Whitlam v Australian Securities and Investments Commission

Court of Appeal (NSW)|2002-09-16|Before: Giles JA, Gzell J

CITATION : Whitlam v Australian Securities and Investments Commission [2002] NSWCA 312 FILE NUMBER(S) : CA 40709/02; 40710/02 HEARING DATE(S) : 16 September 2002 JUDGMENT DATE : 20 September 2002

PARTIES : Nicholas Richard Whitlam - Claimant Australian Securities and Investments Commission - Opponent JUDGMENT OF : Giles JA

LOWER COURT JURISDICTION : Supreme Court LOWER COURT SC 4421/01 FILE NUMBER(S) : LOWER COURT Gzell J JUDICIAL OFFICER :

COUNSEL : A J L Bannon SC & J Stephenson - Claimant M A Pembroke SC & D R Stack - Opponent SOLICITORS : Watson Mangioni - Claimant Jan Redfern, Solicitor for the Australian Securities and Investments Commission - Opponent CATCHWORDS : Companies - disqualification order - stay pending appeal - whether should be granted - serious findings - little evidence of hardship - on facts, stay refused. ND DECISION : Notices of motion dismissed with costs.

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40709/02 CA 40710/02

Friday 20 September 2002 WHITLAM v AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION WHITLAM v AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

Judgment 1 GILES JA: This is an application for the stay pending an appeal of orders made by Gzell J by which Mr Nicholas Whitlam was prohibited from managing a corporation for five years and required to pay to the Commonwealth a pecuniary penalty of $20,000. I am exercising the powers of the Court of Appeal pursuant to s 46 of the Supreme Court Act 1970. 2 For the reasons which follow, in my opinion the application should be dismissed.

The proceedings before Gzell J 3 The Australian Securities and Investments Commission ("ASIC") alleged that Mr Whitlam had contravened provisions of the Corporations Law and the Corporations Act 2001, first by failing to vote as proxy against a resolution at an annual general meeting of NRMA Ltd ("NRMA") in accordance with the instructions of members who appoint him proxy, and secondly by altering the minutes of a meeting of directors of NRMA Insurance Group Ltd ("NIGL"). 4 Gzell J delivered a judgment on 19 July 2002 ([2002] NSWSC 591) in which he held that contraventions had occurred but that Mr Whitlam should be relieved from any liability for the contravention in relation to altering the minutes. Declarations were made that the contraventions had occurred but that there should be the relief from liability. After further submissions as to relief his Honour delivered a judgment on 15 August 2002 ([2002] NSWSC 718) in which he held that the orders the subject of appeal should be made. His Honour stayed the orders up to and including 23 September 2002 to enable Mr Whitlam to apply to the Court of Appeal. 5 The submissions in the application call for an understanding of the findings made by Gzell J and his reasons for the orders. The judgments were comprehensive, and what follows is only a summary sufficient for present purposes.

