In re Gay
[2014] TASSC 22
•15 April 2014
[2014] TASSC 22
COURT: SUPREME COURT OF TASMANIA
CITATION: In re Gay [2014] TASSC 22
PARTIES: GAY, John Eugene
FILE NO: 1155/2013
DELIVERED ON: 15 April 2014
DELIVERED AT: Hobart
HEARING DATE: 17 March 2014
JUDGMENT OF: Pearce J
CATCHWORDS:
Corporations – Management and administration – Duties and liabilities of officers of corporation – Disqualification from management of corporation – Leave to manage or act as a director.
Corporations Act 2001 (Cth), ss206B, 206G.
In re Seymour [2002] TASSC 85; Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203; Adams v Australian Securities and Investments Commission(2003) 46 ACSR 68, followed.
Aust Dig Corporations [1288]
REPRESENTATION:
Counsel:
Appellant: J P Moore SC
Intervenor ASIC: S R Senathirajah
Solicitors:
Appellant: HWL Ebsworth
Intervenor ASIC: Australian Securities and Investment Commission
Judgment Number: [2014] TASSC 22
Number of paragraphs: 51
Serial No 22/2014
File No 1155/2013
JOHN EUGENE GAY v AUSTRALIAN SECURITIES
AND INVESTMENTS COMMISSION
REASONS FOR JUDGMENT PEARCE J
15 April 2014
On 23 August 2013 John Gay pleaded guilty to one count of insider trading contrary to s1043A(1) of the Corporations Act 2001 (Cth) ("the Act"). He was sentenced by Porter J in this Court. His Honour convicted Mr Gay and imposed a fine of $50,000. Because conviction for insider trading is punishable by imprisonment for greater than 12 months, Mr Gay was automatically disqualified from managing corporations for five years.
Nevertheless the Court has power to grant leave to a disqualified person to manage corporations, and Mr Gay applies for leave to manage two corporations, Specialty Veneers Pty Ltd ACN 145 313 828 ("Specialty Veneers") and JEG Management Pty Ltd ACN 009 522 570 ("JEG Management").
ASIC has intervened in and opposes Mr Gay's application. It does so for two main reasons. ASIC contends that Mr Gay has not discharged the onus of persuading the Court to make an exception to the legislative policy that underlies his disqualification. It contends also that to allow Mr Gay to manage these two companies would unduly undermine the retributive and deterrent effects of the sentence imposed on him.
Disqualification from managing corporations
Part 2D.6 of the Act is entitled "Disqualification from managing corporations". In some cases a court has power to order disqualification. For example, a court may order disqualification where a person has contravened a civil penalty provision, s206C, is found to be responsible for the financial failure of companies, s206D, or commits repeated breaches of the Act, s206E. In other cases however, such as this one, the disqualification is automatic; s206B(1)(b) and s206B(2).
A person who is disqualified from managing corporations may only be appointed as director of a company if the appointment is made with permission granted by ASIC under s206F or leave granted by the court under ss206G; 201B.
The power to grant leave derives from s206G. The grant of leave may be general or apply to particular corporations or a class of corporations, s206G(1), and be subject to conditions or restrictions, s206G(3).
The principles to be applied to a grant of leave
Section 206G does not prescribe the factors to be taken into account by the court in deciding whether to grant leave. In determining the application, the Court is exercising a discretion. It does so by having regard to all relevant factors. Each case is to be determined on its own facts. However the principles to be applied to applications made under s206G and equivalent earlier provisions have been considered in many cases and are, for the most part, well established.
In this Court in In re Seymour [2002] TASSC 85, Cox CJ adopted the following passage from Bowen CJ in Eq in Re Magna Alloys & Research Pty Ltd (1975) 1 ACLR 203 at 205 as enunciating the principles governing this type of application:
"The policy to which s122 gives effect is that a person convicted of an offence of any of the types specified in that section is not to be permitted to act as a director or to take part in the management of a company. The section is not punitive. It is designed to protect the public and to prevent the corporate structure from being used to the financial detriment of investors, shareholders, creditors and persons dealing with the company. In its operation it is calculated to act as a safeguard against the corporate structure being used by individuals in a manner which is contrary to proper commercial standards.
The court is given jurisdiction to grant leave to a person, notwithstanding the prohibition, to act as a director or to take part in the management of a company, but an applicant who comes seeking leave bears the onus of establishing that the general policy of the legislature laid down in the section ought to be made the subject of an exception in his case (Re Ferrari Furniture Co Pty Ltd[1972] 2 NSWLR 790; Re Magna Alloys & Research Pty Ltd, 18 October 1973, Street CJ, in Eq; Re Macquarie Investments Pty Ltd(1975), 1 ACLR 40; Re Maelor Jones Pty Ltd(1975), 1 ACLR 4).
