Kardas v Australian Securities Commission
[1998] FCA 1381
•29 OCTOBER 1998
FEDERAL COURT OF AUSTRALIA
ADMINISTRATIVE LAW – review of decision by ASC prohibiting applicant from managing a corporation – whether reasons for decision confusing and ambiguous – failure to give legally acceptable reasons in relation to finding that an asset valuation was misstated – whether finding of “gross incompetence” or similar conduct a prerequisite to disqualification – whether power to prohibit conditional on exercise within a reasonable time of liquidator’s report
CORPORATIONS – review of decision by ASC prohibiting applicant from managing a corporation – Corporations Law s 600 – whether reasons for decision confusing and ambiguous – failure to give legally acceptable reasons in relation to finding that an asset valuation was misstated – whether finding of “gross incompetence” or similar conduct a prerequisite to disqualification – whether power to prohibit conditional on exercise within a reasonable time of liquidator’s report
Corporations Law s 600
Cullen v Corporate Affairs Commission (1989) 7 ACLC 121 followed
Ansett Transport Industries (Operations) Pty Limited v Wraith (1983) 48 ALR 500 discussed
Minister for Immigration and Ethnic Affairs v Wu Shan Liang (1996) 185 CLR 259 applied
Re Sheslow and Australian Securities Commission (1994) 20 AAR 161 disapproved
Laycock v Forbes (1997) 15 ACLC 1814 at 1821 followed
Blunt v Corporate Affairs Commission (No.2) (1988) 6 ACLC 1077 mentioned
Re Dawson Print Group Ltd [1987] 3 BCLC 601 mentioned
Dwyer v National Companies and Securities Commission (No.2) (1989) 7 ACLC 743 mentioned
Caswell v Powell Duffryn Associated Collieries Ltd [1940] AC 152 at 175 applied
Re Delonga and the Australian Securities Commission (1994) 15 ACSR 450 mentioned
Halliday v Commissioner of Corporate Affairs (Supreme Court of Victoria, unreported, 14 May 1990) mentioned
Koon Wing Lau v Calwell (1949) 80 CLR 533 applied
Giris Pty Ltd v Commissioner of Taxation (1969) 119 CLR 365 applied
Re Federal Commissioner of Taxation: ex parte Australena Investments Pty Ltd (1983) 50 ALR 577 applied
Repatriation Commission v Morris (1997) 26 AAR 284 at 289 applied
EMMANUEL SPIROS KARDAS v AUSTRALIAN SECURITIES COMMISSION
NO. VG 3251 OF 1997
HEEREY J
29 OCTOBER 1998
MELBOURNE
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 3251 of 1997
BETWEEN:
EMMANUEL SPIROS KARDAS
APPLICANTAND:
AUSTRALIAN SECURITIES COMMISSION
RESPONDENTJUDGE:
HEEREY J
DATE OF ORDER:
29 OCTOBER 1998
WHERE MADE:
MELBOURNE
THE COURT ORDERS THAT:
The decision of the Delegate of the respondent made on 30 July 1997 be set aside.
The respondent pay the costs of the applicant, including reserved costs.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
VG 3251 of 1997
BETWEEN:
EMMANUEL SPIROS KARDAS
APPLICANTAND:
AUSTRALIAN SECURITIES COMMISSION
RESPONDENT
JUDGE:
HEEREY J
DATE:
29 OCTOBER 1998
PLACE:
MELBOURNE
REASONS FOR JUDGMENT
Introduction
The applicant Mr Emmanuel Kardas was a director of two companies, Supply Logistics Pty Ltd and Infobank International Pty Ltd, each of which went into liquidation. The respondent Australian Securities Commission (the Commission) served on Mr Kardas a notice under s 600(3) of the Corporations Law prohibiting him from managing a corporation for a period of two years. Mr Kardas seeks a review of that decision under the Administrative Decisions (Judicial Review) Act 1974 (Cth) (AD(JR) Act).
Another director of the companies, Mrs Chryssa Kardas, was disqualified for one year. She has taken no part in these proceedings.