The failure to vote as proxy 6 Mr Whitlam was a director of NRMA and its President, and chaired the annual general meeting of NRMA held on 28 October 1998 ("the AGM"). As Chairman he was appointed as the proxy of 3,973 members of NRMA, with instructions to vote against resolution 6 at the AGM. Resolution 6 proposed amendments to the NRMA constitution to put the control of remuneration of members within the NRMA Group in the hands of the members of NRMA. A further resolution 7 was proposed, conditional on the passing of resolution 6, that the remuneration payable to directors be increased. Mr Whitlam supported both resolutions. 7 Mr Whitlam placed the poll paper for the 3,973 votes against resolution 6 in the ballot box. He did not sign the poll paper. The returning officer, Mr Nicholas Hullah, believed that the votes on an unsigned poll paper could not be counted, and having obtained confirmatory legal advice instructed his staff not to count the votes. In the absence of the votes, the resolution was carried. Resolution 7 was then carried. 8 As a result of further research by the NRMA's legal officer, and consequent counsel's advice, in early November 1998 the votes were counted and the result was reversed. 9 The essential issue before Gzell J was whether, as Mr Whitlam maintained, his omission to sign the poll paper was inadvertent rather than deliberate. 10 Prior to the AGM Mr Hullah provided regular summaries of the proxies for, against and unallocated in respect to each resolution to be considered at the AGM, and had a number of conversations with Mr Whitlam concerning proxies. The evidence of Mr Whitlam and Mr Hullah as to the conversations conflicted. Mr Whitlam and Mr Hullah had a conversation at the AGM in which Mr Hullah queried the non-signature of the poll paper, and their evidence as to the conversation again conflicted. There was evidence of reference between Mr Whitlam and Mr Hullah after the AGM to the failure to sign the poll paper. 11 Gzell J preferred the evidence of Mr Hullah to that of Mr Whitlam. His Honour found that, contrary to the evidence of Mr Whitlam, Mr Whitlam did not believe that the passing of resolution 6 was "a tight run thing" and was aware that the votes of members who had appointed proxies to vote on resolution 6 would result in that resolution not being passed. His Honour summarised his further findings - "I am persuaded and find as facts that that the defendant did ask Mr Hullah on 26 October 1998 in what circumstances proxy holders could fail to acquit their responsibilities and was told that a proxy holder could miscount the number of votes, might leave the meeting prior to the poll being called and might fail to sign a proxy paper. It is common ground that the defendant was provided with up to three poll papers with respect to members' appointments of him as proxy in his capacity as chairman of the meeting. It is common ground that he failed to sign the poll paper with respect to members directing him to vote against resolution 6. I find that the defendant filled out that poll paper for resolution 6 at a time when the meeting was quiet and that he displayed no inconvenience in completing his tasks. I am satisfied that the poll paper in question was one of the earliest the defendant filled out with respect to resolution 6. I find that Mr Hullah in confronting the defendant with his unsigned poll paper said words to the effect: "This poll paper is not signed. Was this a deliberate action on your part?" to which I find the defendant responded in words to the effect: "I realise this makes the vote invalid. I'm acting in the best interest of the organisation. You can see that this place is ungovernable". I find that this statement to Mr Hullah implies foreknowledge. I find that there was no reaction by the defendant consistent with innocence. I find that on 30 October 2002 the defendant said to Mr Hullah words to the effect that if he suggested the failure to sign the poll paper was a deliberate act he should be prepared "to put his house on it". I find that this attempt to silence Mr Hullah is consistent with guilt. I infer from my findings of fact that the defendant deliberately failed to sign the poll paper in question. Mr Hullah had no reason to manufacture his file note or his evidence. I have found his evidence reliable having considered the criticisms of the defence. 120 Until he swore his affidavit in these proceedings, the defendant had not suggested to anyone that he was better off with the failure of resolution 6 and therefore lacked a motive in having it passed. His only explanation for his failure to raise the issue earlier was that it was an omission. The stance that he lacked a motive conflicts with his support of resolution 6 both before and at the annual general meeting. The basis for his contention is the fees in fact drawn by him because of his position on the board of SGIO. The possibility of a takeover of SGIO did not arise until September 1998 and there was no guarantee that it would be successful. The defendant agreed that the SGIO might not become a wholly-owned subsidiary. If it did not, there was doubt as to his position on the board and doubt as to the level of fees that he might draw. I find this evidence to be a recent reconstruction on the defendant's part that reflects badly on his credit. The defendant's public position was support for resolution 6. If it was passed the directors collectively, and he individually, stood to gain an increase in fees upon the passing of resolution 7. I find that the defendant had a motive to have resolution 6 passed." 12 In his judgment of 15 August 2002 Gzell J said - "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." 13 Gzell J held that Mr Whitlam deliberately failed to sign the poll paper, and that he had contravened s 250(4) of the Corporations Law (requiring a proxy to vote in accordance with the instructions of the appointing member) and s 232(2) and (6) of the Corporations Law (requiring a director to act honestly and not make improper use of his position to gain an advantage for himself). He declined to relieve Mr Whitlam of liability in the exercise of his discretion under s 1317S(2) of the Corporations Act, saying that the findings he had made negated an honest omission on Mr Whitlam's part.

