Kerkhoffs v Registrar of Aboriginal and Torres Strait Islander Corporations

Federal Court of Australia (Full Court)|2014-05-23|Before: Barker JJ

REASONS FOR JUDGMENT (REVISED FROM THE TRANSCRIPT) THE COURT: 1 This is an appeal against the decision of the primary judge to impose a pecuniary penalty and a disqualification on the appellant under the Corporations (Aboriginal and Torres Strait Islander) Act 2006 (Cth) (the CATSI Act) in respect of four alleged contraventions of that Act, two of which involved courses of conduct. The detail of the primary judge's factual reasoning need not be repeated in these reasons. That is because the sole issue on the appeal has been narrowed simply to the question of whether his Honour failed to apply the totality principle when determining that the overall penalty imposed on Mrs Kerkhoffs should be a pecuniary penalty of $50,000 and a disqualification from being a director of a corporation under the CATSI Act for a period of five years.

Background 2 His Honour gave two ex tempore judgments. He gave the first on the day of the original hearing in which he carefully summarised the facts and the discretionary considerations bearing on the personal circumstances of Leigh Kerkhoffs, the appellant. She had been the chairperson of a charitable company known as Aboriginal and Torres Strait Islanders Corporation for Welfare Services (the company) that had been incorporated under the predecessor of the CATSI Act. In late 2009, the company became insolvent and the Registrar of Aboriginal and Torres Strait Islander Corporations, the respondent, applied for it to be wound up. By then, Mrs Kerkhoffs had engaged in much of the conduct comprising the first two contraventions that we will describe shortly. As a result of the introduction of an independent director, Justin Ericson, who was a certified practicing accountant, and undertakings that were given to his Honour, who was the docket judge, the winding up proceedings were discontinued on 1 February 2010. Subsequently, Mr Ericson resigned because his advice was not being followed and Mrs Kerkhoffs came to engage in the two further contraventions. 3 When his Honour first came to consider penalties, he approached the issue of disqualification on the mistaken assumption, that all the parties before him had adopted, that if the appellant were disqualified under the provisions of s 279-15 of the CATSI Act, it would be a matter for the Australian Companies and Securities Commission (ASIC) to determine whether she should also be disqualified as a director of the two companies in which she held directorships under the Corporations Act 2001 (Cth). That assumption, however, was wrong and gave rise to the second hearing that we will also describe shortly. 4 His Honour proceeded on the basis that Mrs Kerkhoffs' character was unblemished, apart from the circumstances of the matters before him. He said that a discriminating value judgment had to be made about what caused the contravening conduct and the likelihood that that conduct would, in effect, spill over into the conduct of the appellant's family business that was conducted through a company, Kerkhoffs Transport Pty Limited, of which she was a director. He observed that there was no direct translation between the conduct complained of and any impact on the family company. But, he said that those who took board responsibilities in corporations under the CATSI Act needed to understand that the role carried with it duties that were akin to those that fell on directors of companies incorporated under the Corporations Act and that a person did not serve the interests of one's clan or tribal group by failing to adhere to those duties. He said (the first judgment at [37]): "Whilst I have taken into account that this is a case where a pecuniary penalty is warranted, and warranted to the extent that I shall shortly pronounce, I nonetheless have the view that disqualification is necessary." 5 The parties had debated the appropriate period of disqualification that his Honour should impose. The Registrar contended that a seven year period was necessary. His Honour weighed the competing views and came to the conclusion that a five year period was the appropriate period of disqualification, on the basis of the understanding of its impact under the Corporations Act that his Honour had at that time. 6 The primary judge then turned to considering the pecuniary penalty. He addressed that by saying that it was necessary to take into account penalties in respect of the separate incidents as well as the course of conduct. He identified the submissions made by the Registrar as to the impact of the totality principle. The Registrar identified in a table four separate courses of conduct or incidents that he contended merited the imposition of a penalty, namely: (1) the deliberate receipt by the appellant of unauthorised payments totalling $8220.17 when she was chairperson of the company between 11 November 2010 and 16 March 2012. She received those payments after she had been made aware of the related party transactions provisions and prohibitions in Div 268 of Pt 6-4 of the CATSI Act; (2) the decision of the company's board, made when the appellant was participating in the board meeting of 19 October 2009, to forgive her arrears of rent totalling $23,194 that she owed in respect of her residential property that the company owned. That meeting occurred on the day before the winding up proceedings were returnable before his Honour; (3) the decision of the company's board on 8 October 2010, in which the appellant participated, to cause the company to enter into a contract to sell her the property which she was renting (but for which she was not paying rent) at the price of $248,000, being at an undervalue, to her knowledge, of, as his Honour found, $42,000. Mr Ericson had written to the directors earlier, on 25 August 2010, when tendering his resignation that the appellant accepted the next day, stating that the value of that property was $300,000. The impugned decision had followed an earlier board resolution on 20 August 2009 that the company would sell the property to her for $248,000, but that decision had not been acted on until after Mr Ericson resigned; and (4) the appellant's failure to cause the company to keep adequate books and records. Indeed, as his Honour recorded in the first judgment, the liquidator gave evidence that this was the worst instance that he had ever encountered in over 13 years of administration of companies under the CATSI Act and its predecessor. 7 His Honour said that he had taken into account the table below, in which the Registrar had suggested a total of $138,000 in penalties for those four contraventions, namely: Declaration no. Amount taken or conduct Deliberate, dishonest or careless Course of conduct? Penalty amount

