Supreme Court of WA|2000-08-22|Before: Scott J, Anderson J

Australian Securities & Investments Commission v Salvatore Papotto (also known as Samuel John Papotto also known as Sam Papotto) [2000] WASC 201 (22 August 2000)

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA

CITATION : AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION -v- SALVATORE PAPOTTO (also known as SAMUEL JOHN PAPOTTO also known as SAM PAPOTTO) [2000] WASC 201

GOLD COAST HOLDINGS PTY LTD (ACN 050 161 021) (In Liq)

BETWEEN : AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

SALVATORE PAPOTTO (also known as SAMUEL JOHN PAPOTTO also known as SAM PAPOTTO)

Corporations - Management - Application under s 230(1)(c) of Corporations Law for an order disqualifying person from managing any company - Effect of enactment of new Corporations Law provisions - Factors to be considered by the court in determining whether disqualification justified

Corporations Law, s 230(1)(c), s 206E(1)(b), s 1469

Applicant : Australian Securities & Investments Commission

1 ANDERSON J: By application filed on 22 February 2000 made pursuant to s 230(1)(c) of the Corporations Law, the Australian Securities & Investments Commission (ASIC) sought orders prohibiting Salvatore Papotto (also known as Samuel John Papotto also known as Sam Papotto) from managing a corporation for a period to be determined by the court.

2 After the application was filed, amendments were made to the Corporations Law by the Corporate Law Economic Reform Act 1999. It is necessary therefore to have regard to the transitional provisions. These are set out in s 1469 of the Corporations Law as amended. Item 17 relates to applications made under s 230 which were on foot but not completed before the commencement of applicable provisions of the amended Law. On the interpretation of the transitional arrangements which are most favourable to the respondent, the position would seem to be that s 230 of the old Law continues to be applicable in determining whether the respondent is a relevant person and whether there has been a breach of relevant legislation, but in making this determination the court is to take into account the additional requirement imposed by s 206E(1)(b) of the amended Law and be satisfied that the disqualification is justified.

3 The facts leading to this application are as follows. On 24 September 1993, the respondent was convicted in the District Court of the following offences:

(a) Four counts of failing to act honestly in contravention of s 229(1) of the Companies (Western Australia) Code.

(b) Five counts of failing to act honestly with intent to defraud in contravention of s 229(1) of the Companies (Western Australia) Code.

(c) Two counts of falsifying a cash book of Adina Pty Ltd contrary to s 560(1) of the Companies (Western Australia) Code.

4 These provisions of the Companies (Western Australia) Code became s 232(2) and s 1307 respectively of the Corporations Law.

5 The respondent appealed his convictions and succeeded in having one of his convictions quashed. That was one of the convictions (charged in count 1 on the indictment) of failing to act honestly as an officer of a company with intent to defraud. His appeals against the other 11 convictions were dismissed.

6 In respect of these convictions, the applicant was placed on a $10,000 bond for three years and was ordered to do 240 hours of community service. The effect of the convictions was that he was barred from managing a corporation for a period of five years without leave of the court: Corporations Law s 229(3)(c). That time expired on 23 September 1998.

7 On 5 May 1998, the respondent was convicted after trial in the Court of Petty Sessions on a complaint which alleged that between 28 April 1994 and 15 October 1994 he managed a corporation, Power Engine Flush Australia Pty Ltd, during the period of his disqualification, contrary to the Corporations Law s 1311(1)(a). He was sentenced to 6 months' imprisonment on 23 June 1998. He appealed against that conviction and sentence, but both those appeals were dismissed by Scott J in this Court on 8 September 1999.

8 As can be seen from this chronology, the charge in relation to the management of Power Engine Flush Australia Pty Ltd arose from the respondent's conduct within a period of just over one year after the statutory suspension came into effect following his convictions in the District Court.