Altering the minutes 14 Mr Whitlam was a director of NIGL. His remuneration package was considered at a meeting of the NIGL board committee on 10 August 2000. He absented himself while that matter was discussed, and the meeting was relevantly chaired by Mr Geoffrey Cousins. 15 Draft minutes of the meeting were included in the board papers for the NIGL board meeting scheduled for 6 September 2000. After recording Mr Whitlam's departure and Mr Cousins taking the chair they said, "The following points in relation to Chairman's remuneration were then noted … " and against four bullet points set out the elements of a remuneration package. The fourth element dealing with performance based equity participation was stated to be "in principle". 16 Mr Whitlam sent an altered version of the minutes to the NIGL secretariat on 4 September 2000. The alterations went beyond the portion of the minutes concerning his remuneration package. As to that matter, the words "then noted" were deleted, the words "in principle" part of the statement of the fourth element were deleted, and words were added after the bullet points, "IT WAS RESOLVED to accept these recommendations". 17 At the meeting of 6 September 2000 some directors said that the minutes were not accurate. The minutes were not adopted. The fourth element was changed to provide for the equity participation to be examined further and referred back to the board. 18 Mr Whitlam said that the revisions were matters of semantics, and that he did not make them to reflect events that did not occur at the meeting. He said that he had spoken with all the directors bar one between the meetings, and that to greater or lesser extent they gave him information which justified his making the alterations to the minutes. Mr Cousins had given evidence that he had told Mr Whitlam that the remuneration package was not approved by the board. Mr Whitlam denied that he had been told this. 19 Gzell J did not accept that the directors provided information to Mr Whitlam which justified his making the alterations to the minutes, and specifically accepted the evidence of Mr Cousins. His Honour considered that by altering the minutes, by causing the altered minutes to be circulated to the other directors, and by entertaining their adoption at the meeting of 6 September 2000 Mr Whitlam did not exercise reasonable care and diligence. However, he did not think that Mr Whitlam acted dishonestly in proffering the altered minutes, saying that his dishonesty lay in denying the conversation with Mr Cousins rather than in putting forward the alterations to the minutes in conflict with what Mr Cousins had told him. 20 His Honour held that Mr Whitlam had contravened s 180(1) of the Corporations Act (requiring a director to act with reasonable care and diligence), but was not satisfied that he had contravened ss 181(1) or 182(1) of the Corporations Act (requiring a director to act in good faith and for a proper purpose and not make improper use of his position to gain an advantage for himself.) In the exercise of his discretion under s 1317S(2) of the Corporations Act he relieved Mr Whitlam of any liability to which he would otherwise be subject for his breach of s 180(1).

The orders 21 When considering the orders to be made Gzell J declined to have regard to Mr Whitlam's conduct in relation to altering the minutes in determining the appropriate orders in relation to the failure to vote as proxy. He noted that in fact there was no consequence for Mr Whitlam or NRMA as a result of the contraventions found, because the result of the poll was reversed and there was no increase in remuneration payable to directors, but did not accept that Mr Whitlam had promptly sought to cure the contraventions. He accepted that there was no likelihood of a repetition of a failure to sign a poll paper, but considered that what was relevant was repetition of conduct of a similar sort. 22 His Honour noted that Mr Whitlam regretted the fact that the poll paper was not signed and regretted the trouble that had occurred but did not resile from the evidence he had given, and found that Mr Whitlam lacked contrition for his conduct and that there was a likelihood of repetition: this, however, was qualified by his Honour's acceptance of "the tension which exists when a matter is the subject of appeal and there is perceived to be some significance in a resolute denial of events found by the primary judge". 23 Many testimonials favourable to Mr Whitlam were presented, and Gzell J said - "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." 24 His Honour further said - "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." 25 The nub of his Honour's reasons for the orders was - "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." 26 His Honour decided that he should make no order as to costs, essentially because each of ASIC and Mr Whitlam had had partial success and partial failure in the proceedings.

