Forge v Australian Securities and Investments Commission - [2004] NSWCA 448

No judgment structure available for this case.

Reported Decision:
52 ACSR 1
(2005) 23 ACLC 1010

Court of Appeal

CITATION: William Arthur Forge & 5 Ors v Australian Securities & Investments Commission [2004] NSWCA 448

HEARING DATE(S): 11 August 2003 to 14 August 2003
30 September 2003, 2 October 2003 (written submissions)

JUDGMENT DATE:
7 December 2004

JUDGMENT OF: Handley JA at 1; Santow JA at 2; McColl JA at 3

DECISION: (1) Appeal dismissed save as to ground 22. (2) Matter remitted to the Equity Division for hearing on penalty only. (3) Appellants to bear three-quarters of the costs of the appeal. (4) The primary judge's order that the appellants pay ASIC's costs of the proceedings below including reserved costs should not be disturbed.

CATCHWORDS: CORPORATIONS LAW - APPEALS - Appeal from declarations of contravention of the Corporations Law, disqualification orders and pecuniary penalties - breach of directors' duties and related party transaction provisions of the Corporations Law - whether proceedings commenced under the Corporations Law validly continued under the Corporations Act 2001 (Cth) - whether fourth appellant was an "officer" for the purposes of s 232 of the Corporations Law - whether primary judge erred in concluding the appellants had contravened ss 232(2), (4) and (6) and s 243ZE of the Corporations Law - subjective or objective test of "honestly" in s 232(2) of the Corporations Law - whether purported ratification of contraventions of the Corporations Law by shareholders effective - whether a separate hearing on penalty should be held in civil penalty proceedings - EVIDENCE - Admissibility of expert evidence going to an ultimate legal issue. (D)

LEGISLATION CITED: Constitution s 51(xxxvii)
Corporate Law Economic Reform Program Act 1999 s 1466
Corporations Act 2001 (Cth) s 79, s 180, s 181, s 182, s 208, s 209, s 210, s 211, s 239, s 243N, s 254T, s 254V, s 1317L, s 1332, Ch 10, s 1370, s 1371, s 1371(2), s 1382(1)(bb), s 1383, s 1383(1), s 1383(1)(a), s 1383(1)(b), s 1383(1)(b)(i), s 1383(1)(c), s 1383(2), s 1383(3), s 1383(3)(a), s 1384, s 1384(3), s 1384(3)(a), s 1398, s 1401, s 1401(1)(a), s 1401(1)(b), s 1401(2), s 1401(2)(a), s 1401(2)(b), s 1401(3), s 1408
Corporations (Commonwealth Powers) Act 2001
Corporations Law s 9, s 79, s 82A, s 85A, s 191, s 192, s 192(2), s 192(4), s 232, s 232(1), s 232(2), s 232(4), s 232(5), s 232(6), s 232(6B), s 243F, s 243F(1)(a), s 243F(1)(d), s 243F(1)(e), s 243F(1)(f), s 243G, s 243H, s 243K, s 243N, s 243ZE, s 243ZE(2), s 243ZE(3), s 243ZE(5), s 254C, s 254K, s 254K(b), Pt 9.4B, s 1317DA, s 1317DB, s 1317EA, s 1317EA(2), s 1317EA(3), s 1317EA(3)(a), s 1317EA(3)(b), s 1317EA(4), s 1317EA(5), s 1317EB(1), s 1317EC, s 1317ED, s 1317ED(1), s 1317HD(1), s 1317HD(1A), s 1317JA, s 1332, s 1447, s 1473, s 1473(1)(a)
Evidence Act 1995 (NSW) s 80, s 80(a), s 135(a), s 135(e)
Supreme Court Act 1970 (NSW) s 75A
Supreme Court Rules 1970 (NSW) Pt 4 r 1, Pt 15 r 13

CASES CITED: Adler and Anor v Australian Securities and Investments Commission; Williams v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1
Allstate Life Insurance Co v ANZ Banking Group Ltd (No 6) (Allstate Judgment No 33) (1996) 64 FCR 79
Australian Competition and Consumer Commission v Amcor Printing Papers Group Limited [1999] FCA 672; (1999) ALR 465
Australian Competition & Consumer Commission v FFE Building Services Limited [2003] FCAFC 132; (2003) 130 FCR 37
Australian Competition and Consumer Commission v J McPhee & Son (Australia) Pty Ltd (No 2) (1997) 77 FCR 217
Australian Growth Resources Corporation Pty Limited v Van Reesema (1988) 13 ACLR 261
Australian Securities and Investments Commission v Adler [2002] NSWSC 171; (2002) 41 ACSR 72
Australian Securities and Investments Commission (ASIC) v Adler & Ors [2002] NSWSC 510; (2002) 42 ACSR 74
Australian Securities and Investments Commission v Edensor Nominees Pty Limited [2001] HCA 1; (2001) 204 CLR 559
Australian Securities & Investments Commission v Forge & Ors [2002] NSWSC 760
Australian Securities and Investments Commission v William Arthur Forge and five Others (Supreme Court of New South Wales, unreported, Foster AJ, 12 March 2002)
Australian Securities and Investments Commission v Loiterton [2004] NSWSC 172
Australian Securities and Investments Commission v Plymin [2002] VSC 56; (2002) 4 VR 168
Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123; (2003) 175 FLR 124
Australian Securities and Investments Commission v Vines [2003] NSWSC 1095; (2003) 48 ACSR 291
Australian Securities and Investments Commission (ASIC) v Whitlam (No 2) [2002] NSWSC 591; (2002) 169 FLR 383
Australian Securities and Investments Commission (ASIC) v Whitlam (No 2) [2002] NSWSC 718; (2002) 42 ACSR 515
Bamford v Bamford [1970] Ch 212
Banque Commerciale SA (in Liq) v Akhil Holdings Ltd [1990] HCA 11; (1990) 160 CLR 279
Barbosa v Di Meglio [1999] NSWCA 307
Baumer v The Queen [1988] HCA 67; (1988) 166 CLR 51
Blackie v Police [1966] NZLR 910
Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336
Carabelas v Scott [2003] SASC 389; (2003) 177 FLR 334
Chew v The Queen [1992] HCA 18; (1992) 173 CLR 626
Chief Executive Officer of Customs v Labrador Liquor Wholesale Pty Ltd [2003] HCA 49; (2003) 77 ALJR 1629
Combined Auctions Pty Ltd v Gray Eisdell Timms Pty Ltd (1997) 16 ACLC 252
Commissioner for Corporate Affairs (Vic) v Bracht [1989] VR 821
Commonwealth v Verwayen [1990] HCA 39; (1990) 170 CLR 394
Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115
Corporate Affairs Commission v Papoulias (1990) 20 NSWLR 503
Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1
Feil v Commissioner of Corporate Affairs (1991) 9 ACLC 811
Fitzsimmons v R (1997) 23 ACSR 355
Fox v Percy [2003] HCA 22; (2003) 214 CLR 118
Furs Limited v Tomkies [1936] HCA 3; (1936) 54 CLR 583
Gamester Pty Limited & Anor v The Honourable Mr Justice Lockhart (1993) 67 ALJR 547
George Hill and Co v Hill (1886) 55 LT 769
Giorgianni v R [1985] HCA 29; (1985) 156 CLR 473
Gray Eisdell Timms Pty Ltd v Combined Auctions Pty Ltd (1995) 122 FLR 253
Hall v New South Wales Trotting Club Ltd [1977] 1 NSWLR 378
Harlowe's Nominees Pty Limited v Woodside (Lakes Entrance) Oil Co NL [1968] HCA 37; (1968) 121 CLR 483
Holpitt Pty Limited v Swaab & Ors (1992) 33 FCR 474
Howe v Administrative Decisions Tribunal of New South Wales [2003] NSWSC 157
Howe v Administrative Decisions Tribunal of New South Wales [2003] NSWCA 120
Hughes v N M Superannuation Pty Ltd (1993) 29 NSWLR 653
Ibbs v The Queen [1987] HCA 46; (1987) 163 CLR 447
Kinsela v Russell Kinsela Pty Limited (in Liq) (1986) 4 NSWLR 722
Life Savers (Australasia) Ltd v Frigmobile Pty Ltd [1983] 1 NSWLR 431
Macleod v The Queen [2003] HCA 24; (2003) 214 CLR 230
Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705
Malone v Marr [1981] 2 NSWLR 894
Marchesi v Barnes [1970] VR 434
Mayes v Mayes [1971] 2 All ER 397; [1971] 1 WLR 679
McCann v Switzerland Insurance Australia Limited [2000] HCA 65; (2000) 203 CLR 579
Miller v Miller (1995) 16 ACSR 73
Multinational Gas & Petrochemical Co v Multinational Gas & Petrochemical Services Ltd [1983] Ch 258
Naxakis v Western General Hospital [1999] HCA 22; (1999) 197 CLR 269
Ngurli Ltd v McCann [1953] HCA 39; (1953) 90 CLR 425
Nicholson v Permakraft (NZ) Ltd (in Liq) [1985] 1 NZLR 242
Nowlan v Marson Transport Pty Ltd [2001] NSWCA 346; (2001) 53 NSWLR 116
O'Brien v Gillespie (1997) 41 NSWLR 549
Pascoe Ltd (in liq) v Lucas (1998) 27 ACSR 737
Pascoe Ltd (in liq) v Lucas [1999] SASC 519; (1999) 75 SASR 246; (1999) 33 ACSR 357
Pemble v R [1971] HCA 20; (1971) 124 CLR 107
Permanent Trustee Australia Ltd v Boulton & Lynjoe Pty Ltd (1994) 33 NSWLR 735
Pioneer Concrete Services Ltd v Galli [1985] VR 675
R v Byrnes [1995] HCA 1; (1995) 183 CLR 501
R v De Simoni [1981] HCA 31; (1981) 147 CLR 383
R v GK [2001] NSWCCA 413; (2001) 53 NSWLR 317
R v Newth [1974] 2 NZLR 760
Re Bright Pine Mills Pty Limited [1969] VR 1002
Re Media Entertainment & Arts Alliance; ex parte Hoyts Corporation Pty Limited [1993] HCA 41; (1994) 68 ALJR 179
Re New World Alliance Pty Limited; Sycotex Pty Limited v Baseler & Ors (No 2) (1994) 51 FCR 425
Re Portuguese Consolidated Copper Mines Ltd; Ex parte Badman; Ex parte Bosanquet (1890) 45 Ch D 16
Re Wakim; ex parte McNally [1999] HCA 27; (1999) 198 CLR 511
Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134
Reynolds v Wilkinson (1948) 51 WALR 17
Rich v Australian Securities and Investments Commission [2004] HCA 42; (2004) 78 ALJR 1354
RW Miller & Co Pty Ltd v Krupp (Aust) Pty Ltd (1991) 34 NSWLR 129
Shum Yip Properties Development Limited v Chatswood Investment and Development Co Pty Limited & Ors [2002] NSWSC 13; (2002) 166 FLR 451
Sidebottom & Anor v Commissioner of Taxation of the Commonwealth of Australia [2003] VSCA 2; (2003) 173 FLR 335
Southern Resources Limited v Residues Treatment & Trading Co Limited (1990) 3 ACSR 207
Standard Chartered Bank Limited v Antico & Ors (No 1) (1995) 38 NSWLR 290
Stone v Law Society of the Northern Territory and Others (1992) 108 FLR 332
Suvaal v Cessnock City Council [2003] HCA 41; (2003) 77 ALJR 1449
Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270
Van Den Hoek v R [1986] HCA 76; (1986) 161 CLR 158
Whisprun Pty Limited v Dixon [2003] HCA 48; (2003) 77 ALJR 1598
Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11; (1987) 162 CLR 285
Whitlam v Australian Securities and Investments Commission [2003] NSWCA 183; (2003) 57 NSWLR 559
Williams v The Minister for Aboriginal Land Rights Act 1983 and the State of NSW [2000] NSWCA 255; (2000) Aust Torts Reports 81-578
Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666
Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661

