ASX v McLachlan

[2001] NSWSC 1061

Reported Decision: 40 ACSR 99
(2002) 20 ACLC 312

New South Wales

Supreme Court

CITATION:	ASX v McLachlan [2001] NSWSC 1061
CURRENT JURISDICTION:	Equity
FILE NUMBER(S):	SC 5076/00
HEARING DATE(S):	31/08/01
JUDGMENT DATE:	19 November 2001
PARTIES :	Australian Stock Exchange Limited (ACN 008 624 691) (Plaintiff) Malcolm Boyd McLachlan (Defendant)
JUDGMENT OF:	Santow J

COUNSEL :	J GRIFFITHS (Plaintiff) A S BELL (Defendant)
SOLICITORS:	Allens Arthur Robinson (Plaintiff) Tress Cocks Maddox (as agents for Cowell Clarke) (Defendant)
CATCHWORDS:	CORPORATIONS - Stock Exchange - Business Rules - Interpretation of relevant business rules (rule 13.5.1(4)) relating to $100,000 cap in its proviso where charges brought against Affiliate and subsequently sought to be brought against Participating Organisation - Principles of construction in relation to penalties - Test applicable.
LEGISLATION CITED:	Business Rules of ASX, Rule 13.5.1 Corporations Law s766D(2)(d); s772A
CASES CITED:	Australian Broadcasting Commission v Australasian Performing Right Association (1973) 129 CLR 99 Ex parte Fitzgerald re Gorton (1945) 45 SR(NSW) 182 Hudson Securities Pty Limited v Australian Stock Exchange Limited (2000) 35 ACSR 55 McLachlan v Australian Stock Exchange Limited (1998) 30 ACSR 139 and on appeal (1999) 32 ACSR 524 R v Adams (1935) 53 CLR 563
DECISION:	Cap of $100,000 in proviso to Rule 13.5(4) applies.

IN THE SUPREME COURT
OF NEW SOUTH WALES
IN EQUITY

SANTOW J

No. 5076/00
Australian Stock Exchange Limited (ACN 008 624 691)
Plaintiff

Malcolm Boyd McLachlan
Defendant

JUDGMENT

INTRODUCTION

1    The Australian Stock Exchange Limited (“ASX” or “the Exchange”) seeks to enforce a fine of $100,000 imposed on the Defendant, Mr McLachlan, by the ASX’s Appeal Tribunal on 22 May 2000 (“the Appeal Tribunal”) having earlier fined the company of which he is principal, the same amount. By Amended Summons, ASX seeks a number of declarations that it is entitled so to do. That entitlement depends upon the application of the current Business Rules of ASX, Rule 13.5.1(4) and in particular its proviso, to the charges against Mr McLachlan. The Appeal Tribunal found that the proviso to sub-rule (4) imposing a $100,000 cap could in the circumstances not apply. This was because (it said) the Business Rule itself only applied to a deemed or pure derivative liability; not as here, where separate and distinct charges were laid, albeit based on the same factual matrix. It therefore held that the proviso did not prevent the Appeal Tribunal from imposing a fine of $100,000 upon Mr McLachlan in his capacity as an Affiliate of the Australian Stock Exchange. This was so, notwithstanding that a fine of $100,000 had earlier been imposed on his employer, Thompson Brindal Limited (“TBL”), a “Participating Organisation” under the Business Rules.

2    Mr McLachlan challenges that determination and disputes the interpretation that underpins it. It is common ground that the charges against Mr McLachlan and TBL arose out of the same facts and events. However, the specific charges differ as between TBL and Mr McLachlan, in that certain of the charges against TBL were not brought against Mr McLachlan. The ASX, in these proceedings, argues in the alternative that such differences are sufficiently great as to render the proviso inapplicable, were it otherwise capable of application. Mr McLachlan was the Managing Director at all times and exercised a dominant role in TBL, as is not disputed. The question before this Court is whether the Appeal Tribunal were right in its conclusion that the proviso to Rule 13.5.1(4) did not apply. That is to say, could penalties aggregating in excess of $100,000 be imposed against Participating Organisation and Affiliate in the circumstances, or did the proviso preclude this?

3    The relevant sub-rule (4) with its proviso reads as follows,

“In the case where an Affiliate who is a partner, officer, employee or securities representative of a Participating Organisation is charged under this Rule the Exchange may also charge the Participating Organisation concerned, and the charges shall be heard and determined as if they constituted separate contraventions provided the aggregate fines imposed in any case arising out of any one charge shall not exceed $100,000.”

4    I shall later refer to the other provisions of Rule 13.5.1 and the related definitions, to provide the essential textual context for sub-rule (4).

agreed facts

5    I now set out a narrative of agreed facts.

(1) The Defendant, Mr Malcolm McLachlan (“Mr McLachlan”) was at all relevant times the Managing Director of Thompson Brindal Ltd ( TBL ), a stockbroking firm based in Adelaide. (McLachlan para 3)

(2) From 1964 to 1987 Mr McLachlan was a member of the Stock Exchange of Adelaide Limited. From 1987 to 13 October 1998 he was a member of Australian Stock Exchange Limited ( ASX ), and since 13 October 1998 (being the date that ASX changed its type from a company limited by guarantee to a public company), he has been an Affiliate of ASX within the meaning of the amended Business Rules of ASX adopted on that date. (Kinsky paras 5, 9; McLachlan paras 2, 5)

(3) At all material times up to 13 October 1998, TBL was a member organisation of ASX and, from 13 October 1998 until on or about 1 February 1999, TBL was a Participating Organisation of ASX within the meaning of the amended Business Rules of ASX adopted on that date. (McLachlan paras 3, 5)

(4) On 12 January 1998, ASX commenced disciplinary action against Mr McLachlan by charging him with alleged Prohibited Conduct, within the meaning of its old Business Rules, in relation to certain events and circumstances which occurred between 1991 and 1997. Those events and circumstances concerned trading in shares and options carried out by TBL on behalf of Retireinvest Pty Ltd, an investment planning company, for individual investors known as “the Retireinvest Clients”, which led to substantial trading losses being incurred. (Kinsky para 10, MMK 5, MMK 6)