The appeal 27 Mrr Whitlam filed a notice of appeal without appointment (proceedings 40709/02) on 15 August 2002, between the two judgments, and an amended notice of appeal without appointment on 13 September 2002 taking up the orders made pursuant to the second judgment. At the hearing of this application on 16 September 2002 he had not filed a notice of appeal with appointment, that is, a notice of appeal setting out grounds of appeal. A draft notice of appeal with appointment was handed up, which I have caused to be marked MFI 1 and placed with the papers. It contains no less than 91 grounds of appeal. They challenge findings of fact and decisions of law involved in holding that the contraventions had occurred and they challenge the orders then made. 28 ASIC filed a notice of cross-appeal without appointment on 28 August 2002, appealing against the relief from liability in relation to the alteration of the minutes and the order as to costs. 29 Against the possibility that leave to appeal was required, Mr Whitlam also filed a holding summons for leave to appeal and an amended holding summons for leave to appeal (proceedings 40710/02) on 15 August 2002 and 13 September 2002 respectively. For present purposes it is not necessary to consider whether leave to appeal is required.

This application 30 The application was brought by notices of motion filed in both proceedings on 4 September 2002. The notices of motion inappropriately sought that all orders made by Gzell J be stayed pending determination of the appeal, that is, that an order otherwise dismissing the originating process and the order that there be no order as to costs as well as the disqualification order and the order for a pecuniary penalty. The application was in fact confined to the disqualification order, and it was accepted that for stay purposes the order for a pecuniary penalty was "not something … of any particular detriment". 31 The evidence in support of the application was through the affidavit of Mr Shahan Ahmed sworn on 13 September 2002. Mr Ahmed is a solicitor employed in the firm of solicitors acting for Mr Whitlam. 32 Mr Ahmed drew attention to evidence given by Mr Whitlam in the proceedings below - "A substantial part of my remuneration and my life was and is sitting on boards of significant companies and providing consultancy services to them. The significance to me of my reputation as an honest director cannot be overstated." 33 Mr Ahmed said that he was informed by Mr Whitlam that the publicity associated with the judgments of Gzell J had had a significant effect on his reputation and affected his ability to earn an income, "especially at his age", and that if there was no stay of the disqualification further irreparable harm would be done to his reputation and ability to earn an income and to pursue his personal charitable interests. 34 According to Mr Ahmed's affidavit, Mr Whitlam had resigned as a director of NRMA and all NRMA subsidiary companies of which he was a director, and remained a director of six named companies. The named companies did not include NIGL. 35 Three of the companies were described in submissions as family companies, from company search materials the directors being Mr Whitlam and Mrs Sandra Whitlam and the shareholders directly or indirectly being those two persons. The evidence did not disclose the activities of the family companies or what income Mr Whitlam or Mrs Whitlam received through the companies. Other than the broad second-hand assertion through Mr Ahmed, there was nothing to say why or how Mr Whitlam would be adversely affected if unable to manage the family companies. 36 Three of the companies were described in submissions as charitable companies, and in the affidavit as non-profit organisations established for community or benevolent purposes. Mr Whitlam receives no remuneration for his services on the boards of the charitable companies. The company search materials showed other persons as managers of the companies. A letter from one of the charitable companies expressed confidence in Mr Whitlam and the desire to retain his services. 37 Counsel for Mr Whitlam stated that Mr Whitlam was prepared to undertake to the Court not to manage any other company without the consent of ASIC pending the determination of the appeal. 38 In his submissions on the application counsel for Mr Whitlam outlined some of the challenges to the decisions of Gzell J to be found within the grounds of appeal. Some involved questions of law, for example that in failing to vote as proxy Mr Whitlam was acting as a chairman and not as a director and that in any event Mr Whitlam did vote as proxy by putting the poll paper in the ballot box although the poll paper was not signed. Others involved questions of fact, in particular that there were a number of reasons why Mr Hullah's evidence should not have been preferred to that of Mr Whitlam. 