Australian Securities and Investments Commission v Edwards (No 3) - [2006] NSWSC 376

No judgment structure available for this case.

Reported Decision:
57 ACSR 209

New South Wales

Supreme Court

CITATION: ASIC v Edwards [2006] NSWSC 376

HEARING DATE(S): 06/04/06

JUDGMENT DATE :
5 May 2006

JURISDICTION: Equity Division
Corporations List

JUDGMENT OF: Barrett J

DECISION: Disqualification from managing corporations for ten years

CATCHWORDS: CORPORATIONS - civil penalty proceedings - director allowing insolvent trading - declarations of contravention previously made - whether exoneration order should be made - meaning of "honestly" and "ought fairly to be excused"- whether disqualification order should be made - relevant considerations discussed

LEGISLATION CITED: Corporations Act 2001 (Cth), ss.206C(1), 206G, 1317E(1), 1317S, 1318
Crimes (Sentencing Procedure) Act 1999, s.10

CASES CITED: Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148
Australian Securities Commission v Forem-Freeway Enterprises Pty Ltd (1999) 30 ACSR 339
Australian Securities and Investments Commission v Vines (2005) 56 ACSR 528
Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115
Corporate Affairs Commission v Papoulias (1990) 20 NSWLR 503
Elliott v Australian Securities and Investments Commission (2004) 10 VR 369
Maelor Jones Investments (Noarlunga) Pty Ltd v Heywood-Smith (1989) 54 SASR 285
Re HIH Insurance Ltd; Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80
Rich v Australian Securities and Investments Commission (2004) 220 CLR 129
R J Elrington Nominees Pty Ltd v Corporate Affairs Commission (SA) (1989) 1 ACSR 93
Swiss Bank Corporation v State Bank of New South Wales (unreported, NSWSC, 9 December 1992)

PARTIES: Australian Securities and Investments Commission - Plaintiff
Malcolm Leslie Edwards - Defendant

FILE NUMBER(S): SC 5254/03

COUNSEL: Mr A.J. McInerney - Plaintiff
Mr D. Gasic - Defendant

SOLICITORS: Australian Securities and Investments Commission Solicitor - Plaintiff
Phillip R. Loiterton - Defendant

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

BARRETT J

FRIDAY, 5 MAY 2006

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

JUDGMENT

Background

1 On 28 October 2005, I made the following declarations of contravention pursuant to s.1317E(1) of the Corporations Act 2001 (Cth):

Corporations Act

2. A declaration, pursuant to section 1317E(1) of the Act, that the Defendant, Malcolm Leslie Edwards, whilst being a director of MRL, contravened s.588G(2) of the Act, in that he failed to prevent MRL incurring a debt, on 10 May 1999, of $635,000 to CJC, in circumstances where, at that time, MRL was insolvent, there were reasonable grounds for suspecting that MRL was insolvent, and the Defendant knew that there were reasonable grounds for suspecting that MRL was insolvent.

3. A declaration, pursuant to section 1317E(1) of the Act, that the Defendant, Malcolm Leslie Edwards, whilst being a director of MRL, contravened s.588G(2) of the Act, in that he failed to prevent MRL incurring a debt, on 20 May 1999, of $1,340,000 to CJC, in circumstances where, at that time, MRL was insolvent, there were reasonable grounds for suspecting that MRL was insolvent, and the Defendant knew that there were reasonable grounds for suspecting that MRL was insolvent.

4. A declaration, pursuant to section 1317E(1) of the Act, that the Defendant, Malcolm Leslie Edwards, whilst being a director of MRL, contravened s.588G(2) of the Act, in that he failed to prevent MRL incurring a debt, on 18 June 1999, of $859,370 to CJC, in circumstances where, at that time, MRL was insolvent, there were reasonable grounds for suspecting that MRL was insolvent, and the Defendant knew that there were reasonable grounds for suspecting that MRL was insolvent.

5. A declaration, pursuant to section 1317E(1) of the Act, that the Defendant, Malcolm Leslie Edwards, whilst being a director of MRL, contravened s.588G(2) of the Act, in that he failed to prevent MRL incurring a debt, on 22 July 1999, of $183,889 to CJC, in circumstances where, at that time, MRL was insolvent, there were reasonable grounds for suspecting that MRL was insolvent, and the Defendant knew that there were reasonable grounds for suspecting that MRL was insolvent.

6. A declaration, pursuant to section 1317E(1) of the Act, that the Defendant, Malcolm Leslie Edwards, whilst being a director of MRL, contravened s.588G(2) of the Act, in that he failed to prevent MRL incurring a debt, on 24 September 1999, of $181,772 to CJC, in circumstances where, at that time, MRL was insolvent, there were reasonable grounds for suspecting that MRL was insolvent, and the Defendant knew that there were reasonable grounds for suspecting that MRL was insolvent.”

2 The making of the declarations of contravention followed publication of reasons for judgment on 24 August 2005: Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148. There was a subsequent hearing on penalty. In that connection, it is the contention of the plaintiff that the court should, under s.206C(1) of the Corporations Act, make an order disqualifying the defendant from managing corporations for a period considered appropriate by the court. The plaintiff contends that the period should be twelve years or more. The plaintiff does not seek any pecuniary penalty.

3 In addition to the question of penalty, I also have before me a question of exoneration. It is submitted by the defendant that the court should exercise its discretion under s.1317S or s.1318 to relieve the defendant from the liability to which the making of the s.1317E declarations exposes him, including, of course, the liability to suffer a disqualification order of the kind the plaintiff seeks.

4 Mr Gasic of counsel, who appeared for the defendant, made it clear that the application based on ss.1317S and 1318 should be approached by reference to the same evidence as has been put before the court for the purposes of penalty, including character evidence. The general proposition advanced on behalf of the defendant is, as I understand it, that the whole of the evidence adduced on the further hearing before me should be assessed for these purposes and that the court should, on the basis of that evidence, conclude that there are grounds for an order granting relief under s.1317S or s.1318, failing which, the court should be satisfied that no grounds sufficient to warrant an order of disqualification have been shown. While, in some cases, the matter of relief and the matter of penalty might be considered separately, following the making of declarations of contravention under s.1317E(1) (see, for example, Australian Securities and Investments Commission v Vines (2005) 56 ACSR 528), there is no reason why the two should not be considered together particularly where, as here, the defendant has acquiesced in such a course.

5 I adopt in these reasons the abbreviations and labels set out in paragraph [2] of the judgment of 24 August 2005. For that and more general reasons, the two must be read together.

The approach on exoneration

6 Each of s.1317S and s.1318 poses two central questions. The first is whether the defendant “has acted honestly”. The second question is whether, having regard to all the circumstances, the person “ought fairly to be excused” for the shortcoming in conduct.

7 Mr Gasic submitted on behalf of the defendant that s.1317S and s.1318 should be approached by reference to considerations made relevant to the discretion of criminal courts to dismiss charges without conviction upon the finding of guilt. He referred to s.10 of the Crimes (Sentencing Procedure) Act 1999 and decisions of the Court of Criminal Appeal on that section. I do not accept that any useful analogy may be drawn from the criminal sphere in this connection. The relevant provision of the Crimes (Sentencing Procedure) Act refers to a number of specific matters, including the inexpediency of other than nominal punishment or the expediency of release on a good behaviour bond, promoting the treatment or rehabilitation of the relevant person, personal factors such as age, health and mental condition, the trivial nature of the offence and extenuating circumstances in which the offence was committed. Neither expressly nor by implication do these matters play any part in the assessment called for by s.1317S and s.1318. The two basic questions to which I have already referred are the determinants of the applicability of those provisions.

8 The first question relevant to exoneration under each provision is whether the defendant acted “honestly”. Referring to observations in both Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 and Re HIH Insurance Ltd; Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80, Austin J, in Australian Securities and Investments Commission v Vines (above), equated honesty, for these purposes, with lack of moral turpitude. Such a meaning of “honestly” may also be gathered from the judgment of Bollen J in R J Elrington Nominees Pty Ltd v Corporate Affairs Commission (SA) (1989) 1 ACSR 93 at p.110:

“I think that the word ‘honestly’ [scil: ‘dishonestly’] may comprehend conduct which is not criminal but which is morally wrong in the commercial sense. It comprehends conduct which is not straightforward. Moreover, I think it may comprehend such conduct viewed objectively. The evidence does not prove that Elrington intended to misrepresent or disregard the position to customers or disregard the advice given him by McNamara nor that he intended to profit by failure to make the position clear.”

