. He said:
"Adverse publicity is often one of the inevitable consequences of wrongdoing and in most cases is without influence in the assessment of the appropriate penalty.
"But adverse publicity initiated by the prosecuting authority itself requires special consideration. If the matter is publicised ahead of the trial, and widely, and in terms likely to induce public censure of the parties concerned and those parties are in day-to-day business relationships with the public, then there is obvious danger of injury to the lawful business of the parties which from a practical point of view may have the effect of effectuating a cumulative punishment …. In such a case an element has been injected into the situation which subjects the parties to more than the natural and probable consequences of mere publication of the fact that they are being prosecuted for named offences. In my view this is a case in which, by reason of the press release of the prosecuting authority, the danger of cumulative punishment along these lines is real and should be treated as part of the background against which the penalty should be assessed."
66 In my December judgment (at [118]-[119]) I found that the publicity with respect to allegations of impropriety that were later withdrawn was a factor relevant to the exercise of my discretion whether to grant relief under the "honesty defence", but I found that it was not a weighty matter on that issue. I expressed the view that if ASIC commences a proceeding for dishonesty or impropriety as well as negligence, and announces to the world that it has done so, and later withdraws the allegations of dishonesty and propriety, it should take scrupulous care to make a further announcement countermanding the previous one. But I decided that the primary remedy was for ASIC to correct the public record rather than for the court to use what was essentially a collateral matter as a ground for granting relief from liability for the contraventions.
67 On 10 March 2006, more than 2 1/2 months after publication of my December judgment containing these observations, ASIC published media release 06-072 on its website. The new announcement referred to and summarised the initial announcement, and then summarised the amendments to the pleadings made in September 2001 and October 2003, though without any explanation of the reasons for the amendments. The announcement noted that the court had found that the defendants breached the duty to act with reasonable care and diligence on certain occasions and that Mr Fox had breached his duty to act honestly, and that the court had subsequently rejected applications by Mr Vines and Mr Robertson for relief from liability, and would be conducting a hearing on penalties later that month.
68 I regard the announcement of 10 March 2006 as adequate to countermand the impression created by the earlier media release, but there is still no adequate explanation for the fact that ASIC did not make such an announcement in October 2003, or least well before March 2006. The observations of the courts in the Bishopsgate Insurance and Southern Motors cases need to be borne in mind by ASIC when it makes media releases of the kind made in this case in June 2001. Importantly for present purposes, a consequence is that Mr Vines and Mr Robertson have suffered avoidable prejudice over a substantial period of time, which is to be taken into account by the court in exercising its discretions with respect to disqualification orders and pecuniary penalties.
Mr Vines