Corporations Law s 600
Section 600(2) provides:
“The Commission may give to a person who is a relevant person in relation to 2 or more relevant bodies that are, at the time of service, section 600 bodies a notice in writing requiring the person to show cause why the Commission should not serve on the person a notice under subsection (3).”
A “relevant person” is a person who was a director of a relevant body at any time during the 12 months prior to the beginning of its winding up: s 600(1)(c). A “relevant body” is, for present purposes, a corporation, including a corporation that is being wound up: s 9. A relevant body is a “section 600 body” if at any time within the previous seven years a liquidator of the body has reported under s 533(1) or a previous corresponding enactment with respect to a matter relating to the ability of the body to pay its unsecured creditors: s 600. Section 533(1) requires a liquidator to report to the Commission if it becomes apparent to the liquidator in the course of the winding up that (a) a past or present officer may have been guilty of an offence in relation to the company, (b) a person who has taken part in the formation, promotion, administration, management or winding up of the company may have misapplied money or property of the company or been guilty of any negligence, default, breach of duty or breach of trust in relation to the company, or (c) the company may be unable to pay its unsecured creditors more than 50 cents in the dollar.
Returning to s 600, subs (3) provides:
“Where the Commission:
(a) has served on a person a notice under subsection (2); and
(b)has given the person an opportunity of being heard in relation to the matter;
the Commission shall, unless it is satisfied that it is not appropriate to do so, serve on the person a notice in writing prohibiting the person, for such period not exceeding 5 years as is specified in the notice, from managing a corporation.”
Supply Logistics and Infobank
Commencing in 1979, Supply Logistics carried on the business of information technology consulting, specialising in computer databases and cataloguing systems. Mr Kardas was its managing director. On 5 August 1988 its assets were transferred to Infobank, which was also controlled by Mr Kardas. Supply Logistics went into liquidation on 30 November 1988. The same fate befell Infobank on 27 June 1991.
On 25 January 1990 the liquidator of Supply Logistics provided to the Commission a report under s 418 of the Companies (Victoria) Code, the predecessor of s 533(1) of the Corporations Law. The report indicated that the company may be unable to pay its unsecured creditors more than 50 cents in the dollar. The liquidator believed offences may have occurred constituted by breach of directors’ duties in relation to the transfer of assets to Infobank for $4.9 million and also insolvent trading.
On 1 December 1993 the liquidator of Infobank reported to the Commission under s 533. The liquidator stated that the company remained unable to pay any dividend to its unsecured creditors.
Mr Kardas later became a director of a company called Supply Resources International Pty Ltd. Subject to certain undertakings and conditions, Mr Kardas was on 27 October 1997 granted leave to manage that company until the hearing and determination of the present application.
Notice to Show Cause
On 17 May 1995 the Commission served a s 600(2) notice to show cause on Mr Kardas. Attached to the notice were schedules in relation to each company setting out “areas of concern to be addressed by Mr Emanuel [sic] Kardas”. They were as follows:
“ [Supply Logistics]
1.That the Company under your management will be unable to pay its unsecured creditors more than fifty cents in the dollar.
2.That the Report as to Affairs of the company disclosed a deficiency of assets over liabilities of $939,145.37.
3.That the company under your management failed to remit Payroll Taxation in the amount of $24,362.93, ATO Group Tax of $238,434.27, ATO Fringe Benefits Tax of $9000.
4.That the company under your management failed to lodge an annual return for the years 1986 and 1988 in contravention of Section 263 of the Companies (Victoria) Code.
5.That the company under your management transferred assets valued at $4.9 million to Infobank International Pty Ltd. This allegedly breached the duties of a director to act honestly, exercise a reasonable degree of care and diligence and not to make improper use of their position or improper use of information obtained by virtue of their position. Such alleged breaches contravene Sections 229(1), 229(2), 229(3), 229(4) respectively of the Companies (Victoria) Code.
6.That the company under your management transferred assets valued at $4.9 million to Infobank International Pty Ltd. This allegedly also breached Section 554(c)(i) involving the concealment or removal of any property of the company greater than $100 in value.