PARTIES :
William Arthur Forge - (1st Appellant)
Jozsef Endresz - (2nd Appellant)
Dawn May Endresz - (3rd Appellant)
Allan Paul Endresz - (4th Appellant)
Kamanga Holdings - (5th Appellant)
Bisoya Pty Limited - (6th Appellant)
Australian Securities & Investments Commission - (Respondent)

FILE NUMBER(S): CA 40854/02

COUNSEL: P M Biscoe QC (1 - 6 Appellants)
D R Stack (Respondent)

SOLICITORS:
Ken Cush & Associates by their agents Curwood & Partners (1 - 6 Appellants)
Graeme Plath, Australian Securities and Investments Commission (Respondent)

LOWER COURTJURISDICTION: Supreme Court

LOWER COURT FILE NUMBER(S): SC 2338/01

LOWER COURT
JUDICIAL OFFICER : Foster AJ

CA 40854/02
SC 2338/01

HANDLEY JA
SANTOW JA
McCOLL JA
Tuesday, 7 December 2004

William Arthur FORGE & 5 ORS v AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

FACTS

The first appellant, Mr Forge, is the sole director and secretary of the sixth appellant, Bisoya Pty Limited (“Bisoya”), which is his private family company. The second and third appellants, Mr and Mrs Endresz, are husband and wife. The fourth appellant, Allan Endresz, is their son. The fifth appellant, Kamanga Holdings Pty Limited (“Kamanga”), is a family company of the Endresz family. Mr and Mrs Endresz and Allan Endresz were at different times directors of CTC Resources NL (“CTC”). Mr Forge was a friend of the Endresz family. He became the Managing Director of CTC on 9 September 1994.

The Australian Securities and Investments Commission (“ASIC”) brought proceedings against the appellants alleging that they had contravened ss 232(2), (4) and (6) and s 243ZE of the Corporations Law. The proceedings related to the disbursement by CTC of a sum of $3,596,348.90 by eight transactions entered into between 20 April and 13 November 1998 which were variously said to be either the payment (both retrospective and prospective) of management and consultancy fees and the provision of unsecured loans to Kamanga and Bisoya respectively. ASIC alleged that the transactions were uncommercial (in the sense of improper), not in the interests of CTC or its shareholders, and in breach of the related party provisions of the Corporations Law.

ASIC commenced the proceedings in April 2001. By the time the matter came on for hearing in March 2002 the Corporations Law had been repealed and the Corporations Act 2001 (Cth) had come into force.

ASIC was successful at trial. The appellants appealed from declarations made by Foster AJ pursuant to s 1317EA(2) of the Corporations Law that they had contravened the relevant sections of the Corporations Law, orders that each be disqualified from managing corporations for periods ranging up to sixteen years and pecuniary penalties ordered pursuant to s 1317EA(3) of the Corporations Law.

The key issues raised by the appeal were:

(a) Whether the proceedings were validly continued under the Corporations Act 2001 (Cth);

(b) Whether the primary judge erred in concluding that Allan Endresz was an “officer” of CTC for the purposes of s 232 of the Corporations Law;

(c) Whether the primary judge had found the appellants had contravened the Corporations Law on a basis not advanced by ASIC at the trial;

(d) Whether the primary judge erred in concluding that the appellants had contravened the Corporations Law;

(e) Whether the contraventions of the Corporations Law could be, and were, cured by the purported ratification of the transactions by CTC’s shareholders in June 2003;

(f) Whether a Court hearing civil penalty proceedings should, in the event that it makes declarations of contravention, hold a separate penalty hearing.

HELD per McColl JA (Handley JA and Santow JA agreeing), dismissing the appeal save as to ground 22 (separate hearing on penalty):

Transitional provisions argument

1. The proceedings, commenced pursuant to the Corporations Law, were validly continued by virtue of the Transitional Provisions of Chapter 10 of the Corporations Act 2001 (Cth). [66] – [68], [71]

Australian Securities and Investments Commission v Edensor Nominees Pty Limited [2001] HCA 1; (2001) 204 CLR 559; Shum Yip Properties Development Limited v Chatswood Investment and Development Co Pty Limited & Ors [2002] NSWSC 13; (2002) 166 FLR 451; Australian Securities and Investments Commission (ASIC) v Whitlam (No 2) [2002] NSWSC 591; (2002) 169 FLR 383; Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123; (2003) 175 FLR 124 referred to.

“Officer” of a corporation

2. The concept of being concerned in the management of a corporation comprehends activities which involve policy and decision-making, related to the business affairs of a corporation, affecting the corporation as a whole or a substantial part of that corporation, to the extent that the consequences of the formation of those policies or the making of those decisions may have some significant bearing on the financial standing of the corporation or the conduct of its affairs. [199] – [200]

Commissioner for Corporate Affairs (Vic) v Bracht [1989] VR 821; Holpitt Pty Limited v Swaab & Ors (1992) 33 FCR 474; Re New World Alliance Pty Limited; Sycotex Pty Limited v Baseler & Ors (No 2) (1994) 51 FCR 425; Standard Chartered Bank Limited v Antico & Ors (No 1) (1995) 38 NSWLR 290 discussed and applied.

3. The primary judge did not err in concluding that Allan Endresz was an “officer” of CTC for the purposes of s 232 of the Corporations Law. [200] – [201]

Basis of liability

4. The primary judge found the appellants contravened s 232 of the Corporations Law on the basis for which ASIC had contended, as principals not accessories. [180] – [182]

Contraventions of the Corporations Law

5. In order to establish that a person was involved in a contravention of s 243ZE(3)(a) of the Corporations Law it is necessary to prove that the person knew of the essential facts which constitute the contravention. [202]

Australian Securities and Investments Commission v Adler [2002] NSWSC 171; (2002) 41 ACSR 72 applied.

6. The primary judge found that each appellant had knowledge of all the material facts of the transactions. [203] – [205]

7. The primary judge found the appellants had acted with subjective dishonesty. [247] – [248]

Marchesi v Barnes [1970] VR 434; Australian Growth Resources Corporation Pty Limited v Van Reesema (1988) 13 ACLR 261; Chew v The Queen [1992] HCA 18; (1992) 173 CLR 626; R v Byrnes [1995] HCA 1; (1995) 183 CLR 501 referred to.

8. It is not the function of an appellate court to survey evidence afresh and arrive at its own conclusions in the absence of an appellant positively demonstrating that the primary judge was wrong. [9], [233], [242]

Williams v The Minister for Aboriginal Land Rights Act 1983 and the State of NSW [2000] NSWCA 255; (2000) Aust Torts Reports ¶81-578; Adler and Anor v Australian Securities and Investments Commission; Williams v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1; Fox v Percy [2003] HCA 22; (2003) 214 CLR 118; Suvaal v Cessnock City Council [2003] HCA 41; (2003) 77 ALJR 1449 applied.

9. The appellants failed to demonstrate any error in the primary judge’s conclusions that they had breached ss 232(4) and 232(6) of the Corporations Law. [250] – [252]

Adler and Anor v Australian Securities and Investments Commission; Williams v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1 applied.

10. Expert evidence that goes to an ultimate legal issue is admissible. [271]

Adler and Anor v Australian Securities and Investments Commission; Williams v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1 applied. Evidence Act 1995 (NSW) s 80; Allstate Life Insurance Co v ANZ Banking Group Ltd (No 6) (Allstate Judgment No 33) (1996) 64 FCR 79; O’Brien v Gillespie (1997) 41 NSWLR 549; Barbosa v Di Meglio [1999] NSWCA 307; Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705; R v GK [2001] NSWCCA 413; (2001) 53 NSWLR 317; Australian Securities and Investments Commission v Vines [2003] NSWSC 1095; (2003) 48 ACSR 291 referred to.

11. The primary judge did not err in concluding that the appellants had contravened ss 232(2), (4) and (6) and s 243EZ(3) of the Corporations Law. [242], [300] – [303]

Ratification

12. The purported ratifications of the contraventions of the Corporations Law by CTC’s shareholders in June 2003 were ineffective because:

(a) They sought to cure the appellants’ wrongful taking of CTC’s resources, would unfairly prejudice third parties, and the shareholders did not exercise their voting power for the benefit of the company as a whole. Ratification is ineffective where it would constitute a fraud on the minority or misappropriation of company resources. [376] – [377]

Ngurli Ltd v McCann [1953] HCA 39; (1953) 90 CLR 425; Miller v Miller (1995) 16 ACSR 73 applied.

(b) Ratification resolutions cannot cure a breach of statutory duty. [384]

Miller v Miller

Pascoe Ltd (in liq) v Lucas

Carabelas v Scott

(c) They were too late in time. [389]

Hughes v N M Superannuation Pty Ltd

(d) The disclosure to CTC’s shareholders was inadequate. The shareholders were not fully informed both of CTC’s rights consequent upon the declarations of contravention and that the effect of the ratification resolutions could be that CTC would lose both its statutory and equitable rights against the appellants. [402]

Bamford v Bamford

Winthrop Investments Ltd v Winns Ltd

Miller v Miller

Penalty

13. A court hearing civil penalty proceedings should, in the event that it makes

declarations of contravention, hold a separate hearing on the issue of penalty. [423] – [424]

Hall v New South Wales Trotting Club Ltd

Malone v Marr

Howe v Administrative Decisions Tribunal of New South Wales

Reynolds v Wilkinson

Mayes v Mayes

R v De Simoni

Ibbs v The Queen

Baumer v The Queen

Stone v Law Society of the Northern Territory and Others

Australian Securities and Investments Commission (ASIC) v Adler & Ors

Australian Securities and Investments Commission (ASIC) v Whitlam (No 2)

Rich v Australian Securities and Investments Commission

14. The primary judge should also have drawn the appellants’ attention to their right to elicit evidence and make submissions on the issue of penalty. [424]

Hall v New South Wales Trotting Club Ltd [1977] 1 NSWLR 378 applied.

15. ASIC should have drawn the primary judge’s attention to the principles of law referred to in Hall v New South Wales Trotting Club Ltd [1977] 1 NSWLR 378 and Malone v Marr [1981] 2 NSWLR 894 as well as to the circumstances of other civil penalty proceedings in which it had been involved in which there were separate hearings on the issue of penalty. [425]

Hall v New South Wales Trotting Club Ltd [1977] 1 NSWLR 378; Malone v Marr [1981] 2 NSWLR 894; Australian Securities and Investments Commission (ASIC) v Adler & Ors [2002] NSWSC 510; (2002) 42 ACSR 74; Australian Securities and Investments Commission (ASIC) v Whitlam (No 2) [2002] NSWSC 718 referred to.

ORDERS

(1) Appeal dismissed save as to ground 22.

(2) Matter remitted to the Equity Division for hearing on penalty only.

(3) Appellants to bear three-quarters of the costs of the appeal.

(4) The primary judge’s order that the appellants pay ASIC’s costs of the

proceedings below including reserved costs should not be disturbed.

