OPUS CAPITAL LIMITED And AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

[2010] AATA 694

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2010] AATA 694

ADMINISTRATIVE APPEALS TRIBUNAL      )

)          No 2010/3743

GENERAL ADMINISTRATIVE DIVISION		)
Re		OPUS CAPITAL LIMITED

Applicant

And AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION

Respondent

DECISION

TRIBUNAL:             Deputy President P E Hack SC

DATE:                      3 September 2010

PLACE:                   Brisbane

THE TRIBUNAL DIRECTS:

1.That the Applicant lodge and serve a statement of facts, issues and contentions on or before 7 September 2010;

2.That the Respondent lodge and serve a statement of facts, issues and contentions on or before 9 September 2010;

3.That the Applicant lodge any reply on or before 10 September 2010;

4.That the parties lodge and serve any further evidence upon which they intend to rely on or before 13 September 2010;

5.That the mater be listed for hearing for two days commencing on 15 September 2010.

THE TRIBUNAL ORDERS:

Pursuant to s 41(2) of the Administrative Appeals Tribunal Act 1975 (Cth) that, until further order,

1. the further operation and implementation of the decision under review be stayed;

2. the Respondent’s obligation to publish a notice of the decision pursuant to s 915F(2) of the Corporations Act 2001 (Cth) be stayed.

Pursuant to s 35(2)(b) of the Administrative Appeals Tribunal Act 1975 (Cth) that, until further order,

3. the Respondent remove all reference to the decision under review from any of its publications, alerts and the Public Register;

4. the Respondent be restrained from including the decision under review, or any part thereof, in any publications, alerts, and in the Public Register pursuant to s 922A of the Corporations Act 2001 (Cth) or otherwise;

5. the Applicant be described by a pseudonym for the purpose of the applications;

6. publication of the name of the Applicant and of any material tending to identify it be restricted to the parties, their legal representatives, the Tribunal, its members and officers in the course of their duties;

7. publication of the evidence given before the Tribunal and of matters contained in documents lodged with the Tribunal be restricted to the parties, their legal representatives, the Tribunal, its members and officers in the course of their duties;

8. all hearings shall take place in private.

...............Signed................

Deputy President

CATCHWORDS

SECURITIES & INVESTMENTS – Australian financial services licence – condition requiring licensee to hold net tangible assets of not less than 0.5% of assets – cancellation of licence by the Australian Securities and Investment Commission

PRACTICE & PROCEDURE – stay application – likely prejudice from not granting stay far exceeded potential prejudice from staying implementation of decision until hearing – public interest favoured stay where matter to be heard within very short period – necessary for appointment of temporary responsible entity if cancellation decision not stayed – stay necessary to secure effectiveness of hearing – stay granted

PRACTICE & PROCEDURE – confidentiality order application – compelling reasons to depart from the norm – risk that cancellation decision would not be properly understood by investor public – suppression of publication until hearing warranted having regard to very unusual circumstances of case – confidentiality order granted

Administrative Appeals Tribunal Act 1975 (Cth), ss 35, 41(2)

Corporations Act 2001 (Cth), ss 912A, 915F, 922A

ASIC v AAT & anor [2009] FCAFC 185; (2009) 181 FCR 130

REASONS FOR DECISION

10 September 2010	Deputy President P E Hack SC
Introduction

1. At the conclusion of the hearing on 3 September 2010 I made the orders and directions that are set out above and indicated that I would publish my reasons for making those orders and directions in due course. What follows are those reasons.

2. The applicant, Opus Capital Limited, (Opus), carries on a financial services business. In that capacity it is the responsible entity (as that term is used in the Corporations Act 2001 (Cth)) of some 12 managed investment schemes which are registered under that Act. It held an Australian financial services licence, which enabled it to act in that capacity, until the decision of the respondent, the Australian Securities & Investments Commission, which is the subject matter of these proceedings. That licence was cancelled by a decision of the Commission (by its delegate) made on 26 August 2010 and communicated to Opus on 31 August 2010. On 2 September 2010, without opposition from the Commission, I made interim orders preserving the status quo to enable the parties to present the arguments in full the following day.

3. In the substantive proceedings, commenced on 1 September 2010, Opus seeks a review of the Commission’s cancellation decision. It sought, on an interlocutory basis, orders staying the operation and implementation of the decision pending the hearing and confidentiality orders. Section 41(2) of the Administrative Appeals Tribunal Act 1975 (Cth) is relied on as the basis of the former and s 35 of the same Act as the basis of the latter.

