Farrelly and Australian Securities and Investments Commission - [2023] AATA 4350

Farrelly and Australian Securities and Investments Commission [2023] AATA 4350 (22 December 2023)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2023/8125 & 2023/8132
Re:Jamie Farrelly
Gary Kelly
APPLICANTS

AndAustralian Securities and Investments Commission
RESPONDENT

DECISION
Tribunal:Deputy President Bernard J McCabe
Date:22 December 2023
Place:Brisbane

The applications for stay and confidentiality orders are refused.
..................................[SGD]......................................
Bernard J McCabe, Deputy President
Catchwords
PRACTICE AND PROCEDURE – STAY APPLICATION – application for stay of publication of disqualification order by the Respondent – section 206F of the Corporations Act – where applicants were disqualified for 2 years as directors – where companies were liquidated – where tax debts were owed – where publication of disqualification order may impact further investors – objectives of the regulators in making a decision – where objective of legislation – consumer protection – objective of transparency – where there may be reputational damage
Legislation
Administrative Appeals Tribunal Act 1975 (Cth)
Australian Securities and Investments Commission Act 2000 (Cth)
Corporations Act 2001 (Cth)
Cases
Australian Securities and Investments Commission v Administrative Appeals Tribunal [2009] FCAFC 185
Daly and Australian Securities and Investments Commission [2020] AATA 1516
Rent-To-Own Australia Pty Ltd and Australian Securities and Investments Commission [2011] AATA 689
Re Pochi and Minister for Immigration and Ethnic Affairs (1979) 36 FOR 482
Scott and Australian Securities and Investments Commission [2009] AATA 798
REASONS FOR DECISION
Deputy President B McCabe

The applicants were both company directors until a delegate of the Australian Securities and Investments Commission (ASIC) exercised the power in s 206F(3) of the Corporations Act 2001 (Cth) to disqualify them from managing corporations. The delegate found the applicants had both been directors of companies that had gone into liquidation. The delegate decided the applicants should both be disqualified from managing corporations for a period of two years.
The applicants have asked the Tribunal to review the disqualification decisions made on 28 September 2023. While that review proceeds, they have both asked the Tribunal to:
(a)Stay the operation and implementation of the reviewable disqualification decisions on certain conditions pursuant to s 41(2) of the Administrative Appeals Tribunal Act 1975 (the AAT Act). Under the terms of the stay, they would be permitted to remain involved in the management of several identified companies and ASIC would be restrained from publicising its decision in the ordinary way; and
(b)Make ‘confidentiality’ orders that would provide a private hearing in the Tribunal but also restrain ASIC from discussing the case.
The applicants have both offered undertakings that they would nonetheless disclose the fact of the reviewable decision and the review proceedings to identified persons if the orders were granted.
The applicants’ want to remain in charge of a handful of companies that are engaged in a significant property development. If the development is successfully completed, there is reason to believe the companies (and presumably the applicants) will make a handsome profit. In the meantime, those companies have substantial loans which need to be refinanced. The applicants fear there will be adverse publicity if the reviewable decisions come to light. That publicity would make it harder (if not impossible) for the companies to arrange fresh finance and complete the developments. The applicants say they need to remain in control of the companies in question so they can quietly arrange a new finance facility away from the glare of media attention. If the orders are not made, I was told, the companies in question and their creditors and contractors might be adversely impacted. The applicants say that would be a perverse outcome given the objectives of the disqualification regime.
Mr McDonald, counsel for the applicants, said it was necessary to obtain appropriately conditioned orders under both ss 35 and 41(2) for the applicants to have any hope of success in negotiating new finance arrangements. He said that, as a practical matter, the applicants needed to be directors to give the necessary guarantees to a financier. They also needed to avoid adverse publicity that might scare off a potential financier. Given that submission, I infer a stay order issued without a s 35 order would have limited utility. That means it is practically important to deal with the s 35 order first.
I am not satisfied it is appropriate to make the orders sought under s 35 of the AAT Act, and I am not satisfied it is desirable or appropriate to make the orders under s 41(2). I explain my reasons below.