INDEX

Paragraph No

INTRODUCTION
3

Scope of the appeal
8

Legal representation
10

Statement of the case
13

THE LEGISLATIVE FRAMEWORK

Substantive provisions
18

Transitional provisions
24

TRANSITIONAL PROVISIONS ARGUMENT
44

CONTRAVENTIONS OF THE CORPORATIONS LAW

The transactions
73

Events following the transactions: the auditor’s concerns
75

The transactions: the factual context
93

Mr Tutt’s evidence
118

The appellants’ case at trial
120

The primary judge’s assessment of the appellants’ evidence
124

Credit
138

Conclusions at trial

Related party transactions
140

Directors’ duty contraventions
146

INVOLVEMENT
150

Role of Allan Endresz: the primary judge’s findings
155

The appellants’ submissions
168

ASIC’s submissions
172

Consideration

The threshold issue
177

Officer of CTC: legal principles
183

Officer of CTC: conclusion
196

Knowledge
202

DIRECTORS’ DUTY CONTRAVENTIONS

Grounds of appeal
206

The appellants’ submissions
208

Transactions 1 and 2: retrospective management and

consultancy fees
211

Transactions 3, 4, 5, 6 and 8: future management and

consultancy fees
220

Transaction 7: Bisoya loan $75,000
222

Interpretation of s 232(2)
223

ASIC’s submissions
226

Interpretation of s 232(2)
231

Consideration
233

Contravention of s 232(2)
244

Contravention of ss 232(4) and (6)
250

Admission of Mr Tutt’s evidence
253

Repayment of loans
280

Related party transactions
293

Penalty privilege
304

Proof
320

RATIFICATION

Introduction
329

The evidence
334

The appellants’ submissions
350

ASIC’s submissions
362

Consideration
370

Misappropriation/fraud on the minority
371

Breach of statutory duty
378

Timing of ratification resolutions
385

Disclosure
390

Conclusion
403

DECLARATIONS, BANNING ORDERS AND PECUNIARY

PENALTIES
405

PENALTY

Grounds of appeal
409

Separate hearing on penalty: conclusion
410

OTHER GROUNDS OF APPEAL
429

ORDERS
435

COSTS
436

CA 40854/02
SC 2338/01

HANDLEY JA
SANTOW JA
McCOLL JA
Tuesday, 7 December 2004

William Arthur FORGE & 5 ORS v AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

Judgment

1 HANDLEY JA: I agree with McColl JA.

2 SANTOW JA: I agree with McColl JA.

3 McCOLL JA:

Introduction

Corporations Law

4 The first appellant, William Arthur Forge (“Mr Forge”), is the sole director and secretary of the sixth appellant, Bisoya Pty Limited (“Bisoya”), which is his private family company. The second appellant, Jozsef Endresz (“Mr Endresz”), and the third appellant, Dawn May Endresz (“Mrs Endresz”), are husband and wife. The fourth appellant, Allan Paul Endresz (“Allan Endresz”), is their son. The fifth appellant, Kamanga Holdings Pty Limited (“Kamanga”), is a family company of the Endresz family. Mr and Mrs Endresz and Allan Endresz were at different times directors of CTC Resources NL (“CTC”). Mr Forge was a friend of the Endresz family. He became the Managing Director of CTC on 9 September 1994.

5 The action did not proceed against Kamanga because the proceedings against it were stayed (Australian Securities & Investments Commission v Forge & Ors [2002] NSWSC 760 at [145]). The reasons for the stay did not emerge from the judgment or, so far as I could glean, from the evidence or counsel’s addresses at trial or on appeal.

6 The proceedings relate to the disbursement by CTC of a sum of $3,596,348.90 by eight transactions entered into between 20 April and 13 November 1998 which were variously said to be either the payment (both retrospective and prospective) of management and consultancy fees and the provision of unsecured loans to Kamanga and Bisoya respectively. ASIC alleged that the transactions were uncommercial (in the sense of improper), not in the interests of CTC or its shareholders, and in breach of the related party provisions of the Corporations Law.

7 ASIC commenced the proceedings by filing a document entitled “Originating Process” in April 2001. The matter came on for hearing in March 2002. During that period the Corporations Law was repealed and the Corporations Act 2001 (Cth) (“the Corporations Act”) came into force.

Scope of the appeal

8 The key issues raised by the appeal are:

(a) Whether the proceedings were validly continued under the Corporations Act ; (the “transitional provisions argument”)
(b) Whether the primary judge erred in concluding that Allan Endresz was an “officer” of CTC for the purposes of s 232 of the Corporations Law;

(c) Whether the primary judge had found the appellants had contravened the Corporations Law on a basis not advanced by ASIC at the trial;

(d) Whether the primary judge erred in concluding that the appellants had contravened the Corporations Law ;

(e) Whether the contraventions of the Corporations Law could be, and were, cured by the purported ratification of the transactions by CTC’s shareholders in June 2003;

9 As will become apparent the appellants’ challenge to the findings that they had contravened the Corporations Law raised multiple issues. To the extent they attacked the primary judge’s factual findings that they had contravened the Corporations Law their approach, in some respects, resembled the approach criticised in Williams v The Minister for Aboriginal Land Rights Act 1983 and the State of NSW [2000] NSWCA 255; (2000) Aust Torts Reports ¶81-578 where Heydon JA (with whom Spigelman CJ and Sheller JA agreed) drew attention to the limits of a rehearing pursuant to s 75A of the Supreme Court Act 1970 (NSW). These remarks were endorsed recently in Adler and Anor v Australian Securities and Investments Commission; Williams v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1 (special leave refused 28 May 2004; [2004] HCATrans 182) in which Giles JA (with whom Mason P and Beazley JA agreed) said (at [17] ff):

Jones v Bradley

Williams v The Minister for Aboriginal Land Rights Act 1983 and the State of NSW

Minister for Immigration, Local Government and Ethnic Affairs v Hamsher

‘... the court is not obliged to proceed to make new findings of fact on all relevant issues and discharge the judgment appealed from if those findings differ from those of the Trial Judge and do not support the judgment. The court must be satisfied that the judgment of the Trial Judge is erroneous and it may be so satisfied if it reaches the conclusion that the Trial Judge failed to draw inferences that should have been drawn from the facts established by the evidence. The court is unlikely to be satisfied if all that is shown is that the Trial Judge made a choice between competing inferences, being a choice the court may not have been inclined to make but not a choice the trial judge should not have made.'

Williams v The Minister for Aboriginal Land Rights Act 1983 and the State of NSW

‘The Plaintiff's approach sometimes invited the court to survey for itself, afresh, all the evidence on particular points and arrive for itself at particular conclusions about them, without essaying the necessary task of positively demonstrating that the Trial Judge was wrong. The Plaintiff's approach also paid insufficient regard to the difference between, on the one hand, pointing to difficulties in the Defendants' path of establishing matters which they wished to contend for and, on the other, pointing to sufficient evidence to permit an inference to the contrary of the Defendants' contention.'

Biogen Inc v Medeva plc

la [vérité] est dans une nuance

Benmax

de novo

Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd

Legal representation

10 The appellants chose not to be legally represented before Foster AJ. Allan Endresz represented them all. Their choice was not determined by lack of funds. They had legal representation prior to the final hearing, including at a time when consent orders were made for the filing of evidence. They had relinquished those representatives by the time they made an application before the primary judge in March 2002 seeking certain interlocutory orders. These included a challenge to the competence of the proceedings based on the transitional provisions argument.

11 In the course of the appeal Mr Biscoe QC submitted that the primary judge ought to have drawn principles relating to penalty privilege and sentencing to the appellants’ attention. It should be noted, in this respect, that “[o]utside a criminal trial there is no requirement that a judge … do more than afford a party a reasonable opportunity to present his or her case. In particular, there is no requirement to point to arguments or evidence that may assist in making the case”: Re Media Entertainment & Arts Alliance; ex parte Hoyts Corporation Pty Limited [1993] HCA 41; (1994) 68 ALJR 179 at 185; Gamester Pty Limited & Anor v The Honourable Mr Justice Lockhart (1993) 67 ALJR 547 at 549. The position is otherwise in a criminal trial where there is an obligation on the trial judge to leave to the jury defences which are open on the evidence but not raised in order to ensure the accused has a fair trial according to law: see Pemble v R [1971] HCA 20; (1971) 124 CLR 107 at 117–18, 132–3; Van Den Hoek v R [1986] HCA 76; [1971] HCA 20; (1986) 161 CLR 158 at 161 – 162.

12 In hearing ASIC’s application the primary judge was required to apply the rules of evidence and procedure applied in hearing civil matters. However, as Rich v Australian Securities and Investments Commission [2004] HCA 42; (2004) 78 ALJR 1354 at 1361 – 1362 [30] – [35] per Gleeson CJ, Gummow, Hayne, Callinan and Heydon JJ; at 1363 [41] per McHugh J makes plain, that does not deny the fact that civil penalty proceedings may bear the character of both civil and criminal proceedings. As will become plain later in this judgment, the fact that the final stage of the proceedings bore a close resemblance to the sentencing process which occurs in a criminal trial meant that the trial judge was, at least in that respect, under an obligation to draw the appellants’ attention to principles of law attendant upon that process.

Statement of the case

13 The background to the proceedings can conveniently be taken from the final judgment below (Australian Securities & Investments Commission v Forge & Ors [2002] NSWSC 760):

3 The first defendant, William Arthur Forge “(Mr Forge”) is a friend of the Endresz family and is the sole director and secretary of the sixth defendant, Bisoya Pty Limited (“Bisoya”) which is his private family company.

4 Mr and Mrs Endresz and Allan Endresz were at different times directors of the company CTC Resources N.L. (“CTC”) which, until 12 March 1991, was named Emu Hill Gold Mines N.L. From 1989 Allan Endresz and Mr Endresz held 51% of the issued shares in this company. Until 18 December 1990 the company was listed on the Australian Stock Exchange (“ASX”) but, on that date, was delisted pursuant to an ASX discretionary rule.

5 In April 1991 Mrs Endresz was appointed a director of CTC. On 11 June 1993 Allan Endresz resigned as director and secretary and Mr Endresz was appointed as secretary in his place. Mr Forge was appointed a director of CTC on 9 September 1994.

7 In the early 1990’s CTC retained Davis Samuel Pty Limited (“Davis Samuel”) as a corporate advisor. This company was owned as to 50% of its shares by Kamanga. In 1994 CTC brought a claim for damages in the Supreme Court of Western Australia against the ASX, alleging that its delisting had been wrongful. Damages were claimed, ranging between $37,000,000.00 and $1,500,000,000.00. Davis Samuel conducted the action on behalf of CTC, originally in consideration of its receiving 60% of damages recovered. A subsequent variation of these arrangements involved CTC purchasing half of the 60%, whilst the remaining 30% was sold to Kamanga. Instead of the previous arrangements Davis Samuel was given a fee of $60,000.00 per month from 1 May 1998 onwards in consideration of its continuing to prosecute the claim.

9 These accounts, when presented, indicated significant operating losses in the years 1994 to 1997. In 1994 there was a loss of $164,000.00. In 1997 the loss was $344,000.00. Accumulated losses had increased each year with the result that the accounts indicated that shareholders’ equity was, in fact, a deficiency of $1,427,273.00 in 1997. The company had earned no income over that period.
10 The events with which these proceedings are concerned occurred in April 1998. In that month CTC received into its funds the amount of $6,000,000.00. This amount was received from the Commonwealth of Australia and was characterised as payment for 60,000 redeemable convertible non-cumulative A-Class preference shares called CTC Capital Bonds Series 1, the issue price being $10.00 per share. A dividend of 6.5% was to be paid annually and there was to be a guaranteed redemption of the capital at the end of four years.

11 The circumstances attending the entry into of this capital raising exercise and the receipt of the payment are not in issue in these proceedings. It is the manner in which the amount received was dealt with, by way of disbursement, that is called in question.”

