Australian Securities and Investments Commission v Whitlam

COUNSEL : Mr M A Pembroke SC with Mr D R Stack for the Plaintiff Mr A J Bannon SC with Mr J Stephenson for the Defendant SOLICITORS : Australian Securities and Investments Commission Lawyer for the Plaintiff Watson Mangioni Corporate and Commercial Lawyers for the Defendant CATCHWORDS : CORPORATIONS - Supervision, Regulation and Correction - Penalty for breach of Civil Penalty Provisions - Failure to act honestly - Improper use of position - Relevant principles - Orders for prohibition from managing a corporation - Pecuniary penalty - COSTS - Whether costs should follow the event - Discovery of transcripts of ASIC examinations - Duty to protect witness confidentiality - Limited power to provide transcript to lawyer conducting proceedings - Partially successful and partially unsuccessful - No order Corporations Law (Cth) Supreme Court Act LEGISLATION CITED : Corporations Act 2001 (Cth) Crimes Act 1900 Australian Securities and Investments Commission Act 2001 (Cth) Australian Securities and Investments Commission v Whitlam [2002] NSWSC 591 Re HIH Insurance Ltd Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80 ASC v Donovan (1998) 28 ACSR 583 at 606 Haughton v Smith [1975] AC 476 CASES CITED : Director of Public Prosecution v Nock [1978] AC 979 Vereker v Rodda (1987) 18 FCR 83 at 93 R v Pantano (1919) 49 A Crim R 328 at 30 R v Halabi (NSWCCA, 17 February 1992, unreported) at 4-5 R v Irusta [2000] NSWCCA 391 Johns v Australian Securities Commission (1992-1993) 178 CLR 408 at 425 DECISION : Prohibition from managing a corporation for 5 years. Pecuniary penalty of $20,000. No order as to costs.

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION

4421/01 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v NICHOLAS RICHARD WHITLAM (NO. 2) JUDGMENT 1 On 23 July 2002, I made a declaration in the following terms: "By failing to sign the poll paper with respect to his appointment as proxy by 3,973 members of NRMA Limited (now called National Roads and Motorists' Association Limited) who instructed him to vote against resolution 6 at the annual general meeting held on 28 October 1998, Nicholas Richard Whitlam: (i) in contravention of s 232(2) of the Corporations Law (Cth), failed to act honestly in the exercise of his powers and the discharge of his duties as an officer of NRMA Limited; (ii) in contravention of s 232(6) of the Corporations Law (Cth), made improper use of his position as an officer of NRMA Limited to gain an advantage for himself and for other directors of that company; and (iii) contravened s 250A(4)(c) of the Corporations Law (Cth). "

As my judgment in Australian Securities and Investments Commission v Whitlam [2002] NSWSC 591 reveals, the first two subparagraphs of the declaration were made under the Corporations Law (Cth), s 1317EA(2). The last subparagraph was made under the inherent power of the court to grant declaratory relief which power is declared in the Supreme Court Act 1970, s 75. 2 The current proceedings are to determine whether or not, in accordance with the Corporations Law (Cth), s 1317EA(3), an order prohibiting the defendant from managing a corporation should be made and whether or not the defendant should be ordered to pay to the Commonwealth a pecuniary penalty. The contraventions referred to in the first two subparagraphs of the declaration were contraventions of civil penalty provisions. Those breaches enliven s 1317EA(3). The contravention in the last subparagraph of the declaration was not of a civil penalty provision and, in these proceedings, I am not concerned with it. 3 The Corporations Law (Cth), s 1317EA(3) is deemed to be included in the Corporations Act 2001 (Cth) by virtue of s 1401. Section 1400 is the converse of that provision. It provides, relevantly for the present purposes, that a person incurs a liability equivalent to a former liability under the Corporations Law (Cth) under the corresponding provision of the Corporations Act. The corresponding provision to the power to prohibit a person from managing a corporation in s 1317EA(3)(a) of the former legislation is s 206C of the present legislation. Mr Pembroke SC who, with Mr Stack, appeared for the plaintiff, submitted that I should act under s 206C as well. I decline to do so. This basis for jurisdiction was not argued in the substantive proceedings and, as Mr Bannon SC who, with Mr Stephenson, appeared for the defendant, points out a precondition to its operation is a declaration made under s 1317E of the current legislation which was not invoked by me in making the declaration set out above. It is too late in the proceedings for this issue to be raised. The defendant was entitled to give it consideration and to address the court on its operation. In any event, my reasons with respect to s 1317EA(3)(a) of the former legislation would not have been different had I acted under s 206C of the current legislation. 4 On 23 July 2002 I also made a declaration in the following terms: "By revising the draft minutes of the meeting of the board of directors of NRMA Insurance Group Limited (now called Insurance Australia Group Limited) held on 11 August 2000 relating to his remuneration package, by causing the revised minutes to be circulated to the other directors and by entertaining their adoption at the meeting of the board of directors held on 6 September 2000, Nicholas Richard Whitlam: (i) in contravention of s 180(1) of the Corporations Act 2001 (Cth) failed to exercise his duties as a director with the degree of care and diligence that a reasonable person would exercise if he or she were a director of a corporation in the circumstances of NRMA Insurance Group Limited and occupied the office held by and had the same responsibilities within NRMA Insurance Group Limited as did Nicholas Richard Whitlam; but (ii) acted honestly, nonetheless, and in all the circumstances ought fairly to be excused for the contravention."