The court in exercising its discretion will have regard to the nature of the offence of which the applicant has been convicted, the nature of his involvement, and the general character of the applicant, including his conduct in the intervening period since he was removed from the board and from management. Where, as here, the applicant seeks leave to become a director and to take part in the management of particular companies the court will consider the structure of those companies, the nature of their businesses and the interests of their shareholders, creditors and employees. One matter to be considered will be the assessment of any risks to those persons or to the public which may appear to be involved in the applicant's assuming positions on the board or in management."
Lindgren J set out another summary of the relevant principles in Adams v Australian Securities and Investments Commission(2003) 46 ACSR 68 at 71:
"(1) The applicant bears the onus of establishing that the court should make an exception to the legislative policy underlying the prohibition: Re Altim Pty Ltd[1968] 2 NSWR 762 (Altim) at 764 as applied in Re Ferrari Furniture Co Pty Ltd[1972] 2 NSWLR 790 (Ferrari) at 792; Re Macquarie Investments Pty Ltd(1975) 1 ACLR 40 at 42; Re Maelor Jones Pty Ltd(1975) 1 ACLR 4 at 13; Re Magna Alloys and Research Pty Ltd(1975) 1 ACLR 203 at 205; Re Zim Metal Products Pty Ltd (1977) 2 ACLR 553 (Zim) at 555; Inre Marsden(1981) 29 SASR 454 at 460; 6 ACLR 694 at 700 (Marsden); Re Australian Limousin Breeders Society Ltd(1989) 7 ACLC 426 at 429–30; Murray v Australian Securities Commission(1993) 12 ACLC 11 at 13 (Murray); Pace v Australian Securities and Investments Commission(1999) 17 ACLC 1674 at [21] (Pace); Re Seymour[2002] TASSC 85; BC200206122.
(2) That legislative policy is one of protecting the public, not one of punishing the offender: Altim at 764, as applied in Ferrari at 791–2; Zim at 555; Murray at 13; Chew v National Companies and Securities Commission[1985] WAR 337 at 340–1; (1985) 9 ACLR 527 at 529–30 (Chew); Pace at [21]; Re Seymour at 2; Borsboom v Australian Securities Commission (unreported, SC(WA), White J, No COR295 of 1996, 17 January 1997, BC9700022).
(3) Another objective is to deter others from engaging in conduct of the particular kind in question: Chew at 340–1; Zim at 555; Murray v ASC at 13; Pace at [21]; Re Seymour, above, at [6].
(4) A further objective is the more general one of deterring others from abusing the corporate structure to the disadvantage of investors, shareholders and others dealing with a company: Re Marsden above at SASR 459ACLR 699; Zim at 555; Murray at 13; Re Magna Alloys at 205; Pace at [21]; Re Seymour, above, at [6].
(5) The prohibition itself contemplates that there will be hardship to the offender. Therefore hardship to the offender alone is not a persuasive ground for the granting of leave: Chew at 340–1; Re Maelor Jones Pty Ltd(1975) 1 ACLR 4 at 13; Murray at 14.
(6) The court in exercising its discretion will have regard to the nature of the offence of which the applicant has been convicted, the nature of his involvement, and the general character of the applicant, including his conduct in the intervening period since he was removed from the board and from management. Where, as here, the applicant seeks leave to become a director and to take part in the management of particular companies the court will consider the structure of those companies, the nature of their businesses and the interests of their shareholders, creditors and employees. One matter to be considered will be the assessment of any risks to those persons or to the public which may appear to be involved in the applicant's assuming positions on the board or in management, per Bowen CJ in Eq in Re Magna Alloys at 205, followed in Zim at 555–6.
This passage does not purport to be an exhaustive statement of the matters appropriate to be taken into account by the court as relevant to the exercise of its discretion under the section. Clearly, there can be no such exhaustive statement."
In In Duffy, In the Matter of Westgate Ports Ltd (2010) 79 ACSR 267, Gordon J referred at [19] to those and other cases in which the statutory provisions concerning both automatic and court imposed disqualification have been considered.
Mr Gay's background and personal circumstances
Mr Gay is 70 years old. After he left school in Grade 10 he was employed at his father's sawmill. He then managed a different sawmill before, in 1973, taking up the position of manager at the Waverley sawmill of Gunns Brothers. He became timber manager for Gunns Brothers. In the early 1980s he assumed control of the business and purchased some shares in the company. In 1986 a public company, Gunns Limited ("Gunns"), was formed. He was the general manager and director. On 31 July 2002 he was appointed executive chairman. He remained in that position until 2010. In the interim the business expanded and diversified. Its activities were sawmilling, the export of woodchips, management of forestry and horticultural managed investment schemes, construction, retail of hardware and building supplies, and the production and retail of wine. By 2005 Gunns was listed as one of Australia's top 100 companies. At its peak the company employed over 2,000 people.