14 A portion of the $6,000,000.00 received from the Commonwealth of Australia was invested in a Commercial Bill Facility. The balance, $3,596,348.90, was disbursed in eight transactions as summarised below:

Transaction	Date	Description
1	20.04.98	$2,205,000 to Kamanga
2	20.04.98	$260,000 to Bisoya
3	29.05.98	$40,833 to Kamanga
4	28.05.98	$10,833 to Bisoya
5	28.10.98	$250,000 to Kamanga
6	30.10.98	$100,000 to Kamanga
7	27.10.98	$75,000 to Bisoya
8	13.11.98	$150,000 to Kamanga

15 The first two transactions involved the retrospective payment by CTC of management fees to Kamanga and Bisoya respectively. The third and fourth involved payment by CTC of future management fees to Kamanga and Bisoya respectively. The final four transactions related to unsecured loans CTC made to Kamanga and Bisoya respectively. Transactions 5 and 6 were two tranches of one loan of $350,000. Transaction 7 was a loan to Bisoya to enable Mr Forge to facilitate a Family Law settlement.

16 ASIC complained that the eight transactions occurred in breach of relevant sections of the Corporations Law. Its Originating Process summarised the application as follows:

Corporations Law,

Corporations Law.

Corporations Law

Corporations Law ….

17 ASIC complained, in substance, that the eight transactions had been entered into in breach of the appellants’ duties as officers of CTC and also fell foul of the related party transaction provisions in the Corporations Law. It sought declarations that the appellants, as officers of CTC, had contravened ss 232(2), (4) and (6) of the Corporations Law by “approving, permitting and allowing” CTC to enter into each relevant transaction. In addition it sought declarations that the personal appellants had each, “by being involved in or by being recklessly concerned in or by being party to” the transactions, contravened s 243ZE(3) of the Corporations Law in relation to CTC. It also sought declarations that Kamanga and Bisoya had respectively contravened s 243ZE(2) of the Corporations Law in relation to the payments they had received as a result of the impugned transactions.

The legislative framework: substantive provisions

18 ASIC contended that the provisions of the Corporations Law in force at the time of the various transactions governed the proceedings. It relied upon the following provisions.

19 The allegations of breaches of directors’ duties related to the following provisions of the Corporations Law:

s. 232(4) An officer of a corporation shall at all times exercise a reasonable degree of care and diligence in the exercise of his or her powers and the discharge of his or her duties.

s. 232(6) An officer or employee of a corporation must not, in relevant circumstances, make improper use of his or her position as such an officer or employee, to gain, directly or indirectly, an advantage for himself or herself or for any other person or to cause detriment to the corporation.

s.232(6B) Subsections (2), (4), (5) and (6) are civil penalty provisions as defined by section 1317DA, so Part 9.4B provides for civil and criminal consequences of contravening any of them, or of being involved in a contravention of any of them.”

20 The following provisions of the Corporations Law were relevant to the related party transaction allegations:

“SECT 243F Related party of a public company

related party

(a) a director of the public company;

(c) one of the persons constituting an entity (other than a body corporate) that is a parent entity of the public company;

(d) a spouse or de facto spouse of such a director or person;

(e) a parent, son or daughter of such a director, person, spouse or de facto spouse;

(ii) 2 or more such persons together have control;

(g) a parent entity or sibling entity of the public company.”

“SECT 243H Prohibited financial benefits to related parties of public companies

(1) A public company must not give a financial benefit to a related party except as permitted by Part 2E.4 or 2E.5.”

21 Sections 243K and 243N, which appeared in Part 2E.4, relevantly provided:

“SECT 243K Remunerating officers

(2) A body corporate may pay or provide remuneration to a person in a capacity as an officer of the body if:

(a) the body does so as required by a contract between the body and the person; and

(b) it was reasonable for a body corporate in the body's circumstances to make that contract with an officer in the person's circumstances.

(4) Any of the following paid by a body corporate to an officer of the body as such (however the rate or amount is worked out) is remuneration paid by the body to the officer:

(a) salary;

(b) wages;

(d) allowances paid for the sole purpose of meeting expenses incurred in connection with performing services as such an officer. …

(a) the expression "remuneration" in subsections (1) and (2); or

SECT 243N Financial benefit on arm's length terms

(1) A public company, or a child entity of a public company, may give a financial benefit to a related party of the public company if it does so on terms and conditions no more favourable to the related party than those on which it is reasonable to expect that the company or entity, as the case may be, would give the benefit directly if dealing with the related party at arm's length in the same circumstances.

(a) the amount of the loan or the extent of the accommodation;

(b) what interest or charges are payable;

(c) the credit risk;

(d) what security is given;

(e) the timetable for repayments of amounts owing and for payments of interest or charges.”

22 Section 243ZE, which appeared in Part 2E.6 dealing with Enforcement, relevantly provided (notes omitted):

“s 243ZE

(1) This section applies if:

(b) the public company contravenes subsection 243H(1) …, by giving the benefit.

(3) Subject to subsection (4), a person contravenes this subsection if the person:

(a) is involved (as defined in section 79) in; or

(b) is, by act or omission, directly or indirectly, recklessly concerned in, or party to the contravention of subsection 243H(1) or (2), or the contravention of subsection (2) of this section.

(4) Neither the public company …:

(b) is taken to be involved in, or concerned in or party to:

(ii) a contravention of subsection (3) of this section by a person.

(5) Subsections (2) and (3) are civil penalty provisions as defined by section 1317DA, so Part 9.4B provides for civil and criminal consequences of contravening, or of being involved in a contravention of, either of them.

(6) In a proceeding against a person for:

(a) a contravention of subsection (2); or

(b) a contravention of subsection (2) because of section 243ZG, 1317DB, 1317DC or 1317DD;

it is a defence if it is proved that the person was unaware of a fact or circumstance essential to the contravention of subsection 243H(1) or (2), as the case requires.”

23 Section 79 of the Corporations Law which was referred to in s 243ZE(3)(a) relevantly provided:

s. 79

(b) has induced, whether by threats or promises or otherwise, the contravention;

The legislative framework: transitional provisions

24 The transitional provisions argument took its colour both from amendments to the Corporations Law prior to 15 July 2001 and from the change, effective from 15 July 2001, from the regulation of corporations through State and Territory legislation to their regulation by federal legislation, the Corporations Act. The latter change was consequent upon the States enacting the Corporations (Commonwealth Powers) Act 2001 which had the effect of referring matters relating to corporations and financial products and services to the Parliament of Australia under s 51(xxxvii) of The Constitution. The Corporations Act was a product of that referral of power.

25 The legislative matrix which supported the regulation of corporations prior to 15 July 2001 was described by Gummow and Hayne JJ in Re Wakim; ex parte McNally [1999] HCA 27; (1999) 198 CLR 511 at 566 [87] – [88] as follows (footnotes omitted):

Corporations Act

Australian Securities Commission Act

Corporations Act

Corporations Law

(a) applies as a law for the government of the Capital Territory; and

Corporations Law

Corporations Act

(b) to apply certain other laws of the Commonwealth as laws of [name of State] for the purpose of the administration and enforcement of the law relating to corporations, the securities industry, the futures industry and some other matters."

Corporations Act

Corporations Law

Corporations Act

Corporations Law

Corporations Act

26 Prior to 13 March 2000 Part 9.4B of the Corporations Law dealt with the civil and criminal consequences of contravening civil penalty provisions.

27 Division 2 dealt with “Civil Penalty Orders”. “Civil penalty order” was defined in s 9 to mean “a declaration or order made under section 1317EA”.

28 An application for a civil penalty order could be made by ASIC, a Commission delegate or a person authorised by the Minister (s 1317EB(1)). Applications for civil penalty orders had to be made within six years after the contravention (s 1317EC). In hearing and determining an application for a civil penalty order the Court was required to apply the rules of evidence and procedure that applied in hearing and determining civil matters (s 1317ED(1)).

29 Section 1317EA applied when the Court was satisfied that a person had contravened a civil penalty provision. In such circumstances the Court was required (subject to one exception under Division 4) to make a declaration of contravention of the relevant civil penalty provision (s 1317EA(2)). The Court was also given discretion to make an order prohibiting the person from managing a corporation for a specified period (s 1317EA(3)). Such an order could not be made if the Court was satisfied that, despite the contravention, the person was a fit and proper person to manage a corporation (s 1317EA(4)).

30 The Court could also order the person the subject of the declaration to pay a pecuniary penalty to the Commonwealth (s 1317EA(3)), but such an order could not be made unless the Court was satisfied that the contravention was a “serious one” (s 1317EA(5)).

31 The Corporations Law was amended on 13 March 2000 by the Corporate Law Economic Reform Program Act 1999 (the “CLERP Act”). The CLERP Act repealed Chapters 2D and 2F of the Corporations Law in which the provisions of the Corporations Law to which ASIC’s Originating Process referred were found. It inserted a substitute Chapter 2D dealing with “Officers and employees” and a substitute Chapter 2E dealing with “Related party transactions”. It repealed Part 9.4B of the Corporations Law and substituted a new Part 9.4B dealing with the civil consequences of contravening civil penalty provisions. It also inserted s 1473 which provided:

“s.1473

(b) an offence committed against one of those civil penalty provisions;

32 “[O]ld Law” meant the Corporations Law as in force immediately before the commencement of Schedule 1 to the CLERP Act: s 1466 CLERP Act. Schedule 1 contained the main amendments to the Corporations Law.

33 Subsections 232(2), (4), (5) and (6) and ss 243ZE(2) and (3) were listed in s 1317DA of the old Law.

34 The Corporations Law of the States and Territories was repealed, with effect from 15 July 2001, and replaced by the Corporations Act. That Act re-enacted (inter alia) Chapters 2D and 2F as enacted by the CLERP Act.

35 Chapter 10 of the Corporations Act deals with Transitional Provisions. I set out below the provisions which are relevant to the appeal.

36 Section 1370 provides:

“ Object of Part

(a) that old corporations legislation had, from time to time when it was in force, been valid Commonwealth legislation applying throughout those States and Territories; and

(b) the new corporations legislation (to the extent it contains provisions that correspond to provisions of the old corporations legislation as in force immediately before the commencement) were a continuation of that old corporations legislation as so applying.”

37 "[O]ld corporations legislation" of a particular State or Territory is relevantly defined in s 1371 to mean:

Corporations Law

(b) the old application Act for that State or Territory, and any instruments made under that Act; and

Corporations Law

38 “[N]ew corporations legislation" of a particular State or Territory is relevantly defined in s 1371 to mean the Corporations Act.

39 Section 1383 deals with proceedings which had been commenced under the old corporations legislation. It provides:

“SECT 1383 Treatment of court proceedings under or related to the old corporations legislation — proceedings other than federal corporations proceedings

(1) This section applies to a proceeding, other than a federal corporations proceeding, in relation to which the following paragraphs are satisfied:

(a) the proceeding was started in a court before the commencement; and

(i) under a provision of the old corporations legislation of a State or Territory in this jurisdiction; or

(ii) brought as, or connected with, a prosecution for an offence against a provision of the old corporations legislation of a State or Territory in this jurisdiction; and

(c) the proceeding was not an enforcement proceeding, or an appeal or review proceeding, in relation to an order of a court; and

(d) the proceeding had not been concluded or terminated before the commencement; and

(ii) if the proceeding is an interlocutory proceeding—this section applies…

old proceeding

(b) the provision of the old corporations legislation referred to in whichever of subparagraphs (1)(b)(i) and (ii) applies is called the relevant old provision.

the new proceeding

(a) if subparagraph (1)(b)(i) applies — under the provision of the new corporations legislation that corresponds to the relevant old provision; …”

To the extent that the old proceeding, before the commencement, related to pre-commencement rights or liabilities, the new proceeding relates to the substituted rights and liabilities in relation to those pre-commencement rights or liabilities.

Note 2: In all cases, there will be a provision of the new corporations legislation that corresponds to the relevant old provision, either because:

(a) the new corporations legislation actually contains a provision that corresponds to the relevant old provision; or

(b) the new corporations legislation, because of section 1401 or 1408, is taken to include the relevant old provision (whether with or without modifications), in which case the provision so taken to be included will be the corresponding provision.”