7.That it has been alleged that the company continued to trade while insolvent contrary to the provisions of section 556 of the Companies (Victoria) Code.”
“[Infobank]
1.That the company under your management will be unable to pay its unsecured creditors more than fifty cents in the dollar.
2.That the Report as to Affairs of the company disclosed a deficiency of assets over liabilities of $3,211,985.
3.That the company under your management failed to remit $49,462.00 to the ATO.
4.That the company under your management failed to lodge an annual return for the years 1988, 1989 and 1990 in contravention of Section 263 of the Companies (Victoria) Code.”
Hearing
Following discussions between solicitors for Mr Kardas and the Commission it was agreed that Mr Kardas would avail himself of his rights to attend a hearing, to be represented by counsel and to make submissions. The hearing before a delegate of the Commission commenced on 16 April 1996 and continued until 18 April. It resumed on 26 June and was adjourned to 14 January 1997. There was a further adjournment to 27 February 1997.
In some way which does not clearly emerge from the evidence it became known to the solicitors for Mr Kardas that the Delegate was proposing to impose some disqualification. Towards the end of 1996 correspondence commenced between the Commission and the solicitors for Mr Kardas in which the latter were asserting a right to be provided with written reasons of the Delegate prior to submissions being made on behalf of Mr Kardas as to the length of any disqualification. The Commission wrote to the solicitors on 29 January 1997 refusing to give reasons. But apparently enclosed with that letter was a document entitled “Notice of Standing on the Concerns”. The document was in the following terms:
“Notice of Standing on the Concerns
I refer to the attached Notice to Show Cause (“the Notice”) issued by M H Broder and dated 17 May 1995. For all the concerns given in annexures to the Notice I am reasonably satisfied that the explanations provided do not indicate matters of deliberate dishonesty or fraud. Accordingly it would appear a maximum period of prohibition is not required.
Infobank International Pty Ltd ACN 006 849 538 (‘Infobank International’)
For the concerns numbered one to four the explanations given are insufficient to persuade me that they ought to be disregarded
Supply Logistics Pty Ltd ACN 005 517 608 (‘Supply Logistics’)
I am not reasonably persuaded that the concerns numbered one to four inclusive and seven ought to be dismissed.
The explanations given for the concerns numbered five and six are insufficient to persuade me that they are without some substance. Following submissions I am not satisfied the concerns as drawn are accurate. I am persuaded that directors had reasonable grounds for determining the quantum of consideration given for the assets which were sold (and referred to under the concerns numbered five and six for Supply Logistics).
Further Concerns:
Infobank InternationalThe submissions made initially about the concerns for Supply Logistics and numbered five and six gave rise to concerns that directors had permitted the assets acquired by Infobank International to be recorded in the accounts as valued at cost when that was not so and that the accounts did not correctly represent the true financial position.
The explanations provided were insufficient to persuade me that these concerns ought to be disregard.
Supply Resources International Pty Ltd ACN 006 123 655 (“Supply Resources”)
The explanations given by Mr Kardas about anomalies apparent with the 1995 Annual Return and the evidence given explaining its financial position, raised concerns that as a director, Mr Kardas was unable to demonstrate adequate knowledge of his corporation’s financial position and permitted accounts which were incorrect.
The explanations presented were insufficient to persuade me that I ought to dismiss such concerns.”
Decision
On 30 July 1997 the Delegate issued a notice of prohibition. The solicitors for Mr Kardas sought under s 13 of the AD(JR) Act the Delegate’s reasons. On 5 August the Commission served on the solicitors a document “Decision and Summary of Finding and Principal Reasons”. For present purposes the relevant part of the document is as follows:
“ DECISION AND SUMMARY OF FINDINGS AND PRINCIPAL
REASONS…
3.3Directors attributed Supply Logistics’ failure to undercapitalisation and an inability to obtain sufficient finance. In the liquidator’s view heavy development costs, insufficient revenue to cover operating costs and poor management also contributed to it’s [sic] insolvency.
