Pace v Australian Securities and Investments Commission
[1999] WASC 151
PACE -v- AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION [1999] WASC 151
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [1999] WASC 151 | |
| Case No: | COR:153/1999 | 25 AUGUST 1999 | |
| Coram: | MURRAY J | 31/08/99 | |
| 12 | Judgment Part: | 1 of 1 | |
| Result: | Leave granted | ||
| PDF Version |
| Parties: | RICHARD HENRY PACE AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION |
Catchwords: | Companies Officers Conviction of director and manager of companies of fraud offences Offences concerned with operation of a company Application for leave to be a director of and manage companies Tests for grant of leave discussed Disqualification having potential to cause hardship to applicant, companies, employees and creditors Leave granted to manage companies but not as a director |
Legislation: | Corporations Law s 91A and s 229 |
Case References: | Murray v ASC (1994) 12 ACLC 11 Re Magna Alloys & Research Pty Ltd (1975) CLC 40-227 Re Marsden (1981) CLC 40-720 Re Shneider (1997) 15 ACLC 90 Chew v NCSC (1984) 2 ACLC 676 Chew v NCSC [1985] WAR 337 Childs v Australian Securities Commission (1996) 20 ACSR 196 Commissioner of Corporate Affairs v Bracht (1989) 7 ACLC 40 Hosken v Australian Securities and Investments Commission (1998) 28 ASCR 542 Pollard v Commonwealth Director of Public Prosecutions & Anor (1992) 10 ACLC 1511 Re Ansett (1990) 3 ASCR 357 Re Australian Limousin Breeders Society Ltd (1989) 7 ACLC 426 Re Carey (1984) 2 ACLC 470 Re Ferrari Furniture Co Pty Ltd (1972) 2 NSWLR 790 Re Hamilton-Irvine (1990) 2 ASCR 616 Re Harrison (1998) 153 ALR 369 Re Macquarie Investments Pty Ltd (1975) 1 ACLR 40 Re Maelor Jones Pty Ltd (1975) CLC 40-209; 1 ACLR 4 Re McLaughlin (1993) 12 ASCR 374 Re Minimix Industries Ltd (1982) 1 ACLC 511 Re Record Leather Manufacturer's (Aust) Pty Ltd [1981] VR 72 Re Roitman & Loli International Pty Ltd, unreported; SCt of Vic; 8 October 1993 Re van Reesema (1975) 11 SASR 322 Zim Metal Products Ltd [1977] ACLC 29,556 Zuker v Commissioner for Corporate Affairs (1980) ACAR 40-652 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
- Applicant
AND
AUSTRALIAN SECURITIES & INVESTMENTS COMMISSION
Respondent
Catchwords:
Companies - Officers - Conviction of director and manager of companies of fraud offences - Offences concerned with operation of a company - Application for leave to be a director of and manage companies - Tests for grant of leave discussed - Disqualification having potential to cause hardship to applicant, companies, employees and creditors - Leave granted to manage companies but not as a director
Legislation:
Corporations Law s 91A and s 229
Result:
Leave granted
(Page 2)
Representation:
Counsel:
Applicant : Dr J J Hockley
Respondent : Mr W J Burbury
Solicitors:
Applicant : Richard O'Shannassy & Co
Respondent : In Person
Case(s) referred to in judgment(s):
Murray v ASC (1994) 12 ACLC 11
Re Magna Alloys & Research Pty Ltd (1975) CLC 40-227
Re Marsden (1981) CLC 40-720
Re Shneider (1997) 15 ACLC 90
Case(s) also cited:
Chew v NCSC (1984) 2 ACLC 676
Chew v NCSC [1985] WAR 337
Childs v Australian Securities Commission (1996) 20 ACSR 196
Commissioner of Corporate Affairs v Bracht (1989) 7 ACLC 40
Hosken v Australian Securities and Investments Commission (1998) 28 ASCR 542
Pollard v Commonwealth Director of Public Prosecutions & Anor (1992) 10 ACLC 1511
Re Ansett (1990) 3 ASCR 357
Re Australian Limousin Breeders Society Ltd (1989) 7 ACLC 426
Re Carey (1984) 2 ACLC 470
Re Ferrari Furniture Co Pty Ltd (1972) 2 NSWLR 790
Re Hamilton-Irvine (1990) 2 ASCR 616
Re Harrison (1998) 153 ALR 369
Re Macquarie Investments Pty Ltd (1975) 1 ACLR 40
Re Maelor Jones Pty Ltd (1975) CLC 40-209; 1 ACLR 4
Re McLaughlin (1993) 12 ASCR 374
Re Minimix Industries Ltd (1982) 1 ACLC 511
(Page 3)
Re Record Leather Manufacturer's (Aust) Pty Ltd [1981] VR 72
Re Roitman & Loli International Pty Ltd, unreported; SCt of Vic; 8 October 1993
Re van Reesema (1975) 11 SASR 322
Zim Metal Products Ltd [1977] ACLC 29,556