40 “Corresponds” is relevantly defined in s 1371 as follows:

(a) the old provision or part and the new provision or part are substantially the same, unless the regulations specify that the 2 provisions or parts do not correspond; or

(b) the regulations specify that the 2 provisions or parts correspond.”

Note: The range of provisions of the new corporations legislation that may be corresponding provisions for the purposes of this Part is affected by sections 1401 and 1408, which take certain provisions of the old corporations legislation to be included in the new corporations legislation.

(a) differences in the numbering of the provisions or parts;

(b) differences of a minor technical nature (for example, differences in punctuation, or differences that are attributable to the correction of incorrect cross references);

(d) that fact that:

(ii) the old provision or part required a court to apply a criterion of public interest but the new provision or part requires a court to apply a criterion of justice and equity; or

(iii) the new provision or part requires ASIC to take account of public interest but the old provision or part did not;

(e) other differences that are attributable to the fact that the new corporations legislation applies as a Commonwealth law throughout this jurisdiction;

(f) other differences of a kind prescribed by the regulations for the purposes of this paragraph.

This subsection is not intended to otherwise limit the circumstances in which 2 provisions or parts are, for the purposes of paragraph (2)(a), substantially the same.”

41 Section 1401 provides:

“Sect 1401 Creation of equivalent rights and liabilities to those that existed before the commencement under repealed provisions of the old corporations legislation

(a) was acquired, accrued or incurred under a provision of the old corporations legislation of a State or Territory in this jurisdiction that was no longer in force immediately before the commencement; and

(b) was in existence immediately before the commencement.

However, this section does not apply to a right or liability under an order made by a court before the commencement.

(a) the provision of the old corporations legislation (with such modifications (if any) as are necessary) under which the pre-commencement right or liability was acquired, accrued or incurred; and

(b) the other provisions of the old corporations legislation (with such modifications (if any) as are necessary) that applied in relation to the pre-commencement right or liability.

(3) On the commencement, the person acquires, accrues or incurs a right or liability (the substituted right or liability), equivalent to the pre-commencement right or liability, under the provision taken to be included in the new corporations legislation by paragraph (2)(a) (as if that provision applied to the conduct or circumstances that gave rise to the pre-commencement right or liability).

Note: If a time limit applied in relation to the pre-commencement right or liability under the old corporations legislation, that same time limit (calculated from the same starting point) will apply under the new corporations legislation to the substituted right or liability—see subsection 1402(3).

Note: For pre-commencement proceedings in respect of substituted rights and liabilities, see sections 1383 and 1384.”

42 Section 1408 provides:

SECT 1408 Old transitional provisions continue to have their effect

(1) Subject to subsection (3), this Act has the same effect, after the commencement, as it would have if:

Corporations Law

43 After hearing the argument on these grounds of appeal as a preliminary objection to the proceedings the Court indicated it overruled that objection. I am of the view that that was the appropriate course for the following reasons.

Transitional provisions argument

44 The primary judge considered the appellants’ argument that the proceedings were incompetent in his first judgment in the proceedings: Australian Securities and Investments Commission v William Arthur Forge and five Others (Supreme Court of New South Wales, unreported, 12 March 2002). This argument depended upon the proposition that the effect of the commencement of the Corporations Act on 15 July 2001 was to render ASIC’s proceedings a nullity which could only be cured by the bringing of fresh proceedings pursuant to the Corporations Act. His Honour rejected that submission, holding that ASIC’s proceedings were properly framed under the Corporations Law by virtue of the transitional provisions in the Corporations Act.

45 In the primary judge’s view the situation was governed by s 1383 and s 1401 of the Corporations Act. He held that ss 1383(1)(a), (b) and (c) applied to a civil liability incurred under a provision of the old corporations legislation of a State in existence immediately before the commencement of the Corporations Act. The effect of ss 1401(2) and (3) was that a person incurred a liability on the commencement of the new Corporations Act equivalent to his pre-commencement liability which was taken to be included in the new corporations legislation by virtue of s 1401(2)(a) as if that provision applied to the conduct or circumstances that gave rise to the pre-commencement right or liability: judgment, 12 March 2002 at [16] – [18].

46 The challenge to the primary judge’s conclusion on the effect of the repeal of the Corporations Law was made in the following grounds of appeal:

“1. His Honour should have held that the proceedings which had been commenced under and for alleged contraventions of the Corporations Law , were not validly continued under the Corporations Act .

2. His Honour erred in holding that the provisions of the Corporations Law the subject of these proceedings continued to apply pursuant to ss 1383 and 1401 (or any other provisions) of the Corporations Act .

Corporations Act

47 The argument Mr Biscoe QC advanced on the appellants’ behalf on appeal was more sophisticated than that the primary judge was asked to consider.

48 Mr Biscoe QC’s first argument accepted that the proceedings were caught by s 1383(1) of the Corporations Act so that, prima facie, s 1383(3) applied to them. However, he argued that in order that s 1383 could validly deem a new proceeding to have been brought under the Corporations Act, it was essential to identify a provision in the Corporations Act which corresponded to a “relevant old provision” of the Corporations Law: ss 1383(2), 1383(3)(a). He noted that for the purposes of the Corporations Act “corresponds” meant “substantially the same”: s 1371(2). He pointed to the provisions relating to directors’ duties in ss 180 - 182 and the provisions dealing with related party transactions in ss 208 - 211 and 243N of the Corporations Act and submitted that, even given the meaning of “corresponds” in s 1371(2), those provisions did not correspond with ss 232(2), 232(4) and 232(6) and ss 243ZE(2) and (3) of the Corporations Law. Accordingly, he argued, there was no proceeding before the Court under s 1383.

49 Alternatively, Mr Biscoe QC referred to Note 2 to s 1383 which I repeat for convenience:

(b) the new corporations legislation, because of section 1401 or 1408, is taken to include the relevant old provision (whether with or without modifications), in which case the provision so taken to be included will be the corresponding provision.”

50 Turning to s 1401(2), Mr Biscoe QC argued the words in that section “with such modifications (if any) as are necessary” meant that the provisions upon which ASIC relied as against the appellants became modified so as to accord with the provisions of the Corporations Act to which they bore some similarity. He submitted that the trial had proceeded on a different basis and, sub silentio, was invalidated on that basis.

51 ASIC argued that the primary judge’s interpretation of the transitional provisions was correct. Mr Stack submitted that his Honour’s conclusion was consistent with Shum Yip Properties Development Limited v Chatswood Investment and Development Co Pty Limited & Ors [2002] NSWSC 13; (2002) 166 FLR 451; Australian Securities and Investments Commission (ASIC) v Whitlam (No 2) [2002] NSWSC 591; (2002) 169 FLR 383 (reversed on appeal, Whitlam v Australian Securities and Investments Commission [2003] NSWCA 183; (2003) 57 NSWLR 559, but not on this point) and Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123; (2003) 175 FLR 124.

52 In Shum Yip Properties v Chatswood Investment & Development, Austin J considered the transitional provisions in Chapter 10 of the Corporations Act which he, in my view fairly, described as “intricate” (at [9]) and concluded (at [12]) that the effect of ss 1401, 1408 and 1383 of the Corporations Act on proceedings instituted prior to the CLERP Act was that the Court was to continue to apply the substance of the pre-CLERP Act provisions of the Corporations Law, treating those provisions as if they were part of the new Corporations Act.

53 In Australian Securities and Investments Commission (ASIC) v Whitlam (No 2) [2002] NSWSC 591 at [3]; (2002) 169 FLR 383, Gzell J accepted that the effect of s 1401 of the Corporations Act was that ss 1317DA and 1317EA(3) of the Corporations Law were deemed to be included in the Corporations Act.

54 Mandie J reached the same conclusion in Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123; (2003) 175 FLR 124 where (at [336]) he said:

Corporations Act

Corporations Law

55 His Honour concluded (at [339]), after a detailed examination of the transitional provisions in Chapter 10 of the Corporations Act, that:

Corporations Act

56 In the present case, in my view, the appellants’ argument failed for the following reasons.

57 The conduct of which ASIC complains took place in 1998. Under the then Corporations Law ASIC had six years to make an application for civil penalty orders: s 1317EC, Part 9.4B.

58 Although Part 9.4B was repealed by the CLERP Act, it continued to apply to a contravention of ss 232(2), (4) and (6) and ss 243ZE(2) and (3) which were listed in s 1317DA by virtue of s 1473 of the Corporations Law. When ASIC commenced proceedings in April 2001 against the appellants, it did so, as its Originating Process made plain, in reliance upon the preserved Part 9.4B. The proceedings were proceedings started before the commencement of the Corporations Act (s 1383(1)(c)) under a provision (Part 9.4B) of the old corporations legislation of a State (s 1383(1)(b)(i)).

59 Having reached this conclusion, it is necessary to determine for the purposes of s 1383(3)(a) whether there is or are provisions of the Corporations Act which correspond to the provisions of the Corporations Law referred to in s 1383(1)(b)(i). This requires consideration of s 1401 and, in particular, identification of the provision of the Corporations Law under which the pre-commencement liability “was acquired, accrued or was incurred”: s 1401(2).

60 A contravention of ss 232 and 243ZE did not of itself create civil liability. The civil and criminal consequences of a contravention of those sections were provided for in Part 9.4B of the Corporations Law as in force prior to the commencement of the CLERP Act on 13 March 2000: ss 232(6B) and 243ZE(5); see also ASIC v Plymin, above, at [335]. Thus the civil liability of the appellants for the alleged contraventions of ss 232 and 243ZE was incurred under provisions of the “old corporations legislation” of New South Wales (Part 9.4B) which were no longer in force immediately before the commencement of the Corporations Act, having been repealed by the CLERP Act. This satisfied s 1401(1)(a) of the Corporations Act.

61 Further, the liability the appellants had incurred under Part 9.4B was “in existence immediately before the commencement” having been preserved by s 1473(1)(a) of the Corporations Law during the period 13 March 2000 to 15 July 2001: ASIC v Plymin, above, at [335]. This satisfied s 1401(1)(b) of the Corporations Act.

62 Accordingly, s 1401 of the Corporations Act applied in relation to the liability the appellants had incurred under the old Part 9.4B. That meant the Corporations Act was taken to include both the provisions of Part 9.4B of the Corporations Law under which the appellants’ pre-commencement liability was incurred (s 1401(2)(a)) and the provisions of ss 232 and 243ZE of the Corporations Law which applied in relation to that pre-commencement liability (s 1401(2)(b)).

63 As the proceedings had been commenced prior to 15 July 2001, however, it was necessary to have regard to how those proceedings were dealt with under the Corporations Act. Both the appellants and ASIC argued the case on the basis that s 1383 of the Corporations Act was the provision which applied in those circumstances. In my view, s 1384 was the provision which applied to the proceedings as they were “federal corporations proceedings” being proceedings to which the Commonwealth, which for this purpose referred to ASIC, was a party: s 1382(1)(bb); and see Australian Securities and Investments Commission v Edensor Nominees Pty Limited [2001] HCA 1; (2001) 204 CLR 559 at 584 per Gleeson CJ, Gaudron and Gummow JJ and ASIC v Plymin, above, at [337].

64 Little turns upon whether the question is determined as one to which either s 1383 or s 1384 is applicable because, in both cases, the continuance of the proceedings requires the identification of “the provision of the new corporations legislation that corresponds to the relevant old provision”: see s 1383(3)(a) and s 1384(3)(a) and see ASIC v Plymin, above at [338]. Mr Biscoe QC’s argument, as I have earlier noted, was that there was no provision of the new corporations legislation which corresponded to the relevant old provision.

