Australian Securities and Investments Commission v Warrenmang Limited

Federal Court of Australia|2007-06-29|Before: Gordon J

INTRODUCTION 1 By an amended originating process dated 21 December 2006, the Australian Securities and Investments Commission ("ASIC") sought declarations against the Second Defendant ("Mr Pritchard"), in relation to Warrenmang Limited (in liq) ("Warrenmang"), a company of which he was a director. 2 In support of the application, ASIC relied upon the following affidavits: (1) an affidavit of Gregory Chi Fung Fok, a senior investigator with ASIC, sworn on 17 November 2006; (2) an affidavit of Georgina Knight, a financial investigator with ASIC, sworn on 17 November 2006; (3) an affidavit of Colin McIntosh Nicol, the liquidator of Warrenmang, sworn on 12 December 2006; (4) a further affidavit of Colin McIntosh Nicol sworn on 14 December 2006; (5) a second affidavit of Georgina Knight sworn on 9 February 2007; and (6) a third affidavit of Georgina Knight sworn on 14 June 2007. 3 Mr Pritchard appeared at the hearing and was represented by Mr Horgan of Counsel, who acted and appeared pro bono. 4 These reasons are structured as follows: (1) An outline of the facts which were said by ASIC to form the basis of the application for declaratory relief; (2) The relevant provisions of the Corporations Act; (3) The power of the Court to grant such declarations; (4) The form and content of the declarations. (As will become apparent later in these reasons, although I am satisfied that Mr Pritchard, by specific and identified conduct as a director of Warrenmang, contravened ss 180, 181 and 182 of the Corporations Act, I amended the form and content of the declarations sought by ASIC to ensure that the conduct the subject of the declarations was sufficiently described.)