In consequence, I relieved the defendant wholly (except as to costs) from any liability to which he might otherwise be subject or that might otherwise be imposed upon him because of that contravention. Mr Pembroke invited me to have regard to the conduct of the defendant with respect to this contravention in determining appropriate penalty with respect to the first two subparagraphs of my earlier declaration. I decline to do so. The danger of this course is that the defendant might be punished by reason of the latter contravention, contrary to the total relief granted to him with respect thereto. 5 The Corporations Law (Cth), s 1317EA(4) provides that the court is not to make an order prohibiting a person from managing a corporation if it is satisfied that, despite the contravention, the person is a fit and proper person to manage a corporation. Section 1317EA(5) provides that the court is not to make an order that a person pay a pecuniary penalty unless it is satisfied that the contravention is a serious one. 6 An exhaustive analysis of the authorities with respect to the Corporations Act 2001 (Cth), s 206C, the Corporations Law (Cth), s 1317EA(3) and their forerunners in earlier legislation was made by Santow J in Re HIH Insurance Ltd; Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80. It is common ground that the principles discussed by his Honour apply in the instant circumstances. I will not repeat his Honour's conclusions save to say that, in general terms, the purpose of an order prohibiting a person from managing a corporation is to protect the public whereas the purpose of a pecuniary penalty is to act as a personal and general deterrent against repetition of like conduct. 7 In ASC v Donovan (1998) 28 ACSR 583 at 608 Cooper J said that the Corporations Law (Cth), s 1317EA(3)(b) was punitive in character. With respect to the question of prohibition from management of a corporation, Mr Bannon submitted that because his Honour did not use that language when referring to s 1317EA(3)(a) it followed, as a matter of principle, that deterrence considerations should be confined to penalty issues and should not be taken into account in considering the prohibition issue. While it may be said in a broad sense that deterrence is the motive for ordering a penalty and protection of the public is the motive for prohibiting a person from management of a corporation, there is no logical reason why deterrence should not also be taken into account when the question of prohibition from management of a corporation is in question. Indeed, the authorities support such consideration (Adler at 97-98, par [56] (v)-(vi)). 8 Mr Bannon submitted that a unique feature of the instant circumstances was that the defendant, at the first opportunity, put steps in train to cure the contraventions. I do not accept this submission. The judgment in the substantive proceedings reveals that when the defendant was shown the unsigned poll paper on the afternoon of the annual general meeting, he did nothing to set any steps in train but left the premises to take a swim at Tattersall's Club. The steps he put in train 48 hours later were initiated after Dr Morstyn had drawn his attention to legal authority for the proposition that the votes should be taken into account notwithstanding the failure to sign the poll paper. 9 What is unique is the absence of any consequence for the defendant or for NRMA Ltd ("NRMA") as a result of the defendant's contravention of his duties. The result of the poll was reversed and there was no increase in fees payable to directors. This is a significant difference from the authorities discussed by Santow J in Adler. It looms large in my deliberations. 10 Propensity for repetition of similar conduct in the future and the likely harm that might be caused to the public are relevant considerations. I received in evidence a letter from NRMA confirming that the defendant resigned as President on 22 July 2002 and that after the 1999 annual general meeting, the company changed the manner in which directed proxies were dealt with so that all directed proxies were sent to the returning officer. I accept that there is no likelihood of a repetition of the failure to sign a poll paper. 11 Mr Bannon laid stress on a passage from the judgment of Cooper J in Donovan at 606 in which his Honour said: "Because the power under s 1317EA(3)(a) is predominantly protective, it is relevant to have regard to the officer's prior corporate conduct, to the present activities of the officer, to the likelihood that the officer will repeat or engage in conduct of the type which constituted the contravention of s 232 which gives rise to the application, including whether or not the officer shows contrition or accepts responsibility for his or her conduct, and the extent to which the officer benefited from the conduct personally or tried to conceal it."