   Background

4. The material before me established, sufficiently for present purposes, the following background. Opus is a specialist fund management company. It was established in 2000 and became licensed the following year. The managed investment schemes that it operates focus on property investment. There are in excess of 5,000 investors, predominantly “mum and dad” retail investors, across the various investment schemes with a total of funds under investment in excess of $500m. Opus employs a staff of 35 staff (including its directors and officers). Mr Dean Palmer, the chief executive officer of Opus, deposed at some length to the very considerable damage that would be done to Opus if the stay and confidentiality orders sought were not granted. Similarly, Mr Palmer’s affidavit identified likely prejudice to investors and to other third parties if the orders were not made. Mr Palmer’s affidavit was not objected to and he was not required for cross-examination. There was no evidence to the contrary and no reason to doubt what Mr Palmer has said.

5. The licence under which Opus operates is subject to numerous conditions including, materially, a condition requiring it to hold net tangible assets (NTA) of not less than 0.5% of assets (calculated in accordance with the licence conditions). Section 912A of the Corporations Act requires a financial services license to, amongst other things, comply with the conditions of the licence. Failure by a licensee to comply with obligations under s 912A of the Corporations Act provides a basis on which the Commission may suspend or cancel a financial services licence. In April 2009 the external auditors of Opus notified the Commission that Opus had breached that condition in the 6 months ending 31 December 2008. Opus notified the Commission to similar effect the following day. For a considerable time thereafter Opus and the Commission corresponded about proposals to rectify that breach.

6. In late May 2010, Opus submitted to the Commission that the breach of condition 9 had been rectified. The Commission did not accept that that was so and called upon Opus to, in effect, show cause why its licence ought not be cancelled. A hearing was conducted on 19 July 2010. There was correspondence following the hearing but, in the result, the delegate was not satisfied and made the decision on 26 August 2010 to cancel the licence.

7. The issue is whether the requirement of NTA of not less than 0.5% is satisfied. The Commission decided, and will contend in these proceedings, that it is not satisfied. Opus contends that it is. The difference between the parties is the appropriate accounting treatment of two classes of assets, deferred tax assets (DTA) and sale and performance fees (SPF). It is common ground that, if either of these classes of assets is included in the calculation of NTA, the 0.5% requirement is satisfied but that if both are excluded the NTA figure falls below the 0.5% requirement.

8. The financial requirements of a financial services licence are explained in Regulatory Guide 166, published by the Commission. Those requirements are imposed, as RG 166.12 explains,

   “to help ensure that:

   (a)you have sufficient financial resources to conduct your financial services business in compliance with the Corporations Act (including carrying out supervisory arrangements);

   (b)there is a financial buffer that decreases the risk of a disorderly or non-compliant wind-up if the business fails; and

   (c)there are incentives for your owners to comply through risk of financial loss.”

   The underlying principles concerning the NTA calculation are described in RG 166.69 in these terms:

   “We will not require the NTA calculation to address market or credit risks to assets, or the risk of contingent liabilities crystallising. NTA is a measure of general financial standing. It includes non-current assets and is not specifically a measure of capacity to meet financial obligations.”

9. Finally, it should be noted that, with the cooperation of the parties it has been possible to set the matter down for hearing for two days commencing on 15 September 2010. Thus, it may be expected that a final decision will be able to be made relatively swiftly and, equally, the merits (or otherwise) of continuing the stay and confidentiality orders beyond the hearing date may be considered after the evidence has all been heard. .

   The stay

10. The power to stay the implementation and operation of a decision is conferred by s 41(2) of the AAT Act in these terms:

    “(2)The Tribunal may …, if the Tribunal is of the opinion that it is desirable to do so after taking into account the interests of any persons who may be affected by the review, make such order or orders staying or otherwise affecting the operation or implementation of the decision … or a part of that decision as the Tribunal considers appropriate for the purpose of securing the effectiveness of the hearing and determination of the application for review.”

    The Commission accepted that this power was sufficient to permit the making of an order staying the operation and implementation of the decision under review and an order preventing the publication in the Gazette of the notice of cancellation that would otherwise be required by s 915F of the Corporations Act. The Commission contended, though, that the power did not expend to the other orders sought by Opus, namely an order requiring the Commission to remove references to the cancellation decision from the Register that s 922A of the Corporations Act requires the Commission to establish and maintain, nor to an order preventing publication generally, including publication on the Register. 