8 His Honour then said that he had taken into account the totality principle as well as the discount that ought be afforded to those who cooperated in the administration of justice in the way that Mrs Kerkhoffs had by her ready and timely acknowledgement of her contravening conduct. There is no question that that was an appropriate matter for his Honour to take into account, but he recognised that this was a unique case that required a unique penalty. 9 The primary judge sympathetically considered the appellant's financial circumstances, the wake up call in late 2009 that would have been provided to her by the winding up application and all the evidence that had been put before him. He said that he had a very strong impression that clan and family loyalties had proved triumphant over what Mrs Kerkhoffs should have understood ought to have occurred, particularly once she had received Mr Erickson's advice in late 2009. He said that, as with the disqualification period, there was no bright line in relation to the appropriate penalty. He identified that he had to make an intuitive value judgment reflecting justice in terms of the very real need for general deterrence being tempered with mercy arising from the appellant's particular circumstances, both financial and family, as well as her ready and timely acknowledgement of the contraventions. 10 He adopted the Registrar's submission that a $50,000 penalty was appropriate having regard to all the circumstances, and said that: "That sum was not gainsaid on behalf of Mrs Kerkhoffs, but that was in the context that the penalty should be sufficient alone without the additional burden of disqualification. In my view, the amount proposed by the Registrar is sufficient unto this day. In making that observation, I expressly also take into account that there will be a compensation order in the sum that I've mentioned, and, further, that in the ordinary course of events, costs will follow the event. This is one of those cases where it is necessary, unequivocally, to send a wider message. It is for that reason that I have determined the penalty in the amount of $50,000 and disqualification for a period of five years. In so doing, I am very conscious that there will be a particular hardship indeed for Mrs Kerkhoffs, and necessarily more widely for her family with that."

The second decision 11 The day after his Honour delivered his first reasons, the parties drew his attention to the misapprehension under which they had asked his Honour to proceed concerning the effect of the automatic disqualification provisions in s 206B(5) of the Corporations Act. That provided that a person disqualified from being a director under the CATSI Act was disqualified automatically for the same period from being a director of a corporation under the Corporations Act. His Honour considered that, in the exercise of his discretion, he should allow the proceedings to be re-opened and conducted a hearing later in the week on that question. 12 In his second reasons, the primary judge identified that what he had to decide was whether there should now be a different outcome. He said that the case was one in which he was quite sure that disqualification was necessary in relation to corporations under the CATSI Act and that the Parliament had made the value judgment as to the flow-on consequence under the Corporations Act. His Honour noted that such a consequence could be arbitrary in its effect on persons but said that the Parliament had made that value judgment and that, having taken that into account, he was quite sure that Mrs Kerkhoffs needed to be disqualified from holding office under the CATSI Act for a period. He said that part of his reasoning process in the first judgment had involved the need for general deterrence in respect of persons holding office under the CATSI Act from engaging in less than prudent financial management of corporations under that Act, just as it applied to companies under the Corporations Act. 13 His Honour said (the second judgment at [14]-[15]): "I have also reflected on whether I should, in reopening, change in any way the pecuniary penalty which I imposed earlier this week, having regard to the consequential effect. I have determined that I should not vary that pecuniary penalty. That is because the conduct concerned was sustained and involved serious contraventions. Such mercy as needs to be shown was shown, having regard to the timely confession of those contraventions and the cooperation and the administration of justice by making appropriate allowance for that in the amount of the pecuniary penalty. The end result, then, is that, exercising afresh the discretion, having regard to the correct position in relation to flow-on disqualification, I am nonetheless of the view that there ought to be a disqualification order under the CATSI Act of the duration upon which I earlier settled and that that needs to be imposed as well as a pecuniary penalty." 14 Accordingly, his Honour did not vary the orders that he had made earlier in the week.