Prior to his conviction for this offence Mr Gay had not been convicted of any offence. He had been in company management for about 40 years. He produced in evidence, both in support of this application and before Porter J, a large number of testimonials. Porter J found Mr Gay to be "of exemplary character, a man respected and admired by many, with a reputation of honesty and integrity". ASIC does not submit I should come to a different finding. On the material before me, subject of course to the conviction he now has, there is no basis for any different conclusion.
Mr Gay lives in Launceston. He is married to Erica Gay. They have two children, Louise Thirkell-Johnston and Richard Gay, who each have children of their own.
The insider trading
The circumstances of Mr Gay's conviction are fully detailed in the comments on passing sentence of Porter J on 23 August 2013. ASIC does not submit I should make any different factual findings. From those comments I have summarised the facts I see as most salient. The offence relates to Mr Gay's course of conduct in selling shares in Gunns Ltd on 2 and 4 December 2009. In late 2009 he owned about 15 million shares in Gunns. On 2 December 2009 Mr Gay instructed a broker to sell three million Gunns shares at no lower than 90 cents per share. The shares were progressively sold over 2 and 3 December 2009 at the total price of $2,715,617.50. On 4 December 2009 Mr Gay instructed a broker to sell a further 500,000 Gunns shares at not less than 90 cents. 404,178 shares were sold between 4 December and 7 December 2009 for a total of $362,618.63.
At the time of the disposal of the shares Mr Gay was in possession of an October management report detailing the company's financial performance. The report was tabled at the Board meeting on 26 November 2009, and Mr Gay had received the report about a week earlier. The report included information that the revenue of the company was 31.1% below the corresponding 2008 period, the company earnings before interest and tax were 103.2% below the previous corresponding period, and the profit before tax was 139.5% below the previous corresponding period. The content of the management report was inside information, in that it was not generally available and, if it were, a responsible person would expect it to materially affect the price or value of the shares. That is to say, the information may have influenced persons who commonly acquire shares in deciding whether or not to acquire or dispose of them. The company results for the half year to 31 December 2009 were publicly released on 22 February. On the previous day shares in Gunns traded between 84.5 cents and $1.04. On the day of release shares opened at 87.5 cents and closed at 68.5 cents, with a weighted average price for that day of 73.5 cents.
Mr Gay's plea of guilty was on the basis, and involved acceptance, that he ought reasonably to have known that the management report in his possession was inside information. The Crown accepted the plea on the basis that it did not involve an admission that Mr Gay knew, as opposed to "ought reasonably to have known", the information was inside information.
His Honour, in determining the appropriate sentence, took into account all relevant sentencing factors, including those he was required to take into account by s16A of the Crimes Act 1914 (Cth). The Court took into account, in Mr Gay's favour, that:
(a) shortly after October 2008 Mr Gay was diagnosed with prostate cancer with high grade malignancy, the prognosis for which was then poor;
(b) Mr Gay told his accountant in late 2008 he wanted to sell four million Gunns shares to reduce his debt to the ANZ Bank which, at the time, exceeded $14 million;
(c) after some success with initial treatment, a recurrent malignancy was reported to Mr Gay in October 2009. The impact of this news manifested in mood changes, depression and decreased mental acuity. Mr Gay informed his ANZ bank manager in November 2009, before coming into possession of the inside information, of his intention to sell shares to reduce debt, including the debt over his family home;
(d) on or near the day of the 26 November 2009 Board meeting, Mr Gay told the company secretary and at least two other directors of his intention to sell shares to, in light of his health concerns, bring his financial affairs into order. He was not alerted to a restriction on the sale;
(e) the sale of shares was not undertaken in secret and was promptly reported to the ASX;
(f) the sale of shares was not triggered by receiving the information. That is, the trading was not caused by receiving the information but, rather, was motivated by his ill-health. His Honour accepted that the sale of shares was not prompted, even in part, by the inside information. This seems to have been a factor which impacted significantly on his Honour's sentencing discretion.
The Crown asserted that Mr Gay had derived a benefit of $798,798.54 from the commission of the offence. His Honour accepted that Mr Gay avoided a lesser price for the shares as a result of selling when he did, even though the degree of connection between the October figures and the half yearly results was "obscure". However he did not accept that the benefit was the amount asserted by the Crown, and determined that on the material he had he was unable to assess the benefit that Mr Gay received.