34.Infobank’s liquidator reported that its failure appeared due to the Victorian Economic Development Corporation (“VEDC”) withdrawing from the company and the consequent loss of overseas investors.
3.5The collapse of the two corporations left deficiencies of more than $4 million.
SUBSTANTIVE ISSUES
4.1The substantive concerns were provided with each Notice to Show Cause (“Notice”). Prior to hearing submissions about a period of prohibition, Notice of the Standing of the Concerns (“Notice of Standing”) was provided. Copies of the notices are attached.
4.2A substantial concern for Supply Logistics was that assets valued at $4.9 million had been transferred to Infobank contrary to director’s [sic] statutory duties. Following submissions I was persuaded that directors had reasonable grounds for the consideration given. In my view, these assets were then recorded by Infobank as being valued at cost when that was not so.
4.3The Notice of Standing also advised that for Supply Resources International Pty Ltd ACN 006 123 655 (“Supply Resources”) a further concern arose that E Kardas was unable to demonstrate adequate knowledge of the corporation’s financial position.
Deficiencies, Failures to Pay Crown and Other Debts, Directors[’] Duties, and Trading Whilst Insolvent
4.4The materials describe matters, including damage arising due to the earthquake in Newcastle, NSW which are all events beyond directors control. For many of the concerns over which directors ought to have had influence, the explanations leave open conclusions that the companies traded when insolvent.
4.5The corporations had substantial deficiencies for extended periods prior to their liquidation and were highly reliant upon borrowings to support operations continuing. There were prolonged failures to pay Group Taxes.
4.6Having regard to the principals [sic] given in authorities (including Dwyer v. NCSC (2) (1989) 7 ACLC 743 at 746, Kinsela & Anor v Russell Kinsela Pty Ltd (In Liq) (1986) 4 ACLC 215; Nicholson & Ors v Permakraft (N.Z.) Ltd (In Liq) (1985) 3 ACLC 453, Jeffree v National Companies and Securities Commission (1989) 7 ACLC 556 and Cullen and Corporate Affairs Commission (NSW) (1989) 7 ACLC 121) I am not satisfied with the explanations given.
Duty to Submit Annual Returns
4.7Directors are required to take all reasonable steps to keep proper records (see Australian Securities Commission v Fairlie (1993) 12 ACLC 660 and Delonga and ASC (1995) 12 ACLC 246 at page 245) and to assist liquidators.
4.8The explanations leave it open to conclude that insufficient attention was given to ensuring these obligations were met.
Duty to Ensure Accounts are True and Fair
4.9Infobank’s financial statements for the year ending 30 June 1989 recorded its major asset, a cataloguing database, as costing $4,306,500. The consideration paid was much [sic] effectively $103,000. E Kardas gave evidence that he obtained extensive expert advice upon the valuations given in the accounts. It remains open to conclude that the basis for the valuation was misstated.
4.10E Kardas also gave evidence regarding Supply Resources 1995 Annual Return. His explanations referred to signing off reports where key financial information was incorrect and to describing the company’s financial position. I was not satisfied he demonstrated an appropriate understanding of the accounts.
…
CONCLUSIONS
7.1I would need to find that each of the Kardas’ displayed the attributes referred to in Re Delonga and the Australian Securities Commission (1994) 15 ACSR 450 (at pages 458 and 459) to be satisfied that a notice of prohibition should not be issued. The concerns which remain are serious.
7.2I am bound to decide the Kardas’ fitness based on the materials before me. The onus is upon the affected person to produce materials to persuade the Delegate that an order of prohibition is not appropriate (see Cullen v Corporate Affairs Commission (1989) 7 ACLC 121 at page 124 and Re Delonga and The Australian Securities Commission (1994) 15 ACSR 450 at pages 456 and 457).
7.3I am not persuaded that the concerns have been adequately explained.