(2) CORPORATIONS ACT 16 ASIC alleged that Mr Pritchard breached his duties as a director of Warrenmang - ss 180, 181 and 182 of the Corporations Act - in that: (a) between January and May 2004, Robert Graeme Pritchard caused Warrenmang to contravene s 722 of the Corporations Act by dealing with application money paid by persons for shares in Warrenmang other than by refunding that money to those persons, in circumstances where shares in Warrenmang had not been (and were not subsequently) issued to those persons; (b) in May 2004, Robert Graeme Pritchard caused Warrenmang to contravene s 723 of the Corporations Act by failing to refund application money paid to Warrenmang by persons for shares in that company, in circumstance where such shares had not been (and were not subsequently) issued to those persons; and/or (c) in or about January 2004, Robert Graeme Pritchard used part of the money referred to in (a) for his own personal benefit, and in particular used approximately $290,000 towards the purchase of a private residence. 17 Sections 722 and 723 are in Division 5 of Chapter 6D of the Corporations Act and are concerned with fund raising. I have set out the relevant provisions earlier. 18 Sections 180, 181 and 182 in Division 1 of Part 2D.1 of the Corporations Act are concerned with the general statutory duties of directors. Section 180(1) of the Corporations Act entitled "Care and diligence - civil obligation only" provides: "A director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they: (a) were a director or officer of a corporation in the corporation's circumstances; and (b) occupied the office held by, and had the same responsibilities within the corporation as, the director or officer." 19 Section 181 of the Corporations Act entitled "Good faith - civil obligations" provides: "(1) A director or other officer of a corporation must exercise their powers and discharge their duties: (a) in good faith in the best interests of the corporation; and (b) for a proper purpose. (2) A person who is involved in a contravention of subsection (1) contravenes this subsection." 20 Finally, s 182 of the Corporations Act entitled "Use of Position - civil obligations" provides: "(1) A director, secretary, other officer or employee of a corporation must not improperly use their position to: (a) gain an advantage for themselves or someone else; or (b) cause detriment to the corporation. (2) A person who is involved in a contravention of subsection (1) contravenes this subsection." 21 Before proceeding to deal with ss 180, 181 and 182 of the Corporations Act separately, a number of principles applicable to each of these sections need to be stated. 22 The statutory duties imposed by ss 180, 181 and 182 of the Corporations Act reflect and, to some extent, refine the obligations of the directors at general law: Australian Securities and Investments Commission v Maxwell (2006) 59 ACSR 373 at [99]. Each is a duty owed by a director to the corporation. However, directors' duties provisions are not concerned with any general obligation owed by directors to conduct the affairs of the company in accordance with the law generally or the Corporations Act. Moreover, the directors' duties provisions do not necessarily make a director liable for a breach by the company of another provision in the Corporations Act. The corollary is that it cannot be said that every breach by a company of the Corporations Act necessarily gives rise to a breach of the directors' duties provisions. 23 That last proposition or principle (that not every breach by a company of the Corporations Act necessarily gives rise to a breach of the directors' duties provisions) is self evident. It is reinforced by the fact that, under s 180(1) of the Corporations Act, the circumstances of the particular company are relevant to the content of the duty of a director to exercise reasonable care and diligence. The circumstances may include, but are not limited to, the type of company, the size and nature of the company's business, the director's position and responsibilities within the company, the particular functions the director is performing, the manner in which responsibility for the business of the company is distributed and, of course, the circumstances of the case: Maxwell at [100] and the authorities referred to. 24 The need to consider the circumstances of a particular company in defining the