Chye v Australian Securities and Investments Commission

REASONS FOR JUDGMENT 1 The applicant, Mr Chye applies to the Court pursuant to s 206G(1) of the Corporations Act 2001 (Cth) ("the Act"), seeking leave to manage and be reappointed as a director of Sanston Securities Australia Pty Ltd ("Sanston"). In support of the application, Mr Chye relies upon his own affidavits of 2 October 2012 and 12 November 2012 together with further oral evidence given by him at the hearing, as well as affidavits of Hooi Kiang Lim of 26 October 2012 and Bobby Chew Chin Guan of 16 November 2012. 2 The Australian Securities and Investments Commission ("ASIC"), opposes the application. 3 I am not prepared to exercise the Court's discretion for the grant of leave under s 206G of the Act and for the following reasons, I have determined to dismiss Mr Chye's application. 4 On 23 September 2010, Mr Chye was declared bankrupt in Malaysia. Mr Chye claimed that he was not aware of this fact until a copy of a letter from Jabatan Insolvensi Malaysia was faxed to him by his father either on 21 or 22 January 2011. He further deposed that upon receipt of that facsimile, he sought his employer's agreement to return to Malaysia. However, due to the responsibilities he held as managing director of his then employer and the illness suffered by his alternate director, he was asked by his employer not to return to Malaysia at that time. 5 In August 2012, Mr Chye became aware that ASIC had issued notices pursuant to s 30 of the Australian Securities and Investment Commission Act 2001 (Cth) to four corporations of which Mr Chye was director. At the time, Mr Chye was a director of thirteen corporations, including Sanston. Upon becoming aware of the service of the s 30 notices, Mr Chye sought legal advice. He deposed that it was only then that he became aware that he was automatically disqualified from managing Australian corporations pursuant to s 206B(3) of the Act by reason of being declared a bankrupt in Malaysia. On 5 September 2012, after receiving legal advice, Mr Chye took steps to resign as a director from all companies to which he was appointed and to make this application. 6 Mr Chye seeks leave only to manage and be reappointed as a director of Sanston. Sanston was registered on 2 March 2012. It is an investment advisory company based in Melbourne. It holds an Authorised Representative Licence which authorises it to provide general financial product advice and to deal in the following classes of products to wholesale clients: (a) basic deposit products; (b) debentures, stock bonds issued or proposed to be issued by a government; (c) interests in managed investment schemes; and (d) securities. 7 Whilst Sanston holds an Authorised Representative Licence, the giving of financial advice is a small part of its operation and is restricted to wholesale clients. Sanston is also involved in capital raisings and corporate restructuring and assists distressed companies to raise capital by connecting them with potential investors. Sanston primarily targets investors from Asia who want to invest in Australian companies. Mr Chye is the sole shareholder of Sanston. Mr Hooi Kiang Lim became a director of Sanston upon Mr Chye tendering his resignation on or about 5 September 2012. 8 The relevant legal principles are not in dispute. They have been conveniently set out in a number of cases, including in Adams v Australian Securities and Investments Commission (2003) 46 ACSR 68 at [8] (Lindgren J) and more recently in Duffy, Re Westgate Ports Pty Ltd (2010) 79 ACSR 267 at [19] (Gordon J), where her Honour said: As the Applicant submitted, the principles and relevant factors in considering an application under s 206G of the Act are well established (see generally Adams v Australian Securities and Investments Commission (2003) 46 ACSR 68 at [8]); see also Re Altim Pty Ltd [1968] 2 NSWR 762; Re Ferrari Furniture Co Pty Ltd [1972] 2 NSWLR 790; Re Macquarie Investments Pty Ltd (1975) 1 ACLR 40; Re Maelor Jones Pty Ltd (1975) 1 ACLR 4; Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203; Re Zim Metal Products Pty Ltd (1977) 2 ACLR 553; Re Marsden (1981) 29 SASR 454; Re Australian Limousin Breeders Society Ltd (1989) 7 ACLC 426; Murray v Australian Securities and Investments Commission (1993) 12 ACLC 11; Pace v Australian Securities and Investments Commission (1999) 17 ACLC 1674; Re Seymor [2002] TASSC 85; Chew v National Companies and Securities Commission (No 2) [1985] WAR 337; Borsboom v Australian Securities Commission (unreported, Supreme Court of Western Australia, White J, 17 January 1997). Those principles may be summarised as follows: 1. The Applicant bears the onus of establishing that the Court should make an exception to the legislative policy underlying the prohibition; 2. The legislative policy is one of protecting the public, not one of punishing the offender: Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80 at [56]; cf Australian Securities and Investments Commission v Vizard (2005) 145 FCR 57 at [35] and Rich v Australian Securities and Investments Commission (2004) 220 CLR 129 at [41] - [43]; 3. Another objective is to deter others from engaging in conduct of the particular kind in question; 4. The prohibition itself contemplates that there will be hardship to the offender. Therefore, hardship to the offender alone is not a persuasive ground for the granting of leave; 