Australian Securities and Investments Commission v Edwards

[2004] NSWSC 1044

Reported Decision: 51 ACSR 320
(2005) 23 ACLC 37

Supreme Court

CITATION:	ASIC v Edwards [2004] NSWSC 1044
HEARING DATE(S):	08/11/04
JUDGMENT DATE:	9 November 2004
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Barrett J
DECISION:	Undertaking proffered to the court not accepted
CATCHWORDS:	CORPORATIONS - ASIC claims declaration of contravention and disqualification order - claim compromised - defendant proffers undertaking to the court not to be engaged in management of corporations for stated period - whether court should accept undertaking where no power to make order in like terms
LEGISLATION CITED:	Australian Securities and Investments Commission Act 2001 (Cth), s.93AA Corporations Act 2001 (Cth), ss.206A(1), 260C(1), 588G(2), 1317E
CASES CITED:	Australian Competition and Consumer Commission v Woolworths (South Australia) Pty Ltd (2003) 198 ALR 417 Australian Securities and Investments Commission v Rich (2004) 50 ACSR 500 Australian Securities and Investments Commission v Tower Australia Ltd [2003] FCA 660 Re One.Tel Ltd; Australian Securities and Investments Commissioner v Rich (2003) 44 ACSR 682 Thomson Australian Holdings Pty Ltd v Trade Practices Commission (1981) 148 CLR 150
PARTIES :	Australian Securities and Investments Commission - Plaintiff Malcolm Leslie Edwards - First Defendant Leonard George Jones - Second Defendant
FILE NUMBER(S):	SC 5254/03
COUNSEL:	Mr D R Stack - Plaintiff First Defendant in person
SOLICITORS:	Australian Securities and Investments Commission Solicitor - Plaintiff First Defendant in Person

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

BARRETT J

TUESDAY, 9 NOVEMBER 2004

5254/03 – AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v MALCOLM LESLIE EDWARDS & ANOR

JUDGMENT

1 The first defendant has proffered to the court a particular undertaking and has consented to the making of a particular order in proceedings in which Australian Securities and Investments Commission (ASIC) has sought relief in relation to alleged contraventions of the Corporations Act 2001 (Cth) by him as a director of Murray River Limited. The alleged contraventions involve s.588G(2) of the Corporations Act and the duty of company directors to prevent insolvent trading. ASIC has sought a declaration of contravention under s.1317E, as well as a disqualification order pursuant to s.206C(1).

2 Shortly after the proceedings came on for hearing yesterday, the first defendant and ASIC informed the court of their mutual desire to compromise the proceedings on the basis of an undertaking to the court by the first defendant, first, not to be a director or secretary of any corporation or to participate in management of corporations for a certain period and, second, to pay a stated sum to ASIC by a specified date. It was also proposed that there be a consent order that the first defendant pay ASIC’s costs in an agreed sum by stated instalments.

3 When the parties announced that the proceedings were to be compromised on that basis, I said that I wished to defer taking steps to give effect to their compromise until I had considered the applicability of the decision of Bryson J in Re One.Tel Ltd; Australian Securities and Investments Commissioner v Rich (2003) 44 ACSR 682 and that of White J in Australian Securities and Investments Commission v Rich (2004) 50 ACSR 500. Those cases involved the question whether the court should go behind the parties’ agreement when invited to make, by consent, declarations of contravention under s.1317E. The general conclusion was that, because such a declaration is a declaration on a matter relating to public or analogous rights, it should not be made by consent of ASIC and the person against whom ASIC has proceeded, unless the court has a basis for being satisfied by evidence (including agreed facts) that the statutory conditions for the making of the declaration have been fulfilled.

4 Having had a short time to consider the matter, I am satisfied that these considerations do not apply directly where, as here, the compromise between ASIC and the person against whom it has proceeded by reference to ss.1317E and 206C is one under which that person will give an undertaking to the court not to be involved in the management of corporations for a stated period. The acceptance by the court of such an undertaking is not predicated upon the court’s being satisfied as to the existence of circumstances warranting the making of a s.1317E declaration and a s.206C order. The court is not being asked to exercise that statutory jurisdiction.