(5) Also on 12 January 1998, ASX commenced disciplinary action against TBL by charging it with alleged Prohibited Conduct under Article 52 and 13 and other alleged breaches of the old Business Rules under Article 51, arising from TBL’s conduct in relation to the trading conducted on behalf of Retireinvest Pty Ltd, for the Retireinvest Clients referred to above. (McLachlan para 4 and MBM 1)

(6) The charges against Mr McLachlan and TBL arose out of the same facts and events. (JDW1, p12, para [51])

(7) On 21 December 1998, ASX’s National Adjudicatory Tribunal (“the NAT”) (being a domestic disciplinary tribunal clothed with delegated power pursuant to ASX’s Business Rules to hear and determine disciplinary matters), noting that TBL had elected not to contest the charge of Prohibited Conduct levelled against it (under Article 52) and noting that ASX had agreed not to press (under Article 51) the other 13 charges it had brought against TBL, determined that TBL had engaged in Prohibited Conduct as alleged by ASX (meaning the Prohibited Conduct under Article 52). The NAT thereupon imposed a fine of $100,000 on TBL pursuant to Business Rule 13.5.1(3)(b) and determined that TBL’s recognition as a Participating Organisation of ASX be cancelled from 1 February 1999. (McLachlan para 7, MBM 3, pp2, 4)

(8) On 21 July 1999, following a contested hearing held on 31 May and 1 June 1999, the NAT determined that Mr McLachlan had engaged in Prohibited Conduct as alleged in ASX’s Notice of Charge dated 12 January 1998. Reasons for that determination were delivered by the NAT on 18 August 1999. (Kinsky para 15, MMK 6 pp1-2, 6-48)

(9) On 13 September 1999, following a further hearing on that day, the NAT made a determination regarding the penalty to be imposed on Mr McLachlan in respect of the said finding that he had engaged in Prohibited Conduct. Reasons for that determination were delivered by the NAT on 7 October 1999. The NAT ordered, pursuant to Business Rule 13.5.1(3)(f), that Mr McLachlan pay to the NAT that part of the total commission, arising from transactions entered into by TBL on behalf of the Retireinvest Clients after 13 December 1992, less sums paid by TBL to Retireinvest and not returned to TBL, which was to be calculated by reference to Mr McLachlan’s percentage shareholding in TBL from time to time. The NAT also ordered that Mr McLachlan’s recognition as an Affiliate of ASX be cancelled, such cancellation to take effect from the day after the day on which payment was made of the monetary sanction imposed on him. The NAT accepted Mr McLachlan’s submission that, by reason of Business Rule 13.5.1(4), the NAT was unable to levy a fine of any amount on Mr McLachlan pursuant to Business Rule 13.5.1(3)(b), in view of the fine of $100,000 imposed on TBL. (Kinsky para 15, MMK 6 pp3-4, 49-59)

(10) On 23 December 1999, after considering further submissions as to the calculation of the amount ordered to be paid pursuant to Business Rule 13.5.1(3)(f), the NAT ordered that Mr McLachlan pay an amount of $815,369 pursuant to Business Rule 13.5.1(3)(f). Reasons for that determination were delivered by the NAT on 7 January 2000. (Kinsky para 15, MMK 6 pp5, 60-67)

(11) Mr McLachlan appealed from the decision of the NAT to ASX’s Appeal Tribunal, pursuant to the provisions of the Business Rules, including in relation to the NAT’s order that he also pay $815,369 pursuant to Business Rule 13.5.1(3)(f). That appeal was heard by the Appeal Tribunal on 2 May 2000. (Kinsky para 16)

(12) On 22 May 2000, the Appeal Tribunal issued its determination in respect of Mr McLachlan’s appeal. Reasons for that determination were delivered by the Appeal Tribunal on the same date. The Appeal Tribunal varied the decision of the NAT by reversing the decision to order Mr McLachlan to pay $815,369 pursuant to Business Rule 13.5.1(3)(f). It also relevantly ordered that Mr McLachlan pay a fine of $100,000 pursuant to Business Rule 13.5.1(3)(b), payable by no later than 1 month after 22 May 2000, disagreeing with the NAT’s view that, by operation of Business Rule 13.5.1(4), it had no power to levy a fine on Mr McLachlan pursuant to Business Rule 13.5.1(3)(b) in the circumstances, and substituted a finding that the NAT had power to impose a fine not exceeding $100,000 under and subject to Business Rule 13.5.1(3)(b). (Kinsky para 17, MMK 7, p1-2, 4-22)

(13) By letter dated 2 August 2000 addressed to Mr McLachlan’s solicitors, ASX demanded payment of the said fine of $100,000 within 7 days from that date. (Kinsky para 20, MMK 8)

(14) Mr McLachlan has declined to pay this fine, arguing that the Appeal Tribunal was not entitled to impose any fine on him since, in Mr McLachlan’s submission, the imposition of a fine of $100,000 on Mr McLachlan was made in breach of the terms of Business Rule 13.5.1(4) and was void and a breach of contract because Business Rule 13.5.1(4) provided that the maximum aggregate fines arising out of the charge against TBL and Mr McLachlan should not exceed $100,000 and the ASX had already imposed a fine of $100,000 on TBL. (McLachlan paras 6 and 9, MBM 2)

(15) ASX disagrees with Mr McLachlan’s interpretation of the effect of Business Rule 13.5.1(4) and seeks declaratory relief and an order requiring Mr McLachlan to pay the said fine of $100,000, plus interest in accordance with the Business Rules.