THE NATURE OF A DISQUALIFICATION DECISION
8.1Section 600(3) requires [a] decision about whether or not a period of disqualification is appropriate. In determining such matters consideration is given to both the person’s present circumstances and their likely suitability to manage a corporation. It is not open to the ASC to provide leave to manage only certain corporations or to otherwise impose conditions. Decision may contemplate that a person might manage corporations ranging from a small proprietary concern to a listed public company.
8.2ASC records for C Kardas do not record her as being a director of any corporation in Australia.
8.4E Kardas’ present circumstances are that he is one of two directors of Supply Resources. He is the only Australian director and manages its operations. The corporation reported that at 30 November 1996 it had assets $133.8 Million and borrowings of $133.3 million.
8.5In my view, given the present circumstances of Supply Resources, my task requires the highest assurance that the previous conduct is unlikely to recur.
PERIOD OF PROHIBITION
9.0The question of what period of prohibition is appropriate was considered in Cullen’s case supra at page 128. Segregating the Kardas’ from company management is to protect the public. It was put that E Kardas’ livelihood would be particularly affected if disqualified. This is a factor I must give regard to.
9.1I am reasonably satisfied that fraud or deliberate dishonesty was not present. A maximum period of prohibition is not appropriate.
9.2While external factors affected the corporate failures, management also contributed to the deficiencies and the concerns which remain are serious.
9.3I also note that in attracting $1.33 million of foreign funds any benefits have to be balanced against adequate assurances that the conduct would not recur. I am not satisfied that is so.
ORDER
10.0I order that Emanuel Spiros Kardas and Cryssa [sic] Kardas be disqualified from participating in the management of a corporation for periods of, respectively, two years and one year.”
The present application was filed on 26 August 1997. I now turn to the arguments of counsel for Mr Kardas.
Onus of Proof
Counsel for Mr Kardas attacked par 7.2 of the reasons. The Delegate there stated “that the onus is upon the affected person to provide materials to persuade the Delegate that an order of prohibition is not appropriate”. The Delegate cited Cullen v Corporate Affairs Commission (1989) 7 ACLC 121 at 124. In that case Young J, speaking of the predecessor of s 600, said:
“… there is no question of onus of proof in the administrative stage of sec. 562A(3).
True it is that unless the director brings to the attention of the Commission matters other than those that have already been considered, the delegate will almost certainly make an order under sec. 562A(3) and so, practically speaking, there is an onus on the director to adduce further material. But so far as legal notions of onus of proof are concerned, they are inapplicable.”
Seeing that the Delegate specifically referred to Cullen, the reasonable conclusion is that he was using “onus” in the informal and practical sense referred by Young J and not in any technical legal sense. This ground of attack is not made out.
Confusing and Ambiguous Language
Counsel attacked a number of passages of the Delegate’s reasons which were said not to comply with the approach established in Ansett Transport Industries (Operations) Pty Limited v Wraith (1983) 48 ALR 500. In that case Woodward J said at 507 :
“… s 13(1) of the Judicial Review Act requires the decision-maker to explain his decision in a way which will enable a person aggrieved to say, in effect: ‘Even though I may not agree with it, I now understand why the decision went against me. I am now in a position to decide whether that decision has involved an unwarranted finding of fact, or an error of law, which is worth challenging.’
This requires that the decision-maker should set out his understanding of the relevant law, any findings of fact on which his conclusions depend (especially if those facts have been in dispute), and the reasoning processes which lead him to those conclusions. He should do so in clear and unambiguous language, not in vague generalities or the formal language of legislation. The appropriate length of the statement covering such matters will depend upon considerations such as the nature and importance of the decision, its complexity and the time available to formulate the statement. Often those factors may suggest a brief statement of one or two pages only.”