39 Plainly enough there was not reference to all the proposed grounds of appeal, and Mr Whitlam's case on appeal was only sketched out. On a stay application it is material to consider the prospects of success on appeal, although the application is not an occasion for detailed consideration of the merits of the appeal. The challenge to Gzell J's factual findings will be important in the appeal, hence the desirability of an understanding of the findings and, no doubt, the attention given by Mr Whitlam's counsel to reasons why Mr Hullah's evidence should not have been preferred to that of Mr Whitlam. In this case the challenge will face the well-accepted principles of appellate restraint where the trial judge makes credibility-based findings with the benefit of seeing and hearing the witnesses, as counsel for Mr Whitlam acknowledged, and while I am prepared to proceed on the basis that Mr Whitlam has an arguable challenge I do not think more has been shown. Even if on legal grounds Mr Whitlam did not fail to vote as proxy, as to which there may be more to be said, that will not impact on the factual findings or the foundation they provide for the contraventions of s 232 of the Corporations Law. In my opinion the application should be determined on the basis that, while there may be arguable grounds of appeal, Gzell J's findings of fact and opinion as to Mr Whitlam's fitness to manage a corporation are heavy in the balance when exercising the discretion. The findings are serious. The protection of the public is of importance even pending the determination of the appeal. 40 In this I put aside the findings adverse to Mr Whitlam made by Gzell J in relation to altering the minutes. Counsel for ASIC placed some reliance on them, without opposition from counsel for Mr Whitlam. Whether they can properly be taken into account was not argued, but Gzell J did not have regard to Mr Whitlam's conduct in relation to altering the minutes in determining the appropriate orders in relation to failure to vote as proxy and I do likewise. 41 Counsel for Mr Whitlam submitted that, given the unblemished past, there was no compelling risk of detriment to the public if Mr Whitlam were able to manage corporations, subject to the consent of ASIC, but that there would be significant detriment to Mr Whitlam if the stay were not granted. 42 I have earlier described Gzell J's findings as serious. I do not think that, on this application, risk of detriment to the public should be discounted. ASIC should not be required to be the arbiter of management of corporations. If there is particular occasion for Mr Whitlam to manage a corporation application can be made under s 206G of the Corporations Act. That is the appropriate means of alleviating the requisite protection of the public interest. 43 In the state of the evidence as it is I do not think a case has been made out of direct pecuniary hardship to Mr Whitlam if he is unable to manage corporations pending the determination of the appeal. He is not presently a director of other than the six named companies, and there was no evidence of opportunities to earn remuneration as a director of other companies which would be available pending the determination of the appeal but for the disqualification order. To repeat, if there is particular occasion for Mr Whitlam to manage a corporation, application can be made under s 206G of the Corporations Act. There is simply no evidence of directors' fees which will have to be foregone, or income earning activities of the family company which will be adversely affected, if a stay of the disqualification order is not granted. 44 Counsel for Mr Whitlam submitted, in effect, that there would be indirect pecuniary hardship to Mr Whitlam if he is unable to manage corporations pending the determination of the appeal. It does not sit well with the few directorships now held and the proffered undertaking to say, as counsel for Mr Whitlam said, that Mr Whitlam will be affected by a gap in an otherwise successful period of corporate management, and may suffer hardship because, if the appeal succeeds he will have to take up corporate management afresh. There was no evidence to back up any such effect. Again, Mr Whitlam can avail himself of s 206G of the Corporations Act. 45 It may be accepted that, having regard to the findings made and such support as there is for Mr Whitlam's reputation has been adversely affected by the findings made by Gzell J and the disqualification order. The harm to reputation asserted by Mr Ahmed has already occurred. If Mr Whitlam is to be vindicated, and his reputation restored, it will be by success in his appeal. It is difficult to see that a stay would operate as a kind of interim restoration of reputation, and it should not be granted for that purpose. This is not a case in which such doubt has been shown as to the findings of the trial judge that, by so stating and granting a stay, any significant repair to damaged reputation might be worked.

Conclusion 46 I am not persuaded that, having regard to the findings made and such support as there is for a case of hardship to Mr Whitlam if the disqualification order is in force pending the determination of the appeal, a stay of the disqualification order should be granted. 47 I order that the notices of motion be dismissed with costs. **********

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