9 On the affidavit evidence which is now before me I am satisfied that between about 2 October 1997 and 21 August 1998 the respondent obtained control of and managed Gold Coast Holdings Pty Ltd. He did not have the leave of this Court to do so. All of the acts of management occurred within the five-year period of suspension. The acts of management comprised the following:

(a) Became a director of Gold Coast Holdings Pty Ltd;

(b) appointed Anthony Peter Gassira as secretary of Gold Coast Holdings Pty Ltd;

(d) made an application on behalf of Gold Coast Holdings Pty Ltd to Blackburne & Dixon Pty Ltd for mortgage finance;

(e) signed six mortgages in his capacity as a director of Gold Coast Holdings Pty Ltd;

(f) in his capacity as director of Gold Coast Holdings Pty Ltd made an application to the National Australia Bank to open a company account;

(g) became a signatory to the account held by Gold Coast Holdings Pty Ltd at the National Australia Bank.

(ii) Between 3 October 1997 and 27 October 1997 the respondent signed 31 cheques as signatory for Gold Coast Holdings Pty Ltd against the account of Gold Coast Holdings Pty Ltd at the National Australia Bank.

(iii) On 9 October 1997 the respondent accepted appointment as secretary of Gold Coast Holdings Pty Ltd.

(iv) On 2 November 1997 the respondent attended and chaired a meeting of directors of Gold Coast Holdings Pty Ltd in his capacity as director/chairman of Gold Coast Holdings Pty Ltd.

(v) On 2 February 1998 the respondent signed the declaration on the annual return for Gold Coast Holdings Pty Ltd in his capacity as director of Gold Coast Holdings Pty Ltd.

(a) appointed Anthony Peter Gassira as director of Gold Coast Holdings Pty Ltd;

(b) resigned as director and secretary of Gold Coast Holdings Pty Ltd on 22 March 1998 but continued to manage Gold Coast Holdings Pty Ltd after 22 March 1998 until the appointment of a liquidator on 21 August 1998.

10 The respondent appeared before me in person. His oral submissions were very difficult to follow. At one point, he told me that he had been duped or tricked into becoming a director of Gold Coast Holdings Pty Ltd, implying that he never had any intention of becoming a director of that company or of acting in the management of the company. If that is what he intended to convey to me, the multiple acts of management to which reference has been made make it impossible to believe him. At another point, he sought to explain his conduct by telling me that he had been advised that the period during which he was prohibited from managing a corporation was only four years and, accepting that advice, he thought it was permissible for him to become involved with Gold Coast Holdings Pty Ltd when he did. I do not believe that. He knew the period of disqualification was five years and that it had not expired. It is to be remembered that he had already been charged and convicted in the Court of Petty Sessions with respect to his management of Power Engine Flush Australia Pty Ltd. The form of the complaint stipulates the offence as managing a corporation "namely Power Engine Flush Australia Pty Ltd, within five years of his conviction, without the leave of the court, contrary to sections 229(3)(c) and 1311(1) of the Corporations Law".

11 I am satisfied from the affidavit evidence that after the respondent obtained control of Gold Coast Holdings Pty Ltd he arranged for the company to borrow $1,890,400 from or through mortgage brokers Blackburne & Dixon Pty Ltd on the security of 24 strata title lots. These properties consisted of furnished motel units which were part of the Dunsborough Resort Motel. On 31 July 1998, a receiver and manager of the secured properties was appointed and a liquidator was appointed on 21 August 1998. On 27 November 1998, the receiver and manager sold the properties by public tender for $1,250,000 and these funds have been fully distributed to the mortgagees, leaving a deficiency of $926,383.94. Unquestionably, the acquisition by the respondent of control of Gold Coast Holdings Pty Ltd and his subsequent management of the company until its liquidation less than a year later was disastrous for the company and its creditors.

12 The respondent sought to refute this. He mentioned litigation which he seems to think will eventually be successful and will result in all of the company's losses being recovered. There is no affidavit from the liquidator nor is there anything else to support those assertions and I entirely discount them.