However more recent and authoritative judicial statements emphasise the need for a court undertaking judicial review of administrative decisions to avoid a pedantic and error-seeking approach to the construction of reasons for such decisions. In Minister for Immigration and Ethnic Affairs v Wu Shan Liang (1996) 185 CLR 259 at 271 Brennan CJ, Toohey, McHugh and Gummow JJ said (citations omitted):
When the Full Court [of the Federal Court] referred to ‘beneficial construction’, it sought to adopt an approach mandated by a long series of cases, the best exemplar of which is Collector of Customs v Pozzolanic. In that case, a Full Court of the Federal Court (Neaves, French and Cooper JJ) collected authorities for various propositions as to the practical restraints on judicial review. It was said that a court should not be ‘concerned with looseness in the language … nor with unhappy phrasing’ of the reasons of an administrative decision-maker. The Court continued: ‘The reasons for the decision under review are not to be construed minutely and finely with an eye keenly attuned to the perception of error.’
These propositions are well settled. They recognise the reality that the reasons of an administrative decision-maker are meant to inform and not to be scrutinised upon over-zealous judicial review by seeking to discern whether some inadequacy may be gleaned from the way in which the reasons are expressed. In the present context, any court reviewing a decision upon refugee status must beware of turning a review of the decision-maker upon proper principles into a reconsideration of the merits of the decision.”
In the same case Kirby J said (at 291):
“The reasons under challenge must be read as a whole. They must be considered fairly. It is erroneous to adopt a narrow approach, combing through the words of the decision-maker with a fine appellate tooth-comb, against the prospect that a verbal slip will be found warranting the inference of error of law.”
“Open to Conclude”
Counsel argued that the use of the expression “open to conclude” or words to that effect in pars 4.4, 4.8 and 4.9 of the Delegate’s reasons were ambiguous and did not enable the reader to deduce whether the conclusion was drawn or not. I think however, in the context of s 600, what the Delegate is saying is that he is not satisfied that the particular matter in question should not form the basis for a disqualification. I agree that the matter could have been expressed more clearly, but applying the Wu standard I do not think legal error is disclosed.
“Duty to Submit Annual Returns”
I agree with counsel’s submissions that there seems to be no logical connection between this subheading and the matters dealt with in pars 4.7 and 4.8. Moreover, the “areas of concern” do not allege, as such, failure to keep proper records or to assist the liquidators. The liquidators of both companies did not make any complaint in that regard. Also, as far as annual returns are concerned, in the case of each company it was common ground that there was only default in respect of one year. The whole matter is confusing and rather poorly expressed, but I am not satisfied there is an error of law.
“Disregarded” and “Dismissed”
Complaint was made that the “Notice of Standing”, incorporated into the reasons, says in relation to Infobank that explanations given are insufficient and “ought to be disregarded” and in relation to Supply Logistics that he is not persuaded that concerns numbered one to four inclusive “ought to be dismissed”. However, the meaning is clear. This differentiation in language does not raise any error of law.
Conduct
Paras 8.5 and 9.3 refer to “conduct”. I do not see how, as counsel argued, this term is ambiguous in any way. The “conduct” referred to is the conduct of Mr Kardas.
Valuation of Assets
It seems that one of the major issues concerning the Delegate was the transfer from Supply Logistics to Infobank of certain assets valued at $4.9 million for a consideration of $103,000. In substance the Delegate was satisfied that Mr Kardas, in his capacity as a director of Supply Logistics, was not a party to the disposal of that company’s assets at an undervalue: see par 4.2. However, the other side of the transaction was that Infobank took into its books at a value of $4.3 million assets which had only cost $103,000. This raised a concern that the accounts of Infobank did not give a true and fair picture. As already noted, in par 4.9 the Delegate said:
“Kardas gave evidence that he obtained extensive expert advice upon the valuations given in the accounts. It remains open to conclude that the basis for the valuation was misstated.”
Here I think there was a failure to give legally acceptable reasons. The reader is not told what was the valuation in question, what was its basis, and how that basis was misstated. Moreover, the ultimate issue here was not a question of valuation as such, but the conduct of Mr Kardas as a director. Did he in fact obtain “extensive expert advice” and did he know, or ought he have known, that such advice was given on a wrong basis? Prima facie a director of a company who caused such a substantial misrepresentation of its assets in the company’s accounts would be open to severe criticism. The matter was an important aspect of the conduct of Mr Kardas under consideration. There was apparently evidence on the issue but the reasons do not give any indication as to why the delegate formed the view he expressed. In my view this amounted to an error of law.