The companies for which leave is sought and their structure
JEG Management is the trustee company of the John Gay Family Trust ("the Family Trust"). It is a private company. It has two issued fully paid $1 shares. One share is owned by Mr Gay. The other is owned by Mrs Gay. Until 23 August 2013 Mr Gay was the sole director. As a consequence of his conviction he resigned and his wife was appointed as a director along with their daughter, Mrs Thirkell-Johnston. The beneficiaries of the Family Trust are Mr Gay and his wife, their children and grandchildren, and Mr Gay's brother's children. The company owns shares in Gunns, now of no value. It also owns the shares in Specialty Veneers and the land and buildings at Somerset in Tasmania that are leased to Specialty Veneers. Specialty Veneers owes some money to JEG Management. JEG Management does not otherwise actively trade in shares or property. It does not incur debts to persons outside the Gay family.
Specialty Veneers is also a private company. It was incorporated on 20 July 2010 as Launceston Building Supplies Pty Ltd, before the name was changed on 11 October 2011. The company has 24 fully paid shares, all of which are owned by JEG Management in its capacity as trustee of the Family Trust. On its incorporation the shares of the company were equally held by the Family Trust and another individual. That individual and Mr Gay were the directors. However, on 11 October 2011, that person resigned as a director and transferred his shares to the Family Trust. From 11 October 2011 until his resignation on 23 August 2013, Mr Gay was sole director. On his resignation, Mrs Thirkell-Johnston was appointed as sole director. Mrs Thirkell-Johnston was and remains a part-time employee in the company.
Specialty Veneers conducts the business of manufacture of timber veneers and other timber products for sale domestically and internationally. It operates a sawmill in Somerset in Tasmania and has its head office in Launceston. At the instigation of Mr Gay, the company purchased the business from Gunns in October 2011. Since then the business has diversified. In the eight months ending 30 June 2012 Specialty Veneers' turnover was $1.7 million, with assets of $2.821 million, and liabilities of $2.040 million. In the financial year ending 30 June 2013, Specialty Veneers' turnover was $2.905 million, with assets of $2.506 million, and liabilities of $1.745 million. It employs 21 people, six of whom are employed full-time. All of the employees, apart from Mr Gay and the company's commercial manager, work at the sawmill. The commercial manager, Damon Wells, is primarily responsible for managing the day-to-day operations of the business, including financial reporting, performance analysis, tax, and regulatory compliance. He reported to Mr Gay about those matters. Three production employees are managers of the day-to-day business on site.
Until his disqualification Mr Gay had overall responsibility for and control of the veneer business. His primary focus was on the strategic direction of the business, negotiating sales contracts with customers, and training employees at the mill in the manufacturing process. He has substantial experience in the wood manufacture business which he has built up over more than 50 years in the sawmill industry, including about 25 years as director and general manager of Gunns. He claims that without his expertise the business of Specialty Veneers would be much less successful. He has contacts in Australia and overseas. He says that it is his network which drives sales and opportunities for Specialty Veneers and believes that sales will decrease substantially if he is not able to manage the company. He also believes that Specialty Veneers may find it difficult to renew or obtain finance if he is not a director.
As may be expected, the other shareholder of JEG Management, Mr Gay's wife, supports his application. She wants him to be appointed as a director of both companies and believes that his experience and expertise is essential for their operation. Mrs Thirkell-Johnston supports the application. She believes that her father's experience and expertise is essential to the management of Specialty Veneers and JEG Management and wants him to be appointed as a director. She and her children are beneficiaries of the family trust. Richard Gay and his children are beneficiaries of the family trust. He has written a letter supporting the application.
If leave were granted to Mr Gay to manage the corporations he would be appointed a director of both unless I impose a condition to the contrary. Mrs Thirkell-Johnston would remain a director of Specialty Veneers.
The nature and seriousness of the offence
The legislative provisions prohibiting insider trading are intended to protect the integrity of the securities market by ensuring equal access to price sensitive information for those who may buy and sell securities. Unequal opportunity to obtain information is unfair and reduces the confidence of the investing public in the market and the incentive to invest; R v Mansfield (2011) 251 FLR 286. To be executive chairman of a public company and, in contemplation of a sale of shares of considerable magnitude, not know or find out that the information he had was inside information and affected his ability to sell the shares, displays a considerable departure from an appropriate standard of corporate conduct.
However, Mr Gay's offence is to be contrasted with corporate offences involving deliberate dishonesty or knowing wrongdoing. His conduct involved nothing in the nature of dishonesty or other moral wrongdoing. His plea of guilty was accepted by the Crown and the Court on the basis that he did not act knowingly, but rather acted when he ought reasonably to have known that he was in possession of inside information. Thus, Porter J characterised his offence as having "several key features which served to distinguish it from the more usual case of insider trading, and to put it in a less serious category than many which come before the courts".