Zuker v Commissioner for Corporate Affairs (1980) ACAR 40-652
(Page 4)
1 MURRAY J: On 22 October 1998 the applicant pleaded guilty to 13 offences of fraud committed on separate occasions between 27 January 1994 and 18 March 1996 by which means a total amount of $48,045 was obtained from the Commonwealth Department of Commerce and Trade. The offences were committed by the applicant in his capacity as Managing Director of Canon Foods Services Pty Ltd which operates a business preparing and selling convenience foods to retailers. The applicant built up the business which he started in 1984. He has, through his family trust, a 54% equity in the company which trades as Canon Foods. It is a company which employs about 60 people and it is undoubtedly a business of a substantial kind with further plans for expansion.
2 The offences of fraud were committed when the applicant, for Canon Foods, sought and obtained Commonwealth Government grants designed to assist businesses to develop and expand. The grants were to reimburse companies for work done and paid for if the work was of a kind which would qualify for the grants. The reimbursement was of 50% of the money outlayed by the participating company. Consultants were engaged and commenced their work, but Canon Foods encountered cash flow problems and found they had insufficient funds to pay in full the consultants they had engaged. As I understand it that was a problem created by the actions of the applicant. In an affidavit he says that with the consent and agreement of the consultants he paid half their fees and obtained receipts from them for the full amount of the company's liability.
3 Those receipts were then used to support the applications made for the grants as if the full amount had indeed been paid for the consultants' work. When a grant of 50% of that amount was received it would be paid to the consultant in question. In an affidavit the applicant says that the grant money was applied to the purpose for which it was intended, that there was no loss of public money or fraudulent conversion of it, and he regards the frauds as being victimless crimes arising out of his "timing error" in requesting payment of the grant before the company actually qualified for it by paying the consultants in full. Disturbingly to my mind, he says that at the time he was unaware that he was acting "in an inappropriate manner".
4 I find that difficult to accept. The scheme under which the grants were paid is quite obviously designed to assist small businesses which are healthy, to utilise expertise so that they may expand and grow. Clearly the benefit of the payment of the money is lost if the company which is the recipient of the grant is not financially sound and ultimately fails. It is
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- not surprising that an applicant for such a grant must demonstrate the financial health of the company by outlaying the money, which is to be reimbursed in part, before the application is made.
5 The applicant knew that was the requirement to qualify for the grant and so he deliberately set about to mislead the department concerned into thinking Canon Foods was a qualifying applicant. I was told from the bar table that the course he adopted was suggested by one of the consultants he employed, but to my mind that provides no mitigation of his culpability. The dishonesty involved in what he did is patent and it is dishonesty directly related to his management of the principal company in respect of which he now seeks the leave of the court, despite the convictions, to engage in its management.
6 In the District Court on 25 November 1998, the applicant was sentenced to fines totalling $15,000, being a little over twice what his Honour calculated to be the benefit of the interest which might have been earned on the monies received had their payment not been accelerated. In addition his Honour had regard to what he described as "the incalculable benefit of the company being able to repay its debts as and when they fell due" and therefore to continue in business as a viable entity.