content of the duty of a director to exercise reasonable care and diligence is demonstrated in the case of Mr Pritchard. The circumstances of Warrenmang are outlined in paras [5] to [15] above. There was an "identity of interest between the directors and the shareholders, so that in effect the directors [were] the shareholders": Maxwell [103]. Ordinarily that fact may make the requirement to prevent self-interested dealing much less acute: Maxwell at [103]. In the case of Warrenmang, the identity of interest between the directors and the shareholders in fact meant the requirement to prevent self-interested dealing was acute because of the following circumstances. (1) Warrenmang was registered as an unlisted public company on 1 September 2003 with Mr Pritchard holding approximately 20 million of the 20.82 issued shares; (2) although at the time of its incorporation, three directors were appointed, Mr Pritchard was at all times the person in charge of Warrenmang's day to day activities including maintenance of its financial records and was its controlling mind; (3) on 5 December 2003 and again 10 March 2004, Warrenmang sought to raise funds from the public through the sale shares in Warrenmang and in response to the IPO and the Supplementary Prospectus did in fact raise substantial funds from hundreds of subscribers; and (4) the subscription monies were received by Warrenmang and deposited into the Warrenmang Accounts to which Mr Pritchard was the sole signatory. 25 Those circumstances impacted considerably on the content of the duty to exercise reasonable care and diligence that Mr Pritchard owed to Warrenmang. This is one of those cases where it was a contravention of the duty owed by the director to the company for the director to authorise or permit the company to contravene the Corporations Act. Mr Pritchard was the controlling mind of the company. He alone controlled its day to day activities. He alone decided what steps were and were not taken by Warrenmang. The steps he failed to take as a director of Warrenmang were: (1) to ensure that Warrenmang kept the subscription monies separately in accordance with s 722 of the Corporations Act; and (2) to ensure that Warrenmang returned the subscription monies received from subscribers as soon as practicable in accordance with ss 722(2) and 723(3)(d) of the Corporations Act. 26 One further step he took as director of Warrenmang in relation to the subscription monies was simply wrong - he as sole signatory to the Warrenmang Accounts permitted or authorised Warrenmang to pay $300,000 of the subscription monies to him for his own personal benefit - to assist with the purchase of a family home. That conduct is inexcusable. In my view, the conduct was deliberate and he knew that it was not in the interests of Warrenmang. The declaration sought by ASIC referred to an alleged payment of $290,000 from Warrenmang to Mr Pritchard. As para 15(7) above demonstrates the payment was in fact $300,000. 27 As a result of each of those matters, Mr Pritchard exposed Warrenmang to offences for contraventions of ss 722 and 723 of the Corporations Act for which there was no countervailing potential benefit to Warrenmang: Maxwell at [104]. To adopt the words of Brereton J in Maxwell at [105], Mr Pritchard's contravention of s 180(1) of the Corporations Act is founded on jeopardy to the interests of Warrenmang and, in the circumstances of the case, also on jeopardy to the interests of investors as potential creditors. 28 On no view it could be said that conduct summarised in paragraph [26] above satisfied the requirement under s 181 of the Corporations Act for Mr Pritchard as director of Warrenmang to exercise his powers and discharge his duties in good faith in the best interests of Warrenmang and for a proper purpose. He clearly did not. Mr Pritchard abused his power, he permitted his personal interests and those of Warrenmang to be placed in conflict and he misappropriated a portion of trust monies (the subscription monies) for himself. Contrary to s 181(1) and the duty imposed by s 182, Mr Pritchard abused his position for his own advantage to the detriment of Warrenmang: Maxwell at [106] to [110]. 29 The foregoing analysis does not suggest and is not to be taken as suggesting that every breach by a company of the Corporations Act necessarily gives rise to a breach of the directors' duties provisions. It does not.