11. The width of the s 41(2) power was the subject of the decision of the Full Court in ASIC v AAT & anor[1]. That case was an appeal from a decision of the Tribunal[2] staying the implementation of an order made by the Commission preventing the applicant in those proceedings from providing financial services and making confidentially orders of the type sought in the present case. The Court expressly concluded that the s 41(2) power extended to staying publication in the Gazette however Mr Savage SC, who appeared with Ms Chapple of counsel for Opus, placed particular reliance upon these observations of Downes and Jagot JJ:

    “[82]In this matter we do not have to decide whether an order to withdraw a media release (such as the order made in Re PTLZ^[[3]] by DP Forgie) is within power. In judicial terms it amounts to a mandatory injunction. However, although the occasion for the making of such an order will be rare, we do not consider that it is not within power. Once it is accepted that it relates to an activity which is part of the operation or implementation of the banning order, the only question is whether it can be said to be "affecting" that operation or implementation and we see no reason why it should not be so characterised.”

    [1] [2009] FCAFC 185; (2009) 181 FCR 130.

    [2]    See XQZT & ASIC [2009] AATA 669.

    [3] [2008] AATA 106; (2008)100 ALD 648.

12. Mr Chesterman, counsel for the Commission, drew attention to these observations of their Honours:

    “[62]…The making of the banning order triggers the recipient's right to seek review by the AAT and, consequently, the exercise by the AAT of its own statutory powers including its powers in s 41(2) of the AAT Act. If by that time ASIC has not published notice of the banning order, the recipient may request (as part of an application under s 41(2)) a stay not only of the banning order itself but also of the publication of the notice of its making and the required entry in the register.”

    The last sentence, he submitted, suggested that the power of the Tribunal is limited to prospective events and did not extend to, in effect, undoing that which had already been done, that is, the publication in the Register which had occurred, apparently, on 31 August 2010. It was not contended that there was a distinction to be drawn between a media release and publication in the s 922A Register.

13. I do not accept that the power is limited in the way that the Commission contends. An order in the terms sought by Opus is one that relates to an activity which is part of the operation or implementation of the cancellation decision. An order requiring the removal of details of the cancellation from the Register is one “affecting” the implementation of the decision.

14. The question then is whether stay orders in the terms sought ought to be made. The parties are in broad agreement about the matters usually considered by the Tribunal in satisfying itself whether or not a stay ought be granted. The Commission’s submissions[4] identify them as:

    “a.the prospects of success or merits of the applicant’s case on review;

    b.whether there will be prejudice to the parties or anyone else if a stay is not granted;

    c.whether it is in the public interest to grant a stay; and

    d.whether the review application, if successful, would be rendered nugatory or pointless if the stay is not granted.”

    [4]    Citing Re XTWK & ASIC [2007] AATA 1890; (2007) 46 AAR 350 at [14].

15. The Commission submits, in somewhat strong language if I may say so, that there is little merit or substance in the arguments to be presented by Opus and that the more likely outcome is that the Tribunal will ultimately conclude that cancellation of the licence was justified. It is neither possible nor desirable to do more than gain an impression of the apparent strengths or weakness of an applicant’s case at the hearing of an application for a stay however the impression I have from reading the material does not lead me to conclude that the case for Opus lacks merit as the Commission submits. The material provided to the Commission by Opus included the opinions of two well-known accounting firms that conclude that future performance fees were properly included in the calculation of net tangible assets. There is, of course, a contrary view which was accepted by the delegate but it is not possible to say that Opus’ argument is without merit. Similarly, the arguments presented to the delegate that conclude that deferred tax assets ought be included within net tangible assets are not self-evidently without merit. Those arguments are not capable of being dismissed, as the Commission contends, on the footing that the presence of deferred tax assets “does not entitle [Opus] to a cheque from the Commissioner of Taxation”. So much may be accepted, but it does not respond to the argument presented on behalf of Opus.

16. Thus, I proceed on the footing that Opus has an arguable case that one, at least, of the deferred tax losses or future performance fees are properly to be regarded as coming within the scope of net tangible assets.

17. There is undisputed and credible evidence from Mr Palmer of likely prejudice to Opus, to investors and to other third parties, if the cancellation decision is not stayed. At the very least it would be necessary for an application to the Court for the appointment of a “temporary responsible entity”[5], the appointment of a temporary responsible entity and the likely considerable expense associated with the handover of responsibility.

    [5] See ss 601FN and 601FP, Corporations Act.