“Sheslow Findings”
Counsel for Mr Kardas founded this part of his argument on a passage from a decision of the Administrative Appeals Tribunal in Re Sheslow and Australian Securities Commission (1994) 20 AAR 161 at 165 where the Tribunal said:
“It is necessary to show only that the director has been honest and that he has not been guilty of gross incompetence, that he has an appreciation of commercial morality, that he has not displayed a cynical disregard for the trading advantages of limited liability and that generally speaking his activities have not been dishonest, unscrupulous, untrustworthy or irresponsible. If these are shown, it is not appropriate to serve a s 600 notice. I propose to apply these tests in considering the conduct of the applicant."
Counsel submitted that the Delegate failed to make any findings as to gross incompetence, a lack of appreciation of commercial reality, a cynical disregard of the trading disadvantages of limited liability, dishonesty, lack of scruples, untrustworthiness or irresponsibility.
This argument was based on a misconception. Insofar as Sheslow decided that, before a prohibition can be ordered under s 600(3), there must be a finding of gross incompetence, lack of appreciation of commercial morality etc etc, or that a director can avoid such an order by merely establishing the absence of these particular factors, then in my respectful opinion it misstates the law. The existence or otherwise of such matters is doubtless relevant for the exercise of the discretion under s 600(3). But that is a very different thing from saying, as the counsel in the present case and Sheslow appear to say, that these various matters constitute some kind of statutory criteria.
In Laycock v Forbes (1997) 15 ACLC 1814 at 1821 Goldberg J said, after referring to Blunt v Corporate Affairs Commission (No. 2) (1988) 6 ACLC 1077 at 1079, the English case of Re Dawson Print Group Ltd [1987] 3 BCLC 601 at 604 and Dwyer v National Companies and Securities Commission (No. 2) (1989) 7 ACLC 743 at 746:
“However, these considerations [i.e. breach of standards of commercial morality or ‘really gross incompetence’] are not found in the terms of the legislation. Section 533 requires a liquidator to lodge a report if it appears to him in the course of the winding up of a company that an officer may have been guilty of an offence, that a person who has taken part in the management or winding up of a company has misapplied money or been guilty of any negligence, default or breach of duty or that the company may be unable to pay its unsecured creditors more than fifty cents in the dollar. The matters set out in s 533 are disjunctive so that a liquidator may simply report on the fact that a company may be unable to pay its unsecured creditors more than fifty cents in the dollar without reporting on any particular matter in respect of a director. It seems to me therefore that it does not necessarily follow that a disqualification order can only be made after there is established some conduct which is in breach of standards of commercial morality or involves gross incompetence. As s 600(2) entitles the Commission to give a notice to a person who is a relevant person in relation to two or more relevant bodies it seems to me that the legislation contemplates that it would be open to the Commission to serve a notice on a person prohibiting him or her from managing a corporation simply because that person had been a director of two or more companies which had been unable to pay their unsecured creditors more than fifty cents in the dollar. Putting the matter another way, the power given to the Commission under s 600 may be exercised because of the fact of such an association independently of pointing to any particular default on the part of the person to whom the notice is addressed.”
I respectfully agree with his Honour. I would add that it is important not to lose sight of the circumstances which must exist before s 600 can apply, namely that a liquidator has reported on the existence of one or more of the serious matters referred to in s 533 in relation to two or more companies of which the person concerned was a director. As Lady Bracknell might say, to lose one company may be regarded as a misfortune, to lose two looks like carelessness. The bare fact of s 533 reports being made in respect of two or more companies has been seen by Parliament as sufficient to raise the question whether the director concerned should, for the protection of the public, be prevented for a substantial period from benefiting directly or indirectly from the privilege of limited liability.