(3) POWER OF THE COURT TO GRANT DECLARATIONS 30 ASIC submitted that the Court had two sources of power to grant the declarations: s 1317E of the Corporations Act and ss 21 to 23 of the Federal Court of Australia Act 1976 (Cth)("the Federal Court Act"). 31 Section 1317E of the Corporations Act is in Part 9.4B of the Corporations Act entitled "Civil consequences of contravening civil penalty provisions". Section 1317E expressly provides that a Court must make a declaration if the Court is satisfied that a person has contravened one or more of specified provisions of the Corporations Act. These provisions are defined in s 1317E as "civil penalty provisions". For present purposes, it is relevant to note that ss 180(1), 181(1), 181(2), 182(1) and 182(2) are listed as civil penalty provisions. Sections 722 and 723 of the Corporations Act are not. 32 ASIC may apply for such a declaration: s 1317J. Section 1317E(2) prescribes what a declaration under s 1317E(1) must specify, namely: "(a) the Court that made the declaration; (b) the civil penalty provision that was contravened; (c) the person who contravened the provision; (d) the conduct that constituted the contravention; (e) if the contravention is of a corporation / scheme civil penalty provision - the corporation or registered scheme to which the conduct related." Section 1317F provides that a declaration of contravention is conclusive evidence of the matters referred to in s 1317E(2): Re One.Tel Ltd (in liq); Australian Securities and Investments Commission v Rich (2003) 21 ACLC 672. As a result, the court must specify the conduct that constituted the contravention with sufficient particularity to enable the declaration of contravention not only to stand on its own but to meet the statutory requirements and purpose of s 1317E. 33 Other sections provide for the making of pecuniary penalty orders (s 1317G) and provide that the Court must apply the rules of evidence and procedure for civil matters (s 1317L). 34 The intersection between the civil and criminal process is addressed in ss 1317M, 1317N and 1317P. The intersection is not easy. In the present case, it is further complicated by the timing of ASIC's application for declaration of contravention. Section 1317M deals with civil proceedings after criminal proceedings and provides that: "A court must not make a declaration of contravention or a pecuniary penalty order against a person for a contravention if the person has been convicted of an offence constituted by conduct that is substantially the same as the conduct constituting the contravention." (Emphasis Added) 35 Section 1317N deals with criminal proceedings during civil proceedings and provides: "(1) Proceedings for a declaration of contravention or pecuniary penalty order against a person are stayed if: (a) criminal proceedings are started or have already been started against the person for an offence; and (b) the offence is constituted by conduct that is substantially the same as the conduct alleged to constitute the contravention. (2) The proceedings for the declaration or order may be resumed if the person is not convicted of the offence. Otherwise, the proceedings for the declaration or order are dismissed." This provision is significant. It provides that proceedings for a declaration of contravention or pecuniary penalty order are stayed if criminal proceedings are on foot at the same time in relation to conduct that is substantially the same as the conduct alleged to constitute the contravention. In this provision, no distinction is drawn between proceedings for a declaration of contravention and proceedings for a pecuniary penalty order. 36 Section 1317P then deals with criminal proceedings after civil proceedings. It provides: "(1) Subject to subsection (2), criminal proceedings may be started against a person for conduct that is substantially the same as conduct constituting a contravention of a civil penalty provision regardless of whether: (a) a declaration of contravention has been made against the person; or (b) a pecuniary penalty order has been made against the person; or (c) a compensation order has been made against the person; or (d) the person has been disqualified from managing a corporation under Part 2D.6; or (e) an order has been made against the person by ASIC under section 920A (banning orders) or by the Court under section 921A (disqualification by Court)." 37 Section 1317P expressly provides that criminal proceedings may be started against a person for conduct that is substantially the same as the conduct constituting a contravention of a civil penalty provision regardless of whether a declaration of contravention has been made. However, that provision does not sit well with s 1317Q which provides that evidence or information given, or evidence of production of documents, by an individual is not admissible in criminal proceedings against the individual if: "(a) the individual previously gave the evidence or produced the documents in proceedings for a pecuniary penalty order against the individual for a contravention of a civil penalty provision (whether or not the order was made); and (b) the conduct alleged to constitute the offence is substantially the same as the conduct that was claimed to constitute the contravention." 38 In other words, if a declaration of contravention has been made against a person (but there has been no application for a pecuniary penalty order), ss 1317P and 1317Q do not prohibit: (1) criminal proceedings being started against that person for conduct that is substantially the same as the conduct that constituted a contravention of the civil penalty provision; and (2) the evidence or information given, or evidence of production of documents, by that individual in the civil proceeding for a declaration of contravention (without application for a pecuniary penalty order) being admissible in those criminal proceedings. That is an uneasy position having regard to the express terms of s 1317N which draws no distinction between the two processes and s 1317Q which provides limited self incrimination protection. 