Adler v Australian Securities and Investments Commission

[2002] NSWCA 303

Reported Decision: (2003) 43 ACSR 35

New South Wales

Court of Appeal

CITATION:	Adler & Anor v Australian Securities and Investments Commission [2002] NSWCA 303
FILE NUMBER(S):	CA 40538/02
HEARING DATE(S):	9 September 2002
JUDGMENT DATE:	9 September 2002
PARTIES :	Rodney Stephen Adler & Adler Corporation Pty Ltd - Claimants Australian Securities and Investments Commission - Opponent
JUDGMENT OF:	Giles JA

LOWER COURT JURISDICTION :	Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S) :	ED 2753/01
LOWER COURT JUDICIAL OFFICER :	Santow J

COUNSEL:	I M Jackman - Claimants R B S Macfarlan QC & A J Abadee - Opponent
SOLICITORS:	Gilbert + Tobin - Claimants Jan Redfern Solicitor for ASIC - Opponent
CATCHWORDS:	Corporations - order of disqualification from managing - appeal - whether stay of order pending appeal - case for stay not made out.
CASES CITED:	Secretary of State for Trade and Industry v Bannister (1996) 1 WLR 118.
DECISION:	Order that order 1 made by Santow J on 6 June 2002 be stayed pending determination of the appeal to the extent necessary to permit Mr Adler to continue as a director of Adler Corporation for the purposes of (a) Adler Corporation instructing lawyers to prosecute the appeal on its behalf; and (b) Adler Corporation selling assets and using the proceeds of any such sale to pay penalties and compensation in accordance with orders 2, 6 and 7 made by Santow J by 6 December 2002. Notice of motion otherwise dismissed. Order that the claimants pay the opponent's costs of the notice of motion.

CA 40538/02
ED 2753/01

GILES JA

Monday, 9 September 2002

ADLER & ANOR

v

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

Judgment

1 GILES JA: Last year the Australian Securities and Investments Commission (“ASIC”) bought proceedings against, amongst others, Mr Rodney Adler and Adler Corporation Pty Ltd (“Adler Corporation”) alleging contraventions of the Corporations Act 2001 (“the Act”). It was alleged that Mr Adler breached his duties as a director and officer of HIH Insurance Ltd (“HIH”) and its wholly owned subsidiary HIH Casualty & General Insurance Co Ltd (“HIHC”), and that he and Adler Corporation were knowingly involved in breaches by HIH and HIHC of provisions of the Act prohibiting related party benefits and the giving by a company of financial assistance for the purchase of its own or its parent’s shares. ASIC claimed against Mr Adler and Adler Corporation civil penalties and orders for compensation, and against Mr Adler an order of disqualification from managing corporations.

2 The proceedings were heard by Santow J in the latter part of the year. On 14 March this year his Honour published reasons in which he held that the contraventions had been established. On 27 March declarations were made giving effect to his Honour’s conclusions. His Honour then heard submissions in relation to substantive relief. On 30 May he published reasons in which he held that penalty and compensation orders should be made against Mr Adler and Adler Corporation and a disqualification order should be made against Mr Adler.

3 The orders were made on 6 June. They were that Mr Adler and Adler Corporation each pay a pecuniary penalty of $450,000 and pay compensation to HIHC of $7,986,402, and that Mr Adler be disqualified from managing corporations for a period of 20 years from that date.

4 Upon certain undertakings being given to the Court Santow J stayed “the operation and enforcement” of these orders up to and including 3 July. His Honour noted that Mr Adler and Adler Corporation had foreshadowed appeals, and made clear that he intended to provide for a short stay so that application could be made to the Court of Appeal if so desired.

5 Mr Adler and Adler Corporation filed a notice of appeal without appointment on 28 June, and a notice of appeal with appointment (that is, a notice of appeal setting out their grounds of appeal) on 19 July. The grounds of appeal are extensive. They take significant issue with the factual and legal conclusions on which the contraventions are founded, with the arrival at the penalty, compensation and disqualification orders, and with some evidentiary and other matters.

6 By a letter dated 27 June the solicitors for Mr Adler and Adler Corporation wrote to ASIC outlining steps intended to be taken to satisfy the penalty and compensation orders, the steps involving realisation of assets including assets of Adler Corporation, and proposing that the stay granted by Santow J be extended until 6 December 2002 so that those steps could be completed and the orders satisfied. The solicitors proposed also that the disqualification order be stayed to the extent necessary to permit Mr Adler to act as a director of Adler Corporation for the purposes of giving effect to the course of action set out in the letter and of giving instructions in connection with the conduct of the appeal.