Mr Gay's general character
I would readily accept that Mr Gay was, until the commission of this offence, a person with an unblemished record and of good general character. Living in this State I cannot help but be aware that, prior to his resignation as executive chairman, his management of Gunns Ltd was controversial. Those controversies are of a commercial, policy or political nature, and are not relevant to the questions this Court is required to determine.
Those convicted of offences sometimes referred to as "white collar crime" most commonly have an unblemished record. It often is their good character that places them in a position to offend; Australian Securities and Investments Commission v Vizard (2005) 219 ALR 714 at [37]. Nevertheless Mr Gay's good character, his commercial and corporate record until this offence, the absence of any prior convictions, and the absence of dishonesty in the offence that led to his disqualification, are all factors which favour the application for leave.
The interests of shareholders, creditors and employees of Specialty Veneers and JEG Management
I find that Mr Gay's skill and expertise in the management of Specialty Veneers cannot readily be replaced. He has played an important role in the establishment and development of the business it conducts and his ability to continue to manage the company is an important factor in its ongoing commercial performance. ASIC submits that Mr Gay's role in both companies can be adequately performed by others, in the case of the trustee company by his wife, and in the case of Specialty Veneers by his daughter and the commercial manager Damon Wells. ASIC suggests that the benefit of Mr Gay's knowledge, skill and experience would not be lost to the companies because he could be engaged as a consultant or employee to the companies. I do not accept that submission for two reasons:
· Mr Gay's experience and expertise in the timber industry would not be replaced by his daughter and Mr Wells. Before his disqualification Mr Gay was the driving force behind Specialty Veneers. He was the person responsible for determining the direction of the company, selection and purchase of materials, mostly from overseas, and identification and development of markets and sales. Such decisions involve exposing the company to financial risk and require skill and experience. Mrs Thirkell-Johnston has limited experience in the company and in the industry. Before her father's disqualification she worked part-time in office and administrative roles. Mr Wells has been an employee of the company for about two years. His qualifications and expertise are principally in the area of financial administration and, to the extent that his role required decisions about the commercial management and strategic direction of Specialty Veneers, he was subject to the guidance and supervision of Mr Gay. It is true that from the time the disqualification took effect the company has not had the benefit of Mr Gay's input. However the evidence leaves me with the strong impression that in the seven months or so since then the company has been managed on a day-to-day basis and its development has been on hold;
· I do not accept that, without a grant of leave, Mr Gay's expertise and experience are available to the companies, at least at the level required, as an employee or consultant. The prohibition expressed in s206A is in very broad terms. Mr Gay would commit an offence if he were to:
(a)make, or participate in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or
(b)exercise the capacity to affect significantly the corporation's financial standing; or
(c)communicate instructions or wishes (other than advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation) to the directors of the corporation:
(i) knowing that the directors are accustomed to act in accordance with the person's instructions or wishes; or
(ii) intending that the directors will act in accordance with those instructions or wishes.
Section 206A reflects the broad concept of management adopted by Ormiston J in Commissioner for Corporate Affairs v Bracht [1989] VR 821 when considering s227(1) of the Companies (Victoria) Code. As was pointed out by Young J in Cullen v Corporate Affairs Commission(NSW) (1988) 14 ACLR 789 at 794, where there is any doubt, the prudent course for a disqualified person is to apply for leave. The size of the companies is a relevant factor. These are relatively small companies. The close relationships between and the respective financial interests of those involved lead me to conclude that advice from Mr Gay to his wife, his daughter or Mr Wells about company matters at the level required would very likely constitute "management of the company" whether Mr Gay is an employee or consultant or not. The circumstances of this case are quite different than those dealt with by Middleton J in Nenna v ASIC (2011) 198 FCR 32; (2011) 284 ALR 386 in which his Honour considered an application by a person wishing to provide consultancy services through a corporate vehicle. ASIC submits that advice could be given by Mr Gay in the proper performance of functions attaching to his professional capacity or business relationship with the directors or the corporation, and thus within the exception in par(c) of s206A. I doubt that exception is intended to cover these circumstances and applies instead to independent consultants or business associates. In any event, the exception does not save Mr Gay from the operation of s206A(a) and (b). It is inescapable in my view that Mr Gay's advice would be required concerning corporate decisions about, in the case of Specialty Veneers, the purchase of materials, the sale of products, the purchase of significant plant and equipment, or the development and exploitation of markets. Contribution of his knowledge, skill and experience would constitute participation in decisions that affect at least a substantial part of the business, and the exercise of the capacity to affect significantly the corporations' financial standing.
Because of the close relationship between Specialty Veneers and JEG Management, similar considerations apply to both companies. Mr Gay's wife obviously relies heavily on him for guidance and advice about trustee investments. I infer that his son and daughter do so as well. Because the principal assets of JEG Management are the shares in and property occupied by Specialty Veneers, it would be entirely artificial for leave to be granted to manage one company but not the other.