39 As I have noted, Mr Pritchard did not oppose the relief sought by ASIC. Counsel for Mr Pritchard referred the Court to the fact that Part 9.4B of the Corporations Act in its present form was enacted by the Corporate Law Economic Reform Program Act 1999 (Cth). It replaced its predecessor, s 1317EA (read with s 1317FB) of the Corporations Law, which was introduced by the Corporate Law Reform Bill 1992 (Cth). 40 The Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1998 (Cth) described the amendments to the civil penalty provisions in the following terms: "6.5 The draft provisions contain a rewrite of the civil penalty provisions in Part 9.4B of the Law. The civil penalty provisions apply to contraventions of certain specified sections (such as the duty on directors to prevent insolvent trading). If a person has contravened these provisions, the Court can make the following orders: · a declaration that the person has contravened the provision; · an order disqualifying the person from being a director or officer of a company for such period as it thinks fit; and · if the contravention is serious, a pecuniary penalty payable to the Commonwealth of an amount up to $200,000. 6.1 A contravention of a civil penalty provision may also give rise to a criminal offence, if the contravention is accompanied by dishonesty. The civil penalty provisions currently include a number of complex provisions designed to address the situation where a prosecution for the criminal offence has failed, but the court is satisfied that there has been a contravention of the relevant civil penalty provision. In these circumstances the court is currently able to make a civil penalty order. It is proposed to repeal these provisions. Instead, where a criminal prosecution has failed, ASIC would have to commence fresh proceedings to obtain a civil penalty order. 6.2 Currently, the commencement of proceedings for a civil penalty order is a bar to a subsequent prosecution for the corresponding criminal offence. This is intended to prevent evidence obtained in the course of the civil proceedings being used in subsequent criminal proceedings. However, the rule does not operate as a bar to commencing criminal prosecutions under other Acts (for example, the Crimes Act). It also provides a significant disincentive for ASIC to commence civil penalty proceedings. 6.3 It is proposed to repeal the bar and provide instead that evidence given in the course of proceedings for a pecuniary penalty order is not admissible against the person in a prosecution for a criminal offence constituted by substantially similar conduct. This designed to prevent the evidence being used in the prosecution of any offence involving substantially similar conduct, not merely in the criminal prosecution of offences established by the civil penalty provisions. It will also allow a later prosecution to commence where this would be appropriate, without prejudice to the defendant's right to a fair trial because of the earlier proceedings for a pecuniary penalty order. 6.4 It is proposed to remove the power of a criminal court to make a compensation order against a defendant who has not been found guilty. This will make it necessary for ASIC to begin fresh civil proceedings if it wishes to pursue civil remedies following an unsuccessful prosecution." 41 Contrary to the submission of Counsel for Mr Pritchard, neither the express words of the Corporations Act nor the relevant extrinsic materials (see in particular paras 6.2 and 6.3 of the Explanatory Memorandum extracted at [40] above) support the contention that the provisions are "contemplated to follow criminal prosecution rather than to precede it (with all the risks to the defendant that might entail) except where the subsequent prosecution is affected by the evidentiary restrictions imposed by s 1317Q". To take just one example, s 1317P is directly contrary to that submission. Moreover, the decision of Fryberg J in Australian Securities and Investments Commission v Intertax Holdings Pty Ltd [2006] QSC 276 does not support that submission. It was not concerned with s 1317E of the Corporations Act or a civil penalty provision but the more difficult question of the power of a court to make a declaration as to whether conduct by a corporation or its officer contravened the Corporations Act when where there is a likelihood or prospect of criminal proceedings. 42 If there is prejudice to any person by ASIC taking the step of first pursuing and securing a declaration of contravention (without seeking a pecuniary penalty order) under s 1317E of the Corporations Act prior to criminal proceedings being started against that person for conduct that is substantially the same as the conduct that constituted the contravention of the civil penalty provision, ASIC takes that step assessing the risk that it may impede any subsequent criminal proceedings whether by application of the principles under the heading of abuse of process or related doctrines (see for example, Pearce v The Queen (1998) 194 CLR 610 at [29] and [30] (per McHugh, Hayne and Callinan JJ) citing Maxwell v The Queen (1996) 184 CLR 501 at 512 and Rogers v The Queen (1994) 181 CLR 251 in relation to stay of criminal proceedings for abuse of process and Williams v Spautz (1992) 174 CLR 509 at 518-520) or otherwise. It is neither necessary nor appropriate to explore these issues in the present case. It was not the subject of argument and, in any event, the issue may never arise. 