5. The Court in exercising its discretion will have regard to the following factors (Re Magna Alloys 1 ACLR 203 at 205; cited in Re Zim Metal Products 2 ACLR 553 at 555): (i) the nature of the offence; (ii) the Applicant's general character, including conduct prior to and in the period since the offence; (iii) any risks to shareholders, creditors, employees or to the public should the Applicant assume the management position proposed; (iv) any acknowledgement of wrongdoing and co-operation by the Applicant; (v) whether the Applicant's general character is such that he has never before offended, whether he is a valuable and contributing member of the community and whether re-offending is unlikely: see for example, Pace 17 ACLC 1674 at [7]; (vi) the structure of the companies. (The Applicant referred to Jansen v Australian Securities and Investments Commission [2003] FCA 1564, where Mansfield J found the shareholding structure to be of significance in granting leave, as the company had only three shareholders, including the applicant, and the other shareholders were aware of his background and were supportive of his application: in particular at [12] and [14]); (vii) the degree of control which the Applicant would be able to exercise (Re Marsden 29 SASR 454; cited in Pace 17 ACLC 1674 at [23]) and the level of supervision (Pace 17 ACLC 1674 at [29]); and (viii) whether the Applicant has before the Court a specific proposal to take part in the management of a specified corporation or corporations, and whether what is proposed accords with proper commercial standards (see Re Shneider (1996) 71 FCR 69 in which Drummond J stated that the legislative policy of public protection could not be met without a specific and commercially proper proposal before the Court. Re Shneider 71 FCR 69 concerned the predecessor of s 206G of the Act, s 229(3) of the Corporations Law, however the legislative policy and the approach to be adopted would be consistent, particularly as s 206G specifically refers to leave to manage a particular corporation). 9 As noted above, one of the matters that the Court will have regard to in an application of this kind is the general character of the applicant, including his conduct in the intervening period since his disqualification. The matter that concerns me greatly in this case is the manner in which Mr Chye has conducted himself in relation to the debts he owes in Malaysia and his obligations arising from the Malaysian bankruptcy. That is particularly so in the context of the following evidence initially given by Mr Chye in his first affidavit: It is not my usual practice to have unpaid debts, and had I been aware of the CIMB debt, I would not have ignored it or any demands sent in respect of it. 10 There are four debts registered in the Malaysian bankruptcy. Three are not disputed by Mr Chye. They total a very large sum of approximately A$974,000. On the evidence, these debts have been outstanding since 2003. No proper explanation is given by Mr Chye as to his failure to pay what his own evidence admits to be undisputed debts. Mr Chye's unparticularised evidence that his lawyers have been trying to negotiate a settlement of these undisputed debts since 2008 is largely uninformative. 11 Secondly, and of greater concern, is Mr Chye's conduct in relation to the fourth debt to CIMB, a government owned and controlled bank in Malaysia. Mr Chye deposed that he had no knowledge of this debt and disputes it. He says that had he been aware of it, he would not have ignored it or any demands made in respect of it. I am unable to accept that evidence in the light of the fact that from January 2011 Mr Chye was aware of the bankruptcy and that CIMB was the petitioning creditor in the bankruptcy. Yet, on the evidence before me, Mr Chye took no steps until some 18 months thereafter, to seek particulars of the CIMB debt or to otherwise address it. It was not until 19 July 2012 that Mr Chye first made inquiries through his Malaysian legal representatives of the official assignee in Malaysia as to the debts registered in the bankruptcy. 12 The evidence also shows that Mr Chye ignored obligations imposed on him by the Malaysian bankruptcy to cooperate with the official assignee in Malaysia. I would infer that Mr Chye was well aware that disclosure obligations were imposed upon him on becoming a bankrupt. His evidence does not suggest that he was not aware. He was certainly well aware by January 2011. The letter he received at that time spelled out his obligations to attend the Insolvency Department in Malaysia and to provide a list of his assets and a list of his debtors. 13 Mr Chye's entirely unconvincing evidence is that he failed to provide the official assignee with the necessary information required until early September of 2012, some 20 months after becoming aware of the bankruptcy, because he was extremely busy running Sanston and had no time to complete the necessary forms. Nor has the nature of the disclosure now provided by Mr Chye to the official assignee been put into evidence. I am unable to form a view as to whether or not Mr Chye has in fact now properly cooperated with the official assignee in Malaysia, including by disclosing details of his assets (including those in Australia). 