I am not satisfied that, were Mr Gay unable to manage the companies, they would inevitably fail or collapse, although I am satisfied that failure or collapse is a possible result. However in the case of an application for grant of leave for particular corporations it is not necessary for the applicant to demonstrate that the grant of leave is "necessary for the survival of the companies"; Re Zim Metal Products Pty Ltd (1977) 2 ACLR 553; Re Ryan [2014] QSC 18 at [49]. I regard it as likely that the viability and commercial performance of the Specialty Veneers business would be adversely affected were Mr Gay unable to manage, and that his management would benefit the company. The interests of the companies, the 21 employees of Specialty Veneers, and the beneficiaries of the family trust are relevant considerations; Hosken v Australian Securities and Investments Commission [1998] TASSC 101.
The principal grounds for ASIC's opposition – protection of the public, deterrence and punishment
I next deal with the particular factors upon which ASIC's opposition to the application is primarily focused. ASIC contends that the grant of leave would:
(a) undermine confidence in the Court's upholding of corporate standards;
(b) insufficiently protect the public; and
(c) undermine the punishment and general deterrent effect of the sentence imposed by this Court for Mr Gay's offence, particularly when the disqualification resulting from conviction was expressly referred to by his Honour as a factor relevant to his sentence.
The factors identified by ASIC do not raise separate questions or criteria that must be satisfied by Mr Gay. They are factors to be considered and balanced with all other factors for and against the grant of leave.
Confidence in the Court's upholding of corporate standards is a relevant consideration; Re Zim Metal Products Pty Ltd (above); Nenna v Australian Securities and Investments Commission (above). In Re Zim (above), McInerney J said at 558:
"I have considered whether I should grant leave to the applicants to become directors. I have come to the conclusion I should not. The policy of the legislation is that, prima facie, the persons convicted, the applicants, should be excluded from being directors. The possible harm which might occur to the company and to the applicants if they are excluded from management is, in my view, much more real than any harm that may flow if they are not allowed to become directors. There is something to be said, I think, for the view that public morality is better vindicated if the applicants continue to be excluded from being directors. Creditors and persons dealing with the company who now know or may hereafter come to know of the convictions of the applicants, may take the view that the court views the convictions as matters of no concern, if the court allows an applicant to be reinstated as director in a case where, in my view, there is no real need for that appointment."
The consideration identified by McInerney J is to be taken into account as part of the balancing exercise of the Court's discretion. In this case, it does not point strongly to refusal of the application. I do not think that there is a great risk that others will perceive that the Court considers Mr Gay's conviction of no real concern. Cox CJ came to the same conclusion in Re Seymour [2002] TASSC 85. In re Zim, McInerney J did not refuse the application although the applicants in that case had been convicted of a non-corporate offence of dishonesty. He granted leave for the former directors to manage particular companies. His Honour was primarily concerned about whether the applicants ought be permitted to be directors when no real need to grant leave in those terms had been demonstrated.
I next deal with protection of the public and personal deterrence. The primary legislative policy is one of protecting the public, not one of punishing the offender; Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80 at [56]; Australian Securities and Investments Commission v Vizard (above) at [35] and Rich v Australian Securities and Investments Commission (2004) 220 CLR 129 at [41] – [43]. Personal deterrence is also a relevant consideration. The grant of leave sought in this case is limited to two private companies. ASIC submits it should nevertheless be refused. It contends that even though neither company is listed, s206B is designed to protect the public from any type of offending that may arise from the person's involvement with the management of corporations, not just the type of offending which led to disqualification. In Adler at [85] Santow J explained that the statutory protective purpose of disqualification is not to be confined to public companies. His Honour referred to the need to protect those who may "unwittingly deal with companies run by people who are not suitable to be involved in the management of companies" when considering disqualification of a person he found had engaged in a pattern of serious and sustained dishonesty to advance his own interests at the expense of companies of which he was a director, and then lied to attempt to cover it up. Similarly, in Carey, In the matter of Carey [2011] FCA 235, Barker J explained at [32] the function of s206G as protection of the public from the activities of the "dishonest, unscrupulous, untrustworthy, irresponsible or merely incompetent manager".