7 On 28 June Mr Adler and Adler Corporation filed a notice of motion in the Court of Appeal in which they sought an order “that [the penalty and compensation orders] be stayed until 6 December 2002, or further order” and an order that the disqualification order -

“ … be stayed pending determination of an appeal to this Court to the extent necessary to permit the First Claimant [Mr Adler] to continue as a director of the Second Claimant [Adler Corporation] for the purposes of:

(a) the Second Claimant instructing lawyers to prosecute this appeal on its behalf; and

(b) the Second Claimant selling assets and using the proceeds of any such sale to pay penalties and compensation in accordance with orders 2, 6 and 7 by 6 December 2002.”

8 On the same day ASIC replied to the solicitors accepting the regime for payment of the penalties and compensation, on condition that certain security be provided, and agreeing to the stays. Successive orders made by consent extended the stay granted by Santow J on 6 June up to and including today while the security was put in place. That has now occurred.

9 On 5 September Mr Adler and Adler Corporation filed an amended notice of motion, in which they sought an order that the penalty and compensation orders made by Santow J be stayed until 6 December or further order and an order that the disqualification order made by Santow J -

“ … be stayed pending determination of an appeal to this Court insofar as it relates to the management of Adler Corporation Pty Ltd by Rodney Stephen Adler”.

10 I have today heard the application for these orders, exercising the powers of the Court of Appeal pursuant to s 46 of the Supreme Court Act 1970.

The penalty and compensation orders

11 It was apparent from the correspondence, and was affirmed by ASIC today, that ASIC was content with the course whereby the penalty and compensation orders would be satisfied by 6 December. A substantial sum has already been paid, ASIC holds security for the balance, and the steps outlined should lead to satisfaction by that date.

12 ASIC did not oppose the order sought by Mr Adler and Adler Corporation. I indicated to the parties, however, that in the circumstances it did not seem to me appropriate to continue the stay. The orders made by Santow J did not require payment of the penalties or the compensation by a particular date. Mr Adler and Adler Corporation have been and are taking steps to satisfy the orders with which ASIC is content, and ASIC has no intention of seeking to enforce the orders prior to 6 December. The stay granted by Santow J and subsequently extended was of the “operation and enforcement” of the orders, but there is no occasion to stay enforcement of the orders and the orders should remain in place and be operative – they embody the obligations which Mr Adler and Adler Corporation are meeting by the payments they have made and will make.

13 When this had been considered, Mr Adler and Adler Corporation accepted that the order they sought should not be made. It should be specifically recorded that they did so on the basis that, provided the regime for payment of the penalties and compensation remained in place and was adhered to, ASIC did not intend to enforce the penalty and compensation orders prior to 6 December.

The disqualification order

14 The stay now sought by Mr Adler would have wider effect than the stay sought in the original notice of motion. It would permit Mr Adler to manage Adler Corporation in all its activities, as distinct from for the limited purposes of prosecution of the appeal and satisfaction of the penalty and compensation orders. The latter purpose should be fulfilled by 6 December. The appeal has been fixed for hearing commencing on 17 March next year, but it will occupy a significant time and realistically the result is unlikely to be known until the middle of the year.

15 ASIC had no objection to a stay as sought in the original notice of motion pending determination of the appeal, but opposed the wider stay.

16 The evidence in support of the wider stay was through the affidavit of Ms Colleen Platford of Mr Adler’s solicitors. She said that she had been informed by Mr Adler that, after seeking appropriate advice, he had been “working towards reorganising his affairs so that his business affairs and activities can be conducted without involving him in the management of a corporation”, and that in relation to Adler Corporation he was “considering the various available structures including a partnership structure through which the affairs, which would have previously been carried out by Adler Corporation can be conducted”. She continued -

“I am informed by the First Appellant [Mr Adler] and verily believe that Adler Corporation is the entity through which almost all of the First Appellant’s business activities are conducted. The restructuring of the affairs of Adler Corporation into a partnership will involve, I am informed, a significant re-structuring of the First Appellant’s structures and financial arrangements and the possibility of the transfer of legal ownership in a number of assets to the partnership. This restructuring will incur considerable costs and may have tax consequences. In the event that the First Appellant is successful in his appeal against Justice Santow’s judgment, the First Appellant will be in a position of desiring to re-transfer such assets in a relatively short period of time. For this reason that [sic] the First Appellant seeks a stay of Justice Santow’s order disqualifying him from managing a corporation in so far as it relates to Adler Corporation only.”