65 However, in my view, once it is understood that the effect of s 1401(2) was to treat the Corporations Act as including Part 9.4B as well as ss 232 and 243ZE of the Corporations Law it is plain that the s 1383(3)(a) requirement to identify a provision of the Corporations Act which corresponds to the relevant old provision was satisfied. The provisions are identical. They must, therefore, correspond.

66 Accordingly, the proceedings were either a new proceeding equivalent to the old proceeding taken, on commencement of the Corporations Act on 15 July 2001, to have been brought in the Supreme Court exercising federal jurisdiction under the provisions of the Corporations Act which corresponded with the relevant old provisions of the Corporations Law (s 1383(3)), or were continued in the Supreme Court as if they were and had always been a proceeding in relation to a matter to which the provision of the Corporations Act corresponding to the relevant old provision of the Corporations Law applied (s 1384(3)).

67 This conclusion is reinforced by the provision which appears in both ss 1383 and 1384 that “[t]o the extent that the old proceeding, before the commencement, related to pre-commencement rights or liabilities, the new proceeding relates to the substituted rights and liabilities in relation to those pre-commencement rights or liabilities”. When the Corporations Act commenced the appellants incurred a liability, described in s 1401(3) as “the substituted liability”, which was equivalent to the liability they had incurred under Part 9.4B of the Corporations Law.

68 In the light of the above analysis Mr Biscoe QC’s argument concerning the modifications s 1401(2) effected should also be rejected. It proceeded on a misapprehension of the way the transitional provisions operate.

69 In Shum Yip Properties v Chatswood Investment & Development, above at [12], Austin J referred to the legislative scheme created by the transitional provisions as involving “tangled reasoning”. In fairness to the legislature, it should be recalled that the transitional provisions in the Corporations Act operate in the federal legislative context to preserve rights and liabilities which arose or were incurred under the State and Territory legislative regimes I have earlier described. It is not surprising that the drafter, in that context, apparently operating out of more abundant caution, sought to achieve that result by a variety of routes. For example, s 1408 also appears to operate to continue Part 9.4B. The fact that provisions such as s 1401 and s 1408 might overlap was intended to ensure the object of Chapter 10 was achieved. This is made plain by s 1398, which provides:

“The provisions of this Division deal at a broad level with concepts and matters in a way that is intended to achieve the object of this Part as set out in section 1370. Some of the provisions of this Division will (depending on the situation) have an effect that overlaps or interacts to some extent with the effect of other provisions of this Division. This is intended, and the provisions of this Division should be not be regarded as dealing with mutually exclusive situations.”

11 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $40,833.34 to the fifth defendant, on or about 28 May 1998, contravened subsection 232(4) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036.

12 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $40,833.34 to the fifth defendant, on or about 28 May 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036.

Corporations Law

14 The first defendant, second defendant and third defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $10,833.34 to the sixth defendant, on or about 28 May 1998, contravened subsection 232(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036.

Corporations Law

21 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $250,000 to the fifth defendant, on or about 28 October 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036.

Corporations Law

23 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $100,000 to the fifth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 232(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036.

24 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $100,000 to the fifth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 232(4) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036.

Corporations Law

26 The first defendant, second defendant, third defendant and fourth defendant have each, by being involved in or by being recklessly concerned in or by being party to, CTC Resources N.L. ACN 009 061 036 paying $100,000 to the fifth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 243ZE(3) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036.

27 The first defendant, second defendant and third defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $75,000 to the sixth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 232(2) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036.

Corporations Law

29 The first defendant, second defendant and third defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $75,000 to the sixth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036.

30 The first defendant, second defendant and third defendant have each, by being involved in or by being recklessly concerned in or by being party to, CTC Resources N.L. ACN 009 061 036 paying $75,000 to the sixth defendant, between about 27 October 1998 and 30 October 1998, contravened subsection 243ZE(3) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036.

Corporations Law

33 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $150,000 to the fifth defendant, on or about 13 November 1998, contravened subsection 232(4) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036.

34 The first defendant, second defendant, third defendant and fourth defendant have each, as an officer or employee of CTC Resources N.L. ACN 009 061 036, in New South Wales, by approving, permitting or allowing CTC Resources N.L. ACN 009 061 036 to pay $150,000 to the fifth defendant, on or about 13 November 1998, contravened subsection 232(6) of the Corporations Law in relation to CTC Resources N.L. ACN 009 061 036.

Corporations Law

406 The primary judge acceded to ASIC’s application for banning orders pursuant to s 1317EA(3)(a) of the Corporations Law. He concluded (at [153]) that although Allan Endresz’s contraventions were fewer in number than those of the first, second and third defendants, they were significantly more serious. He found that Allan Endresz was “in effect, the leader in the series of contraventions in which he was involved, relating to the disbursement of the monies received on 20 April 1998” and “also … a willing participant in the later payments and loans to Kamanga.” He concluded that Allan Endresz had “shown a distinct pre-disposition to flout the law, having regard to his earlier convictions” and that “his total lack of contrition and his generally arrogant attitude towards these proceedings, do not suggest that he is likely to restrain himself from committing commercial misdemeanours in the future.” Although he took into account the view of CTC’s auditor, Mr Walsh, that Allan Endresz was not actually dishonest (a view his Honour regarded as “perhaps over benign”), he held that the period of prohibition should be substantial. He ordered that Allan Endresz be prohibited from managing a corporation for sixteen years from the date of his judgment.

407 In relation to the other individual defendants the primary judge concluded (at [154]) that their continuance in corporate management would pose a lesser, nevertheless significant, threat to the public interest. He found that “each was significantly wanting in the discharge of his and her duties as director of [CTC] and [had] demonstrated no proper understanding of what those duties required”. He ordered that each should be prohibited from managing corporations for a period of eight years from the date of his judgment.

408 His Honour considered that the contraventions were sufficiently serious to warrant the imposition of the following pecuniary penalties pursuant to s 1317EA(3)(b):

“Transaction 1, He imposed a pecuniary penalty of $120,000 upon Allan Endresz, William Forge, Jozsef Endresz and Dawn Endresz,.

Transaction 2, He imposed a pecuniary penalty of $30,000 upon each of William Forge, Jozsef Endresz, Dawn Endresz and Bisoya Pty Limited.

Transaction 3, He imposed a pecuniary penalty of $10,000 upon William Forge, Jozsef Endresz, Dawn Endresz and Allan Endresz.

Transaction 4, He imposed a pecuniary penalty of $5,000 upon each of William Forge, Jozsef Endresz, Dawn Endresz and Bisoya Pty Limited.

Transaction 5, He imposed a pecuniary penalty of $30,000 upon each of William Forge, Jozsef Endresz, Dawn Endresz and Allan Endresz.

Transaction 6, He imposed a pecuniary penalty of $20,000 upon each of William Forge, Jozsef Endresz, Dawn Endresz and Allan Endresz.

Transaction 7, He imposed a pecuniary penalty of $10,000 upon each of William Forge, Jozsef Endresz, Dawn Endresz and Bisoya Pty Limited.

Transaction 8, He imposed a pecuniary penalty of $20,000 upon each of William Forge, Jozsef Endresz, Dawn Endresz and Allan Endresz.”

Penalty: grounds of appeal

409 The appellants advanced the following grounds of appeal in relation to penalties the primary judge imposed:

“22. His Honour erred in imposing penalties on the appellants without first inviting them and giving them an opportunity to be heard as to penalties after he had determined liability.

23. His Honour erred in finding that, having regard to his earlier convictions, Allan Endresz had a distinct predisposition to flout the law and in holding this against him when imposing penalties [paragraph 153].

24. His Honour erred in finding that Allan Endresz had a generally arrogant attitude towards the proceedings or in holding it against him on penalty [judgment paragraph 153].

25. His Honour erred in finding that the appellants failed to show any contrition and Allan Endresz had a total lack of contrition without first giving them the opportunity to express contrition following the Court’s determination of liability.

26. His Honour erred in holding that Allan Endresz’s total lack of contrition and generally arrogant attitude towards the proceedings did not suggest that he was likely to restrain himself from committing commercial misdemeanours in the future [paragraph 153].

27. By reason of the abovementioned errors in relation to Allan Endresz, his Honour erred in holding that having regard to those factors, the period of prohibition of Allan Endresz must be substantial or as great as he imposed [paragraph 153].

28A His Honour failed to take into account re Bisoya Pty Ltd that under legislative changes introduced in 2000 it would not have had any liability.

29. The penalties imposed by his Honour were manifestly excessive.”

Separate hearing on penalty: consideration

410 Both ASIC and the appellants provided written submissions to the primary judge to which they then spoke. ASIC’s written submissions addressed both the issues of contravention and penalty. The appellants’ written submissions only addressed the issue of whether the contraventions had been proved. They did not address the issue of penalty despite the fact that during the debate about the filing of the appellants’ evidence which took place on 9 April 2002 after ASIC closed its case, the primary judge expressly drew Allan Endresz’s attention to the fact that if and when the penalty issue arose he had “no evidence at all on that”.

411 The appellants’ written submissions appear to have been handed to the primary judge on 1 May 2002 which was the last day of the hearing. They were described by the primary judge as “a very comprehensive set of submissions both on law and fact”. However it is plain from the transcript that his Honour had not had the opportunity to read them in detail before he reserved his decision. While his Honour expressly asked Mr Burbidge QC for ASIC to address the issue of the appropriate relief if he found the contraventions established, no like oral invitation was addressed to the appellants.

412 The appellants submitted that the primary judge erred in not having a separate hearing on penalty after he had found the contraventions proved. They contend that this was the “fair and correct procedure” which was followed in Australian Securities and Investments Commission (ASIC) v Adler & Ors [2002] NSWSC 510; (2002) 42 ACSR 74; Australian Securities and Investments Commission (ASIC) v Whitlam(No 2) [2002] NSWSC 718; (2002) 42 ACSR 515 and in ASIC v Plymin(No 1) [2003] VSC 123; (2003) 175 FLR 124.

413 In Rich v Australian Securities and Investments Commission, above, at 1363 [41], McHugh J observed that:

“… what the judges actually do [when ordering disqualification and fixing periods of disqualification under the corporations legislation] is little different from what judges do in determining what orders or penalties should be made for offences against the criminal law. Elements of retribution, deterrence, reformation and mitigation as well as the objective of the protection of the public inhere in the orders and periods of disqualification made under the legislation.”

414 Once it is recognised that the task in which the primary judge was engaged at this stage of the trial bore the hallmarks of the sentencing process in a criminal trial, the principles attendant upon that process were invoked. It is a fundamental proposition of sentencing “… that the punishment [must] fit the crime. Apart from mitigating factors, it is the circumstances of the offence alone that must be the determinant of an appropriate sentence”: Baumer v The Queen [1988] HCA 67; (1988) 166 CLR 51 at 58. As Gibbs CJ said in R v De Simoni [1981] HCA 31; (1981) 147 CLR 383 at 389, “[T]he general principle [is] that the sentence imposed on an offender should take account of all the circumstances of the offence …”.

415 The circumstances of the offender are equally important to the question of the appropriate sentence. In Ibbs v The Queen [1987] HCA 46; (1987) 163 CLR 447 at 452, the High Court in a joint judgment approved Dwyer CJ’s statement in Reynolds v Wilkinson (1948) 51 WALR 17 at 18 that:

"Crimes bearing the same general description have not equally evil content or characteristics, and offenders also differ in themselves."

416 These propositions were affirmed extra-curially by Gleeson CJ when he said, “the punishment is supposed to fit not only the crime, but also the criminal”: see “Individual Justice” (1995) 69 ALJ 421 at 424.

417 Declarations of contravention can lead to the imposition of substantial penalties both by way of disqualification orders and pecuniary penalties such as those which were imposed in this case. In such circumstances the principles that the punishment should fit both the “offence” and the “offender” are reflected in the proposition that it is the duty of a court to hear the “guilty party” on penalty after the “charge” has been proved.