5 But the course involving the proffering of such an undertaking to the court involves other difficulties. These arise from the nature of an undertaking given to the court by way of final resolution of proceedings before it. That matter was considered in the joint judgment of Gibbs CJ and Stephen, Mason and Wilson JJ in Thomson Australian Holdings Pty Ltd v Trade Practices Commission (1981) 148 CLR 150. Their Honours approved a statement in the Federal Court that the power to accept and to enforce an undertaking is “an invariable attribute of a superior court whose proceedings are protected by rules relating to contempt of court and is inherent in the grant of jurisdiction to grant injunctive relief”. The joint judgment continued:

“An undertaking to the court is given in lieu of an injunction and, if broken, is treated as the equivalent of an order for the purpose of enforcement; it may therefore be enforced in the same manner as an injunction -- Milburn v. Newton Colliery Ltd (1908) 52 Sol. Jo. 317; London and Birmingham Railway Co. v. Grand Junction Canal Co. (1835) 1 Ry. & Can. Cas. 224; In re National Federated Electrical Association's Agreement (1961) L.R. 2 R.P. 447; Biba Ltd. v. Stratford Investments Ltd . [1973] Ch. 281, at pp. 285-287.
As an undertaking is given in lieu of an injunction and is enforceable in like manner, the principles which govern the grant of an injunction by a court must guide it in deciding whether it should accept an undertaking. Limitations which affect the court's jurisdiction or power to grant a final injunction must be observed in the acceptance of an undertaking when it is offered as a substitute for a final injunction. The court cannot escape such limitations by the expedient of accepting an undertaking in lieu of an injunction. The court cannot put itself in the position of enforcing conduct which it has no capacity to command or compel.”

6 It follows from this that the court should not accept an undertaking by way of final disposition of a proceeding unless it has power to enjoin the acts and activities constituting the substance of the undertaking. The possibility of punishment for contempt by reason of non-compliance with an undertaking should not be allowed to arise unless the court has power to make an order to the same effect as the undertaking.

7 In the present case, the terms of the proffered undertaking as to future conduct of the first defendant are in all material respects the same as the terms of s.206A(1) of the Act, in the sense that the things the first defendant would undertake not to do are the things that a person who is disqualified from managing corporations under Part 2D.6 is precluded by s.206A(1) from doing because, if the person does any of those things, he or she commits an offence. Section 206A(1) is in the following terms:

“ Disqualified person not to manage corporations

(1) A person who is disqualified from managing corporations under this Part commits an offence if:
(a) they make, or participate in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
(b) they exercise the capacity to affect significantly the corporation's financial standing; or
(c) they communicate instructions or wishes (other than advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation) to the directors of the corporation:
(i) knowing that the directors are accustomed to act in accordance with the person's instructions or wishes; or
(ii) intending that the directors will act in accordance with those instructions or wishes.”

8 The difficulty is that the court does not have jurisdiction to make an order that the first defendant desist from doing the things mentioned in s.206A(1), whether for a specified period or at all. There is no power under the Corporations Act for the court to make an order forbidding a person to be a director or secretary of corporations generally or compelling a person to desist from all acts of management and administration in relation to corporations. There is a power under each of ss.206C, 206D, 206E and 206F, exercisable by the court upon application made by ASIC, to “disqualify a person from managing corporations” for a period determined in accordance with the particular section. But the only consequence of such an order of disqualification is to subject the person in respect of whom it is made to the s.206A regime which makes it an offence for a disqualified person to do any of the things concerning management and administration of corporations mentioned in s.206A(1). A disqualification order under any of the sections mentioned does not, of its own force, operate to restrain the person concerned from engaging in any conduct. Its sole effect is to bring the person within s.206A.

9 The offence created by s.206A(1) is stated to be an offence of strict liability. This means that what the Criminal Code (Cth) calls “fault elements” are not part of the offence and that the defence of “mistake of fact” under s.9.2 of that Code is not available. Section 206A(2B) does, however, say that it is a defence to a contravention of s.206A(1) if the person concerned has permission under s.206F or s.206G which includes leave to manage the particular corporation in question. There is thus a special statutory scheme, complete with its own mental elements and mechanisms for dispensation.