17 Santow J made serious findings against Mr Adler. His Honour considered that Mr Adler’s conduct was designed to advance his own interests and those of Adler Corporation, to the detriment of the companies to which he owed obligations as a director or officer, and found that his “semi-covert by-passing of proper corporate safeguards” and failure even at the end of 2000 fully and frankly to disclose his involvement in what had occurred reflected a consciousness of impropriety on his part. These findings are caught up in the challenges in the appeal, but they can not be overlooked in considering how matters should stand pending the hearing of the appeal.

18 Mr Adler had submitted to Santow J that any disqualification order should permit him to be involved in the management of Adler Corporation and its wholly owned subsidiaries. His Honour had not agreed, seeing the protection of the public as prevailing over Mr Adler’s private interests; his Honour said in his reasons of 30 May -

“Here, concededly, Mr Adler will be impeded in his field of activity, which includes financial consultancy and investment, including joint ventures, but that is the very area where he has committed the relevant contraventions. That puts in stark relief the need to make the public protective purpose paramount over Mr Adler's private interests, though it be the case that disqualifying him may require him to be a passive investor with no seat on the board or role in management. Whether that of itself prevents him investing is a matter for him and not a matter for the court to enter into. To the extent that Adler Corporation and its wholly-owned subsidiaries are already engaged in ongoing financial or business activity, should a disqualification order be made against Mr Adler he will simply have to find others to carry on that activity or manage it, independently of him, on the basis that he must , in the public interest, be excluded wholly from that activity. That is, at least until such time as a court is persuaded to grant leave pursuant to s206G, if it be so persuaded in light of the then known facts.”

19 What his Honour said is also caught up in the challenges in the appeal, one of the grounds of appeal being that his Honour erred in failing to qualify any disqualification order in the manner suggested. As a general principle, however, the protective purpose of a disqualification order, and its precedence over the private interests of the person disqualified, should be accepted for this application.

20 The affidavit of Ms Platford provides scant explanation of the affairs of Adler Corporation, or of an unacceptable burden on Mr Adler if the disqualification order is not stayed.

21 From other material before me it seems that Adler Corporation carries on business in part as trustee of a family trust of which the beneficiaries are Mr Adler, his wife Mrs Lynda Adler and their children, and in part not as trustee. A letter from Mr Adler’s solicitors says that “the vast majority of Adler Corporation’s business involves trading in equity or property investments”. What the business activities are, and with whom Adler Corporation has dealings, are otherwise not exposed. It seems clear that third parties stand to be affected by Mr Adler’s management of Adler Corporation if that management continues until the determination of the appeal.

22 What Mr Adler intends to do remains uncertain, six months after Santow J’s first reasons and three months after the disqualification order. I do not consider that it is satisfactorily explained why (the prospect of) adopting a partnership structure is necessary for him to exclude himself from the management of Adler Corporation pending the hearing of the appeal, or why some other course less momentous for a restructuring will not serve so to exclude him while permitting in the interim appropriate financial support and the management by others of the affairs of Adler Corporation.

23 On behalf of Mr Adler it was submitted that he and Adler Corporation had conducted themselves cooperatively and expeditiously in the appeal to the present time, that the stay in force to the present time had not had untoward consequences, and that there was nothing to suggest that a stay in the terms sought would be likely to bring detriment to outweigh the hardship to Mr Adler. Until impugned, and it was not submitted that for this application I should not take them at face value, Santow J’s findings against Mr Adler should be given effect as to the future of Adler Corporation, and I do not think that on the evidence in this application a sufficient countervailing case of hardship to Mr Adler has been made out.

24 It is open to Mr Adler to apply pursuant to s 206G of the Act for leave to manage Adler Corporation. It may be that the evidence on any such application will be more complete, and the interests of the public and Mr Adler can then be more suitably considered than in this application (see Secretary of State for Trade and Industry v Bannister (1996) 1 WLR 118, in which it was said that the equivalent to s 206G should normally be taken up instead of applying for a stay).

The result

25 The existing stay will expire later today. It is not extended in relation to the penalty and compensation orders. As to the disqualification order, the fall-back position was a stay in the terms of the original notice of motion. As I have said, ASIC did not oppose such a stay.

26 I order that order 1 made by Santow J on 6 June 2002 be stayed pending determination of the appeal to the extent necessary to permit Mr Adler to continue as a director of Adler Corporation for the purposes of -

(a) Adler Corporation instructing lawyers to prosecute the appeal on its behalf; and

(b) Adler Corporation selling assets and using the proceeds of any such sale to pay penalties and compensation in accordance with orders 2, 6 and 7 made by Santow J by 6 December 2002.

The notice of motion is otherwise dismissed.

27 I will hear the parties as to costs.

(Parties submitted)

Order that the claimants pay the opponent’s costs of the notice of motion.

**********