RESOLUTION OF LEGAL QUESTION OF INTERPRETATION

Overview of Disciplinary Rule Scheme in relation to Mr McLachlan’s Appeal

6    Before dealing with the specific question, it is necessary that I provide, again in agreed form, an overview of ASX’s disciplinary rule scheme between 1998 and 2000, as bears upon the charges brought against Mr McLachlan on 12 January 1998. This explains how the original adjudication by the National Adjudicatory Tribunal was governed by Articles 51 and 52 of ASX’s then Articles of Association whilst the appeal took place under Rule 13.5.1 being the key provision of the regime that replaces the old Articles 51-52. I set out that overview below:

(1) At all material times up to 13 October 1998, ASX’s rules, in relation to investigating the conduct and disciplining of its Affiliates and Participating Organisations, were set out at Articles 48 to 60 inclusive of ASX’s Articles of Association. (MMK1, pp61-72)

(2) The Notice of Charge addressed to Mr McLachlan dated 12 January 1998 charged Mr McLachlan with alleged Prohibited Conduct pursuant to Articles 51 and 52 of ASX’s Articles of Association. (MMK5, p1)

(3) On 13 October 1998:


• ASX changed its incorporated type from a company limited by guarantee to a public company limited by shares;

• amendments to ASX’s Articles of Association and Business Rules took effect, pursuant to s766D(2)(d) of the Corporations Law , whereby the investigatory and disciplinary rules in Articles 48 to 60 of ASX’s Articles of Association were transferred to, but not wholly replicated by, ASX’s Business Rules (in particular to Rules 13 and 14) and were reorganised and renumbered.

(Kinsky para 5, MMK2 Kinsky para 6-8, MMK3)


(4) The Supreme Court of South Australia held in McLachlan v Australian Stock Exchange Limited at first instance, in a judgment delivered on 18 December 1998 (reported at (1998) 30 ACSR 139)) and on appeal to the Full Court of the Supreme Court of South Australia, in a judgment delivered on 16 July 1999 (reported at (1999) 32 ACSR 524)), that transitional provisions contained in ASX’s Constitution (which superseded ASX’s Articles of Association from 13 October 1998) and Business Rules operated to require that the charge pending against Mr McLachlan be dealt with in accordance with the Business Rules as they stood after the amendments made on 13 October 1998 (ie under Business Rules 13 and 14). (MMK7, para [7] and Kinsky para 14)

(5) The charges against Mr McLachlan were heard by ASX’s National Adjudicatory Tribunal (NAT) on 31 May, 1 June and 13 September 1999. A determination was made by NAT on 21 July 1999 (reasons were delivered on 18 August 1999) that Mr McLachlan had engaged in Prohibited Conduct within the meaning of Business Rule 13.5.1 (the successor in part to old Articles 51-52) and a sanction was imposed by NAT by determinations made on 14 September and 23 December 1999 (reasons were delivered on 7 October 1999 and 7 January 2000) pursuant to Business Rules 13.5.1(3)(f) and (g) (again successors in part to old Articles 51-52). NAT also determined that, by reason of Business Rule 13.5.1(4), it was unable to levy a fine on Mr McLachlan under Business Rule 13.5.1(3)(b) (the maximum potential fine under this rule was $100,000). (Kinsky para 15, MMK 6, MBM2)

(6) On 20 January 2000, Mr McLachlan appealed from the determination made by the NAT to ASX’s Appeal Tribunal. (JDW1, p4, para [10]

(7) On 7 February 2000, Business Rule 13.5.1(3)(b) was amended, such that the maximum fine which could be imposed on an Affiliate or a Participating Organisation was increased from $100,000 to $250,000 and the reference to $100,000 in Business Rule 13.5.1(4) was also changed from $100,000 to $250,000. (MMK3 p29 JDW1, p4, para [9])

(8) In its reasons delivered on 22 May 2000, the Appeal Tribunal took the view that, in determining the question of any sanctions to be imposed on Mr McLachlan, it should apply the post-13 October 1998 Business Rules as they stood when NAT made its determination (ie as at 21 July, 14 September and 23 December 1999) and accordingly, the proper approach to take was to regard $100,000 (rather than $250,000) as the applicable maximum fine which might be imposed on Mr Lachlan under Rule 13.5.1(3)(b). (JDW1, p4, para [9])

Competing Contentions

7    I turn now to the competing contentions of the parties. Essentially the ASX first seeks to uphold the Appeal Tribunal’s reasons for decision. It construed sub-rule (4) as placing no impediment in the way of a separate penalty being exactable from Mr McLachlan of $100,000, though the aggregate of the penalty he and TBL would then pay exceeds the limit of $100,000 in Business Rule 13.5.1(4).

8    The essential elements of the Appeal Tribunal’s reasons concerning the construction of sub-rule (4) as placing no impediment to that outcome can be summarised as follows (the square bracketed numbers referring to the relevant paragraphs of the Appeal Tribunal’s reasons):

(i) Business Rule 13.5.1(4) applies where an Affiliate having one of several connections with a Participating Organisation is charged under Business Rule 13.5.1 [46];

(ii) where such an Affiliate is so charged, a Participating Organisation which has a relevant connection with the Affiliate may also be charged for no reason other than its connection with that Affiliate [46];

(iii) in those circumstances, the charge against the Participating Organisation is in a real sense “derivative” and does not depend upon the Participating Organisation having itself engaged in any contravening conduct [46];

(iv) if a Participating Organisation’s own conduct as a corporation is considered by the Exchange to constitute Prohibited Conduct, the Participating Organisation may be charged without resort to sub-rule (4) [46];

(v) where sub-rule (4) applies, there is in reality only one contravention, i.e. that of the Affiliate. Since the derivative charge against the Participating Organisation does not arise from any contravening conduct on its own part, sub-rule (4) creates a fiction that there is a separate contravention supporting the charge against the connected Participating Organisation [48];

(vi) that fiction is evident from the direction given in sub-rule (4) that “….. the charges shall be heard and determined as if they constituted several contraventions” [emphasis added] [47];

(vii) the aggregate cap of $100,000 imposed at the relevant time under sub-rule (4) applies “in any case arising out of any one charge”. In the context of sub-rule (4), that “case” involved the actual charge against the Affiliate and the derivative charge against the Participating Organisation [50];

(viii) accordingly, sub-rule (4) did not apply to the case at hand because the charges against TBL were not derived from those laid against Mr McLachlan, but were based on TBL’s own conduct as a corporation. Accordingly, the aggregate cap did not apply and it was open to the Appeal Tribunal to fine Mr McLachlan even though TBL had previously been fined $100,000 in respect of the separate charges made against it [51]; and

(ix) given the seriousness of Mr McLachlan’s conduct, a fine of $100,000 (the maximum permitted at the relevant time) was imposed [57].