It would be inconsistent with the legislative purpose to read into the plain words of s 600 some further pre-conditions such as “gross incompetence”. After all, unsecured creditors can suffer just as much loss from ordinary incompetence. As Lord Wright said in Caswell v Powell Duffryn Associated Collieries Ltd [1940] AC 152 at 175:
“Generally speaking in civil cases ‘gross’ negligence has no more effect that [sic] negligence without an opprobrious epithet.”
Since 1981 the law has required directors to exercise not only diligence and honesty, but also reasonable care: see s 229(2) of the Companies Codes of the various States and s 232(4) of the Corporations Law. There is no reason why the Commission, in exercising the power of prohibition under s 600, should be inhibited by any requirement of establishing “gross” negligence – a standard not relevant to the lawful discharge of a director’s duties.
The Delegate did not expressly refer to Sheslow but rather to Re Delonga and the Australian Securities Commission (1994) 15 ACSR 450 at 458-459 which in turn cites Sheslow. It is not entirely clear whether the Delegate adopted the Sheslow approach. If he did, there was an error of law, but one which favoured Mr Kardas. In the exercise of the discretion under the AD(JR) Act, I would not grant any relief on this account.
Delay
Counsel relied on the judgment of O’Bryan J in Halliday v Commissioner of Corporate Affairs (Supreme Court of Victoria, unreported, 14 May 1990). His Honour there held that a delay of almost two years between service of a show cause notice and a decision to prohibit would be too long. In that case his Honour was conducting a hearing de novo (see at 8).
A statutory power (such as the power of prohibition under s 600) conditioned upon the occurring of a certain event (such as the making of a s 533 report in respect of two or more companies) will often be subject to an implied requirement that it be exercised within a reasonable time: Koon Wing Lau v Calwell (1949) 80 CLR 533 at 573-574, Giris Pty Ltd v Commissioner of Taxation (1969) 119 CLR 365 at 383, Re Federal Commissioner of Taxation: ex parte Australena Investments Pty Ltd (1983) 50 ALR 577 at 578, Repatriation Commission v Morris (1997) 26 AAR 284 at 289. I am satisfied that the s 600 power is subject to such a requirement.
Once a liquidator’s report in respect of a second “s 600 company” triggers the power of disqualification, that power, if it is to be exercised at all, should be exercised with reasonable promptness. A person potentially the object of that power should not be kept in an indefinite state of uncertainty. More importantly, since the purpose of a s 600 disqualification is prophylactic rather than punitive, there should be as little delay as possible in taking steps to protect the public.
What is a reasonable time will depend on the circumstances. The affairs of companies vary greatly in their complexity. But the Commission does not, as it were, start from scratch. It will, ex hypothesi, have the benefit of a liquidator’s report and no doubt the liquidator would usually be willing and able to provide further information and explanation on request.
To recapitulate the chronology of the present case, the following dates are relevant:
Infobank liquidator’s report 1 December 1993
Show cause notice 17 May 1995
Hearing commences 16 April 1996
Hearing concludes 27 February 1997Notice of prohibition 30 July 1997
Total elapsed time 3 years 8 months
In my opinion, this was well beyond the bounds of reasonableness. Neither counsel engaged in any analysis of the course the hearing took. It may be that, for example, some of the delay in the hearing was attributable to Mr Kardas or his legal representatives. But the power the Commission sought to exercise was subject to a limit that it be exercised within a reasonable time and it was up to the Commission to keep that constraint in mind and conduct its investigation and hearing accordingly.
Conclusion
The decision of the Delegate of 30 July 1997 will be set aside. Since the time in which the Commission could lawfully issue a notice of prohibition has now passed, there is no point in remitting the decision to the Delegate for reconsideration. There will be an order that the Commission pay the costs of Mr Kardas, including reserved costs.
I certify that this and the preceding fifteen (15) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey
Associate:
Dated: 29 October 1998
Counsel for the Applicant: Mr T F Danos with Mr L La Fontaine Solicitor for the Applicant: Glennen Burstyner & Co Counsel for the Respondent: Mr P N Rose Solicitor for the Respondent: Australian Securities Commission Date of Hearing: 12 October 1998 Date of Judgment: 29 October 1998
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