Mr Bannon submitted that the conduct which constituted the contraventions of the Corporations Law (Cth), s 232 was the failure to sign the ballot paper and I should confine my considerations to that act. 12 I do not regard myself as so circumscribed and I do not read the passage as indicating that Cooper J thought the relevant consideration was so circumscribed. The contraventions in question were a failure to act honestly in the exercise of the powers and the discharge of the duties of a director of NRMA and the making of improper use of such position to gain an advantage. Failure to sign the poll paper was the result of that conduct. It is the likelihood of repetition of conduct of a similar sort and not the likelihood of a repetition of the result of that conduct which I regard as the relevant consideration. 13 So far as prior corporate conduct is concerned, evidence was received in the substantive proceedings in the form of testimonials which are relevant in these proceedings as well. Three further testimonials were in evidence in the current proceedings, one from a solicitor and family friend, one from a director of NRMA Insurance Group Limited ("NIGL") and the other from a director of both NRMA and NIGL. The evidence is against my drawing the conclusion that, in the past, the defendant failed to act honestly in the exercise of powers and in the discharge of duties as a director of companies or made improper use of his position as such a director to gain an advantage. 14 It was submitted that the incident in question was an aberration and that the defendant remains a fit and proper person to manage a corporation within the terms of the Corporations Law (Cth), s 1317EA(4). 15 Lack of contrition is a matter to be taken into account according to a number of the authorities analysed by Santow J in Adler. Mr Bannon relied upon the above quoted passage from Donovan to ground the submission that acceptance of responsibility was an alternative to contrition and the defendant at all times accepted responsibility for his failure to sign the ballot paper. I do not read Cooper J's judgment as suggesting that an acceptance of responsibility for conduct excludes the relevance of contrition. When I asked whether, if I formed a different view of what contrition meant, was any contrition offered to the court, Mr Bannon responded that the defendant did not come to the court to resile from the evidence he had given. The defendant regretted the fact that the poll paper was not signed and regretted the trouble that had occurred. Mr Bannon indicated that there were consequences for a defendant who gave different evidence on a subsequent occasion. 16 In my reasons for judgment in the substantive proceedings, I found that the defendant deliberately omitted to sign the poll paper, he had the deliberate intent to disenfranchise those members of NRMA who had appointed him proxy and directed that he vote against resolution 6 and he sought, deliberately, to override the intent of the members of NRMA which he knew to be against passing resolution 6 as a special resolution. Contrary to those findings, the evidence of the defendant, from which he does not resile, was that his failure to sign the poll paper was not deliberate but an inadvertent mistake and he did not deliberately breach any obligation he owed. I find that the defendant lacks contrition for his conduct and there is a likelihood of repetition of the impugned conduct. Nonetheless, I accept the tension that exists when a matter is the subject of appeal and there is perceived to be some significance in a resolute continuance of a denial of events found by the primary judge. 17 I take into account the many testimonials of the service the defendant has rendered to the community by service on many boards of directors both commercial and charitable. The affairs of NRMA have been the subject of much publicity in the past. I accept that the publicity associated with the judgment in the substantive proceedings has had an irreparable effect upon the defendant's reputation and career. There is no doubt in my mind that the defendant and his family have suffered considerably as a result, not only from the partial deprivation of income that has resulted from the publicity, but also from the personal hurt occasioned by these events and the publication of them. These considerations have considerable weight, in my judgment. 18 Mr Bannon sought to confine the act of dishonesty to the deliberate non-signing by the defendant of the poll paper. Mr Pembroke submitted that the defendant's failure to sign was premeditated. While I did not make such a finding in the substantive proceedings, I did conclude that the cumulative effect of my findings negated an honest omission on the part of the defendant to sign the poll paper. I regard premeditation as a reasonable description of that cumulative conduct: the request of Mr Hullah as to how one could fail to acquit one's responsibilities, the direction to split onto separate poll papers the votes directed to the chairman as proxy alone, the knowledge before the meeting that instruments appointing proxies with instructions to vote against resolution 6 spelt the doom of the resolution, the details of which are set out in my reasons for judgment in the substantive proceedings. 19 It was submitted that the defendant placed the unsigned poll paper into the ballot box and, as a matter of law, the ballot paper should have been counted and I should take this matter into account in these proceedings. I have found that the defendant knew that a failure to sign the poll paper would cause the returning officer to fail to count it. What is being put is tantamount to a submission that there was no failure to vote. That is a matter for an appellate court and not one which I should take into account in these proceedings. In my judgment the defendant failed to vote as directed by those members of NRMA who appointed him proxy. Furthermore, the submission contains the misapprehension to which reference has already been made. The failure to sign the poll paper was the result of the conduct in question and was not the impugned conduct. 20 It was submitted by Mr Bannon that there is a proposition in criminal law that a futile conspiracy cannot be a criminal act. I was referred to Haughton v Smith [1975] AC 476, Director of Public Prosecution v Nock [1978] AC 979 and Vereker v Rodda (1987) 18 FCR 83 at 93. Whether or not the authorities go so far, I do not regard them as relevant to my considerations. I have found that the defendant acted dishonestly and that feature remains whether or not the ultimate result of that conduct was futile. 