9    The ASX contends that the Appeal Tribunal’s construction of sub-rule (4) was correct for the reasons given by it. In addition it is said that the following additional matters also support that construction:

(a) the Appeal Tribunal’s construction is said to conform with a fair reading of the language of the sub-rule;

(b) that construction also conforms to the relevant principles of construction; and

(c) that construction is in harmony with the overall scheme of the Business Rules and the dichotomy drawn between Affiliates and Participating Organisations.

10    Finally, it contends in the alternative that, even were Rule 13.5.1(4), properly construed, capable of applying outside the case of a purely derivative liability, the degree of difference between the two sets of charges precludes the proviso applying.

11    Before dealing with the competing arguments about the proper construction of Rule 13.5.1(4) I should set out the connected sub-paragraphs which comprise Rule 13.5.1. I do so mindful of the proper approach to construction as stated by Gibbs J (as he then was) in Australian Broadcasting Commission v Australasian Performing Right Association (1973) 129 CLR 99 at 109:

“It is trite law that the primary duty of a court in construing a written contract is to endeavour to discover the intention of the parties from the words of the instrument in which the contract is embodied. Of course the whole of the instrument has to be considered, since the meaning of any one part of it may be revealed by other parts, and the words of every clause must if possible be construed so as to render them all harmonious one with another.”

12    The process which I follow is first to determine the proper ambit of Rule 13.5.1(4). Is it, as the ASX contends, only applicable in imposing a $100,000 limit to “pure” derivative actions? That is to say, only apply to those actions which arise by a fiction created by the Rule, whereby the Participating Organisation is deemed to have committed the offence of the Affiliate? Or does it rather apply (or, conceivably, as well) only to the case where both Participating Organisation and Affiliate each actually commit an offence, but the offences are sufficiently similar for them to constitute a “case arising out of any one charge”? I shall refer to the first ASX interpretation as the “purely derivative interpretation”.

13 I necessarily have regard to the evident protective purpose of this aspect of the statutory contract embodying the Business Rules as whole created pursuant to s772A of the Corporations Law. I adopt the explanation of its statutory public purpose identified in Hudson Securities Pty Limited v Australian Stock Exchange Limited (2000) 35 ACSR 55 at 56-60, 63 and 67 and earlier McLachlan v Australian Stock Exchange Limited (1999) 32 ACSR 524 and the Appeal Tribunal’s application of that decision in [7] of its Reasons for Decision. That public purpose is one of protection of the investing public. It is derived from the fact that the Corporations Law (Pt 7.2 and the ASX constitution) require the Business Rules to provide “adequate arrangements for monitoring and enforcing compliance” directed to ensuring that “each stock market is an orderly and fair market”. The CorporationsLaw thus underpins the Business Rules, confirming that protective public purpose. In so doing the ASX Business Rules, like the Listing Rules, represent self-regulation enlisted by statute for a public purpose of investor protection.

14    The charges brought against Mr McLachlan as the Affiliate requires comparison to the charges brought against TBL as the Participating Organisation, if and so far as that comparison bears upon the applicability of Rule 13.5.1(4). Whether it does so at all depends upon resolving the earlier question of construction against the purely derivative interpretation of sub-rule (4) adopted by the Appeal Tribunal.

15    I start then for textual content with the full text of Rule 13.5.1 which, for all relevant purposes, conforms to Article 51 and the relevant part of Article 52.

“13.5 DISCIPLINARY ACTION: BREACH OF RULES, PROHIBITED CONDUCT
13.5.1 BREACH OF RULES OR PROHIBITED CONDUCT
(1) If the Exchange considers that an Affiliate or Participating Organisation should be charged with a breach of any of the Rules or Prohibited Conduct, it shall give the Affiliate or Participating Organisation concerned written notice of the particulars of the charge and of the date (being not less than 7 days after the date when such notice is served) when such charge is to be heard. The Affiliate or any partner, officer, or employee of the Participating Organisation shall, if the Affiliate or such person so wishes, be heard in answer to the charge.
(2) If any partner, officer, employee, Settlement Agent or securities representative of a Participating Organisation does an act which if done or not done (as the case may be) by the Participating Organisation would constitute a breach of the Rules or Prohibited Conduct, such act or omission shall be deemed for the purposes of this Rule 13.5.1 to be the act or omission of the Participating Organisation concerned and dealt with hereunder accordingly.
(3) If any Affiliate or Participating Organisation is determined by the National Adjudicatory Tribunal to have, by act or omission, contravened any of the Rules or engaged in Prohibited Conduct, the National Adjudicatory Tribunal may:
(a) censure the Affiliate or Participating Organisation; or
(b) impose a fine not exceeding $100,000 upon the Affiliate or Participating Organisation; and/or
(c) suspend the Affiliate or Participating Organisation from all or any of the privileges of the status of Affiliate or Participating Organisation (as the case may be) of the National Adjudicatory Tribunal; and/or
(d) prohibit the Affiliate or Participating Organisation from transacting any business with or through any Participating Organisation for a period not exceeding 3 months upon such terms and conditions as the National Adjudicatory Tribunal thinks fit; and/or
(e) require that the Affiliate or Participating Organisation institute in a form directed by the Exchange or upgrade to the satisfaction of the National Adjudicatory Tribunal, an education and compliance programme designed to prevent future contravention of the Rules by the Affiliate or Participating Organisation and the partners, officers, employees and representatives of the Affiliate or Participating Organisation; and/or
(f) require the Affiliate or Participating Organisation to pay the total commission or gross profit or part thereof arising from the transaction concerned to the National Adjudicatory Tribunal and the National Adjudicatory Tribunal may deal with such amount in such manner as it thinks fit; and/or
(g) in the case of Prohibited Conduct only, cancel the recognition of the Affiliate or Participating Organisation.
(4) In the case where an Affiliate who is a partner, officer, employee or securities representative of a Participating Organisation is charged under this Rule the Exchange may also charge the Participating Organisation concerned, and the charges shall be heard and determined as if they constituted separate contraventions provided the aggregate fines imposed in any case arising out of any one charge shall not exceed $100,000.
(5) If the National Adjudicatory Tribunal finds that an Affiliate or a Participating Organisation has breached any of the Rules or engaged in Prohibited Conduct pursuant to this Rule 13.5.1 then it shall notify in writing such Affiliate or Participating Organisation of its determination that the Rules have been contravened and the reasons for its determination and the penalty.
(6) …. “