The appellant's submissions 15 The appellant argued that there was an error in his Honour's reasoning process in both judgments. The alleged error was that, having arrived at the appropriate amount for a pecuniary penalty as well as for a disqualification period, his Honour failed, in effect, to say to himself: "should I check to see whether the combined effect of the two penal orders that I am making amounts to too great a penalty?" The appellant contended that this was, in effect, a failure to take into account a relevant consideration or amounted to asking himself the wrong question within the principles of House v The King (1936) 55 CLR 499 at 504-505. 16 The appellant referred us to the nature of the totality principle in sentencing for criminal offences identified in Mill v The Queen (1988) 166 CLR 59 at 62-63 and to the remarks of Jacobson J in the Registrar of Aboriginal and Torres Strait Islander Corporations v Matcham (No 2) (2014) 97 ACSR 412 at 437 [198]. There, his Honour referred to the Court being required, in accordance with the totality principle expressed in Mill: "to conduct a final check to ensure that the total or aggregate penalty is not unjust or disproportionate to the circumstances of the case."

Consideration 17 In our opinion, these arguments should be rejected. In both criminal sentencing and the imposition of penalties in respect of civil penalties, excessive subtleties and refinement should be avoided: Pearce v The Queen (1998) 194 CLR 610 at 623 [39] per McHugh, Hayne and Callinan JJ. They went on to hold that sentencing was not a process that leads to a single correct answer arrived at by some process of mathematical precision, and that proper principles should be applied throughout the process: 194 CLR at 624 [46]; see too Lukatela v Birch (2008) 223 FLR 1 at 15-16 [75]-[77] per Rares J. 18 In Australian Competition and Consumer Commission v Telstra Corporation Ltd (2010) 188 FCR 238 at 277 [228]-[229], Middleton J referred to the application of the totality principle in civil penalty proceedings. He said that the Court ought, in that context, determine whether the proposed penalty was appropriate "as a whole". That exercise ensured that the proposed penalty would be just and appropriate for the entirety of the contravening conduct, looking at what was being punished by way of a civil penalty regime. 19 Moreover, there is no doubt that the power to disqualify a person from being a director is a form of penalty: Rich v Australian Securities and Investments Commission (2004) 220 CLR 129 at 147 [37] per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ. 20 The primary judge was alive to all of those factors in the way in which he addressed penalty in this case. It is clear, on a fair view of both of his Honour's sets of reasons, that he considered the overall impact of the pecuniary and disqualification penalties he was imposing as a whole. His Honour also had regard to the consequences for the appellant arising from the compensation order that he would also make together with the declarations of contravention, those being a necessary pre-condition to the exercise of the power to impose a penalty under the CATSI Act. 21 While his Honour did not say that he had double-checked whether or not the combination of the disqualification and pecuniary penalties was in total appropriate, it is plain, in our view, that he did carefully consider the combination of those two penalties in each of the two judgments, as we have explained above. His Honour proceeded on the basis that the overall result at which he arrived reflected an appropriate punishment for the appellant's admitted wrongdoing with which he was being asked to deal.

Conclusion 22 For those reasons, no error in his Honour's sentencing approach is apparent and the appeal must fail. The appellant must pay the Registrar's costs. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Rares, Collier and Barker.

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