13 As to his catastrophic management of the company, the respondent, in his oral submissions and in two affidavits which he has filed, sought to absolve himself from all responsibility. He blamed the company accountant, Mr Miller, for all the bad decisions. He implied that it was Mr Miller who engineered the borrowings and the mortgages of the company's property and forced him to sign the mortgages. The affidavits which the respondent has filed are nearly as difficult to follow as were his oral submissions. Set out below, by way of example, is par 6 of the respondent's affidavit of 26 July 2000:

" ... on the 2nd October 1997 I was asked by Mr Miller and Mr Ken O'Brien to attend the offices of BlackBurn and Dixon Finance Brokers to sign mortgage documents for the loan. At this meeting I was informed that I would be required to sign as a director of [Gold Coast Holdings Pty Ltd] not withstanding the fact that all the parties were aware that I was not in a position to do so. Mr Miller advised me that he was not going to lodge any documents with ASIC until he had ensure[d] that I had ASIC approval to do so and as GCH was to be turn[ed] into a trust, there was no foreseeable problems in signing the mortgage documents. I was advise[d] by Mr Miller and Mr O'Brien to signed the documents and as I was in no other position but to do so, because I had already paid to Mr Magee the director of GCH the cash payment for the shares and if I did not sign the documents the finance that was to be provided by Blackburn & Dixon would be withdrawn."

14 I should say that, in his affidavit, Mr Miller tells a more comprehensible story (affidavit 14 February 2000). According to Mr Miller, he was introduced to the respondent in about October 1997 by one of the then directors of Gold Coast Holdings Pty Ltd. The respondent told him that he intended to purchase the 24 units owned by Gold Coast Holdings Pty Ltd at the Dunsborough Resort Motel. Ultimately, however, the respondent decided to purchase the company and took office as director. Miller's role was simply to give accounting advice and prepare the finance application for the finance broker. After he took office as director, the respondent appointed an associate by the name of Gassira as secretary. It appeared to Miller that Gassira had no business acumen. According to Miller, the respondent then requested Miller and Gassira to accompany him to the offices of Blackburn & Dixon Pty Ltd, a finance broker about which the respondent had spoken on several previous occasions. On attendance at the offices of Blackburn & Dixon Pty Ltd, the respondent and Gassira each signed six mortgages.

15 Exhibited to Miller's affidavit is a copy of minutes of a meeting of directors of Gold Coast Holdings Pty Ltd held on 2 November 1997 attended only by the respondent and one Lim. Miller was not present at that meeting. The minutes record that the respondent "took the chair for the purpose of the meeting" and that the meeting resolved that "Salvatore Papotto [the respondent] shall operate and manage the company assets separate from the company" and that "a company bank account shall be opened at the National Australia Bank North Perth with the cheque signatory being S Papotto solely". That minute was signed by the respondent.

16 Exhibited to Miller's affidavit are copies of various corporate documents signed by the respondent from time to time. There are copies of 30 cheques signed by the respondent on behalf of Gold Coast Holdings Pty Ltd. Of these cheques, 11 are made out to cash ranging in amount up to $2,000. In his evidence, the respondent does not refer to these cheques or explain how he came to sign them. Exhibited to the affidavit is a corporations form 304, being a notification of change to office holders dated 3 October 1997 signed by the respondent. Also exhibited is the annual return of the company for 1997 signed by the respondent. The respondent does not explain how he came to sign these documents.

17 Accepting that there may be some dispute between the respondent and Miller as to the extent of Miller's involvement in the affairs of Gold Coast Holdings Pty Ltd and in advising the respondent, it is clear that the respondent was the main player, so to speak. The objective evidence is quite inconsistent with the respondent's story that he was tricked into appearing to manage the company, or in some way acted under duress. I am quite satisfied it was he who actively managed the affairs of Gold Coast Holdings Pty Ltd in the period in question according to his own agenda and to the great disadvantage of the company and its creditors.

18 I am satisfied that between 2 October 1997 and about 21 August 1998 at Perth in Western Australia the respondent, being a person convicted of offences under s 229(1) of the Companies (Western Australia) Code, managed a corporation, namely, Gold Coast Holdings Pty Ltd within five years of his conviction without the leave of the court contrary to s 229(3)(c) of the Corporations Law. I am satisfied that he breached s 229 of the Corporations Law on two occasions and thus repeatedly breached relevant legislation. I am satisfied that the respondent breached s 232(2) of the Corporations Law on nine occasions and thus repeatedly breached relevant legislation. I am satisfied that he breached s 232(2) and s 1307 of the Corporations Law and therefore contravened two provisions of a relevant enactment which also constitutes a repeated breach of relevant legislation.