16    “Affiliate” is defined as meaning “a person who is recognised as and remains recognised as an Affiliate by the Exchange under the Rules”, with Rule 5A.1 providing a detailed regime for the recognition of a natural person as an Affiliate. It is important here to note that the Affiliate typically is engaged in the business of a Participating Organisation. Importantly, Rule 5A.1.1(2) states that

“The Exchange shall recognise a natural person as an Affiliate where the applicant meets the requirements specified in Rule 5A.1.1 if the Exchange:
……
(c) is satisfied that the applicant intends to devote the substantial part of the working week to the business of a Participating Organisation as a partner, officer. employee or securities representative.”
Nonetheless ASX is permitted under sub-rule (3) to recognise a natural person as an Affiliate notwithstanding that the applicant does not satisfy the relevant conditions.

17    ASX contend that this provision implicitly requires that the Affiliate, as part of his or her association with the Participating Organisation, will supervise the relevant business of the Participating Organisation and the activities of persons there employed, to ensure compliance with the Business Rules. But in any event, Rule 5.1 provides expressly as follows:

“ 5.1 RESPONSIBILITY FOR AFFILIATES AND SECURITIES REPRESENTATIVES
(1) Each Participating Organisation shall be responsible to the Exchange for the conduct of:
(a) each securities representative of the Participating Organisation; and
(b) any Affiliate who is associated with that Participating Organisation within the meaning of Rule 5A.1.5,
as provided below in rule 5.1(2).
(2) The Participating Organisation is responsible to the Exchange for:
(a) the compliance by the securities representative or the Associated Affiliate with the provisions of the Rules; and
(b) all debts liabilities and engagements incurred or undertaken by the securities representative or the Associated Affiliate,
in his capacity as a securities representative to or an Associated Affiliate of that Participating Organisation or in any way arising out of his connection with that Participating Organisation.”

18    Finally, I should note that “Prohibited Conduct” is defined by the Rules in these terms:

“’Prohibited Conduct’ includes:
(a) conduct which amounts to impropriety affecting professional character and which is indicative of a failure either to understand or to practice the precepts of honesty or fair dealing in relation to clients or the public;
(b) unsatisfactory professional conduct, where the conduct is such that it involves a substantial or consistent failure to reach reasonable standards of competence and diligence;
(c) conduct which is or could reasonably be considered as likely to be prejudicial to the interests of the Exchange or its Participating Organisations or Affiliates.
And need not involve a breach of any of the Rules or a contravention of any law.”

19    Turning now to the proper ambit or construction of Business Rule 13.5.1(4), the Plaintiff and the Defendant offered interpretations at opposite extremities. The Plaintiff’s contention, following that of the Appeal Tribunal, is that sub-rule (4) applies only where is in reality only one contravention, that of the Affiliate. Sub-rule (4) then operates solely to work a fiction. It deems there to be the basis for charging the Participating Organisation derived solely from the charge against the Affiliate but insists that any resulting fines are capped at $100,000. It does so by way of a fiction that there is a separate contravention supporting such a charge against the connected Participating Organisation. The Plaintiffs seizes on the words “as if” as pointing to such a fiction. So once there is an actual charge against the Affiliate, that suffices without more for a charge to be brought against the Participating Organisation though it commit no actual breach. Such a purely derivative charge is therefore both a necessary and sufficient condition for sub-rule (4) with its proviso to apply. On this view, the only purpose of sub-rule (4) is to allow the ASX to have automatic access to the Participating Organisation in recovering a penalty for the Affiliate’s breach. One would have expected clearer language saying so. Moreover it is difficult to see why sub-rule (4) then requires the actual and fictional charges, to “be heard and determined as if they constituted separate contraventions”. Would it not be something of a charade literally to repeat the hearing that has already occurred for the Affiliate, when it comes to the self-same identical, but purely fictional charge against the Participating Organisation? What is there to hear again if the charge is purely derivative?

20    The ASX also now argues that, were its purely derivative construction wrong, the charges against the Participating Organisation are sufficiently distinct and differentiated, though arising out of the same factual matrix, as to render sub-rule (4) inapplicable even on Mr McLachlan’s interpretation of it.

21    To this the Defendant responds that either result would be repugnant to the evident purpose of providing a $100,000 cap on the monetary penalty where the charges relate to breaches arising from the same substratum of fact. The Defendant emphasises that other penalties such as disqualification remain available to vindicate the protective public purpose of the Business Rules. These penalties remain capable of applying severally both to the Affiliate and the relevant Participating Organisation. The Defendant points to the fact that such a monetary cap therefore has evident reasonableness, given the amplitude and severity of other available non-monetary sanctions which do still operate cumulatively. Further, that if the Plaintiff’s construction were correct, by the simple device of bringing a charge similar but not identical against the Participating Organisation to those against the Affiliate, or leaving one charge out, the monetary cap would be readily circumvented. Moreover such an intent to maintain a cap of $100,000 can be seen elsewhere in Rule 13.5.1, notably in sub-para (3)(b). It makes clear the relevant monetary sanction is to “impose a fine not exceeding $100,000 upon the Affiliate or Participating Organisation” [emphasis added]. The disjunctive “or” is said to be a further indication against cumulative monetary sanctions for broadly similar charges in relation to Participating Organisation and Affiliate, arising out of the same matrix of facts.

22    The Defendant’s argument then proceeds from the proposition that, the words being ambiguous and being found in what is said to constitute a penal or quasi-penal provision, a strict construction is called for in which the penal sanctions are not extended where the language used does not compel that result. The Defendant cites the High Court’s statement in R v Adams (1935) 53 CLR 563 at 567-8 that:

“No doubt in determining whether an offence has been created or enlarged, the court must be guided, as with other questions of interpretation, by the fair meaning of the language of the enactment, but when that language is capable of more than one meaning, or is vague or cloudy so that its notation is uncertain and no sure conclusion can be reached by consideration of the provisions and subject matter of the legislation, then it ought not to be construed as extending any penal categories.”