418 This appears clearly from Hall v New South Wales Trotting Club Ltd [1977] 1 NSWLR 378 at 382 where Hutley JA (with whose judgment on this point Samuels JA agreed at 391, Mahoney JA dissenting) said, “[t]he right to be heard in palliation of misconduct is established by authority nearly a century old.” Applying that principle, his Honour also said (at 382), in the context of a domestic tribunal, that the tribunal had a duty to hear a person found guilty on the question of penalty and that a “person found guilty cannot really address until he knows of what he has been found guilty”.

419 While Hutley JA accepted that a person might waive the right to a hearing on penalty, his Honour said (at 382 – 383) it was incumbent in effect upon the tribunal to draw the right specifically to the person’s attention. He said that the tribunal should be guided by “the minimum standards required of the more summary and informal courts” and that it was “… for such a court to take the initiative in maintaining those standards”. He referred approvingly to Mayes v Mayes [1971] 2 All ER 397; [1971] 1 WLR 679, where, at the end of the complainant's evidence, magistrates dismissed the case without hearing her solicitor. Bagnall J in the Divisional Court said (at 682; 400):

"It seems to me where a court has to act, as all courts have, in accordance with settled practice or rules of natural justice, and that practice or those rules give a person a right to be heard, it must be wrong for the court to proceed to a decision without positively affording that right and that it would be wrong for the court to proceed relying upon the advocate in question to assert his rights."

420 Hall v New South Wales Trotting Club Ltd was followed by Holland J in Malone v Marr [1981] 2 NSWLR 894. His Honour said (at 902) that two things followed from the views expressed by the majority:

“First, the requirements of natural justice are not satisfied by showing that when the accused appeared before the tribunal to answer the charges he knew that the tribunal had power to impose a penalty upon him if he should be found to be guilty or that he could have addressed the tribunal on matters going to the question of punishment at the same time as he was heard upon the charge made against him if he had chosen to do so. Second, if the tribunal, after making a finding of guilt, fails in its duty with regard to a hearing on penalty as above described and, in consequence, the decision on penalty is invalid, the tribunal may, if it chooses, rectify its error by re-opening the question of penalty, inviting the accused to tender evidence and/or address on the question of penalty and thereafter re-consider and decide that question.”

421 See also Stone v Law Society of the Northern Territory and Others (1992) 108 FLR 332 at 344 where Martin J applied Hall v New South Wales Trotting Club Ltd and Malone v Marr in the circumstance of disciplinary proceedings against a legal practitioner.

422 ASIC submitted that the appellants had been given ample opportunity to reply to ASIC’s submissions on penalty. It relied upon the facts that the appellants knew from the Originating Process that relief in the nature of penalties was sought, that Mr Burbidge QC’s opening address made plain that ASIC sought the imposition of penalties, that the primary judge had informed Mr Alan Endresz that he did not have any evidence on the issue of penalty and the provision of ASIC’s written submissions which addressed the issue of penalty at length.

423 ASIC submitted that the case was similar to Howe v Administrative Decisions Tribunal of New South Wales [2003] NSWSC 157 where Dunford J distinguished Hall v New South Wales Trotting Club Ltd and Malone v Marr. His Honour accepted (at [20]) that “it is generally desirable that addresses on penalty follow a determination of guilt so that the person accused knows precisely the ambit of the findings to which submissions on penalty need to be addressed”. He held, however, (at [21]) that “the rule [to which Hutley JA referred] is not inflexible, and provided there is an ample opportunity to address on penalty, there is no breach of any rules of natural justice or procedural fairness”. In Howe v Administrative Decisions Tribunal of New South Wales [2003] NSWCA 120 when hearing an application in a proposed appeal from Dunford J’s decision for orders having the effect of precluding the Tribunal from making any further orders in the proceedings before it or publishing its outstanding decision as to penalty, Giles JA said (at [14]) he regarded Dunford J’s “decision on this point [as] unarguably correct” in circumstances where “the claimant had had the fullest opportunity to address on penalty”.

424 Hall v New South Wales Trotting Club and Malone v Marr make plain that the matters upon which ASIC relies are insufficient to displace the appellants’ right to be heard separately on the issue of penalty once they were aware of the contraventions which had been found against them.

425 Further it was, in my view, incumbent upon the primary judge to approach the determination of the contravention issue and penalty in the two-stage process dictated by Hall v New South Wales Trotting Club Ltd. He should also have drawn the appellants’ attention to their right to elicit evidence and make submissions on the issue of penalty.

426 It was also, in my opinion, incumbent upon ASIC in the circumstances of this case to draw his Honour’s attention both to the principles of law referred to in Hall v New South Wales Trotting Club and Malone v Marr as well as to the circumstances of other civil penalty proceedings in which it had been involved in which there were separate hearings on the issue of penalty: see Australian Securities & Investments Commission v Adler [2002] NSWSC 510; (2002) 42 ACSR 74; Australian Securities & Investments Commission v Whitlam(No 2) [2002] NSWSC 718; (2002) 42 ACSR 515.

427 The consequence of the failure to conduct a separate penalty hearing means that the issue of penalty must be revisited. It is appropriate, as counsel for the appellants submitted (and ASIC did not demur), that that exercise be undertaken by remitting the matter to the Equity Division to be heard by a judge different from the primary judge.

428 This conclusion means it is not necessary to deal with grounds 23 – 29.

Other grounds of appeal

429 The appellants raised the following miscellaneous grounds of appeal:

“15. His Honour erred in stating that the $6,000,000.00 carried with it obligations to pay interest [paragraphs 144, 132].

430 Ground 15 turned on the proposition that the non-cumulative dividend on the redeemable preference shares was not interest. Accepting that to be the case, his Honour’s statement, as Mr Biscoe QC conceded in the course of argument, could not have a material effect on the outcome of the appeal.

431 The same can be said of the complaint regarding his Honour’s understanding about why Allan Endresz had not obtained legal representation. To the extent that this ground seeks to undermine the primary judge’s conclusion about Allan Endresz’s credit, it is plain from reading the judgment on appeal that the adverse view his Honour formed of Allan Endresz’s credit was based on the entirety of the evidence including his observation of Allan Endresz’s demeanour.

432 Moreover his Honour’s observation was made when he was referring to the difficulties under which he was labouring due to the appellants not having legal representation. It is plain from Allan Endresz’s cross- examination that the absence of legal representation was not due to lack of finance. Although his Honour’s remark did not express the entirety of Allan Endresz’s statement in my view his Honour was entitled to form the opinion that “[I]n view of the civil penalties that were being sought against him and the other defendants, this [choosing not to have legal representation] seemed a strangely arrogant attitude”.

433 As with ground 15, this remark does not have a material effect on the appeal.

434 Grounds 15 and 17 should be rejected.

Orders

435 I propose the following orders:

(1) Appeal dismissed save as to ground 22.

(2) Matter remitted to the Equity Division for hearing on penalty only.

Costs

436 The appellants have already been ordered to pay the costs of the adjourned hearing on 30 June 2003.

437 As to the costs of the appeal, the appellants have failed on the majority of grounds which occupied the substantial part of the hearing. In my view they should bear three-quarters of the costs of the appeal.

438 As to the trial, the point on which the appellants have succeeded was not argued at all. In my view the primary judge’s order that the appellants pay ASIC’s cost of the proceedings below including reserved costs should not be disturbed.

**********

Last Modified: 12/15/2004

Citations

Forge v Australian Securities and Investments Commission [2004] NSWCA 448

Most Recent Citation

Cases Citing This Decision

231

Forge v Australian Securities and Investments Commission [2006] HCA 44

Chew v The Queen [1992] HCA 18

Cases Cited

80

Statutory Material Cited

8

Australian Securities and Investments Commission v Forge [2002] NSWSC 760

Williams v The Minister Aboriginal Land Rights Act 1983 and the State of New South Wales [2000] NSWCA 255