19 The respondent was a relevant officer of Adina Pty Ltd as defined in s 230(6) of the Corporations Law in respect to the 1993 convictions. The respondent was a relevant officer of Power Engine Flush Pty Ltd as defined in s 230(6) of the Corporations Law in respect to the 1998 conviction. The respondent was a relevant officer of Gold Coast Holdings Pty Ltd between 2 October 1997 and 21 August 1998.

20 The factors to be considered which govern the exercise of the court's powers of disqualification are the character of the offender, nature of the breaches, structure of the company and nature of its business, interests of shareholders, creditors and employees, risks to others from continuation of offenders as company directors, honesty and competence of the offender, hardship to the offender and his personal and commercial interests, and the offender's appreciation that future breaches could result in future proceedings: Commissioner for Corporate Affairs (WA) v Ekamper [1987] 12 ACLR 519 at 522; Australian Securities Commission v Roussi [1999] FCA 618.

21 The offences of which the respondent was convicted in the District Court in 1993 involved repeated acts of dishonesty as a director. The conviction in the Court of Petty Sessions in 1998 involved acting in the management of a company over a six-month period within a period of about a year after the five-year statutory disqualification came into force. That conduct reveals a lack of remorse and a disregard for the law. The breach in respect to the respondent's management of Gold Coast Holdings Pty Ltd must be viewed very seriously when considered in light of the respondent's previous convictions and the heavy losses incurred by Gold Coast Holdings Pty Ltd in the relatively short period during which the respondent managed its affairs.

22 The purpose of the order sought by ASIC is protective not punitive: Re Minimix Industries Ltd [1982] 1 ACLC 511 at 512; Re Marsden and the Companies Act [1981] 5 ACLR 694 at 699. The interests to be protected include those of the public who may unwittingly deal with companies run by people who are not suitable to be involved in the management of companies and the public interest generally in the transparency and accountability of companies and the suitability of directors to hold office: Commissioner of Corporate Affairs (WA) v Ekamper (supra) at 525.

23 In this case, the disqualification of the respondent will not adversely affect the interests of shareholders, creditors or employees of Gold Coast Holdings Pty Ltd. The previous convictions of the respondent and his conduct generally in the corporate field, including his repeated disregard for the law, shows that the public needs to be protected from him and that he is not a person of sufficient honesty and competence to be entrusted with the management of companies. His conduct, including that he has ignored the prohibition to a serious degree on two occasions, render it likely that he will involve himself in the management of a corporation in the future, notwithstanding an awareness that this could result in future proceedings. In the above circumstances, I would be quite satisfied that disqualification is justified. There are, however, additional factors which point to the need for disqualification.

24 The submissions which the respondent made orally and the contents of the two affidavits which he has filed reveals a peculiar state of mind, to say the least. He appeared to wish to contend that little or no regard should be paid to the losses sustained by the company's creditors because of the losses sustained by him personally in the same transaction. As I have said, he would have it that his conduct in the management of the company was not really his conduct at all but conduct induced by others such as the accountant, Miller. There is nothing in the material presented by him, or in the statements he made in court, which gives the slightest cause to think that he has any regard for the interests of anyone but himself. Bearing in mind that company directors are trustees who must accept responsibilities to the company and to its members and creditors, I am quite satisfied that this is a proper case for the exercise of the court's powers of disqualification.

25 A long disqualification is called for. It is very unlikely that the respondent will ever obtain the basic attributes required of company directors, they being honesty and a proper regard for company law.

26 I order that the respondent be prohibited from managing any corporations for a period of seven years from this date.

Law Economic Reform Act 1999

Australian Securities & Investments Commission v Salvatore Papotto

At a glance

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Judgment (52 paragraphs)

Australian Securities & Investments Commission v Salvatore Papotto (also known as Samuel John Papotto also known as Sam Papotto) [2000] WASC 201 (22 August 2000)

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Legislation Cited (1)