23    The Defendant also points to the fact that the words of a penal provision must be strictly adhered to, such that a purposive construction may be inappropriate: Ex parte Fitzgerald re Gorton (1945) 45 SR(NSW) 182 at 186 per Jordan CJ.

24    The Defendant’s argument then proceeds that sub-rule (2), omitting as it does any reference to “Affiliate”, though expressly referring to a category of persons who are typically though not inevitably Affiliates such as partners, employees, etc., evinces an intention that where those persons breach the Rules then and only then, is the Participating Organisation automatically rendered derivatively liable and dealt with accordingly. This is so, though the Participating Organisation has in reality committed no such breach. In contrast, sub-rule (4) expressly refers to “an Affiliate who is a partner, officer, employee or securities representative of a Participating Organisation” (omitting only “Settlement Agent” from sub-rule (2)). It is therefore intended by contrast to apply to those categories of person only if they are also an Affiliate and to do so outside the situation of a purely derivative liability of the Participating Organisation. Derivative liability is imposed rather by sub-rule (2). The proviso to sub-rule (4) then catches the case where there is an actual charge against the Participating Organisation which derives from, in the sense of arises out of, the same factual matrix as founded the charge against the Affiliate, though the two sets of charges may differ. I will call this the “common factual matrix” interpretation.

25    A variant of that argument would narrow the proviso to apply where there is both a common factual matrix and the charges “broadly correspond”. It would not be enough, though necessary, that there be a common factual matrix. Thus on this argument sub-rule (2) alone deals with the purely derivative case of liability on the part of the Participating Organisation; that is, where only the partner, officer, etc. breaches the Rules. Whereas, the Participating Organisation is thereby only deemed to have done so, though no actual charge is brought against it. That means sub-rule (4), by contrast, has a wider ambit. It is to cover the case where there are actual breaches by both Participating Organisation and Affiliate of the Rules, leading to charges under the Rules against both. The proviso to sub-rule (4) then places the $100,000 cap only where the two sets of charges “broadly correspond” as between Participating Organisation and Affiliate; that is, there must be more than a common factual matrix.

26    For convenience, I will refer to this latter as the “broad correspondence” interpretation of the sub-rule (4) proviso or cap as against the earlier, wider “common factual matrix” interpretation. Another way of characterising that interpretation is to ask the question, are the charges against each party fined substantially similar (in like “case”) as between Participating Organisation and Affiliate? Thus for example the charge against the Participating Organisation may be expressed in terms of both vicarious liability for the actual conduct (being the direct breach) and also in terms of a failure of supervision (being the indirect breach). The former is essentially common to both, while the latter (failure of supervision) is only applicable to the Participating Organisation. If one accepts that the charges still broadly correspond, that suffices to invoke the proviso to sub-rule (4).

27    This interpretation and its earlier variant need not depend upon differentiation between sub-rule (2) and sub-rule (4) based merely upon the absence of express reference to an Affiliate in sub-rule (2) but inclusion of express reference to Affiliate in sub-rule (4). Nonetheless the argument accommodates that differentiation. It suffices that sub-rule (2) already deems there to be a purely derivative liability upon the Participating Organisation. This is for breaches by those enumerated, all of whom would ordinarily be Affiliates, though not inevitably. That strongly suggests that sub-rule (4), has other work to do, and does not impose again the same purely derivative liability upon the Participating Organisation. If it did, it would be repetitive. There can be no logic in explaining sub-rule (4) as being there to cater for what is a narrower class than sub-rule (2); namely the partner, officer, etc. who is also an Affiliate (sub-rule (4)), as against the few instances who are not also Affiliates. Sub-rule (4) is properly explained as being directed at the class of case, where there are two actual sets of charges; one against the Affiliate and the other against the Participating Organisation. The first part of sub-rule (4) up to the proviso then permits charges to be brought against both Participating Organisation and Affiliate. The proviso, on that interpretation, qualifies that result by imposing the cap, where charges which broadly correspond would otherwise impose multiple liability exceeding $100,000. Denial of that cap for subrule (4) would be unduly onerous and quite contrary to the intent of sub-rule (3)(b), with its maximum fine of $100,000. It does so by imposing a $100,000 cap on the two sets of charges, where the “arising out of” test is satisfied.

28    I return now to textual context and its exegesis. I consider interpretation of the proviso in sub-rule (4) is assisted by considering the relationship between sub-rule (4) and the preceding sub-rules of Rule 13.5.1.

29    I start with sub-rule (1) as the primary sub-rule. It entitles the Exchange to commence proceedings against either an Affiliate or the Participating Organisation. Sub-rule (1) uses the disjunctive “or” so as to require the Exchange to choose between charging the Affiliate or charging the relevant Participating Organisation with which the Affiliate is connected.

30    However, the sub-rules which follow then provide a scheme for when charges may be brought against both the Affiliate and the Participating Organisation (as well as either of them). Sub-rule (2) thus permits a charge to be brought purely derivatively in relation to the Participating Organisation to which the relevant “partner, officer, employee, Settlement Agent or securities representative” is connected. These are typically but not inevitably Affiliates. That simply amounts to deemed derivative liability. Sub-rule (2) so understood is therefore the only place where one would expect to find the means for establishing a purely derivative liability on the part of the Participating Organisation. In that context, it is perfectly understandable that purely derivative liability should depend upon the relationship being sufficiently close to the Participating Organisation such as with a partner, officer, employee, etc., without also requiring that such person be an Affiliate.

31    Turning now to sub-rule (3), that clearly deals with the broad ambit of penalty and sanction for the preceding cases. Sub-rule (3(b) clearly lays down that the fine “not exceeding” $100,000 is imposed “upon the Affiliate or Participating Organisation” thus ensuring that result for a purely derivative liability.

32    Sub-rule (4) on the other hand applies to an Affiliate who is also a partner, officer, employee, etc. of the Participating Organisation. It therefore fits into a scheme where derivative liability in the pure sense is already, and only, imposed by sub-rule (2). For sub-rule (4) then to do the same work (posited on pure derivative liability) does not have any logic in such a scheme. This is more especially when sub-rule (4) expressly contemplates two sets of hearings and determinations. This would make no sense at all for a purely derivative liability, where the second hearing would be a repetitious farce.