The background
The applicants were directors of companies in a group that carried on a property development business. The delegate found the applicants were directors of at least five companies that were wound up between 2019 and 2021 in circumstances where debts (including tax debts) remained owing. In several cases, liquidators lodged reports identifying possible mismanagement and potential contraventions of the law. (There was some evidence presented at the hearing before me that other companies had been wound up since the date of the disqualification decision, but the circumstances in which all that occurred were unclear.)
The applicants dispute the delegate’s characterisation of the demise of the relevant companies. They say some if not all of the failures were due to bona fide disputes or exogenous factors rather than bad management.
After a hearing, the delegate was satisfied the discretion to disqualify in s 206F(3) of the Corporations Act was enlivened. Each of the directors were disqualified for a two-year period. The applicants learned of the disqualification decision several weeks later.
One of the group’s property development projects is apparently nearing completion. I was shown financial statements annexed to Mr Kelly’s statement that forecasted a significant surplus once the project is finished. The applicants acknowledge there are financing challenges in the short term. The development depends on borrowed monies. There is an existing facility in place under which the development companies (or one of them) has been advanced approximately $35 million. The facility is due to expire early in 2024. The applicants are concerned that the development will be interrupted and the viability of the entire group may be threatened if anything interferes with the refinancing efforts.
The group financial controller also provided a statement for the purpose of the interlocutory hearing in which he detailed the loan obligations of other companies in the group. While the companies are mostly passive in the sense that they hold assets rather than actively trade, they also presumably acquired goods and services on credit in the ordinary course. They also have some tax debts.
The applicants say they need to remain involved in the management of the subset of companies that are directly involved in the particular development. They have tried to convince friends and associates to step in as directors in their place, but I was told they had limited success in doing so. The obstacle appears to be that any incoming director might be financially exposed, and they would in any event be asked to provide personal guarantees to the companies’ new financier(s) in respect of the corporate debt. (The applicants provided statements which tended to confirm that prospective lenders would require personal guarantees.) The applicants are confident that if they can remain at the helm, they will be able to complete the developments in the medium term but also obtain the finance required in the short term. They say they are happy to give the personal guarantees that will be sought by any prospective financier. While they could give guarantees without remaining involved in the management of the company, there may be good reasons why they would not do so: as guarantors, they would have financial exposure to companies they do not control while the disqualification decision remains in effect.
The applicants made clear they would agree to conditions on any orders that required them to disclose the fact of the disqualification decision and the Tribunal review process to any financiers with whom they negotiated. In those circumstances, I was told, prospective creditors would be able to take account of the reviewable decision when deciding whether to do business with the applicants and their companies. But the applicants want to make sure that news of their present difficulties does not extend more widely.
Non-disclosure orders
While there is some overlap between the matters I must consider when exercising the discretionary powers found in ss 35 and 41(2), it is as well to remember they are separate powers that require separate decision-making processes. I will deal with the orders sought under s 35 first.
Section 35 makes clear that hearings before the Tribunal are to be conducted in public in the absence of an order or other legislative provision which requires a different approach. Indeed, when considering whether to make one of the orders mentioned in sub-sections 35(2),(3) or (4), s 35(5) makes clear the Tribunal must take “as the basis of its consideration” the principle that public hearings are desirable but it must also have regard to any reasons why the orders should nonetheless be made. That sub-section expressly refers to the possibility that material might be of an inherently ‘confidential nature’.
I should say at once there is nothing inherently confidential about ASIC’s reviewable decision. It is a decision of a public regulator that would ordinarily be published to the world at large. It follows the applicants must refer to other reasons in favour of giving such a direction.