9 The last part of this passage emphasises that dishonesty may exist in the absence of any subjective intention to deceive. And as was observed by Allen J in Corporate Affairs Commission v Papoulias (1990) 20 NSWLR 503 at p.506, deception and defrauding are not necessary ingredients of dishonesty. The same view was expressed by Madgwick J in Australian Securities Commission v Forem-Freeway Enterprises Pty Ltd (1999) 30 ACSR 339 at p.346 in the following passage which dealt with the meaning of “dishonestly” in circumstances bearing a resemblance to those of this case:

“That Mr Morton did not subjectively intend outright to defraud customers of the company cannot avoid a conclusion that his behaviour in this regard was both unreasonable and dishonest. Any reasonable person in the position of a director of the company in its circumstances must have realised that at any given time its liabilities substantially exceeded its assets and that, by reason of the dishonoured cheques and the practice and/or entrenched fact of excessive delays in meeting customers’ orders, the company could only meet its debts as they fell due by falling into default in relation to obligations to customers. That is not an ability to pay debts as they fall due, and any reasonable person would understand this. The extent of what I have called the entrenched fact of excessive delays in meeting customers’ needs and the established practice of making unrealistic representations to them about how soon and how reliably they would get their equipment indicates that the boundary between self-deception as to the company’s prospects and conscious deception of its customers had been crossed, and crossed at Mr Morton’s behest. That was, in the ordinary meaning of the word, dishonest behaviour in relation to the affairs of the company.”

10 If a finding of honesty is made, the court must next consider whether the defendant “ought fairly to be excused”, having regard, in particular, to enumerated matters. The basic question there is whether the defendant “has acted honourably, fairly, in good faith and in a common sense manner as judged by the standards of others of a similar professional background”: Maelor Jones Investments (Noarlunga) Pty Ltd v Heywood-Smith (1989) 54 SASR 285 at p.295 per Olssen J.

The approach on penalty

11 Authoritative guidance as to the approach the court must take upon an application for a penalty under the civil penalty provisions is to be found in the judgments in Rich v Australian Securities and Investments Commission (2004) 220 CLR 129. The joint judgment of Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ approved (at [38]) the focus in earlier cases “upon why the orders sought should be made and what purposes might be achieved by their making”. The nature of the inquiry to be undertaken was elucidated in the judgment of McHugh J (at [43]):

“In exercising their discretion, however, courts which administer the legislation do not concern themselves solely with the issue of whether the defendant now is or in the future will be a fit and proper person to manage corporations. They take into account a wide variety of factors in addition to determining whether any and, if so, what period of disqualification should be imposed. They consider more than the present and future fitness of the defendant to manage corporations. They take into account factors such as the size of any losses suffered by the corporation, its creditors and consumers, legislative objectives of personal and general deterrence, contrition on the part of the defendant, the gravity of the misconduct, the defendant's previous good character, prejudice to the defendant's business interests, personal hardship and the willingness of the defendant to render assistance to statutory authorities and administrators. No doubt some -- maybe all -- of these matters are relevant in determining whether the defendant ought to be disqualified or the period of disqualification that is required in order to protect the public. But in practice courts do not use these matters merely as evidentiary indicators of the time when the defendant will, if ever, be fit to manage corporations. Rather, they become part of a synthesis from which the judges make a value judgment concerning whether to order disqualification and, if so, the period of disqualification that should be imposed. It is not the practice of judges to say: "On the evidence, I find that after (say) five years, the defendant will be sufficiently reformed to make it safe for him or her to manage corporations." This suggests that the disqualification provisions are not purely protective in nature.”

12 McHugh J expressly approved a series of fifteen propositions formulated by Santow J in Re HIH Insurance Ltd; Australian Securities and Investments Commission v Adler (above) at [56]:

“The cases on disqualification gave orders ranging from life disqualification to 3 years. The propositions that may be derived from these cases include:

(i) Disqualification orders are designed to protect the public from the harmful use of the corporate structure or from use that is contrary to proper commercial standards: Australian Securities and Investments Commission v Hutchings (2001) 38 ACSR 387 at 395 Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561 Australian Securities Commission v Forem-Freeway Enterprises Pty Ltd (1999) 30 ACSR 339 at 349-50 Australian Securities Commission v Donovan (1998) 28 ACSR 583 at 602 Australian Securities Commission v Roussi (1999) 32 ACSR 568 at 570–1 Re Strikers Management Pty Ltd; Australian Securities Commission v Dimitri (unreported, Fed C of A, Burchett J, No NG 3789 of 1996, 7 May 1997, BC9702133) Re Tasmanian Spastics Association; Australian Securities Commission v Nandan (1997) 23 ACSR 743 at 751.

(ii) The banning order is designed to protect the public by seeking to safeguard the public interest in the transparency and accountability of companies and in the suitability of directors to hold office: Australian Securities Commission v Roussi , above, at 570; Re Gold Coast Holdings Pty Ltd; Australian Securities and Investments Commission v Papotto (2000) 35 ACSR 107 at 112.

(iii) Protection of the public also envisages protection of individuals that deal with companies, including consumers, creditors, shareholders and investors: Australian Securities Commission v Roussi at 570; Re Gold Coast Holdings Pty Ltd , above, at 112; Re Tasmanian Spastics Association , above, at 751.

(iv) The banning order is protective against present and future misuse of the corporate structure: Australian Securities Commission v Donovan , above, at 603.

(v) The order has a motive of personal deterrence, though it is not punitive: Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203 at 205; Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd , above; Australian Securities Commission v Donovan at 607; Re Tasmanian Spastics Association at 751.

(vi) The objects of general deterrence are also sought to be achieved: Australian Securities Commission v Donovan at 602.

(vii) In assessing the fitness of an individual to manage a company, it is necessary that they have an understanding of the proper role of the company director and the duty of due diligence that is owed to the company: Australian Securities Commission v Donovan at 607.

(viii) Longer periods of disqualification are reserved for cases where contraventions have been of a serious nature such as those involving dishonesty: Australian Securities Commission v Donovan at 605–7.

(ix) In assessing an appropriate length of prohibition, consideration has been given to the degree of seriousness of the contraventions, the propensity that the defendant may engage in similar conduct in the future and the likely harm that may be caused to the public: Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd ; Australian Securities and Investments Commission v Parkes (2001) 38 ACSR 355 at 386; Australian Securities Commission v Forem-Freeway Enterprises ; Australian Securities Commission v Roussi at 570–1.

(x) It is necessary to balance the personal hardship to the defendant against the public interest and the need for protection of the public from any repeat of the conduct: Australian Securities Commission v Donovan at 607; Australian Securities and Investments Commission v Parkes , above, at 386.

(xi) A mitigating factor in considering a period of disqualification is the likelihood of the defendant reforming: Australian Securities Commission v Forem-Freeway Enterprises at 351.