18. The countervailing consideration, on which the Commission places reliance, was identified by Downes and Jagot JJ in ASIC v AAT in these terms[6]:

    “Although the reasons [of the AAT] briefly address the public interest in [28]-[29], they do not appear to grapple with the context set by the Corporations Act or the importance of the availability of information to the market generally and to existing and potential customers of the second respondent, as a critical element in the public interest.”

    [6]    Ibid at [56].

19. The question of prejudice to the public at large if a stay is granted needs to be considered in the context that the confidentiality orders have been made. There is thus the potential that between now and the time of the ultimate decision some persons may invest in funds managed by Opus where those persons may not have invested absent the confidentiality orders and the stay. But that risk is far removed from that identified by Downes and Jagot JJ. Their Honours were dealing with the position of a person providing financial services whose licence had been cancelled because the Commission had taken the view that the applicant in that case had engaged in market manipulation, partly in the interests of his clients but also in his own interests[7]. The evidence here is that Opus is not presently seeking investor equity although it did do so, without demur from the Commission, in the second half of 2009. The submissions of the Commission argued that the solvency of Opus was relevant to the position of investors not because they were directly at risk were it to be insolvent in fact but because an entity that was not unable to manage its own financial affairs ought not be permitted to manage the financial affairs of others. I should add that there is not a skerrick of evidence that Opus is insolvent by any conventional measure and there is no evidence of any kind that investors’ funds are at risk.

    [7] See [2009] AATA 669 at [8]-[9].

20. In these circumstances, the likely prejudice that would flow from not granting a stay far exceeds the potential prejudice that may arise from staying the implementation of the decision until the hearing.

21. For essentially similar reasons, I regard the public interest as favouring a stay. The state of affairs that occasioned the cancellation decision has existed for some 20 months. The Commission does not point to any adverse consequence to any person as a result of that state of affairs. Refusal of a stay will likely cause considerable concern to the 5,000 investors, many of whom are unlikely to be able to come to grips with the nuances of the Commission’s decision and will simply regard it as an adverse judgment about Opus’ solvency. Where the matter can be heard within a very short space of time the public interest favours a stay.

22. The final question, whether the application would be regarded nugatory or pointless if the stay were not granted, must be resolved in favour of Opus as well. If the cancellation decision is not stayed it will be necessary for a temporary responsible entity to be appointed. Opus will be unable to operate and will lose its income earning capacity. Cancellation is an event of default under Opus finance facilities leaving Opus exposed to the risk of the financiers taking action to enforce their securities. There is a real prospect that Opus would fail if a stay were not granted and thus I regard granting a stay as necessary to secure the effectiveness of the hearing.

    Confidentiality

1. So far as it is presently relevant, s 35 of the AAT Act provides as follows:

   “(1)Subject to this section, the hearing of a proceeding before the Tribunal shall be in public.

   (1A)If, at a time a hearing is in public, a person participates in the hearing by a means allowed under section 35A, the Tribunal is to take such steps as are reasonably necessary to ensure that the public nature of the hearing is preserved.

   (2)Where the Tribunal is satisfied that it is desirable to do so by reason of the confidential nature of any evidence or matter or for any other reason, the Tribunal may, by order:

   (a)direct that a hearing or part of a hearing shall take place in private and give directions as to the persons who may be present; and

   (aa)give directions prohibiting or restricting the publication of the names and addresses of witnesses appearing before the Tribunal; and

   (b)give directions prohibiting or restricting the publication of evidence given before the Tribunal, whether in public or in private, or of matters contained in documents lodged with the Tribunal or received in evidence by the Tribunal; and

   (c)give directions prohibiting or restricting the disclosure to some or all of the parties to a proceeding of evidence given before the Tribunal, or of the contents of a document lodged with the Tribunal or received in evidence by the Tribunal, in relation to the proceeding.

   (3)In considering:

   (a)whether the hearing of a proceeding should be held in private; or

   (b)whether publication, or disclosure to some or all of the parties, of evidence given before the Tribunal, or of a matter contained in a document lodged with the Tribunal or received in evidence by the Tribunal, should be prohibited or restricted;

   the Tribunal shall take as the basis of its consideration the principle that it is desirable that hearings of proceedings before the Tribunal should be held in public and that evidence given before the Tribunal and the contents of documents lodged with the Tribunal or received in evidence by the Tribunal should be made available to the public and to all the parties, but shall pay due regard to any reasons given to the Tribunal why the hearing should be held in private or why publication or disclosure of the evidence or the matter contained in the document should be prohibited or restricted.”