The power to make an exception to the norm of a public hearing ought to be exercised sparingly: see Re Pochi and Minister for Immigration and Ethnic Affairs (1979) 36 FOR 482 at 510 per Brennan J. That caution is appropriate even where the Tribunal is willing to order a stay of the decision under s 41(2). Where an applicant seeks orders directed to a regulator that require it to suppress news of its regulatory decision, the Tribunal will look hard at the reasons proffered by the applicant. There are sound reasons of public policy for doing so in a regulatory context, whether the orders in question are to be made under s 35 or s 41. As Downes and Jagot JJ explained in Australian Securities and Investments Commission v Administrative Appeals Tribunal [2009] FCAFC 185 (at [76]):
When measured against the existence of the norm of a public hearing and the scheme established by the Corporations Act with respect to banning orders, it is apparent that the AAT would need some cogent reason by reference to the particular case to depart from the ordinary requirement of a public hearing. It is difficult to accept that harm (even serious harm) to the recipient’s reputation resulting from public awareness of the banning order will be a sufficiently cogent reason to justify the grant of a stay in most cases. This is because the risk of harm of this type is inherent in the nature of a banning order.
I referred to this issue in Daly and Australian Securities and Investments Commission [2020] AATA 1516 at [17]-[18] where I explained:
The Tribunal will look carefully at requests to suppress news of a reviewable decision even where the Tribunal is otherwise prepared to issue a stay under s 41(2). The reasons for that caution are obvious enough. The Tribunal’s review mechanism is intended to operate in a transparent way. But the Tribunal is also conscious that others who continue to deal with an applicant will be understandably angry if they later discover they were kept in the dark about a reviewable decision that might have influenced their choices as consumers of the applicant’s services.
While the Tribunal will consider the reputational damage and economic loss that an applicant might experience if the reviewable decision is published while the review proceeds, it might not give those concerns much weight. Requests for suppression orders – for that is what they are, in substance – will be scrutinised very carefully where the reviewable decision in question relates to a person’s right to participate in a regulated occupation. Participation in a regulated occupation brings many benefits, including (in many cases) economic advantages that accrue to licence holders. Those economic advantages flow from the establishment of barriers to entry that incidentally reduce competition between the favoured few. The licence necessarily carries with it a requirement that the licensee conform to the rules and participate in regulatory processes according to law. Most of those regulatory regimes – including the one established in Chapter 7 of the Corporations Act 2001 … – place a premium on transparency. It follows that a risk of bad publicity accompanying adverse regulatory action will often be regarded as an incident of a licensee’s participation in a regulated occupation.
The decision in Daly dealt with individuals who were banned from providing financial services under Chapter 7 of the Corporations Act. The power to disqualify persons from managing corporations is found in Part 2D.6 but the comparison with the powers in Chapter 7 is relevant because those who manage corporations are also engaged in a regulated activity. The regulatory regime applicable to directors recognises that being a director is ultimately a privilege available to private individuals under corporate law. Exercise of that privilege may be subject to regulation in the public interest. The parliament has decided the public interest requires the exclusion of directors with a track record of being involved in corporate failures and insolvency. The power in s 206F is principally directed to protecting the public against abuses, like ‘phoenixing’, and against mismanagement that tends to insolvency. That legislative purpose is evident from the text.
The regulatory regime does not just protect the public against losses occasioned by dealing with an individual company managed by a particular problem director. The market is presumably aware the ASIC ‘cop on the beat’ is vigorously policing problem actors. That knowledge can contribute to the maintenance of a ‘high-trust’ commercial environment where traders know they can do business with any company with greater confidence. That trust can reduce transaction costs, which makes markets operate more efficiently. Promoting efficient markets is an objective of the Corporations Act and of ASIC under s 1 of the Australian Securities and Investments Commission Act 2000 (Cth). Transparency is essential to that end.
That said, the applicants in this case say the public will be adequately protected if I make orders under s 35 that have the effect of temporarily suppressing news of the reviewable decision because they will undertake to disclose the fact of the decision to any financier from whom they seek credit. They have not undertaken to make the same disclosure to existing financiers, creditors or contractors. (If they did make a disclosure to everyone who currently did business with the companies, there must be some doubt as to whether the news would remain secret for long as it is unlikely to be appropriate to make orders that require third parties to not repeat what they have been told by the applicants.)