(xii) The eight criteria to govern the exercise of the court's powers of disqualification set out in Commissioner for Corporate Affairs (WA) v Ekamper (1987) 12 ACLR 519 have been influential. It was held that in making such an order it is necessary to assess:
• character of the offenders;
• nature of the breaches;
• structure of the companies and the nature of their business;
• interests of shareholders, creditors and employees;
• risks to others from the continuation of offenders as company directors;
• honesty and competence of offenders;
• hardship to offenders and their personal and commercial interests; and
• offenders’ appreciation that future breaches could result in future proceedings.
Australian Securities Commission v Roussi at 570–1; Re Gold Coast Holdings Pty Ltd at 111;

(xiii) Factors which lead to the imposition of the longest periods of disqualification (that is disqualifications of 25 years or more) were:
• large financial losses;
• high propensity that defendants may engage in similar activities or conduct;
• activities undertaken in fields in which there was potential to do great financial damage such as in management and financial consultancy;
• lack of contrition or remorse;
• disregard for law and compliance with corporate regulations;
• dishonesty and intent to defraud;
• previous convictions and contraventions for similar activities.
Australian Securities and Investments Commission v Hutchings ; Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd ; Australian Securities Commission v Parkes ;

(xiv) In cases in which the period of disqualification ranged from 7–12 years, the factors evident and which lead to the conclusion that these cases were serious though not ‘worst cases’, included:
• serious incompetence and irresponsibility;
• substantial loss;
• defendants had engaged in deliberate courses of conduct to enrich themselves at others’ expense, but with lesser degrees of dishonesty;
• continued, knowing and wilful contraventions of the law and disregard for legal obligations;
• lack of contrition or acceptance of responsibility, but as against that, the prospect that the individual may reform;
Australian Securities Commission v Forem-Freeway Enterprises ; Australian Securities Commission v Donovan ; Australian Securities Commission v Roussi ; Re Strikers Management Pty Ltd ; Re Gold Coast Holdings Pty Ltd .
The difficulty with Roussi's case is that disqualification for 10 years was ordered, as this was the period of disqualification that the ASC had sought. Had a longer period been applied for, Einfeld J may have considered giving a longer period: Australian Securities Commission v Roussi at 571;

Donovan's

Australian Securities Commission v Donovan

Re Tasmanian Spastics Association

13 McHugh J also approved the following statement of the Court of Appeal of the Supreme Court of Victoria (Warren CJ, Charles JA and O’Bryan AJA) in Elliott v Australian Securities and Investments Commission (2004) 10 VR 369 at [137] in relation to the matters referred to by Santow J:

“Many of the propositions and factors listed by Santow J bear a similarity to sentencing principles. Matters going to aggravation and mitigation in relation to contraventions of s 588 G [of the Corporations Law] need to be considered and accorded proper weight. But above all else protection of the public and deterrence, specific and general, must also be given appropriate consideration."

Existing factual findings

14 The plaintiff puts forward a number of factual considerations emerging from the judgment of 24 August 2005 which it says are relevant to the tasks currently before the court. These are (with references to relevant paragraphs from the earlier judgment noted) as follows:

1. From January 1999, MRL was only capable of borrowing $440,000 (or perhaps $600,000) in the open market and the crucial matters of lease extension and capital raising, together with other aspects of viable operation including take-out strategy, were in such a state that further funds, as a matter of commercial practicality, were not available to MRL at that time or at all (paragraph [201]).

2. When CJC began work on the project on 3 February 1999, MRL was insolvent and continued in a state of insolvency at all times thereafter (paragraph [211]).

3. Debts of $3,589,661 were incurred by MRL during which time MRL was insolvent (paragraphs [16] and [211]).

4. The defendant was a director of MRL at the time the debts of $3,589,661 were incurred (paragraph [9]).

5. There were reasonable grounds for suspecting that MRL was insolvent at the time it incurred debts of $3,589,661 (paragraph [251]).

6. The defendant had ample ability to cause MRL to avoid incurring debts of $3,589,661 by ensuring the building work was not undertaken. He therefore failed to prevent MRL from incurring such debts generated by the performance of the building work (paragraph [259]).

7. The defendant knew all the facts “contributing inexorably to an objectively based mistrust, at each material time, as to the ability of MRL to pay all its debts as they fell due” (paragraph [261]).

8. The Club and those of its directors who were members of the MRL board (plus Mr Mullarvey) deferred to the defendant in the matter of raising finance (paragraph [256]). This was because, as they saw it, the defendant was the “commercial and financial expert” and “his view on matters of financial prudence would have been accepted virtually as a matter of course” (paragraph [257]). It was the defendant who was principally responsible for and involved in developing plans to raise finance for MRL (paragraph [265]).

9. The defendant could have ensured that the building work did not commence (paragraph [257]).

10. The defendant could, at any time, have stepped in and required that building work cease (paragraph [257]).

11. Had the defendant taken one or both of the steps mentioned in 9 and 10 above because “funding was not yet in place” and the building “was not commercially feasible” at that point in time, the other directors of MRL would have welcomed it and the building either would not have commenced or would have stopped immediately (paragraph [257]).

12. The defendant never warned his co-directors of the reality that MRL did not have the funds with which to undertake the building works (paragraph [258]).

13. The defendant’s numerous communications to the board of MRL, through Mr Jones, that various elements necessary to secure the necessary funding were within grasp (paragraph [258]) was blatantly wrong, misleading and calculated to mislead and deceive.

Further evidence

15 There is also now before the court evidence beyond that adduced in the proceedings that led to the making of the declarations of contravention. From the plaintiff’s side, there is an additional affidavit of Mr Plath, an ASIC solicitor (who was cross-examined by Mr Gasic) and certain tendered documents. From the defendant’s side, there is a further affidavit of the defendant, oral evidence in chief from the defendant (as well as cross-examination) and affidavits of five persons who have given testimony about the defendant’s character. Certain facts have also been conceded by the defendant following services of two notices to admit facts.

16 The plaintiff sought to read a further affidavit of Mr Mullarvey and a further affidavit of Mr Joss. The defendant objected to this on the basis that the deponents had been required for cross-examination but were not made available. The plaintiff sought leave to rely on the affidavits in any event. I refused that leave, with the result that the further evidence of the two witnesses was not received. The plaintiff was, however, successful in its attempts to tender, as a business record, the annexure “A” to Mr Mullarvey’s affidavit, being the profit and loss account of the Club for the year ended 30 June 2001 in which a sum of $2,609,937 was shown as having been written off as a bad debt, with a note as follows:

“The bad debt related to the Loan to Murray River Ltd of $2,500,000 and other expenses paid on behalf of Murray River Ltd of $108,937.”

17 Mr Plath’s affidavit deals with two matters. First, it refers to attempts made in 2004 to compromise the proceedings brought by the plaintiff against the defendant. Second, the affidavit refers to a number of episodes in the period from 1992 involving the defendant and companies with whichu he was associated.

18 The defendant, for his part, relied on the additional evidence given by him and upon character evidence given by Bruce Ian McWilliam, John Sheahan, Harold Woolf, Joseph Grant Jagelman and Bernard John McGeorge.

Further evidence - loss

19 The first matter to be addressed is the extent of the loss caused by the defendant’s conduct. The plaintiff relies on the material in the profit and loss account of the Club for the year ended 30 June 2001 showing that a total of $2,609,937 had been written off on account of the MRL project. The defendant, however, refers to a statement of Mr Mullarvey, which he says was made to him outside court in the following terms (referring to the development site):

“We’ve got a project going. It’s moving along. Joss is in control, but I can’t tell you about that.”

20 Other evidence in this connection on which the plaintiff sought to rely was rejected.

21 In these circumstances, I have no basis for making a precise finding of the extent of the losses that might be said to be attributable to the defendant’s conduct. Loss to the Club is not the only relevant loss (and what, if anything, has been written back since 30 June 2001 does not appear). There must also have been loss to CJC which was not paid more than $3.5 million due for building work but may have recouped some of that. But I consider myself entitled to infer that the defendant’s conduct was productive of some appreciable loss to both the Club and CJC.

Further evidence – the defendant’s record

22 The defendant says in his further affidavit:

“I have not been the subject of any complaint by any person in relation to my conduct as a company director apart from the conduct complained of in these proceedings.”

23 The plaintiff proved by documentary evidence that:

Corporations Law

(c) Mr J.V. Hutchinson, liquidator of Ozton Pty Ltd (of which the defendant was one of two directors), reported to the plaintiff in 1992, that “[t]he company traded whilst blatantly insolvent” and that “the company continued to incur debts even after the directors became aware of the inadequacies of the line of credit available”.

24 The plaintiff also drew attention to certain observations of Rogers

CJ CommD in Swiss Bank Corporation v State Bank of New South Wales (unreported, NSWSC, 9 December 1992):

“Edwards remained in contact with Sothirasan even after the fraud was exposed. Essington submitted that Edwards' continuing contact lent plausibility to his claimed belief that the money was part of a genuine loan. I reject that submission. As I have had occasion to say several times earlier, in all the circumstances of the case, a man of Edwards' commercial experience could not possibly have believed that Sothirasan was organising a genuine and bona fide loan.

it reinforces the impression created by the ‘Blue Sky’ comment that, Edwards did not care, from where, by what means, money may be obtained for the Essington Group's financial salvation just so long as it came

The correspondence from Sothirasan is replete with contradictions and purported explanations which make commercial nonsense.