14 As I have said, to some extent Mr Chye has attempted to explain his non-engagement with the Malaysian bankruptcy since he first became aware of it by reference to his work commitments. He suggested that he was precluded from travelling to Malaysia by reason of those commitments. He has not, however, explained why it took him some 18 months to instruct his lawyers to commence inquiries. 15 I can only conclude that Mr Chye either deliberately chose to ignore the Malaysian bankruptcy and the underlying debts upon which it was founded or has been deleterious in his handling of the bankruptcy. On either basis, his conduct has been irresponsible. Even if it be accepted that the incurring of the debts in question involved no dishonesty or impropriety which, for current purposes, I accept. Mr Chye has not acted responsibly in relation to those debts: compare Re Application of Chapman (2006) 228 ALR 586 at [12] and [17] (Barrett J). 16 As Middleton J said in Australian Securities and Investments Commission v Healey (2011) 196 FCR 291 at [14]: A director is an essential component of corporate governance. Each director is placed at the apex of the structure of direction and management of a company. The higher the office that is held by a person, the greater the responsibility that falls upon him or her. The role of a director is significant as their actions may have a profound effect on the community, and not just shareholders, employees and creditors. 17 That is particularly so in circumstances where the person concerned is either the sole director or the controlling director of the corporation. I have no doubt that given Mr Chye is the sole shareholder of Sanston, if he were to resume as the director, he would operate at the apex of Sanston's management structure and likely operate unencumbered by any conflicting positions taken by any other director, including Mr Lim. Mr Lim's evidence makes it fairly clear that he would likely defer to Mr Chye in relation to the management of Sanston. 18 ASIC has raised other matters relating to Mr Chye's integrity which I need not determine. 19 Mr Chye's irresponsible behaviour in relation to his bankruptcy provides a sufficient basis for the Court to come to the view that he has failed to establish that he is a person who can be relied upon to honour in a timely and appropriate manner, the obligations and responsibilities of a director. Whilst Sanston is a small company in terms of its staff, it deals in transactions which involve vast sums of money. It is also a corporation licensed to give securities advice even if it be the fact that in the past it has only done so as a relatively small part of its operation. It is a corporation heavily involved in trade, and the very point of this application is to substantially increase that trade by facilitating Mr Chye's return to its management. This is not a situation where members of the public are unlikely to be exposed to any great financial risk as a result of the corporation's activities: compare Re Australian Limousin Breeders Society Ltd (1989) 7 ACLC 426 at 430 (Powell J). 20 The legislative policy is one of protecting the public. In my view, Mr Chye has failed to establish that the Court should make an exception to the legislative policy in his case. 21 I am primarily of that view because I am unable to grant the indulgence sought with sufficient confidence that, whilst Mr Chye remains a bankrupt and until his very substantial debts are paid, he may be trusted to fulfil the obligations of a director in a way which gives proper protection to the interests of the public. I say that in circumstances where although there is evidence of negotiations taking place to resolve Mr Chye's Malaysian debts, the evidence before the Court does not identify Mr Chye's financial capacity to meet the debts which he owes. 22 I have taken into account the preparedness of Sanston to give an undertaking that whilst Mr Chye remains an undischarged bankrupt it would not receive in its own right, or hold on trust, any moneys on behalf of any third parties. Two other conditions have been suggested as follows: (a) At all times while the status of Mr Chye as an undischarged bankrupt in Malaysia continues, he shall not be the sole signatory on any account maintained by Sanston with any bank or financial institution; and (b) Mr Chye shall complete a course of continuing education in relation to director's duties and company management administered by the Australian Institute of Company Directors (or such other course approved by ASIC) on or before 16 November 2013 and shall provide ASIC with proof of satisfactory completion before 1 December 2013. 23 In my view, those matters do not tip the balance in Mr Chye's favour. None of those matters impact upon the capacity of Sanston to incur debt. It seems to me that a significant rationale for the policy by which a bankrupt is disqualified from acting as a director, is that a person in the difficult financial position in which a bankrupt usually finds him or herself, ought not be put in charge of a corporation and be given a capacity to make significant financial decisions whilst subject to that personal financial distress. Permitting a director to operate in that context makes both the corporation and the persons with whom it deals more vulnerable. 24 The applicant's application must be dismissed. The Court will make the following orders: 1. The application be dismissed. 2. The applicant pay the costs of the intervener. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Bromberg.