It appears the applicants have not disclosed the reviewable decision to the companies’ existing principal financier even though there is an argument that there is a requirement to do so under the terms of the financing facility. I do not need to decide whether they are currently acting in breach of that obligation, but I venture it is plainly information which the financier would expect the debtor to bring to the financier’s notice. I gather there are other creditors who are also unaware of the regulatory action. By failing to inform them, the applicants presume to decide on behalf of third parties what information those parties should consider when deciding to continue an existing business relationship with the applicants’ companies. In effect, the applicants are asking the Tribunal to assist them in keeping those third parties in the dark.
The Tribunal ventures onto dangerous ground when it starts to second-guess what strangers in a marketplace might want or need to know as they deal with an actor who happens to be a party before the Tribunal. Sooner or later, news of the reviewable decision will come out – either because the applicants have been vindicated at the hearing, or because the decision is affirmed or varied. Those who were kept in the dark in the meantime would be understandably upset when they learn about the regulatory action, especially if the Tribunal substantially affirmed ASIC’s findings. They might be critical of ASIC and the Tribunal for acquiescing in the applicants’ decision not to communicate information that third parties would assume they are entitled to know. That would undermine confidence in the regulatory arrangements.
If the companies were prevented from refinancing because prospective financiers are reluctant to deal with them in the event of public disclosure, there is a chance the companies might fail. That would have implications for existing creditors, and for the applicants who may yet be vindicated following the review. I acknowledge the consequences of disclosure might be irreversible. It is also possible that such an eventuality might be avoided if the applicants were able to negotiate in secret. But the companies might fail even if they do find a financier willing to deal with them after the applicants confidentially disclosed news of the reviewable decisions. I am not satisfied the applicants’ plans amount to a reason – certainly not a weighty reason – for making an exception to the transparency principle evident in s 35 of the AAT Act.
Making orders under s 35 would amount to an intervention in the operation of the market to make it less transparent. The argument in favour of orders smacks of “an overanxious desire to permit regulated activity”: see Rent-To-Own Australia Pty Ltd and Australian Securities and Investments Commission [2011] AATA 689 at [47] per Downes J and DP Hack.
I am not satisfied the reasons proffered by the applicants justify making the orders sought given the starting principle.
The stay application
The applicants’ counsel made clear there was no utility in the stay orders in the absence of what amounts to suppression orders. I am not satisfied it is appropriate to make those orders under s 35, but I should deal briefly with the applicant for a stay under s 41(2) for the sake of completeness.
I have already noted the applicants make clear they are prepared to give undertakings. There is no doubt the Tribunal can make a stay conditional on the applicants doing certain things, and the scope of the stay can be adjusted.
The stay power in s 41(2) of the AAT Act is available “for the purpose of securing the effectiveness of the hearing and determination of the application for review.” It follows the Tribunal may not make an order under s 41(2) unless the order is directed to that end. But there is a further limitation. The Tribunal may not make an order directed to that end unless it is also “of the opinion that it is desirable to do so after taking into account the interests of any persons who may be affected by the review”.
The conventional approach to the analysis of stay applications was set out in the reasons of Downes J in Scott and Australian Securities and Investments Commission [2009] AATA 798. In that case, Downes J suggested a non-exhaustive framework of inquiry at [4]. I will adopt that framework below. In doing so, I keep in mind the objectives of the regulatory regime that I have already identified.
The prospects of success

ASIC says the applicants have little prospect of securing a better outcome on review, but the applicants insist they have an arguable case.
Where applicants have an obviously poor case, this consideration will weigh against exercising the discretion to order a stay. Where their case has obvious merit, the exercise of the discretion will be more attractive. In most cases, this consideration will not count heavily for or against the exercise of the discretion because it is simply too early to make a proper assessment of prospects – and the Tribunal should not conduct a mini-trial to reach a view.
This is one those cases where the prospects are unclear. I do not think the consideration weighs in favour of ordering the stay, but I would not go so far as to say it weighs heavily against.