2. The exercise of this discretion was also considered in ASIC v AAT. Downes and Jagot JJ (with whom Moore J expressly agreed on this point) made the following pertinent observations about s 35 of the Administrative Appeals Tribunal Act:

   “[74] Again, we think it is important to emphasise certain aspects of the statutory provisions. Although s 35(1) is subject to the balance of the section, it establishes a norm. The norm is that the proceedings before the AAT shall be in public. This norm is reinforced by the requirements of s 35(3) which expressly confirm the principle that it is desirable that hearings be held in public. It follows that when deciding whether it is satisfied that it is desirable to exercise its powers under s 35(2), the AAT is required to form a state of satisfaction which recognises the existence of the norm and the values it is intended to protect. This, no doubt, is why Brennan J in Re Pochi and Minister for Immigration and Ethnic Affairs (1979) 36 FLR 482 at 510 described the power in s 35(2) to depart from this norm as one to be exercised ‘sparingly’. It also explains the approach in Australian Securities and Investments Commission v PTLZ (2008) 48 AAR 559; [2008] FCAFC 164 at [6], [41] and [42] (an appeal to the Full Court of the Federal Court from the decision of the AAT in Re PTLZ and Australian Securities and Investments Commission (2008) 100 ALD 648; [2008] AATA 106) emphasising that the words of s 35(3) require this principle of the desirability of hearings to be in public to be ‘the basis’ of the AAT’s consideration of adopting a different approach (in contrast, for example, to ‘a basis’ for that consideration).
   [75] Suppression orders are rarely made in courts, even though publicity undoubtedly disadvantages the parties. Criminal proceedings are a good example. In the AAT itself facts which parties would not wish to be published and which may disadvantage them are frequently published. Social security applications are a good example. The reason these matters are not kept secret is the overriding importance of justice being administered openly and in public. It is not readily apparent why persons in businesses should be treated differently even when, for example, employees may be disadvantaged.

   [76] When measured against the existence of the norm of a public hearing and the scheme established by the Corporations Act with respect to banning orders, it is apparent that the AAT would need some cogent reason by reference to the particular case to depart from the ordinary requirement of a public hearing. It is difficult to accept that harm (even serious harm) to the recipient’s reputation resulting from public awareness of the banning order will be a sufficiently cogent reason to justify the grant of a stay in most cases. This is because the risk of harm of this type is inherent in the nature of a banning order.”

3. Accepting, as I do, that the terms of s 35(3) require the principle of the desirability of hearings to be in public to be the basis of any consideration of a different approach, there are, in any view, compelling reasons shown to depart from the norm.

4. First, the debate is, as Opus submits, a technical one that concerns conflicting expert views about accounting treatment. There was, in the decision, no suggestion of any unfitness on the part of Opus to manage its funds or any criticism of the way in which it has done so in the past. But because the argument, at bottom, concerns “a measure of general financial standing” there is, I think, a real risk that the cancellation decision, and the evidence concerning it, would not be properly understood by the investor public and might be understood, quite wrongly, as reflecting upon the security of funds invested with Opus.

5. And the case for preventing public access to material lodged in the Tribunal is made all the more compelling by the references in the Commission’s submissions to “serious concern … about the solvency of [Opus]”, “precarious financial situation”, “parlous financial position” and similar epithets. These issues formed no part of the decision and, so far as I am aware, are not supported by any evidence. Publication of material of such a nature could cause serious and irreparable damage to the reputation and standing of Opus and quite wrongly undermine investor confidence in Opus to the detriment of investors.

6. Finally, it is again pertinent to note that the state of affairs complained of has existed for some 20 months without being in the public domain. Suppression of publication for a further short period until the hearing is warranted having regard to the very unusual circumstances of this case. 

7. The orders made operate until further order. They will be revisited at the hearing once a clearer picture emerges and all the evidence has been considered. They can be revisited earlier if there is any material change in circumstances.

I certify that the 29 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President P E Hack SC

Signed:         ............Signed...........................................................
  Associate

Date of Hearing  3 September 2010
Date of Decision  3 September 2010
Date of reasons for decision     10 September 2010
Counsel for the applicant          Mr D Savage SC & Ms J Chapple
Solicitors for the Applicant        McMahon Clarke 
Counsel for the Respondent     Mr DEF Chesterman

Solicitors for the Respondent    Australian Securities & Investments Commission