As well there was Edwards' failure to make inquiries, in circumstances, where persons with much less business experience than he had, would have felt compelled to pursue the matter.

The documentation cried out in disbelief at Sothirasan's claim to have organised the loan, or his repeated assertions that the loan was in place.

Only five years' notes were executed and were executed without reference, or inquiry, by Edwards as to what the interest was which was payable ‘under the principal loan’.

In November, Sothirasan repeatedly informed Edwards that the transfer of funds amounting to $500 million had been completed and indeed on 24 November stated in terms that ‘all funds were received at the Beyina Merchant Bank escrow account on 22 November 1989 - - - on 24 November 1989 Convent received the total funds enabling payment of the securities on instructions to the Deutsche Bank to transfer the balance of $346,875,000 in accordance with the Beyina Merchant Bank undertaking to Essington. The transfers will be completed in Deutsche marks to Essington Ltd's account with the Commonwealth Bank of Australia’. In those circumstances one is compelled to ask why was only $30 million to be paid, not to the Commonwealth Bank, but to SBN?

As against that Edwards explained, in answer to questions I asked (Tp 52-4), that between December 1988 and November 1989 he was working under enormous pressure. He was Managing Director of Ariadne, attempting to organise privatisation of Impala and Pacific Securities, sell Crawford Productions, and Health Corporation in Hong Kong. He said:-

‘In October we were engaged in considerable litigation in the United States, where I guess I could spend anything up to two and three hours a day on conference calls and Essington at that time had found that Estate Mortgage who had commitments to it of $406 million were not performing’.

I accept that, under such pressure, Edwards may not have given the evolving Sothirasan excuses and explanations the amount of attention which, in other circumstances, he would have devoted to them

Even minimal attention was sufficient to bring home to a man of Edwards' experience and acuity that all that he was getting were explanations which amounted to no more than ‘Blue Sky’.

The fact of the matter is that anyone in Edwards' position would have had to ask himself why Sothirasan was maintaining this facade that $500 million in loan was forthcoming. What conceivable advantage was there to Sothirasan in misrepresenting the situation? The advantage was in the receipt of the ‘commission’. If there was not a loan of $500 million, what ‘loan’ was there? Who was Sothirasan trying: to fool? At the end of the day I accept the submissions of SBC that Essington and Edwards were prepared to:

1. tolerate the most extraordinary delay in the transaction

2. failed to insist on the most basic inquiries concerning unusual or inexplicable features of the transaction

3. tolerated and made no inquiry about unexplained changes in the manner and amount of drawdowns not sought by it

4. accepted the most amazing departures from normal banking transactions.

Mr Jucovic QC for Essington, submitted that notwithstanding all these matters, at the end of the day Mr Edwards was entitled to believe that all was well. The money had come from a highly reputable source, from SBC. How it came to SBC, in what manner it may have been ‘Blue Sky’, was of no relevance to Mr Edwards. As Mr Jucovic put it, Edwards was entitled to proceed on the basis that someone in SBC had authorised the payment of the money to Essington.

As Mr Jucovic put it (Tp 653) ‘blinded by Sothirasan's fraud Mr Edwards did not perceive that he was being used as a dupe in a theft on Swiss Bank’. So much may be conceded.

Edwards, although he may not have realised. that the money was being stolen, knew that there was something extremely odd about this transaction. Whatever it was, could not be cured by transmitting it through a reputable organisation like SBC. Insofar as Edwards took a risk it extended to the source of the money. Shutting his eyes provided no excuse at law for Edwards.”

(Italics identify the passages on which the plaintiff places particular reliance.)

25 The plaintiff accepts that none of the criticisms of the defendant in 1991 and 1992 resulted in any prosecution or civil action directed at him. The defendant was pressed in cross-examination as to why, in the light of these matters, he had said in his affidavit that he had not been the subject of any complaint regarding his conduct as a company director other than the complaint that resulted in these proceedings. His answer was that he was not aware of items (a), (b) and (c) in paragraph [23] above and that, in any event, he intended, when referring to “complaint”, to refer to a complaint resulting in court proceedings. The last part of that answer is somewhat curious in light of the fact that, in the two immediately preceding paragraphs of the affidavit, he had said that he had no convictions (apart from a conviction for driving with the prescribed concentration of alcohol) and, apart from the present proceedings, there had been, so far as he was aware, “no other action commenced by ASIC or other regulatory authority in relation to my conduct whilst holding a position of company director”. Those two paragraphs refer specifically to court proceedings and it is not at all clear how the defendant could have considered “complaint” in the the paragraph of his affidavit quoted at paragraph [22] above to be confined to a complaint resulting in court proceedings.

26 The defendant does refer in his affidavit to the fact that “many Essington-related companies” were liquidated in the early years of the 1990s and that he was made bankrupt in 1993 as a result of director guarantees. The bankruptcy was annulled in 1995.

27 The defendant also gives evidence of various positions he has held:

(a) Royal Far West Children’s Home – member of the council from 1979 to 1990; member of the planning and development committee from 1987 to 1991;

(b) Australian Institute of Company Directors – director and national vice-president from 1 January 1990 to 8 November 1991; councillor for New South Wales division from September 1991 to May 1993;

(c) Company Directors Association – president of New South Wales chapter from 15 April 1985 to 24 February 1988; federal president of the Australian council from 29 April 1988 to 31 December 1989;

(d) Japan Entrepreneurs and Presidents Association – Australian representative 1986; representative adviser to JEPA in Japan 1992; deputy chairman of Australian branch advisory board from 1 January 1995 to 5 December 2003;

(f) Shore Foundation – director from 12 August 1987 to 21 July 2003.

28 The defendant points out that he gave his time, effort and experience to these organisations. He says that he resigned from various organisations upon commencement of these proceedings. The only one of those listed to which that can relate is the penultimate (Japan Entrepreneurs and Presidents Association), given that the proceedings were commenced on 14 October 2003.

Further evidence - character

29 Character evidence was given on behalf of the defendant by five persons. Mr Bruce Ian McWilliam, commercial director of Seven Network Limited, has known the defendant since 1980. Mr McWilliam was then an employed solicitor at Allen Allen & Hemsley, a firm of which the defendant was a client. Mr McWilliam worked with the defendant closely as a lawyer over many years and acted as a director of one of his family companies for a time. He has remained friendly with the defendant and has enjoyed a close association. Mr McWilliam has read the judgment of 24 August 2005. He says in relation to it:

“Given my commercial and personal association with the defendant I can say that the Court’s findings are not consistent with my experience of the defendant, which is overwhelmingly positive. I am happy to attest to his honesty and integrity and also his awareness of his legal obligations.”

30 Mr John Sheahan, a chartered accountant and official liquidator, has known the defendant for about fourteen years. The association began when Mr Sheahan became liquidator of each of six Essington companies of which the defendant was a director. Mr Sheahan has read the judgment of 24 August 2005. He says in relation to it:

“During the time of my professional association with the defendant I say that the Court’s findings are not consistent with my experience of the defendant.”

31 Mr Harold Woolf was a management consultant with GPR Dehler Pty Ltd from 1994 to January 2006 and is now chairman of that company. He has known the defendant for over twenty years, having first met him in connection with the Company Directors Association of Australia. He acted for the defendant’s companies in one matter about five years ago. Otherwise, their contact has been “essentially business/social”. He regards the defendant as “an astute and savvy businessman”. Mr Woolf has read the judgment of 24 August 2005 and says of it:

“Given my long friendship with Malcolm, and my impressions of him stated in paragraph 5 above, as well as his experience as a property developer, investor and businessman, the Court’s findings are not consistent with my knowledge and impressions of him.”

32 Mr Joseph Grant Jagelman is the managing director of an oil exploration company and has held corresponding positions for over thirty years. He has known the defendant for twenty five years “in a professional and personal capacity”. He has read the judgment of 24 August 2005 and says of it:

“During the time of my commercial and personal association with the defendant, I say that the Court’s findings are completely out of character.”