43 In the circumstances, it is also unnecessary to consider the second ground relied upon by ASIC for the granting of the declarations - the Federal Court Act. In my view, there was and remains a real issue whether, having regard to the provisions in issue, it was within the discretionary guidelines for a court to make a declaration as to whether conduct by a corporation or its officer contravened the Corporations Act. The precise boundaries of such a power are by no means clear where there is a likelihood or prospect of criminal proceedings. In light of the view that I have formed that s 1317E of the Corporations Act gives the Court jurisdiction to grant the declarations against Mr Pritchard, it is neither necessary nor appropriate to consider the precise boundaries of the power under the Federal Court Act. In the present case, that issue may have never arisen in relation to Mr Pritchard for no other reason than ASIC informed the Court that there were only four reasons why it had sought declarations: (1) to deter other members of the public from engaging in similar conduct; (2) to deter Mr Pritchard from repeating the conduct; (3) because the liquidator of Warrenmang could not identify every investor who had not been repaid and (4) because "it [was] in the public interest to make declarations which record the outcome of enforcement proceedings". 44 I now turn to consider whether the Court should, pursuant to s 1317E of the Corporations Act, grant the declaration sought. (3) SHOULD THE COURT GRANT THE DECLARATIONS SOUGHT? 45 Mr Pritchard, by his counsel, informed the Court that Mr Pritchard: (1) had not and did not intend to file any evidence; (2) had not and did not object to the evidence filed for and on behalf of ASIC; and (3) did not oppose the making of the declarations sought by ASIC. 46 Notwithstanding the attitude adopted by Mr Pritchard, a declaration is a judicial act which s 1317E of the Corporations Act prescribes should only be made if the Court is satisfied by the evidence that it is appropriate to grant the declarations sought: BMI Ltd v Federated Clerks Union of Australia (1983) 51 ALR 401 at 412-413 (per Keely and Beaumont JJ). See also Australian Securities and Investments Commission v Cash King Pty Ltd [2005] FCA 1429 at para [3]. 47 In the present case, for the reasons outlined earlier, I am satisfied by the evidence that it is appropriate to grant declarations of contravention against Mr Pritchard. Warrenmang contravened ss 722 and 723 of the Corporations Act. The contraventions were serious. The IPO was just that - a public offer. Subscribers for shares subscribed and not only did not get their shares but, at least some of them, did not get their subscription monies returned. The legislative safeguards which were designed to ensure that the subscription monies provided by the members of the public were protected were breached. The director who "authorised" or "permitted" Warrenmang to commit those contraventions of the provisions of the Corporations Act was Mr Pritchard. In doing so, Mr Pritchard breached his statutory duties to Warrenmang: (1) to exercise a proper degree of care and diligence: s 180; (2) to act in good faith in the best interests of Warrenmang and for a proper purpose: s 181; and (3) to refrain from improperly using his position to gain an advantage for himself or someone else, or to cause detriment to Warrenmang: s 182. (4) THE FORM AND CONTENT OF THE DECLARATIONS 48 I have amended the declarations sought by ASIC. The declarations sought by ASIC suffered from two particular defects - they were not sufficiently time specific and did not accurately describe the conduct said to give rise to the contraventions of ss 180, 181 and 182 of the Corporations Act. In relation to paras (b) and (c), the declaration of contravention specifies the relevant conduct as occurring no later than 10 June 2004. Under the Supplementary Prospectus, 10 June 2004 was the last date that Warrenmang could have listed on the ASX: s 723(3)(b) of the Corporations Act. 49 Accordingly, I propose to make the following declaration of contravention pursuant to s 1317E of the Corporations Act: (1) Robert Graeme Pritchard contravened ss 180, 181 and 182 of the Corporations Act 2001 (Cth) ("the Corporations Act") in that: (a) on and from 8 January 2004, he caused Warrenmang Limited ("Warrenmang") to contravene s 722 of the Corporations Act, in that he failed to cause Warrenmang to hold the application money paid by persons for shares in Warrenmang on trust; (b) by no later than 10 June 2004, he caused Warrenmang to contravene s 722 of the Corporations Act, in that he failed to cause Warrenmang to return application money paid by persons for shares in Warrenmang as soon as practicable, in circumstances where shares in Warrenmang had not been (and were not subsequently) issued to those persons; (c) by no later than 10 June 2004, he caused Warrenmang to contravene s 723 of the Corporations Act, in that he failed to cause Warrenmang to refund application money paid to Warrenmang by persons for shares in Warrenmang, in circumstances where shares in Warrenmang had not been (and were not subsequently) issued to those persons; and (d) of the application monies referred to in (a), on or about 19 January 2004 he as a director of Warrenmang authorised payment of $300,000 of that money to himself and used that money for his own personal benefit. 50 The amended originating process otherwise stands dismissed. There will be no order as to costs. Finally, I would like to express the Court's gratitude to Mr S Horgan who acted and appeared as pro bono counsel for Mr Pritchard. I certify that the preceding fifty (50) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon.

Associate: Dated: Counsel for the Plaintiff: Mr J Moore

Solicitor for the Plaintiff: Australian Securities and Investments Commission

Counsel for the Second Defendant: Mr S R Horgan (Pro Bono)

Date of Further Written Submissions: 25, 26 and 28 June 2007

Corporations Act 2001(Cth)ss 180, 181, 182, 722, 723, 724, 1317E

Corporate Law Economic Reform Program Act 1999(Cth)

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