The consequences for the applicants
The statements filed in support of the application for a stay and suppression orders suggest the applicant may sustain significant and irretrievable economic loss if the orders are not made. The damage may occur because the group companies they wish to direct will be practically unable to obtain finance and complete the development. That loss will potentially be sustained long before the review can be completed.
There is something to this concern, as I have already explained. But I also pointed out it is unclear whether the applicants would be able to get finance even if orders are made under s 41(2), and the applicants admit there is little prospect of a bad outcome being averted if orders under s 35 are not also made. I do not think this consideration weighs heavily in favour of ordering a stay.
The public interest
The officers and employees of the companies directed by the applicants form part of the public. So are the companies themselves. Their interests must be considered. The interests of creditors and contractors are also relevant.
It will be apparent from my earlier discussion of the objectives of the regulatory regime that I assume the public interest – but most especially the interests of creditors and contractors – will generally be served by transparency. A stay order that is not disclosed to the public is not in the public interest in the circumstances of this case, even if there are concerns about the viability of the group in the event of publicity.
A stay order that does not include (or which is not accompanied by) suppression orders is of less concern. It is conceivable that a stay order may even work to protect the interests of the companies and their employees, and perhaps their contractual counterparties and any investors. But this consideration does not weigh heavily in favour of the exercise of the discretion.
The consequences for ASIC as it carries out its regulatory function
There is a risk that ASIC will be embarrassed in the performance of its regulatory function if suppression orders prevented it from announcing the reviewable decision and recording that fact on the relevant register. The public expects ASIC to do its job, and ASIC would be placed in a difficult position if (for example) a journalist or a financier were to ask ASIC (or search the register) to confirm whether any regulatory action had been taken.
An order under s 41(2) which simply restored the applicants as directors while the review proceeded without requiring ASIC to suppress news of the decision does not create the same difficulties. I have already indicated I am not prepared to make suppression orders; a conditional order of reinstatement without more does not complicate ASIC’s task. It certainly should not be treated as a reflection on ASIC’s performance: applications for review and orders for stays are a feature of the decision-making continuum. This consideration does not weigh against ordering a limited stay.
Whether the applicant for review would be rendered nugatory if the order is not made
This consideration goes to the heart of the purpose of the stay power. The applicants say they would sustain irretrievable economic damage in the event the orders were not made and the group companies collapsed. ASIC’s counsel argued the casual connection was in doubt, but I see the applicants’ point. The problem for the applicants is that it is unclear whether they could secure finance if I made all the orders they sought, and it is very unlikely they would succeed in their negotiations in the absence of suppression orders. In the circumstances, I doubt the proceedings would be rendered nugatory if I did not make the orders under s 41(2), especially if I decline to make the orders under s 35 given the principles and public interest considerations involved under that section. To be blunt: I am not persuaded the orders under s 41(2) will have the effect the applicants anticipate. At a minimum, I am not satisfied this consideration weighs in favour of making orders.
Other matters that may be relevant
We discussed the possibility of an expedited hearing final hearing. While it is likely the parties can move comparatively quickly, it will still take some time to bring the matter to a final hearing. This consideration does not weigh for or against the exercise of the discretion.
Conclusion with respect to the stay application
On balance, I am not satisfied it would be appropriate to order a stay under s 41(2). I considered making a limited stay order without suppression orders however the applicants make clear that will not be enough to achieve their commercial purpose. In those circumstances, there is good reason to doubt making an order under s 41(2) would achieve the purpose of securing the effectiveness of the hearing and review.
I certify that the preceding 43 (forty-three) paragraphs are a true copy of the
reasons for the decision herein of Deputy President McCabe
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Associate
Dated of decision: 22 December 2023
Date of hearing: 12 December 2023
Counsel for the Applicants: Geoffrey McDonald
Advocate for the Applicant: Belinda Crossland
Counsel for the Respondent: Caryn Van Proctor
Solicitors for the Respondent: Matthew Povey and Sarah Maneckshana