7 Having said those things, however, it should also be said that there is a wealth of evidence before the court to demonstrate that the commission of these offences over the period of approximately two years concerned was in the nature of an isolated departure from rectitude. These are the applicant's only relevant convictions and there is much evidence to indicate that he has otherwise been, and continues to be, a valuable member of the community, a high contributor and a person who has much to offer. There is little likelihood I think that the applicant would commit any further offences of dishonesty.
8 The application he now makes is under the Corporations Law s 229. So far as is relevant, s 229(3) provides that a person who has been convicted on indictment of an offence "in connection with the promotion, formation or management of a body corporate or corporation" or "of serious fraud" shall not within five years after the conviction without the leave of the court manage a corporation. Under s 229(5), if leave is granted the court may impose such conditions and restrictions as it thinks fit. In relation to a local corporation such as Canon Foods, s 91A(2) provides that a person manages a corporation if he or she "is a director or promoter of, or is in any way (whether directly or indirectly) concerned in
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- or takes part in the management of, the corporation." Whether or not the offences of which the applicant was convicted are properly described as offences in connection with the management of Canon Foods, they certainly fell within the description of "serious fraud" as defined in s 9. They were undoubtedly offences "involving fraud or dishonesty" punishable by much more than three months imprisonment.
9 The applicant says that he did not understand after his conviction that as a result of the convictions he sustained, he would be prohibited for five years from managing any corporation. He says he was never told this, despite the fact that he was legally represented, indeed before the District Court by senior counsel. Be that as it may his ignorance of the law could not excuse a breach of the law. When, "several months after sentence was passed", his solicitor raised with him the possibility that he might be disqualified from the management of Canon Foods under s 229, the question whether the offences of which he had been convicted constituted "serious fraud" was investigated and raised with the respondent, receiving what I would have thought is the obvious advice that they were indeed regarded as being offences of that character. To breach s 229 is of itself to commit an offence punishable under the Corporations Law by a fine of $5,000 or imprisonment for one year or both. There has, I understand, been correspondence between the parties. The respondent has not taken prosecution action, but equally it has not condoned any breach of s 229 in this case.
10 It is indeed perfectly clear that as at the date when this application was heard and at all times following the applicant's convictions he has continued to function as a member of the board of Canon Foods, as the Managing Director of that company and in a position described as "Director of Sales and Marketing", by which I think is meant the officer of the company having particular responsibilities in that regard. He continues to negotiate and deal with retail outlets and effectively continues to run the company.
11 The justification he offers for this unlawful behaviour is that of commercial necessity. In effect he says that he is the only person who knows all aspects of the business and he says, "I provide the vision, life and soul and energy to maintain it as a viable entity." The applicant says he is the person who has the skill and is used to dealing with customers of the business and with the business' financiers. He deposes that, "It is highly probable that our bankers will withdraw their support if I was not the Managing Director or able to be involved in the management of the
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- Company", but no evidence is provided from the bankers to support this statement.
12 Further, he says that the largest supplier to Canon Foods (of chickens) is Steggles Ltd and that company is Canon Foods' largest creditor, supporting the company by the application of favourable terms of trade negotiated for Canon Foods by the applicant. His application is supported by an affidavit of a Mr White, the State Manager for WA of Steggles Ltd. He deposes that the favourable trading terms would not be available to Canon Foods if the applicant "is not able to be a Director or to be involved in the management of that Company." Speaking on behalf of Steggles Ltd he supports the application.
13 As I understand it, at about the time that the prosecution of the applicant was being dealt with in the District Court changes were made to the structure of the board of Canon Foods. A Mr Samson, a friend of the applicant's, accepted an invitation to join the board as its Chairman. He holds no shares in the company. He is a senior person, an eminent citizen of this State with extensive business experience. I have no doubt that his business acumen is considerable and he is of the highest character. Apart from the applicant, the other members of the board are a Mr Dickinson, the Production Manager of the company who holds 18% of the equity in the company and a Mr Arnold, who is the Company Accountant, and who holds the remaining 28% of the equity in the company.