33 Mr Bernard John McGeorge is the managing direction of an Australian Stock Exchange listed company. He has known the defendant for about twenty five years, having first met the defendant when the defendant “had business dealing with and was a confidant of the late Kerry Packer” in whose publishing businesses Mr McGeorge was employed. The defendant and Mr McGeorge were directors of a Packer company for about two and a half years. Mr McGeorge found the defendant to be trustworthy, honest and candid. Mr McGeorge has read the judgment of 24 August 2005. He says of it:

“During the time of my [professional/personal] [sic] association with the defendant I say that the Court’s findings are not consistent with my experience of the defendant.”

Exoneration – discussion and decision

34 My findings as stated in the earlier judgment included findings that, at the time each of the six quantum meruit debts to CJC was incurred by MRL, MRL was insolvent; that, at each such time, the defendant knew that there were reasonable grounds for suspecting that MRL was insolvent (or, as I put it at paragraph [261], that “he knew all the facts contributing inexorably to an objectively based mistrust, at each material time, as to the inability of MRL to pay all its debts as they fell due”); that the defendant could, at any time, have stepped in and required that building work cease (he could also have stepped in to ensure that it did not commence in the first place); that the defendant never warned his co-directors of the reality that MRL did not have the funds with which to undertake the project; and that the message he communicated, both directly and through Mr Jones, was always that the various elements necessary to ensure the necessary funding were within grasp (so that it was always just a matter of a short time until all would be well).

35 These findings preclude any conclusion that the defendant acted honestly in the sense discussed at paragraphs [8] and [9] above. His conduct was not straightforward. Knowing as he did that there were reasonable grounds for suspecting that the resultant debts would never be paid, he allowed CJC to begin work. He knew that CJC was not “building for practice” and expected to be paid – indeed, that CJC would have a right to be paid. In allowing CJC to proceed (something he could have stopped), he did not act in a way that was straightforward. His conduct was morally wrong entailing, as it did, allowing CJC to embark on a course which the defendant knew would lead to CJC’s disadvantage and to the benefit of the interests the defendant represented as well as his personal interests (in that CJC would perform services for the benefit of MRL – and therefore for the benefit of its shareholder, Essington, a company owned by the defendant and his family – when there was no reasonable prospect of its being remunerated by MRL); and this was in circumstances where the defendant must have known that CJC was working on an assumption that MRL had adequate funding available. There were elements of unconscionability and moral turpitude in what the defendant allowed to happen. He did not act honestly.

36 This finding is sufficient to dispose of the defendant’s claims to exoneration under s.1317S and s.1318. I do not need to consider separately the additional question whether the defendant “has acted honourably, fairly, in good faith and in a common sense manner as judged by the standards of others of a similar professional background”, that being the question which according to Olssen J in Maelor Jones Investments (Noarlunga) Pty Ltd v Heywood-Smith (above), should be answered favourably in order to activate the “ought fairly to be excused” provision. I observe, nevertheless, that the several findings I have summarised do not allow that question to be answered favourably to the defendant.

37 The court will not make an exonerating order under s.1317S or s.1318.

Penalty - discussion

38 My finding that the defendant did not act honestly (see paragraph [35] above) emphasises the seriousness of his conduct. That finding, coupled with the fact that the defendant’s past conduct in other corporate contexts has, on three occasions, attracted adverse reports by liquidators and receivers (albeit adverse reports which were not productive of criminal or civil proceedings against the defendant) as well as adverse comment by Rogers CJ Comm D, means that the court should exclude him from situations in which his lack of honesty may again rebound to the disadvantage of persons having dealings with companies in which he is involved. The defendant has been shown to have misused the corporate structure in this case and to have attracted like criticism (although without proof in court proceedings) in earlier cases. He may have, at the theoretical level, an understanding of the proper role of a company director but he has not translated theory into practice.

39 The plaintiff says that the defendant should be disqualified for twelve years or more. In making that submission, the plaintiff refers to the periods of disqualification that have been imposed in other cases. It says that the seriousness of the defendant’s conduct matches that of the conduct at the upper end of a scale of disqualification from seven to twelve years, as disclosed by decided cases. These submissions are made by reference to a number of considerations emerging from the evidence.

40 The first consideration to which the plaintiff points is that the defendant’s contravention of the Act was both knowing and wilful. I accept that that is so. Given his history and the circumstances in which he had found himself over the years (both in relation to other troubled companies and as an official of professional bodies for company directors), it is inconceivable that the defendant could have been ignorant of the insolvent trading laws. He did not attempt to show that he was so ignorant. The defendant knew, at the time he allowed work on the project to start, that MRL did not have the necessary funds and had no apparent means of raising them.

41 The second matter put forward by the plaintiff is that, by allowing MRL to incur the relevant debts of somewhat more than $3.5 million, the defendant knowingly brought about a situation in which loss was occasioned to CJC. For reasons already canvassed, I am satisfied that loss was occasioned to CJC and that the Club also sustained loss. I am not in a position to quantify the loss with any certainty (see paragraph [21] above).

42 The plaintiff’s third submission is that the defendant has shown no contrition. The defendant says in his affidavit sworn on 2 March 2006:

“12. I would not in the future behave other than totally in accordance with my duties as a director. Accordingly, the experience of these proceedings has made me acutely aware that I should be proactive and not believe in comment of others or believe that commercial conventions be followed.

13. I am sorry and deeply regret others have been hurt as a result of my lack of pro activity resulting in these proceedings.

14. I accept I made mistakes and was neglectful in my duties in respect of the issues in this case.

15. These proceedings have caused a negative impact on my personal and commercial life. I am saddened that there are people who have been hurt by these proceedings.”

43 The defendant was extensively cross-examined on this part of his affidavit. It is necessary to quote a long passage from his cross-examination:

“McINERNEY: Q. Mr Edwards, in paragraph 12 of your affidavit in the second sentence you state, ‘Accordingly, the experience of these proceedings has made me acutely aware that I should be proactive’. Stopping there, what did you mean by your statement that you should be proactive? In what sense?
A. In the sense of not simply relying on people who had carriage of the particular project but indeed being proactive to ask every day what was happening.

Q. And who is it that you say had the conduct of the particular project to which you were referring?
A. If we are going back in time then I am saying that it was Mr Jones and Mr McNamara predominantly who had that carriage.

Q. And do you say that your role with respect to MRL was of a type whereby you relied on Mr Jones and Mr McNamara? Is that your evidence to the court?
A. Until after May of 1999 that is my statement.

Q. And that is evidence you have previously given in this case, is it not, to that effect?
A. Yes.

Q. And you adhere to the same evidence now, do you?
A. Yes.

Q. So do I understand it that the position between you sitting in the witness box here today and the evidence you gave in these proceedings before his Honour made any findings about your conduct has not changed; is that correct?
A. I am very respectful of the court and, as I say, I know it is required to be proactive.

Q. Could you answer my question, please, Mr Edwards. I am asking you whether or not your position has not changed, that is, that you still--
A. I know that--

Q. If you listen to the question, please.
A. Very good, Mr McInerney.

Q. Your position has not changed in that you maintain a position before the court today that you deferred to Mr Jones and Mr McNamara; is that correct?
A. No, I didn't say that at all. What I said to you was that I should have been more proactive in seeking regular advice from people who had carriage of the project.

Q. And what do you mean by that, Mr Edwards?
A. Well, with respect, I don't know how to say it any other way than what I just did.

Q. Do you say that you relied on Mr Jones and Mr McNamara and that you regarded them as having conduct of the matter on behalf of MRL?
A. Yes, and I think that's eminently clear from the minutes and other documents that were put in evidence.

Q. * And do you maintain before the court today a position that they were more responsible for what was occurring within MRL in regard to the raising of finance for the project rather than yourself?

GASIC: I object to that. Mr Edwards has clearly given evidence that he should have been more proactive in finding out for himself what the status was in respect of the project. Now Mr McInerney is going back and revisiting matters that are already in evidence.

HIS HONOUR: I allow the question.