33    In taking the “broad correspondence” construction as I do, rather than attributing a broader ambit to the proviso to sub-rule (4) to embrace all cases where the same matrix of fact underlies the charges however differentiated, I must here have regard to the protective purpose of these Rules in regulating Stock Exchange conduct. That is served by the available non-monetary penalties. That protective purpose does not need the additional penalty effect of a multiplicity of $100,000 fines, as would result from splitting the charges between Affiliates and the Participating Organisation. Common factual matrix as a sole test would in practice be unduly lenient. In a broad sense a common matrix of fact would invariably be found, simply by aggregating the overall conduct of all the protagonists and calling it a common matrix. However, the test of “broad correspondence” in the nature of the charges brought by reference to the common underlying conduct is more stringent. Yet it still maintains the policy of avoiding punitive multiple fines exceeding $100,000 in aggregate, where the “case” against Participating Organisation and Affiliate is in that sense sufficiently similar. One might indeed have applied a somewhat more stringent test of “substantially similar”, though I would on balance say that goes further than the words require. That said, I doubt its application, if adopted, would produce a different result in the present case, for reasons I now explain.

34    That leads to the question, could it be said in the present case that the TBL and McLachlan charges do broadly correspond so as to come within the cap or proviso, it being conceded that they arise out of a common matrix of fact. A comparison of the TBL and McLachlan charges was submitted by the Plaintiff and is in these terms:

“1. The Notice of Charge directed to TBL, at page 2(i), charges TBL with Prohibited Conduct with respect to the trading activities and the supervision (by TBL, not by Mr Malcolm McLachlan) of the trading activities of Mr Bob Mennie.
The Notice of Charge directed to McLachlan, at page 2(i), does not charge McLachlan with Prohibited conduct with respect to the trading activities of Mennie (a substantial part of the relevant facts and events — see MMK6 pages 17-23). The Notice of Charge directed to McLachlan, at page 2(i) charges McLachlan with Prohibited Conduct with respect to the supervision (by McLachlan, not TBL) of the trading activities of Mennie.
2. The same differences are apparent at page 2(ii) in respect of the trading activities of Hamish McLachlan (Mr McLachlan’s son). Those trading activities also formed a substantial part of the relevant facts and events — see MMK6 pages 24-32).
3. The various failures by TBL to act or to supervise alleged in the Notice of Charge addressed to it were failures which in many instances arose from TBL’s own conduct by omission — not by McLachlan’s conduct: see Particulars 1.2, 1.4, 1.5, 1.6, 1.10. The equivalent allegations in the Notice of Charge addressed to McLachlan relate to his personal alleged failures.
4. The Notice of Charge directed to TBL, at particular 1.2.4 asserts matters which are not asserted against McLachlan.
5. The Notice of Charge directed to TBL, at particular 1.6.3 (as pressed — see MBM3 at pp2-3) asserts matters which are not asserted against McLachlan.”

35    These differences relate to charges respectively made against the Affiliate, Mr McLachlan, and against the Participating Organisation, TBL. The former charge is to be found in Exhibit NMK 5 to the affidavit of Martin Kinsky sworn 17 December 2000. The charge against TBL is Annexure MBM 1 to the affidavit of Mr McLachlan sworn 20 April 2001. Both charges were laid on 12 January 1998 by Mr Kinsky and relate to an identical period of time — August 1991 to 21 October 1993. Importantly, I should point out here that apart from the first charge against TBL, the further charges were not pressed against TBL but were abandoned at the time the first hearing commenced, it appears following some form of plea bargaining. The Plaintiff properly conceded that the charges not pressed could not be taken into account in any differentiation of the charges against the Affiliate as against the charges against TBL.

36    Of the two sets of charges, the ASX Appeal Tribunal held that, “the facts and events supporting the charge against [Mr McLachlan] also formed the basis of charges against TBL which resulted in a fine of $100,000 being imposed on TBL itself”; see para 43 of the Appeal Tribunal’s Reasons, being Exhibit JDW 1 to the affidavit of John Warde sworn 22 May 2001. In paragraph 51 of those Reasons, the Appeal Tribunal also observed that:

“TBL was made the subject of charges covering broadly the same ground as the charge brought against Mr McLachlan, though the charge against him concentrated on elements of failure to exercise appropriate supervision and the like. It is also true that both charges arose out of the same facts and events .” [emphasis added]

37    I note here that the differentiation in question is in relation to TBL vis a vis the Affiliate and not the Affiliate vis a vis TBL, as is clear from the structure of sub-rule (4). I should note here that the expression “arising out of”, as the Defendant points out, connotes genesis, derivation or birth rather than connoting a notion of “having identical content”, though it still requires broad correspondence derived as it may be from a common genesis.

38    When one analyses the differences between the two sets of charges and their associated particulars, I am satisfied that not only do they arise out of the same matrix of fact, as is conceded, but indeed broadly correspond. I would go further. I consider they are substantially similar, were that the test.

39    Thus both TBL and Mr McLachlan are charged with “Prohibited Conduct”. However, it is argued by ASX that the particular respect in which the Prohibited Conduct arises differs as between TBL and McLachlan. That difference, which relevantly must be in relation to additional features of the charge against TBL, is according to the statement by the Plaintiff, that TBL is charged “with Prohibited Conduct with respect to the trading activities and the supervision by TBL of the trading activities of Mr Bob Mennie”. Whereas Mr McLachlan is not charged with Prohibited Conduct with respect to the trading activities of Mr Mennie. Rather he is charged with failure of his own supervision of the trading activities of Mr Mennie.

40    Similar relatively insubstantial differences are pointed to in respect of the trading activities of Hamish McLachlan, Mr McLachlan’s son.

41    However, the evidence is clear that Mr McLachlan was in fact the Chief Executive Officer of TBL and dominated its affairs. It is artificial in the extreme to differentiate TBL’s supervision of Mr Bob Mennie and Mr Hamish McLachlan from the supervision which its Chief Executive Officer Mr McLachlan should have exercised over these two persons. Thus I do not consider that the charges could be properly so differentiated as no longer to broadly correspond. For concededly as the Tribunal found, TBL was “made the subject of charges covering broadly the same ground” in such circumstances. Indeed if a somewhat more stringent test of “substantial similarity” between the two sets of charges were adopted, the result would in my judgment be still the same.