10 It would be inconsistent with this scheme of regulation, in which a declaration by the court under s.1317E may lead on to the court’s making an order of disqualification under s.206C the effect of which is to cause conduct otherwise lawful to be an offence under s.206A(1), for the court simply to make an order prohibiting the doing of the things which, if done, would amount to the offence. The Corporations Act does not allow any such order to be made; nor does any established head of equitable jurisdiction. While an injunction may lie where conduct will entail contravention of a statutory prohibition, the position in the present context is that there is no statutory prohibition (in the form of creation of an offence) unless and until both a s.1317E declaration and a s.206C order have been made by the court. The foundation for the grant of a final injunction therefore does not exist in this case.

11 Since, on this analysis, the court has no power to grant an injunction in the same terms as the proffered undertaking, the constraints discussed in the Thomas Australia Holdings case mean that it will not accept that undertaking.

12 What I have said is not intended to call into question the parties’ intention and desire to settle the proceedings. It is not the function of the court to impede settlements. On the contrary, parties to litigation are encouraged to resolve their differences wherever possible so that negotiated outcomes may be achieved and resources can be used in other directions. The problem here is solely with the proposed manner of settlement.

13 Alternatives are, no doubt, available. There might, as in the cases before Bryson J and White J mentioned at the beginning of these reasons, be a proposal that the court make consent declarations and orders under ss.1317E and 206C. An alternative might be acceptance of the proposed undertaking by ASIC rather than by the court. There may be other available courses. The various courses potentially available will no doubt have pros and cons from the perspectives of the parties. The court does not, of course, advocate the adoption of any of them.

14 In relation to the first of these alternatives, I have given some consideration to the question whether the material the parties have already put before the court will enable it to assess the circumstances sufficiently to warrant the making of a declaration of contravention and a disqualifying order by consent. My view at the moment is that it will not. ASIC’s claims and the basis for them are clear. The first defendant has filed points of defence which, as to all relevant ingredients, traverse ASIC’s allegations. Both sides have filed extensive affidavit evidence with even more extensive annexures and exhibits. These materials in the “raw” and voluminous form in which they currently exist provide no ready basis for ascertaining even the basic facts. I do not consider that the first of the possible approaches is likely to be productive unless and until the parties are able to put before the court material in the way of agreed facts sufficient to permit in this case the course that was followed by both Bryson J and White J.

15 As to the second possibility, I note the terms of s.93AA of the Australian Securities and Investments Commission Act 2001 (Cth):

“ Enforcement of undertakings

(1) ASIC may accept a written undertaking given by a person in connection with a matter in relation to which ASIC has a function or power under this Act.

(2) The person may withdraw or vary the undertaking at any time, but only with ASIC's consent.

(3) If ASIC considers that the person who gave the undertaking has breached any of its terms, ASIC may apply to the Court for an order under subsection (4).

(4) If the Court is satisfied that the person has breached a term of the undertaking, the Court may make all or any of the following orders:
(a) an order directing the person to comply with that term of the undertaking;
(b) an order directing the person to pay to the Commonwealth an amount up to the amount of any financial benefit that the person has obtained directly or indirectly and that is reasonably attributable to the breach;
(c) any order that the Court considers appropriate directing the person to compensate any other person who has suffered loss or damage as a result of the breach;
(d) any other order that the Court considers appropriate.

16 The words “in connection with”, used in a corresponding provision of the Trade Practices Act 1974 (Cth), were said by Mansfield J in Australian Competition and Consumer Commission v Woolworths (South Australia) Pty Ltd (2003) 198 ALR 417 to be of wide import. His Honour noted that the power of a statutory authority empowered by such a provision to accept undertakings is more comprehensive than that of a court which is subject to the constraints to which I have referred. He also discussed the process by which the court may “note” undertakings given to such a statutory authority – something that might be useful in this case and was also referred to by Sackville J in Australian Securities and Investments Commission v Tower Australia Ltd [2003] FCA 660.

17 In view of the unfavourable conclusions I have reached in relation to the particular procedure for compromise the parties currently propose, the desirable course is that the proceedings stand over for further mention at an appropriate time.

**********

Last Modified: 11/10/2004