Above question marked * read

WITNESS: No. What I am saying is that in the question of the raising of finance and so on it was as much my activity as that of Mr Jones. Mr McNamara was not involved in that part of the activity. My comments are directed to the management of the project proper in the way things progressed in that period.

McINERNEY: Q. How is it that you say that you now recognise that you should have been more proactive? In what way?
A. Because, as I said, I respect the findings of the court. I have put my evidence during the course of it, but I do realise that you cannot rely on comments or what I had expected to occur.

Q. And what is it that you say you had expected to occur?
A. I say that what I had expected to occur was that nothing would happen in terms of entry into any contracts or giving anybody any possession of any land until such time as there was a proper board meeting to approve it and that all the other things that would have been done by then or flowed from that would have happened.

Q. * Is this the case. You still blame Mr Jones for what happened with respect to MRL and you don't take any responsibility for it yourself; is that correct?
A. Mr McInerney, you are trying to restructure my mind. I have said I recognise my obligation to be more proactive than in relying - and please remember many years ago there were a lot of companies I was involved with a lot of people, so I do know the word proactive.

Q. Mr Edwards, could you answer the question, please.

Above question marked * read

WITNESS: No, it is not correct.

McINERNEY: Q. In what way do you now accept responsibility for your role in what occurred with MRL and its insolvency?
A. The way in which I see the position is that I am very remorseful that I didn't have the control that everybody attributes to me in that project.

Q. You don't attribute to yourself control of MRL at the relevant time; is that correct?
A. No. If you wish--

Q. Is that correct, Mr Edwards?
A. I will just give you an example of why I didn't have control.

Q. Please don't. Please answer the question, Mr Edwards.

GASIC: With respect, your Honour, he is trying to.

HIS HONOUR: Q. Go ahead, Mr Edwards.
A. There were a number of occasions during that project, including when I recommended to the Murray River people and the directors of Murray River that we enter into an agreement with a public company called Bintang which would have involved probably giving up about 10 or 12 per cent of the future benefit of the project to existing public company shareholders. It would have made it much simpler when the confusion was on with the non-determination of ASIC's managed investment scheme. The club at that time would not allow that on the basis they were sharing some potential profit with others. I had no control over it. When we were trying to do the deal to raise the finance with Capital Finance and various others, arrangements that I had in place were overruled by the club's directors and so I say to you I did not have the control of things that would have better enabled Murray River to have gone forward, even in the difficult circumstances we found ourselves.

McINERNEY: Q. In your answer you stated, did you not, that you did not have control of MRL. Is that what you are saying to the court?
A. I think in answering your question, Mr McInerney I demonstrated that I did not have control of MRL.

Q. And do you maintain that position here today, yes or no?
A. Yes.

Q. In the next part of the second sentence of paragraph 12 you say, and I will paraphrase it in this way. ‘Accordingly, the experience of these proceedings has made me’, then you stated ‘acutely aware that I should be proactive’, and then you go on ‘and not believe in comment of others’. What did you mean by that comment, ‘not believe in comment of others’?
A. I meant what it says and not believe in the comment of others without testing what they are saying or seeing evidence of it or whatever it is.

Q. To whom were you referring? Who were the others?
A. At that time I was referring in my mind in this specific instance to others, although the way that is worded we are talking about the future, no matter who those others are. But at that time I was thinking of McNamara, Martin Burke in particular and Len Jones in general.

Q. And what comment of the gentlemen to whom you have just referred did you have in your mind's eye when you made this statement in paragraph 12 of your affidavit? What is the comment that they made that you should not have believed in?
A. There were numerous comments, and given that I haven't had the opportunity to respond to these affidavits it's very hard to go backwards at the moment, but I am making a comment here that I realise that no matter who is doing what or who has carriage of what if I was ever a director of a company then I just would not believe what is being said without testing it.

Q. Your evidence is, is it not, that you believed you were misled by Mr Jones; is that correct?
A. I believe there are a number of issues where I was surprised at the way the position was outlined which wasn't the case.

Q. And you are there referring to Mr Jones?
A. I am referring generally to include Mr Jones but others in the incidents.

Q. Is this the case. In effect you are still of the view that they pulled the wool over your eyes; is that what you are saying?
A. I am saying that - no, I am not saying somebody pulled the wool over my eyes, I am saying there were issues related to me which were not as I interpreted them to be without going behind the issue to be more proactive.

Q. In plain language, are you saying that they misled you?
A. I am saying that there were certainly issues where I was misled during the Murray River matter.

Q. In the next part of the second sentence of paragraph 12 you go on to state these words, ‘or believe that commercial convention will be followed’.
A. Yes.

Q. What commercial conventions, I take it are you referring to with respect to Murray River Limited, which were not followed?
A. During 1998 there was an operating memorandum of understanding between Essington and Mulwala club. That was to come to an end in or about October or November of '98. It was purposefully let come to an end because of the difficulties with that managed investment scheme and the various - the many things that were open-ended. We didn't know which way this was going to go and all the original plans were certainly out of the window. The MOU was allowed to lapse, and some many weeks, maybe eight weeks from the preparation of the joint venture agreement which would have certain pre-conditions. I can't remember them off the top of my head now, but I took great comfort in the fact that Jim Curtis-Smith and Michael Mullarvey said words to the effect to me that nothing happens without going through all the board processes. Mr Curtis-Smith was their lawyer, Mr Mullarvey was their secretary, they structured the board, and the pre-conditions including transfer of the land and various other things all got out of hand when I would have thought that convention means that you would be having definitive board meetings with nothing going anywhere until the pre-conditions were met.

Q. Mr Edwards, your presentation from your evidence today, you would accept, has the character of blaming others rather than accepting responsibility for your own conduct. Do you agree with that proposition?
A. No, it is not a proposition at all, Mr McInerney. I have said I am very mindful of my mistakes and I am very mindful of the duties and obligations. I am simply responding to your questions in the context of what I believe are commercial convention with the way the companies would have operated.

Q. You referred in your last answer to your mistakes, Mr Edwards. What were your mistakes?
A. To have not been dealing with the Murray River or paying enough attention to it to have known more was happening with the builder than there was and to be across it and to ensure that nobody could do anything until everything was in place to go forward.

Q. Is that because there were others, such as Mr Jones, who you say were more responsible for what was happening with Murray River Limited than yourself?
A. What I am saying is that given the assurances I had from Jim Curtis-Smith and Michael Mullarvey I can't believe that the club would have possibly given access to that land without all of the paperwork done.

Q. You are not suggesting, are you, that you deny knowing the builder was going on to the property on 4 February 1999 in or about late January 1999, are you?
A. Mr McInerney, if we are to go back through the last 12 months of trial, all I can say to you is what you rejected and stomped over my head on at that stage was that 4 February was a date that was worked out back in the ether of July or August of '98. The paperwork was all prepared. If you look at any project it doesn't matter what date they put on the project, the dates are all the wish and hope of management. When it gets to the board and gets approval there's a new date. As far as I am concerned when that MOU came to an end and the joint venture commenced and the pre-conditions were there, that's when it should have happened. But I can't say I hadn't seen in the past a dead document that said 4 February which everybody seems to think became the golden rule.

Q. Mr Edwards, my question was directed to your present state of mind, that is, whether you are stating to the court in your evidence that as at late January 1999 you did not appreciate that the builder was going on to the site on or about 4 February 1999?
A. Well, that is correct. The position is that I am respectful of the court's finding, I am remorseful of the fact that we are even in this position, but I believe that the evidence and everything else that went on and your comment, if you go into it, which is in Mr Plath's affidavit, about a million bricks. I pay about as much attention to a news article as anybody else. It's what they put in the paper.

Q. In paragraph 14 you state you accept, in effect, that you were neglectful in your duties.
A. Yes.

Q. How were you neglectful and what duties?
A. What I am saying is I accept I made mistakes and was neglectful of my duties in respect of the issues in this case. I have read the judge's decision. I am respectful of the court's decision, but I have my own views of what happened at the time which may be others had different opinions, so I accept the court's decision that I was neglectful in my duties.

Q. I am asking you whether you accept you, not the court, that you were neglectful of your duties?
A. Yes, I--

Q. * What do you accept that you were neglectful of?
A. Not taking control--

GASIC: Mr Edwards has specified those portions of his evidence where he has conceded that he has made some mistakes. They are clearly evident.

