Scott v Australian Securities and Investments Commission

REASONS FOR JUDGMENT 1 By a decision dated 27 January 2010, the Administrative Appeals Tribunal ('the Tribunal') affirmed the decision of a delegate of the Australian Securities and Investments Commission ('ASIC') to disqualify Anthony James Scott from managing corporations for a period of 18 months, pursuant to s 206F of the Corporations Act 2001 (Cth) ('the Corporations Act'). 2 On 24 February 2010, Mr Scott filed and served a notice of appeal from the Tribunal's decision, pursuant to s 44 of the Administrative Appeals Tribunal Act 1975 (Cth) ('the AAT Act'). 3 Section 206F of the Corporations Act empowers ASIC to disqualify a person from managing corporations for up to five years if the requirements set out in the section are met. The section relevantly provides as follows: ASIC's power of disqualification 206F (1) Power to disqualify ASIC may disqualify a person from managing corporations for up to 5 years if: (a) within 7 years immediately before ASIC gives a notice under paragraph (b)(i): (i) the person has been an officer of 2 or more corporations; and (ii) while the person was an officer, or within 12 months after the person ceased to be an officer of those corporations, each of the corporations was wound up and a liquidator lodged a report under subsection 533(1) (including that subsection as applied by section 526 35 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006) about the corporation's inability to pay its debts; and (b) ASIC has given the person: (i) a notice in the prescribed form requiring them to demonstrate why they should not be disqualified; and (ii) an opportunity to be heard on the question; and (c) ASIC is satisfied that the disqualification is justified. (1A) To avoid doubt, the references in paragraph (1)(a) to corporations include references to Aboriginal and Torres Strait Islander corporations. 206F (2) Grounds for disqualification In determining whether disqualification is justified, ASIC: (a) must have regard to whether any of the corporations mentioned in subsection (1) were related to one another; and (b) may have regard to: (i) the person's conduct in relation to the management, business or property of any corporation; and (ii) whether the disqualification would be in the public interest; and (iii) any other matters that ASIC considers appropriate. (2A) To avoid doubt, the references in subsection (2) to a corporation includes a reference to an Aboriginal and Torres Strait Islander corporation. 4 The operation of section 206F has been explained by the Full Court of the Federal Court in Murdaca v Australian Securities and Investments Commission (2009) 178 FCR 119. In paragraph 101 of that decision the Court set out a number of propositions summarising the operation of the provision: [101] Our reasons for these conclusions may be shortly stated as follows: (a) Subsection (1) of s 206F comprises, in ascending order of importance: (i) A trigger mechanism (the conditions, filters or gateway) embodied in subs (1)(a) (stage 1); (ii) A procedural fairness requirement (the giving of a show cause notice and an opportunity to be heard): subs (1)(b) (stage 2); and (iii) A merits decision captured in the requirement that ASIC be satisfied that disqualification is justified: subs (1)(c) read with s 206F(2) (stage 3). (b) ASIC's power to disqualify a person from the management of corporations must be exercised for the purposes for which it was granted. Those purposes are the protection of all those persons who deal with corporations from the consequences of the actions of those corporate officeholders who, either through incompetence or dishonesty or a combination of the two, bring about the failure of corporations and thus cause loss to others (Rich v Australian Securities and Investments Commission (2004) 220 CLR 129 ; 209 ALR 271 ; 50 ACSR 242 ; [2004] HCA 42 at [47]-[50]) and the maintenance of professional management standards in the public interest (Visnic v Australian Securities and Investments Commission (2007) 231 CLR 381 ; 234 ALR 413 ; [2007] HCA 24 at [11] and [26]). (c) Section 206F does not give reports prepared by liquidators pursuant to s 533 of the Act any particular status or weight. ASIC may approach the exercise of its power of disqualification under s 206F(1)(c) in any way it thinks fit, subject to complying with s 206F(1) and (2) and subject to respecting and applying the principles referred to in subpara (b) above. (d) Subsection (2) of s 206F informs the exercise of the power given to ASIC by subs (1)(c). Subparagraph (a) of subs (2) lays down a mandatory requirement to which regard must be had and subpara (b) sets out matters to which regard may be had. ASIC is not obliged to have regard to the s 533 report or reports which triggered the disqualification process when considering whether disqualification is justified. No doubt it may do so in an appropriate case but it is not obliged to do so. Rather, it is authorised and empowered to make a decision on the merits as to whether disqualification is justified. It would make no sense at all if it were also required to involve itself in a merits-based decision in relation to the correctness of the relevant s 533 report or reports at stage 1 of the process. In the event that reliance is placed upon the s 533 report or reports at stage 3 of the process, ASIC will