21 It was submitted that my decision created a genuine controversy between the obligation of a director to vote as proxy and the provisions of the Corporations Law (Cth), s 250A which might be thought to be a code and the fact that my decision was not free from legal controversy should be taken into account in these proceedings. Again, I reject the submission on the basis that that is a matter for an appellate court and not for me. 22 Mr Pembroke submitted that persons who occupy high office in the business community in whom great trust is placed must expect condign punishment when that trust has been dishonestly breached (R v Pantano (1990) 49 A Crim R 328 at 330, R v Halabi (NSWCCA, 17 February 1992, unreported) at 4-5. I was also referred to the Crimes Act 1900 s 344A with respect to an attempt to commit a crime and to R v Irusta [2000] NSWCCA 391 at par [41],[44]. These are criminal cases and, while the current proceedings possess some features common to the criminal law, I prefer to base my judgment on the issues referred to in Adler and those referred to above. 23 The community is entitled to except high standards of probity from directors of public corporations in which the community is invited to invest. This is particularly so of the chairman of a board of directors who is regarded as holding a pre-eminent position in the organisation. The defendant as President of NRMA was in a position similar to the chairman of a board of directors. Furthermore, this was not a case of thwarting the vote of an institutional investor in a public company. Any motorist in New South Wales is entitled to become a member of NRMA. Membership entitles one to a vote in common with every other member. By deliberately failing to sign the ballot paper, the defendant intended to disenfranchise 3,973 individual members of the company. 24 Notwithstanding the testimonials, I am not satisfied that the defendant is a fit and proper person to manage a corporation and I am satisfied that contraventions of the Corporations Law (Cth), s 232(2) and s 232(6) were serious. It remains for consideration whether or not I should exercise my discretion under s 1317EA(3). 25 Notwithstanding the damage that the defendant has already suffered to his reputation and career and the personal suffering to him and his family, notwithstanding the lack of consequence in the defendant's action of deliberately failing to sign the poll paper and notwithstanding the loss to the community from the deprivation of his services, I am of the view in weighing up the factors that I should exercise my discretion against the defendant. In the interests of the protection of the public and as a deterrence both personal and general I have decided that I should prohibit the defendant from managing a corporation for a period of 5 years and I should order the defendant to pay to the Commonwealth a pecuniary penalty of $20,000. I propose to make no order as to costs. I propose to dismiss the remainder of the originating process. 26 Costs with respect to an application by the defendant for discovery of the entirety of the transcripts of evidence taken by the plaintiff from potential witnesses in the substantive proceedings under the Australian Securities and Investments Commission Act 2001 (Cth) were reserved. The plaintiff resisted making the entirety of the transcripts available to the defendant's solicitors. Some of the examinees appeared on the application and joined in that opposition. I ordered discovery of the full transcripts. 27 The plaintiff opposed the ordinary result that costs should follow the event on the basis that it was obliged to protect the confidentiality of the examinees under the Australian Securities and Investments Commission Act 2001, s 127(1) which required the plaintiff to take all reasonable measures to protect from unauthorised use or disclosure, information given to it in confidence in, or in connection with, the performance of its functions or the exercise of its powers. On the other hand, s 25(1) provided that the plaintiff might give a copy of a written record of examination to a person's lawyer if the lawyer satisfied the plaintiff that the person was carrying on or was contemplating in good faith a proceeding in respect of a matter to which the examination related. It was submitted that in resisting discovery, the plaintiff was acting in accordance with the overriding requirement of s 127(1). Reference was made to the judgment of Brennan J in Johns v Australian Securities Commission (1992-1993) 178 CLR 408 at 425. What his Honour there said, however, was that s 25(3) gave a limited authority to give a copy of a written record of an examination only if it be for a purpose consistent with s 127. Section 127(2) provided that the disclosure of information as required or permitted by a law of the Commonwealth was taken to be authorised use and disclosure of the information. In my view that includes disclosure under s 25(3). 28 It was open to the plaintiff, in my judgment, to exercise its limited authority under the Australian Securities and Investments Commission Act 2001, s 25(3) and grant the solicitor for the defendant a copy of the entire transcripts in question. The normal result would be that the defendant is entitled to an order with respect to the reserved costs. 29 In the substantive proceedings, the plaintiff was substantially successful with respect to the matters the subject of my first declaration and, notwithstanding the making of my second declaration, the defendant was substantially successful with respect to it because of the relief granted. The normal rule would be that the plaintiff is entitled to the costs associated with the first declaration and the defendant is entitled to the costs associated with the second declaration. Considerations of the time taken with respect to separate issues might be used to determine the outcome. In the circumstances, however, I consider it appropriate that each party bear its own costs. 30 I direct the parties to bring in short minutes of orders in accordance with these reasons for judgment.

Last Modified: 08/19/2002 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.