HIS HONOUR: I allow the question.

Above question marked * read

WITNESS: Not making sure that I was aware of everything that was happening in the project at a distance, of not having attending formal meetings with the chaps involved day-to-day with the project, in not being more forceful in terms of getting through to the club directors that nothing could happen until we settled all the points of the joint venture, of not taking - in terms of talking to Joss, the last thing he wanted was to see an administrator appointed. That seems to be what everybody leaps to today instead of working through the project where you've got a very small group of people, in this case Murray River and the builder. There wasn't great external numbers of people, and I believed there was a way to work through with Joss and the club and Murray River to overcome the problem, and my mistake was not to - the mistake was to be weak and not force issues. I am very mindful of trying to work through with the club, who was a local community and wanted to save face more than facing commercial reality, and they were my mistakes in going down that path or not resisting it more.

McINERNEY: Q. In paragraph 13 you state that you are sorry and you deeply regret that others have been hurt. Who are the others you are referring to?
A. Well, everybody involved. Mullarvey used to tell me how he was embarrassed to go to the shops with his wife because they all knew him in the district, and so on it goes. I am genuinely sorry for any personality that was hurt because of my lack of proactivity.

Q. Who are the personalities to whom you were referring in paragraph 13?
A. Well, I guess after some of those articles that were published in the February of 2000, for example, you have got at the very time when we were finally trying to get this financier sorted out, we had the National Bank of Australia attending meetings down in Mulwala, we had switched from where I wanted to do the financing with Capital group to the Statewide thing, which went on for another three months after when we could have done it in August with Statewide. There were all manner of delays, and basically when you see the hurt that is caused to my own family or people who worked with Essington, when they want to put out an article just to embarrass me that the builder is laughing or chuckling, the word was, about the project looking like Beirut, it is not the most sensible article to put out at a time when we are trying to get finance behind us.

44 I am not satisfied that the defendant is remorseful or contrite about having breached the law and caused financial loss. In his affidavit, he expresses sorrow and deep regret that others have been hurt as result of his “lack of proactivity resulting in these proceedings” and that he is saddened that people “have been hurt by these proceedings”. In his cross-examination, he is careful to say, in effect, that he accepts the decision of the court but does not agree with it; that he was not really in the position of control that the court found him to have occupied; that he is remorseful that he did not have that position of control; and that he expected assurances he had supposedly been given by others would have prevented the situation that in fact arose. The concessions on the defendant’s part do not represent contrition in the relevant sense. He does not acknowledge his wrongdoing.

45 The fourth submission made on behalf of the plaintiff is that the defendant’s evidence was implausible (to the point of being fabricated) and was a false reconstruction of the true position. Furthermore, his evidence changed radically once he was shown the article from the “Border Mail” of 27 January 1999 carrying his handwritten message to Mr Jones, “LGJ for info. Have we got the valuation yet. MLE 27/1”. My findings at paragraph [227] of the judgment of 25 August 2005 on this bear out the plaintiff’s contention. They were as follows:

“The defendant’s initial evidence was thus that he had no advance knowledge that work was to start on 3 February 1999 and that he had found out about it by chance by overhearing the conversation some weeks later between Mr Jones and Mr McNamara that led on the “building for practice” understanding. The introduction into evidence of the newspaper article carrying his handwritten note to Mr Jones dated 27 January 1999 caused the defendant to give new and inconsistent evidence which, I am satisfied, makes unreliable his initial version and warrants a finding that he was aware on 27 January 1999 not only that work was to begin but that it was to be for the account of MRL.”

46 I accept that, as the plaintiff submits, the defendant, having previously committed himself to a false version of events, could not bring himself to state his actual state of mind truthfully during the period 27 January 1999 to late February 1999.

47 I turn now to submissions made on behalf of the defendant. He says that, if he is disqualified at all, the period of disqualification should be no greater than that ordered in respect of Mr Jones, that is, five years. It is said that Mr Jones was “disqualified on the same facts and circumstances of this case” and that principles of parity should be applied. The plaintiff takes the view that the defendant was more culpable than Mr Jones. While conceding that it had been willing to accept a compromise resolution under which the defendant would have submitted to the same period of disqualification as was accepted in the compromise with Mr Jones, the plaintiff says (through Mr Plath’s latest affidavit) that it would not have been of that mind if it had been conscious of the “Border Mail” article of 23 January 1999 and the defendant’s handwritten notation on it. The plaintiff also points to the court’s finding (at paragraph [256] of the judgment of 24 August 2005) that not only the Club or those of its directors who were members of the MRL board (plus Mr Mullarvey), but also Mr Jones, deferred to the defendant in the matter of raising finance. I am satisfied that the defendant attracts a greater degree of culpability than did Mr Jones.

48 The defendant points to what he regards as two mitigating factors:

(1) It has not been found that the defendant was engaged in a deliberate dishonest scheme or any criminal conduct or any dishonest deception.

(2) The defendant is a person of good character and unlikely to re-offend.

49 In relation to the first of these matters, it is sufficient to say two things: first, that I have already stated my conclusion that the defendant did not act honestly; second, that in the statutory context of civil penalty with which I am here concerned, it is irrelevant that the particular conduct engaged in by the defendant does not also amount to a crime or involve dishonest deception as one of its elements. Conduct amounting to a particular statutory wrong cannot somehow be discounted because it does not also fit into other categories of wrongdoing.

50 On the matter of character, the first thing I would say is that the affidavit evidence led by the defendant does him something of a disservice. Mr McGeorge was obviously working from some kind of pro forma affidavit and, in the passage quoted at paragraph [33] above, did not bother to omit one of the two alternatives, “professional” and “personal” or the square brackets surrounding the alternatives. One cannot but be left with a clear impression that Mr McGeorge did not read in a careful way this important part of his sworn evidence. Three of the five character witnesses (including Mr McGeorge) use precisely the same form of words in commenting on the court’s findings vis a vis the defendant: “… are not consistent with my experience of the defendant” (see paragraphs [29], [30] and [33] above). Again, there cannot but be a strong impression of adoption of some prepared text.

51 I do not say that these matters cause the evidence of the relevant character witnesses to be devoid of probative value. But they certainly blunt its impact. And, of course, the character evidence – including the observations of those witnesses on the defendant’s high standards of behaviour in business matters – must be considered in light of the evidence that liquidators and receivers, in three diverse situations, saw fit to make formal submissions to an enforcement authority calling into question the defendant’s standards of corporate behaviour and his probity; also that a judge of this court made findings in 1992 critical of his commercial judgment and the standard of his corporate behaviour.

52 Reference was made in submissions on behalf of both parties to periods of disqualification imposed in other cases. The plaintiff sought to draw parallels justifying disqualification for twelve years. The defendant questioned the parallels and said that any disqualification should be significantly shorter than that. My view is that there are strong similarities between this case and Elliott v Australian Securities and Investments Commission (above), at least as regards the nature of the conduct. There is also an appreciable degree of similarity, as to surrounding circumstances and relevant considerations, between the present defendant and the defendant Plymin in that case – although, as will be seen, Plymin’s predicament was assisted by certain matters which are not available to the present defendant.

53 The Court of Appeal of the Supreme Court of Victoria held in Elliott that the appropriate period of disqualification for Plymin was seven years. It reduced the disqualification of ten years imposed at first instance. The factors to which the Court of Appeal referred (at paragraphs [132] to [145] of the joint judgment) in reaching its decision were as follows:

1. The debts improperly incurred amounted to $3,369,000. There were 61 relevant creditors.

2. Plymin had had a career of 30 years as a businessman, a commercial manager and an executive director.

3. Plymin was aged 53. A ten year disqualification would end his business career.

4. Plymin had worked with the company’s administrators full-time and part-time for about 10 months after its collapse to ensure that the creditors were paid.

5. He expressed deep regret that creditors had suffered loss.

6. He showed genuine remorse.

7. Character evidence showed Plymin to be a hard-working, conscientious professional in his approach to matters and highly ethical.