Such considerations do not carry much weight in this case. ASIC properly concedes that personal deterrence is not a relevant consideration for Mr Gay. Porter J found no appreciable risk of reoffending. I respectfully agree. That remains so, in my view, even if leave is granted. Having regard to the nature and shareholding of the companies for which the grant of leave is sought, Mr Gay's return to management would, in my assessment, expose the shareholders and employees of the companies to no risk of improper or unlawful corporate conduct. I am so satisfied even though, taking into account the structure of the companies and the relationships between Mr Gay and the other shareholders and officers, there is little doubt that he would exercise substantial control of these two companies if granted leave. Nor do I think there is any appreciable risk to creditors of the company that would exist as a result of Mr Gay's participation in management. He has been found guilty of no conduct that suggests that his participation in management would expose creditors to any risk. His commercial experience suggests strongly to the contrary. Moreover I regard Mr Gay's expertise and experience in industry as being advantageous to the interests of the employees of Specialty Veneers. As I have already pointed out, their interests are a relevant consideration. Because these companies are small private companies there is no risk of a repetition of the type of conduct that led to Mr Gay's conviction. I do not regard Mr Gay's state of health as adding to the risk his management may pose.
General deterrence and punishment
Porter J recognised when sentencing Mr Gay that general deterrence was a weighty sentencing factor. His Honour pointed out that there is a strong public interest in seeking to discourage insider trading activities amongst company directors, officers and those who are involved in or closely associated with the stock market, and that there were sound policy considerations for not requiring a causal link between trading and the possession of inside information.
In cases involving imposition of disqualification by a court under ss206C, 206D, or 206E, a court will take into account that one objective of such an order is general deterrence. Adler; Vizard; Nenna; Australian Securities and Investment Commission v Beekink (2007) 238 ALR 595 and Australian Securities and Investment Commission v Healey (No 2) (2011) 196 FCR 430 are all examples of such cases. Except for Nenna, they were not cases concerning the grant of leave under s206G. In each case the court considered whether a disqualification order should be made and if so for how long, taking into account why such orders are made and the purpose to be served by such an order. A disqualification order may be made in combination with other orders made by the court, including a pecuniary penalty.
Cases involving an application for the grant of leave to manage a corporation following automatic disqualification for an offence involve a similar but different question. Because the disqualification is automatic a legislative intention to achieve all of the objectives of disqualification, including general deterrence, can be assumed. It must also be firmly borne in mind that the legislature has, by s206G, expressly contemplated and provided for the grant of leave in appropriate cases. The Court is thus required to consider whether, and if so to what extent, the grant of leave in the case before it would detract from the general deterrent force of disqualification. The result of that consideration is one factor in the exercise of discretion under s206G. In considering the issue of general deterrence the Court may take into account the sentence imposed for the offence leading to the disqualification.
Similar considerations arise when considering the effect of disqualification as punishment and retribution. As he was required to do by s16A of the Crimes Act 1914, Porter J took into account whether the sentence he was to impose was adequate punishment for the offender. In the course of considering that question his Honour said:
"More readily ascertainable is the effect of conviction, the appropriateness of which is not in dispute. Upon conviction, s206B(1)(b) of the Corporations Act will operate to disqualify the offender from managing corporations. This in itself is a penalty: Rich v ASIC (2004) 220 CLR 129 at [37]."
Earlier in his comments Porter J noted that Mr Gay was "running a small business making timber veneers". ASIC submits that, when read together, these passages demonstrate that his Honour specifically contemplated that the effect of conviction was disqualification from running the veneer business and that his Honour regarded this as appropriate. I do not accept that submission. I find myself unable to read his Honour's remarks in that way. His Honour was referring to the appropriateness of conviction, not the appropriateness of disqualification. He had no cause to remark on the appropriateness of disqualification because on conviction it was automatic and thus not an issue he was required to consider or make an order about. The prospect of a later application for leave was drawn to his Honour's attention but his Honour made no reference to it in his comments. Moreover, the Court's description of the veneer business was remote from his reference to "managing corporations" and did not include any reference to whether the veneer business was conducted by a corporation or not.
Nevertheless, notwithstanding the statements in In re Magna Alloys, Adams and Re Duffy that the legislative policy is one of protecting the public, not one of punishing the offender, more recent authority suggests that one of the purposes of disqualification is punitive: see the reasons of the majority in Rich at [37], and particularly the reasons of McHugh J at [48] – [58]. It is to be borne in mind that Rich did not directly concern the imposition of an automatic or court ordered disqualification. The court considered whether proceedings that may lead to an order for disqualification under the Corporations Act were proceedings seeking a penalty or forfeiture, thus entitling the person in question to rely on the privilege against exposure. The decision has, however, been applied in subsequent cases considering the purpose of disqualification orders; for example Vizard at [35], and the judgments of Middleton J in Nenna at [23] and ASIC v Healey at [109]. In the context of an application under s206G, the question of whether a grant of leave may detract from the punitive effect of disqualification, taken with the sentence imposed for the offence, is but one of the factors relevant to the exercise of the discretion.