be called upon to assess the worth of that report or those reports at that stage in order to decide whether disqualification is justified. (e) Section 206F is an alternative to court action by ASIC. It is meant to be a quick and cheap alternative to court action. However, it cannot be utilised just because ASIC feels that it would like to take action against a particular individual. Certain preconditions for action must be satisfied. But, in the end, the merits consideration by ASIC is intended to take place only once in the process - not at two stages. In a sense, the preconditions provided for in subparas (a) and (b) of s 206F(1) are jurisdictional requirements which must be satisfied before ASIC's power to disqualify under s 206F is enlivened. (f) To interpret s 206F as the appellant has contended would lead to endless challenges during the s 206F disqualification process directed to the validity of the relevant s 533 reports and would be likely to render s 206F unworkable. 5 Once the requirements of s 206F(1)(a) and (b) have been met, the decision whether or not the person should be disqualified involves the exercise of a discretion by ASIC. This stage of the process involves a merits consideration, in the course of which ASIC must decide whether it considers that disqualification is justified, bearing in mind the purposes for which a s 206F disqualification power is conferred. ASIC must be 'satisfied that the disqualification is justified' under s 206F(1)(c) having regard to any matters that ASIC considers appropriate under s 206F(2). 6 A number of matters were raised between the parties relating to the requirements of s 44(1) of the AAT Act and ASIC's application for summary dismissal of the proceeding pursuant to inter alia s 31A of the Federal Court Act 1976. I need not consider these matters. 7 I have come to a clear view that the application should be dismissed. 8 I have been greatly assisted by counsel in the identification of the real issue in this appeal and it arises out of the amendment sought to be made to the notice of appeal. 9 The ground sought to be raised by amendment is as follows: 4.5 Absent any material finding(s) in relation to one of (sic) more considerations of the kind referred to in sub-ss 588G(1)(c) and (2) of the Act, the mere fact of trading whilst insolvent was irrelevant to the issue of whether a ban was justified in relation to the Applicant. 10 The other grounds of appeal clearly had no basis because the Tribunal nowhere found or relied upon the fact that Mr Scott contravened s 588G of the Corporations Act. Each of the original grounds of appeal were essentially predicated on the fact that the Tribunal so proceeded. 11 Before going to the Tribunal's reasons, which upon analysis disposes of this application, I make the following observation concerning s 206F of the Corporations Act. 12 In my view, the approach taken by the Tribunal in Quinlivan v Australian Securities and Investments Commission (2010) AATA 113 was correct when it explained the relationship between s 206F and other parts of the Corporations Act which impose duties on the directors. In Quinlivan, the Tribunal stated as follows: We are not obliged to identify specific breaches of duty or contraventions of the law in order to pass judgment on the adequacy of Mr Quinlivan's performance for the purposes of section 206F. See re Guss v Australian Securities and Investments Commission (2006) AATA 401; (2006) 90 ALD 349 at paragraph 48 per Deputy President Olney. While evidence of contraventions were obviously relevant to a decision to disqualify, the section has a different focus. The operation of the section is triggered by evidence of a pattern of failure. As the Tribunal explained in Re Andrews v Australian Securities and Investments Commission (2006) AATA 25 at [23]. The provision was apparently enacted on the assumption that involvement in one failure might simply be unfortunate, but involvement in two or more separate failures could suggest carelessness and other breach of duty. 13 In relation to this application, the Tribunal was satisfied that two companies of which Mr Scott was an officer had traded while they were insolvent. This was a factual finding open to the Tribunal, given the material that was before it. The fact that Mr Scott had been involved in the management of corporations that had traded while insolvent was a matter that was relevant to the Tribunal's consideration of whether the disqualification was justified in light of the purposes to which the s 206F disqualification power was directed. 14 Before the Tribunal, the main focus was on Mr Scott's failure in maintaining of financial records (see s 206F(2)(b)(i)) and this was in the context of the relevant companies trading while insolvent (see s 206F(2)(b)(iii), another matter that ASIC considered appropriate to consider). 15 I now turn to the reasons of the Tribunal. 16 First, there is no doubt, as counsel for Mr Scott accepted, some period of disqualification would have been appropriate, based upon the Tribunal's findings in relation to Swift Securities & Investments Pty Ltd and the failure to keep proper financial records (see paragraphs 19 to 22 of the reasons of the Tribunal). This failure could have involved breaches (probably in relation to more than one event) of s 286(1) of the Corporations Act. 17 Secondly, the Tribunal understood that the position of the companies and Mr Scott was different in relation to insolvent trading. 