Adler v Australian Securities and Investments Commission [2003] NSWCA 131

Actions

Download as PDF Download as Word Document

CITATION:	William Arthur Forge & 5 Ors v Australian Securities & Investments Commission [2004] NSWCA 448
HEARING DATE(S):	11 August 2003 to 14 August 2003 30 September 2003, 2 October 2003 (written submissions)
JUDGMENT DATE:	7 December 2004
JUDGMENT OF:	Handley JA at 1; Santow JA at 2; McColl JA at 3
DECISION:	(1) Appeal dismissed save as to ground 22. (2) Matter remitted to the Equity Division for hearing on penalty only. (3) Appellants to bear three-quarters of the costs of the appeal. (4) The primary judge's order that the appellants pay ASIC's costs of the proceedings below including reserved costs should not be disturbed.
CATCHWORDS:	CORPORATIONS LAW - APPEALS - Appeal from declarations of contravention of the Corporations Law, disqualification orders and pecuniary penalties - breach of directors' duties and related party transaction provisions of the Corporations Law - whether proceedings commenced under the Corporations Law validly continued under the Corporations Act 2001 (Cth) - whether fourth appellant was an "officer" for the purposes of s 232 of the Corporations Law - whether primary judge erred in concluding the appellants had contravened ss 232(2), (4) and (6) and s 243ZE of the Corporations Law - subjective or objective test of "honestly" in s 232(2) of the Corporations Law - whether purported ratification of contraventions of the Corporations Law by shareholders effective - whether a separate hearing on penalty should be held in civil penalty proceedings - EVIDENCE - Admissibility of expert evidence going to an ultimate legal issue. (D)
LEGISLATION CITED:	Constitution s 51(xxxvii) Corporate Law Economic Reform Program Act 1999 s 1466 Corporations Act 2001 (Cth) s 79, s 180, s 181, s 182, s 208, s 209, s 210, s 211, s 239, s 243N, s 254T, s 254V, s 1317L, s 1332, Ch 10, s 1370, s 1371, s 1371(2), s 1382(1)(bb), s 1383, s 1383(1), s 1383(1)(a), s 1383(1)(b), s 1383(1)(b)(i), s 1383(1)(c), s 1383(2), s 1383(3), s 1383(3)(a), s 1384, s 1384(3), s 1384(3)(a), s 1398, s 1401, s 1401(1)(a), s 1401(1)(b), s 1401(2), s 1401(2)(a), s 1401(2)(b), s 1401(3), s 1408 Corporations (Commonwealth Powers) Act 2001 Corporations Law s 9, s 79, s 82A, s 85A, s 191, s 192, s 192(2), s 192(4), s 232, s 232(1), s 232(2), s 232(4), s 232(5), s 232(6), s 232(6B), s 243F, s 243F(1)(a), s 243F(1)(d), s 243F(1)(e), s 243F(1)(f), s 243G, s 243H, s 243K, s 243N, s 243ZE, s 243ZE(2), s 243ZE(3), s 243ZE(5), s 254C, s 254K, s 254K(b), Pt 9.4B, s 1317DA, s 1317DB, s 1317EA, s 1317EA(2), s 1317EA(3), s 1317EA(3)(a), s 1317EA(3)(b), s 1317EA(4), s 1317EA(5), s 1317EB(1), s 1317EC, s 1317ED, s 1317ED(1), s 1317HD(1), s 1317HD(1A), s 1317JA, s 1332, s 1447, s 1473, s 1473(1)(a) Evidence Act 1995 (NSW) s 80, s 80(a), s 135(a), s 135(e) Supreme Court Act 1970 (NSW) s 75A Supreme Court Rules 1970 (NSW) Pt 4 r 1, Pt 15 r 13
CASES CITED:	Adler and Anor v Australian Securities and Investments Commission; Williams v Australian Securities and Investments Commission [2003] NSWCA 131; (2003) 179 FLR 1 Allstate Life Insurance Co v ANZ Banking Group Ltd (No 6) (Allstate Judgment No 33) (1996) 64 FCR 79 Australian Competition and Consumer Commission v Amcor Printing Papers Group Limited [1999] FCA 672; (1999) ALR 465 Australian Competition & Consumer Commission v FFE Building Services Limited [2003] FCAFC 132; (2003) 130 FCR 37 Australian Competition and Consumer Commission v J McPhee & Son (Australia) Pty Ltd (No 2) (1997) 77 FCR 217 Australian Growth Resources Corporation Pty Limited v Van Reesema (1988) 13 ACLR 261 Australian Securities and Investments Commission v Adler [2002] NSWSC 171; (2002) 41 ACSR 72 Australian Securities and Investments Commission (ASIC) v Adler & Ors [2002] NSWSC 510; (2002) 42 ACSR 74 Australian Securities and Investments Commission v Edensor Nominees Pty Limited [2001] HCA 1; (2001) 204 CLR 559 Australian Securities & Investments Commission v Forge & Ors [2002] NSWSC 760 Australian Securities and Investments Commission v William Arthur Forge and five Others (Supreme Court of New South Wales, unreported, Foster AJ, 12 March 2002) Australian Securities and Investments Commission v Loiterton [2004] NSWSC 172 Australian Securities and Investments Commission v Plymin [2002] VSC 56; (2002) 4 VR 168 Australian Securities and Investments Commission v Plymin (No 1) [2003] VSC 123; (2003) 175 FLR 124 Australian Securities and Investments Commission v Vines [2003] NSWSC 1095; (2003) 48 ACSR 291 Australian Securities and Investments Commission (ASIC) v Whitlam (No 2) [2002] NSWSC 591; (2002) 169 FLR 383 Australian Securities and Investments Commission (ASIC) v Whitlam (No 2) [2002] NSWSC 718; (2002) 42 ACSR 515 Bamford v Bamford [1970] Ch 212 Banque Commerciale SA (in Liq) v Akhil Holdings Ltd [1990] HCA 11; (1990) 160 CLR 279 Barbosa v Di Meglio [1999] NSWCA 307 Baumer v The Queen [1988] HCA 67; (1988) 166 CLR 51 Blackie v Police [1966] NZLR 910 Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 Carabelas v Scott [2003] SASC 389; (2003) 177 FLR 334 Chew v The Queen [1992] HCA 18; (1992) 173 CLR 626 Chief Executive Officer of Customs v Labrador Liquor Wholesale Pty Ltd [2003] HCA 49; (2003) 77 ALJR 1629 Combined Auctions Pty Ltd v Gray Eisdell Timms Pty Ltd (1997) 16 ACLC 252 Commissioner for Corporate Affairs (Vic) v Bracht [1989] VR 821 Commonwealth v Verwayen [1990] HCA 39; (1990) 170 CLR 394 Commonwealth Bank of Australia v Friedrich (1991) 5 ACSR 115 Corporate Affairs Commission v Papoulias (1990) 20 NSWLR 503 Coulton v Holcombe [1986] HCA 33; (1986) 162 CLR 1 Feil v Commissioner of Corporate Affairs (1991) 9 ACLC 811 Fitzsimmons v R (1997) 23 ACSR 355 Fox v Percy [2003] HCA 22; (2003) 214 CLR 118 Furs Limited v Tomkies [1936] HCA 3; (1936) 54 CLR 583 Gamester Pty Limited & Anor v The Honourable Mr Justice Lockhart (1993) 67 ALJR 547 George Hill and Co v Hill (1886) 55 LT 769 Giorgianni v R [1985] HCA 29; (1985) 156 CLR 473 Gray Eisdell Timms Pty Ltd v Combined Auctions Pty Ltd (1995) 122 FLR 253 Hall v New South Wales Trotting Club Ltd [1977] 1 NSWLR 378 Harlowe's Nominees Pty Limited v Woodside (Lakes Entrance) Oil Co NL [1968] HCA 37; (1968) 121 CLR 483 Holpitt Pty Limited v Swaab & Ors (1992) 33 FCR 474 Howe v Administrative Decisions Tribunal of New South Wales [2003] NSWSC 157 Howe v Administrative Decisions Tribunal of New South Wales [2003] NSWCA 120 Hughes v N M Superannuation Pty Ltd (1993) 29 NSWLR 653 Ibbs v The Queen [1987] HCA 46; (1987) 163 CLR 447 Kinsela v Russell Kinsela Pty Limited (in Liq) (1986) 4 NSWLR 722 Life Savers (Australasia) Ltd v Frigmobile Pty Ltd [1983] 1 NSWLR 431 Macleod v The Queen [2003] HCA 24; (2003) 214 CLR 230 Makita (Australia) Pty Ltd v Sprowles [2001] NSWCA 305; (2001) 52 NSWLR 705 Malone v Marr [1981] 2 NSWLR 894 Marchesi v Barnes [1970] VR 434 Mayes v Mayes [1971] 2 All ER 397; [1971] 1 WLR 679 McCann v Switzerland Insurance Australia Limited [2000] HCA 65; (2000) 203 CLR 579 Miller v Miller (1995) 16 ACSR 73 Multinational Gas & Petrochemical Co v Multinational Gas & Petrochemical Services Ltd [1983] Ch 258 Naxakis v Western General Hospital [1999] HCA 22; (1999) 197 CLR 269 Ngurli Ltd v McCann [1953] HCA 39; (1953) 90 CLR 425 Nicholson v Permakraft (NZ) Ltd (in Liq) [1985] 1 NZLR 242 Nowlan v Marson Transport Pty Ltd [2001] NSWCA 346; (2001) 53 NSWLR 116 O'Brien v Gillespie (1997) 41 NSWLR 549 Pascoe Ltd (in liq) v Lucas (1998) 27 ACSR 737 Pascoe Ltd (in liq) v Lucas [1999] SASC 519; (1999) 75 SASR 246; (1999) 33 ACSR 357 Pemble v R [1971] HCA 20; (1971) 124 CLR 107 Permanent Trustee Australia Ltd v Boulton & Lynjoe Pty Ltd (1994) 33 NSWLR 735 Pioneer Concrete Services Ltd v Galli [1985] VR 675 R v Byrnes [1995] HCA 1; (1995) 183 CLR 501 R v De Simoni [1981] HCA 31; (1981) 147 CLR 383 R v GK [2001] NSWCCA 413; (2001) 53 NSWLR 317 R v Newth [1974] 2 NZLR 760 Re Bright Pine Mills Pty Limited [1969] VR 1002 Re Media Entertainment & Arts Alliance; ex parte Hoyts Corporation Pty Limited [1993] HCA 41; (1994) 68 ALJR 179 Re New World Alliance Pty Limited; Sycotex Pty Limited v Baseler & Ors (No 2) (1994) 51 FCR 425 Re Portuguese Consolidated Copper Mines Ltd; Ex parte Badman; Ex parte Bosanquet (1890) 45 Ch D 16 Re Wakim; ex parte McNally [1999] HCA 27; (1999) 198 CLR 511 Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 Reynolds v Wilkinson (1948) 51 WALR 17 Rich v Australian Securities and Investments Commission [2004] HCA 42; (2004) 78 ALJR 1354 RW Miller & Co Pty Ltd v Krupp (Aust) Pty Ltd (1991) 34 NSWLR 129 Shum Yip Properties Development Limited v Chatswood Investment and Development Co Pty Limited & Ors [2002] NSWSC 13; (2002) 166 FLR 451 Sidebottom & Anor v Commissioner of Taxation of the Commonwealth of Australia [2003] VSCA 2; (2003) 173 FLR 335 Southern Resources Limited v Residues Treatment & Trading Co Limited (1990) 3 ACSR 207 Standard Chartered Bank Limited v Antico & Ors (No 1) (1995) 38 NSWLR 290 Stone v Law Society of the Northern Territory and Others (1992) 108 FLR 332 Suvaal v Cessnock City Council [2003] HCA 41; (2003) 77 ALJR 1449 Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1987) 8 NSWLR 270 Van Den Hoek v R [1986] HCA 76; (1986) 161 CLR 158 Whisprun Pty Limited v Dixon [2003] HCA 48; (2003) 77 ALJR 1598 Whitehouse v Carlton Hotel Pty Ltd [1987] HCA 11; (1987) 162 CLR 285 Whitlam v Australian Securities and Investments Commission [2003] NSWCA 183; (2003) 57 NSWLR 559 Williams v The Minister for Aboriginal Land Rights Act 1983 and the State of NSW [2000] NSWCA 255; (2000) Aust Torts Reports 81-578 Winthrop Investments Ltd v Winns Ltd [1975] 2 NSWLR 666 Yorke v Lucas [1985] HCA 65; (1985) 158 CLR 661
PARTIES :	William Arthur Forge - (1st Appellant) Jozsef Endresz - (2nd Appellant) Dawn May Endresz - (3rd Appellant) Allan Paul Endresz - (4th Appellant) Kamanga Holdings - (5th Appellant) Bisoya Pty Limited - (6th Appellant) Australian Securities & Investments Commission - (Respondent)
FILE NUMBER(S):	CA 40854/02
COUNSEL:	P M Biscoe QC (1 - 6 Appellants) D R Stack (Respondent)
SOLICITORS:	Ken Cush & Associates by their agents Curwood & Partners (1 - 6 Appellants) Graeme Plath, Australian Securities and Investments Commission (Respondent)

LOWER COURTJURISDICTION:	Supreme Court
LOWER COURT FILE NUMBER(S):	SC 2338/01
LOWER COURT JUDICIAL OFFICER :	Foster AJ

INDEX	Paragraph No
INTRODUCTION	3
Scope of the appeal	8
Legal representation	10
Statement of the case	13
THE LEGISLATIVE FRAMEWORK
Substantive provisions	18
Transitional provisions	24
TRANSITIONAL PROVISIONS ARGUMENT	44
CONTRAVENTIONS OF THE CORPORATIONS LAW
The transactions	73
Events following the transactions: the auditor’s concerns	75
The transactions: the factual context	93
Mr Tutt’s evidence	118
The appellants’ case at trial	120
The primary judge’s assessment of the appellants’ evidence	124
Credit	138
Conclusions at trial
Related party transactions	140
Directors’ duty contraventions	146
INVOLVEMENT	150
Role of Allan Endresz: the primary judge’s findings	155
The appellants’ submissions	168
ASIC’s submissions	172
Consideration
The threshold issue	177
Officer of CTC: legal principles	183
Officer of CTC: conclusion	196
Knowledge	202
DIRECTORS’ DUTY CONTRAVENTIONS
Grounds of appeal	206
The appellants’ submissions	208
Transactions 1 and 2: retrospective management and
consultancy fees	211
Transactions 3, 4, 5, 6 and 8: future management and
consultancy fees	220
Transaction 7: Bisoya loan $75,000	222
Interpretation of s 232(2)	223
ASIC’s submissions	226
Interpretation of s 232(2)	231
Consideration	233
Contravention of s 232(2)	244
Contravention of ss 232(4) and (6)	250
Admission of Mr Tutt’s evidence	253
Repayment of loans	280
Related party transactions	293
Penalty privilege	304
Proof	320
RATIFICATION
Introduction	329
The evidence	334
The appellants’ submissions	350
ASIC’s submissions	362
Consideration	370
Misappropriation/fraud on the minority	371
Breach of statutory duty	378
Timing of ratification resolutions	385
Disclosure	390
Conclusion	403
DECLARATIONS, BANNING ORDERS AND PECUNIARY
PENALTIES	405
PENALTY
Grounds of appeal	409
Separate hearing on penalty: conclusion	410
OTHER GROUNDS OF APPEAL	429
ORDERS	435
COSTS	436