In the circumstances of this case, the total effect of the sanctions to which Mr Gay is subject should put others on notice that they will be punished if they acquire or dispose of shares when they ought reasonably to have known that they are in possession of inside information. It is not just the disqualification that is to be taken into account. The sanctions should be adequate punishment for the offence. I do not consider that the grant of leave to Mr Gay to manage two private companies undermines the deterrent or punitive effect of the sanctions to a significant extent. Mr Gay was fined $50,000. He has been made subject to the formal expression of his wrong by imposition of a criminal conviction. He has suffered the condemnation, shame and loss of reputation which accompanies a prosecution of this nature. He will still be disqualified from managing other companies. Whilst there is no evidence that Mr Gay had any immediate intention to participate in the management of any other companies, private or public, it remained a possibility for a person with his business skills and experience.
Mr Gay has been disqualified since 23 August 2013, a period approaching eight months or so. It is not a lengthy period, but there is nothing in the legislation limiting the grant of leave by time. The exercise of the discretion depends on the facts of each case. In some cases leave will be appropriate after a short time. In other cases it will not.
The Commonwealth Director of Public Prosecutions intends to apply for a pecuniary penalty order under s116 of the Proceeds of Crime Act 2002 (Cth). A court must make such an order if satisfied that the person has derived a benefit from the commission of the offence; s116. A court passing sentence must not have regard to any pecuniary penalty order that relates to the offence: Proceeds of Crime Act, s320(d). However it was submitted by counsel for Mr Gay that such an order, if made, is relevant to the grant of leave because it amounts to another element of the punishment to which Mr Gay may be subject. The name of the order itself suggests some "penalty" although the intention of such provisions is to ensure that persons do not benefit from wrongdoing. It seems to me that there is some force in ASIC's submission that it cannot be a penalty to return a benefit unlawfully obtained. That Mr Gay may be subject to such proceedings is relevant to the extent that it adds to considerations of general deterrence. The prospect of proceedings for such an order is a disincentive to offending. Beyond those considerations I find it unnecessary to consider the matter further because I am satisfied it is appropriate to grant conditional leave whether or not a pecuniary penalty order is applied for or made.
Summary, conclusion and orders
Taking into account all of the considerations to which I have referred, I am satisfied that Mr Gay has discharged the onus of demonstrating that leave should be granted to him to manage the two companies that are the subject of this application, JEG Management and Specialty Veneers. Both corporations are relatively small private companies owned by him and his family. JEG Management is the trustee of the Gay Family Trust, the only assets of which are the shares in Specialty Veneers and the land on which its veneer business is conducted. Mr Gay is the driving force behind the veneer business. There is no appreciable risk that he will reoffend. His management of the companies poses no risk to the public and to the interests of the shareholders, creditors and the 21 employees of the company. To the contrary, without the benefit of his experience, knowledge and expertise there is a prospect that their interests may be adversely affected. I am particularly mindful of the interests of the employees. His input will not be available, in any sufficient way, without a grant of leave.
Insider trading is a serious offence. Mr Gay's offence was serious. It requires a sanction that achieves the purposes of protecting the public, deterring others from committing such offences and adequately punishing the offender. Even so, Mr Gay's offence had several key features which served to distinguish it from the more usual cases of insider trading, and put it in a less serious category than many which come before the courts. His offence did not involve dishonest or deliberate conduct. I have concluded that the grant of leave, limited as it is to the two companies of the nature and structure I have described, will not unduly undermine the protective, deterrent and punitive objects that the legislature intended by the automatic disqualification provision. Mr Gay was made subject to a criminal conviction and fine. He has suffered public condemnation and loss of reputation. He will remain disqualified from managing any other company.
Although I am satisfied that the risk of future corporate misconduct is very low it would be prudent to impose a condition that Mr Gay is not sole director of either company. Thus the grant of leave for Mr Gay to manage both companies will be conditional upon there being, if he is appointed a director, at least one other director in each case. The evidence suggests that this is intended in any event.
The application is granted. Subject to the submissions of the parties I propose an order in the following terms:
Leave is granted to John Eugene Gay to manage the corporations Specialty Veneers Pty Ltd ACN 145 313 828 and JEG Management Pty Ltd ACN 009 522 570 subject to the condition that, in the event that John Eugene Gay becomes a director of either corporation, there be at least one other director of that corporation.
On 16 April 2014 I made the following order:
Leave is granted to John Eugene Gay to manage the corporations Specialty Veneers Pty Ltd ACN 145 313 828 and JEG Management Pty Ltd ACN 009 522 570 subject to the condition that, in the event that John Eugene Gay becomes a director of either corporation, for the duration of Mr Gay's five-year period of disqualification, there be at least one other director of that corporation.
I make no order as to costs.
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