8. The contraventions were not an isolated event but extended over five months in circumstances where Plymin had been aware of the company’s serious financial difficulties for an even longer period.

9. Plymin was managing director at all material times and had more knowledge than any other director of the company’s parlous financial state.

54 Referring to the approach taken by Santow J in Adler, as set out at paragraph [12] above, the Court of Appeal noted that a number of the factors considered by his Honour to be indicative of seven to twelve years as the appropriate period of disqualification (see item (xiv) of the extract from Santow J’s judgment) were not present in the case of Plymin.

55 In the present case, the following picture emerges when one considers the matters 1 to 9 above (using the same numbering):

1. The debts improperly incurred amounted to more than $3.5 million, all owed to one creditor.

2. The defendant has had a career of some 30 years as a businessman, entrepreneur and company director.

3. The defendant is aged 58.

4. The defendant did nothing in an attempt to make good losses suffered.

5. The defendant’s expressions of regret were not directed at the plight of persons who had suffered loss (see paragraph [44] above).

6. The defendant has not shown genuine remorse at having done wrong (see paragraph [44] above).

7. Character evidence (with the reservation expressed at paragraph [51] above) is favourable to the defendant but is offset to a very significant extent by the reports of liquidators and receivers in 1991 and 1992 and the observations of Rogers CJ Comm D.

8. There were six contraventions over a five month period. The defendant had been aware of MRL’s financial position and its very limited financial capacity since its formation. The contraventions were knowing and wilful.

9. The defendant was, in the MRL context, the commercial and financial expert and his view on matters of financial prudence would have been accepted virtually as a matter of course. It was the defendant who was principally involved in developing plans to raise finance.

56 As far as the matters in Santow J’s item (xiv) are concerned (see paragraph [12] above), I am satisfied that this case involves the first, third, fourth and fifth of them. It is not necessary to say more than has already been said about the first, fourth and fifth. As to the third, I repeat my earlier observation (at paragraph [35] above) that the defendant allowed CJC to embark on a course which he knew would lead to CJC’s disadvantage and to the benefit of the interests the defendant represented and his personal interests (in that CJC would perform services for the benefit of MRL – and therefore for the benefit of Essington, a company owned by the defendant and his family – where there was no reasonable prospect of its being remunerated).

57 The second matter referred to by Santow J is “substantial loss”. In the present case, for reasons already stated, I am not in a position to quantify loss precisely. I therefore cannot say that there was “substantial loss”. But I repeat that I consider myself entitled to infer that the defendant’s conduct was productive of some appreciable loss to both the Club and CJC (see paragraph [21] above).

58 I would add that there is, in this case, the further point that the defendant changed his evidence in a material way after being confronted with documentary evidence that showed his original account to be implausible (to the point of being fabricated).

Penalty - decision

59 The case law makes it very clear that protection of the public and deterrence, specific and general, are to be given consideration above all other matters in cases of this kind.

60 In the present case, the defendant is shown to have committed significant contraventions and not to have acted honestly. There is evidence that liquidators and receivers have, in the past, made complaints about his conduct as a company director. There is accordingly good reason to think that the public is in need of protection from the possibility of further contravening conduct by the defendant. A prohibition upon the defendant’s being engaged in the management of corporations is warranted.

61 A prohibition of significant duration will serve to underline the disapproval and opprobrium that attach to conduct of the kind engaged in by the defendant. That will promote deterrence.

62 The factors referred to at paragraph [55] above, compared with those at paragraph [53], confirm that the defendant’s conduct and his subsequent actions and attitudes attract greater blame than those which warranted disqualification of Plymin for seven years in Elliott v Australian Securities and Investments Commission. In addition, four of the five matters referred to in Santow J’s item (xiv) have been determined adversely to the defendant (see paragraphs [56] and [57] above). The conclusion in relation to the remaining matter is that there was loss but that the court does not have evidence enabling it to characterise the loss as “substantial”. It can, however, be inferred that there was appreciable loss. The matter referred to at paragraph [58] is also adverse to the defendant.

63 The defendant’s wrongdoing may thus be seen to warrant disqualification for a period towards the upper end of the scale referred to in Santow J’s item (xiv) and greater than that imposed on Plymin. The appropriate period is ten years.

64 I am conscious of the fact that disqualification for that period is likely to put an end to the defendant’s commercial career. That, however, is an inevitable by-product of his conduct.

Section 206G

65 It was submitted on behalf of the defendant that, if a disqualification order were made, there should also be an order under s.206G allowing him to perform management functions in relation to the Essington group of companies. The plaintiff says that, if there is to be any application for such an order, it should be made separately and subsequently by appropriate process supported by affidavit evidence.

66 I accept the plaintiff’s submissions on this point. A case for leave under s.206G can be sensibly made only against the background of the disqualification order and the reasons for it. There must also be evidence about the particular companies to which the application for leave relates. The court must be able to see the risks that are involved. If the defendant wishes to pursue the matter, he should initiate a separate application.

Timing

67 I am aware that the defendant has taken steps to appeal against the making of the declarations of contravention of 28 October 2005. It may be that he will, for that reason, seek a stay in relation to the disqualification order. I am also conscious of the need for a short time to be allowed for him to arrange his withdrawal from positions which it will be unlawful for him to hold once the disqualification is in force.

68 For those reasons, the period of disqualification will commence 28 days after the making of the order.

Order

69 The court orders pursuant to s.206C(1) of the Corporations Act 2001 (Cth) that the defendant, Malcolm Leslie Edwards, be disqualified from managing corporations for the period of ten years commencing on and from Friday 2 June 2006.

Costs

70 The plaintiff seeks an order that the defendant pay the plaintiff’s costs of the proceedings as a whole. Written submissions on costs were handed up by counsel for the plaintiff some time ago. There have been no submissions on costs from the defendant.

71 I direct that any submissions of the defendant concerning the costs of the proceedings be reduced to writing and delivered to my Associate within 14 days.

72 The question of costs is at this stage reserved.

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Citations

Australian Securities and Investments Commission v Edwards (No 3) [2006] NSWSC 376

Most Recent Citation

ASIC v Flugge (No 2) [2017] VSC 117

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Statutory Material Cited

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Chan v First Strategic Development Corporation Limited (in liq) [2015] QCA 28

Australian Securities and Investments Commission v Edwards [2005] NSWSC 1278

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CITATION:	ASIC v Edwards [2006] NSWSC 376
HEARING DATE(S):	06/04/06
JUDGMENT DATE :	5 May 2006
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Barrett J
DECISION:	Disqualification from managing corporations for ten years
CATCHWORDS:	CORPORATIONS - civil penalty proceedings - director allowing insolvent trading - declarations of contravention previously made - whether exoneration order should be made - meaning of "honestly" and "ought fairly to be excused"- whether disqualification order should be made - relevant considerations discussed
LEGISLATION CITED:	Corporations Act 2001 (Cth), ss.206C(1), 206G, 1317E(1), 1317S, 1318 Crimes (Sentencing Procedure) Act 1999, s.10
CASES CITED:	Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148 Australian Securities Commission v Forem-Freeway Enterprises Pty Ltd (1999) 30 ACSR 339 Australian Securities and Investments Commission v Vines (2005) 56 ACSR 528 Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 Corporate Affairs Commission v Papoulias (1990) 20 NSWLR 503 Elliott v Australian Securities and Investments Commission (2004) 10 VR 369 Maelor Jones Investments (Noarlunga) Pty Ltd v Heywood-Smith (1989) 54 SASR 285 Re HIH Insurance Ltd; Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80 Rich v Australian Securities and Investments Commission (2004) 220 CLR 129 R J Elrington Nominees Pty Ltd v Corporate Affairs Commission (SA) (1989) 1 ACSR 93 Swiss Bank Corporation v State Bank of New South Wales (unreported, NSWSC, 9 December 1992)
PARTIES:	Australian Securities and Investments Commission - Plaintiff Malcolm Leslie Edwards - Defendant
FILE NUMBER(S):	SC 5254/03
COUNSEL:	Mr A.J. McInerney - Plaintiff Mr D. Gasic - Defendant
SOLICITORS:	Australian Securities and Investments Commission Solicitor - Plaintiff Phillip R. Loiterton - Defendant