18 This is evident from the Tribunal's reasons at paragraph 45: 45. Trading while insolvent is a serious matter. The Tribunal is not entitled to draw any conclusion from the evidence before it that the applicant intentionally permitted the companies to trade while insolvent. Indeed the evidence before the Tribunal suggests, and the Tribunal is satisfied, that the applicant was using his best endeavours to ensure that the companies were placed in a position where, because of the line of credit arranged in the last instance through Swift Malaysia, that the companies met their debts. The applicant was obviously conscious of the financial strain and again used his best endeavours to make suitable arrangements with the ATO to ensure liabilities were met. His action in moving both companies into administration occurred within a short time frame of him realising that there was no hope that the companies were going to be able to meet their liabilities. 19 Further, paragraph 45 is an important paragraph, putting in context what the Tribunal ultimately concluded at paragraphs 52 to 53. At paragraphs 52 to 53 the Tribunal stated: 52. The matters referred to above in their totality warrant consideration of the imposition of a period of disqualification. As the delegate pointed out in his reasons[96] the purpose of the imposition of a period of disqualification is not to punish a person (although clearly it may have that result) but to protect the public. The applicant is a legal practitioner of long standing and is of an age where the likelihood of him successfully re-establishing himself in the corporate world, if a disqualification is imposed, is not high. Nevertheless the Tribunal notes that there were substantial sums of money involved and that the unsecured creditors will recover nothing, that there has been a failure of competence in the maintenance of financial records and trading while insolvent and that employees' entitlements were unable to be met from funds available and had to be paid by taxpayers through the Commonwealth's General Employee Entitlement and Redundancy scheme. It was submitted on behalf of the applicant if any period of disqualification was warranted then it should be limited to the time the ban was imposed by the delegate, being 10 August 2009 to the date the Tribunal delivers this decision. That would be a period of about five months. 53. The Tribunal is satisfied that a ban for approximately five months is too short having regard to the circumstances outlined earlier in the reasons. The breaches are of a magnitude which warrants a ban for a more substantive period even taking into account the personal circumstances of the applicant. The delegate reached a decision that a period of 18 months was warranted. The Tribunal is satisfied that an 18 month ban is justified in the circumstances of this case. 20 There was some debate for me as to what meaning these paragraphs conveyed. A fair reading in the context of all the reasons is what is required to ascertain the true meaning. 21 In my view, the Tribunal's main focus was on the failure of competence in the maintenance of financial records, in the context though of other matters such as substantial sums of money being involved, the fact that unsecured creditors would recover nothing, the fact that the companies were trading while insolvent, and the fact that employees entitlements were unable to be met from funds available and had to be paid by taxpayers through the Commonwealth's General Employee Entitlement and Redundancy Scheme. 22 The context in which there was a failure to maintain records was significant, including the fact that the companies were trading while insolvent and the consequences to third parties. These are matters that ASIC could consider appropriate within the meaning of s 206F(2)(b)(iii) of the Corporations Act in determining whether disqualification was justified. 23 The Tribunal in paragraph 45 of its reasons found favourably to Mr Scott, but, nevertheless, after taking into account all the circumstances (including the insolvency of the companies) ultimately found as it did. 24 I do not consider that the plural references to 'breaches' in paragraph 53 of the Tribunal's reasons detracts from the otherwise fair reading to be given to paragraph 52. It seems to me that the reference to breaches was a general reference to the failure to maintain financial records. In any event, in view of the reasons of the Tribunal, the reference to breaches was not a reference to s 588G of the Corporations Act or to anything that was not otherwise identified earlier by the Tribunal as wrongful conduct on behalf of Mr Scott as a director. 25 In my view, the fact that the companies were 'trading while insolvent', and the Tribunal's reliance on this fact in the context of paragraph 52, did not introduce any irrelevant consideration such as to impugn the decision of the Tribunal. In fact, I would have expected the Tribunal to consider all the circumstances concerning the alleged failure to maintain financial records before considering whether disqualification was justified. 26 For the above reasons, the application should be dismissed and I order accordingly. I certify that the preceding twenty-six (26) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Middleton.