42    The particulars referred to in paragraph 3 of the comparison (see para 31 above) do not to my mind alter that conclusion, for it is difficult to see how TBL’s conduct by omission could be other than attributed to Mr McLachlan’s dominating influence as its Chief Executive Officer. To suppose otherwise is wholly artificial. (There may be distinguishable cases where the Affiliate charged was not the same person as had, as managing director, or chief executive officer, such overall supervisory responsibility –but this is not such a case.)

43    Nor do I consider that adding the description “trading activities” in relation to Mr Bob Mennie and Mr Hamish McLachlan reflects a difference in substance between the charges. This is more particularly as the introductory delineation of the “Prohibited Conduct” which precedes the specific instances of it is expressed in precisely the same terms other than with such necessary changes as to apply to a natural person, Mr McLachlan, as compared to TBL an incorporated entity.

44    The other attempt at differentiation relates to the particulars in 1.2.4 in the Notice of Charge directed to TBL. This it is said, asserts matters which are not asserted against Mr McLachlan. Similarly, the Notice of Charge directed to TBL in particular 1.6.3 as pressed (see MBM 3 at p2-3) is said to assert matters which are not asserted against Mr McLachlan.

45    To this, the Defendant responds that neither of these particulars is related to the carrying out of trading activities but rather relates to the underlying basis of those charges which were not pressed. Thus in each case, the relevant particulars refer merely to causing or permitting the commencement of the relevant trading activities. But they then go on to say that this is “in circumstances where it had failed to conduct” certain enquiries. These are those enquiries the subject of the requirement to exercise reasonable due diligence or make reasonable enquiries to learn the relevant investment objectives, etc. of the clients whose transactions were the subject of the charges. Given that those charges have not been pressed against TBL, the particulars, I agree, no longer bear upon the relevant charges that were pressed.

46    I would therefore accept the Defendant’s submission in that regard, but in any event do not consider that the particulars sufficiently differentiate the relevant charges so as to take them outside the proviso to sub-rule (4).

summing up

47    To sum up:

(a) Sub-rule (1) is the basal or starting provision. It’s disjunctive form gives ASX the right to bring a charge for breach of the Rules or Prohibited Conduct against either an Affiliate or Participating Organisation.

(b) Sub-rule (2) then is apt to deal exclusively with the purely derivative liability of a Participating Organisation; that is, for breach by a partner, officer, employee, Settlement Agent or securities representative thereof, who typically is, but need not be, an Affiliate. It allows ASX to charge the Participating Organisation, though not itself the party that in fact committed the relevant act or made the omission.

(c) Sub-rule (3)(b) then imposes a fine capped so it does not exceed $100,000 in that class of case.

(d) Sub-rule (4), if simply replicating that effect of sub-rule (2) with its cap in sub-rule (3)(b), would be merely repetitious. There can be no logical basis for a distinction based on sub-rule (4) narrowing the class of case dealt with in sub-rule (2); that is by adding the qualifying “Affiliates” to the various enumerated persons who make up the sub-rule (2) class.

(e) That textual context therefore points to a wider ambit to sub-rule (4). So too does its differing language, particularly the absurdity of duplicating hearing and determination for what (on that hypothesis) was a purely derivative liability. Sub-rule (4) deals rather with cases where the Participating Organisation and the Affiliate separately commit acts, or make omissions, though they may overlap, which breach the Rules or constitute Prohibited Conduct, and give rise to two sets of charges. It expressly permits the Exchange to bring such charges against both, notwithstanding sub-rule (1) with its disjunctive “or” as seeming to require an election. (If sub-rule (4) in addition included the case of purely derivative liability, then its proviso would be simply repeating the $100,000 cap, though it already applies under sub-rule (3)(b) so the result would remain the same).

(f) The proviso to sub-rule (4) then operates where there is at least a broad correspondence between the two sets of charges, placing again a cap of $100,000. Broad correspondence is capable of being made out, though the charge against the Participating Organisation includes failure of supervision of the relevant Affiliate whose act or omission constitutes the charge against that affiliate, in the particular circumstances of this case. This is where the charge is against the managing director who customarily has the overall supervisory responsibility (and, in this case, moreover dominated the Participating Organisation). It is not, however, enough to find a common matrix of fact, as such a test would be rather too vague and imprecise and would unduly weaken the necessary protective purpose.

(g) The interpretation in (f) above derives from the textual context. It is the construction that best harmonises various elements of the overall scheme. It also best accommodates the language of sub-rule (4). It thereby mitigates what would otherwise be an excessively harsh penal or quasi-penal regime, at odds with the earlier cap in sub-rule (3)(b). Otherwise, by the simple device of inserting minor differences in the charges brought, the $100,000 cap would be readily circumvented. Such an interpretation is not in harmony with its context nor compatible with its quasi-penal character.

(h) Moreover it exceeds what is necessary to fulfil the Business Rules’ protective purpose. It must be remembered there still remain extensive additional non-monetary sanctions cumulatively available, including disqualification. Thus this interpretation is not so lenient as to conflict with the protective purpose of the Rules.

(i) Even if the test for application of the sub-rule (4) proviso were not “broad correspondence” but the somewhat narrower test of “substantially similar”, the circumstances of the two sets of charges in the present case would still satisfy the requirements of that proviso so construed. The charges against the Affiliate are indeed charges “arising out of” the charges against the Participating Organisation (and vice versa). If “case” in that proviso were used in the sense of “overall case” (as distinct from meaning “specific instance”) that further supports that conclusion, though not necessary to do so.

Overall Conclusion

48    Insofar as the charges against TBL are sought to be differentiated from those against its Affiliate Mr McLachlan, I do not consider that such differences as exist take them outside the proviso to sub-rule (4), properly construed. I therefore consider that the decision of the Appeal Tribunal was in error.

49    The Plaintiff therefore fails in seeking the declarations set out in its Amended Summons. Costs ordinarily should follow the event though I will hear submissions from the parties if they wish. I direct that the matter come back before me in twenty-one days time for any orders to be made and for any argument on costs.

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Last Modified: 11/22/2001