14 There are a number of affidavits by the applicant and Mr Samson, largely repetitious in their content, directed to arguing that it is imperative for the commercial well being of Canon Foods that the applicant should be permitted to remain a Director of the company as well as functioning as its General Manager and Sales or Marketing Manager.
15 Mr Samson deposes that the present board functions very effectively. He says he meets daily with the applicant and that the board now subjects the applicant to "close, considerable and constant scrutiny and questioning". In his first affidavit Mr Samson speaks of the importance to the company of the applicant's "management together with guidance from the Board", but he goes on to say that although the other two directors are capable persons in their fields of production and accounting, neither of them would be capable of performing the role that the applicant performs in the Company. He adds:
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- "If [the applicant] cannot continue as a Director then there is a very real and imminent prospect that the Company will have to be placed in liquidation."
16 Neither in that affidavit nor in later affidavits, however, does Mr Samson offer any factual support for that broad statement, although he adds that if the application is not granted the 50 full time staff members "will be unemployed" and the further 10 part time workers "will be made redundant". He expresses the view that if the applicant is removed from his present position (as indeed he has been by the operation of the law), then the company's bankers will be forced to seek possession and sell off the company's assets and rely on the collateral security provided in the form of the applicant's family home. Much the same views are expressed in Mr Samson's second affidavit, and in his third affidavit he says that the company would be prepared to appoint an auditor to oversee the finances of the company if that should be a condition which the court thought to be appropriate.
17 In a second and third affidavit the applicant argues for the same result. Again he speaks of his intimate knowledge of the business, his management skills and the need to have his advice constantly available to the board. He says that if he is a director that will "open many doors" for the company. He points out that the company's present very sound financial position and the constant expansion of its business activities is largely the result of his efforts and upon "personal contacts developed at Director to Director level." He deposes that, "The ability of customers to deal with the Managing Director and not with a sales person is a great advantage for the company in securing sales." He speaks of negotiations which are current and apparently of considerable value, including for certain joint venture activities, none of which he says will eventuate if he is unable to continue as a director. Again, however, there is nothing to suggest why that should be so.
18 He says that the company's indebtedness is secured not only by the company, but personally by the security in the form of his family home. He says baldly, "If I am not a Director the loans will be called up." Again there is nothing to support that statement and it would be astonishing if it was true.
19 There is little additional material in the applicant's third affidavit. He speaks there again of current negotiations for orders worth $7M and he says:
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- "These contracts will not materialise if I am not permitted to continue as a Director of Canon. The customers rely on me as the Managing Director. They prefer to deal with me as a Director. They do not want to deal with an employee who cannot make decisions."
- Of course, if the applicant were permitted to participate in the management of the company as its General Manager, he would hardly be described as an employee who cannot make decisions. In short, I am not persuaded of the "dire consequences" forecast for Canon Foods if the applicant is not permitted to be a director of the company, although it is equally perfectly clear that, as the company is structured and having regard to the personnel who otherwise constitute its management, the applicant has in the past and, if permitted by the court, would continue to play a pivotal role in the successful commercial operation of the company.
20 There is another company in respect of which the application is pursued, called Valpall Pty Ltd. The directors of that company are the applicant and Mr Dickinson. It does not currently trade. It has been used as the marketing arm of Canon Foods to test products on the market. It has accumulated trading losses. There are plans to reactivate the company to operate a retail food outlet in the city. The applicant deposes that, "It is essential that I remain a Director of this Company to assist in its management through the opening phase of its move into retailing."
21 How then in relation to the two companies mentioned above is the discretion to grant leave under s 229(3) to be exercised? The proper approach to the power conferred by this section was restated by Owen J in Murray v ASC (1994) 12 ACLC 11 at 13 when his Honour said:
"The legislative purpose in enacting the section was to reinforce the protection of the public. The disqualification of persons from acting as a director is designed to ensure that the public is not put at risk from the activities of persons who have been shown to be lacking in the required level of expertise and conduct. The section is not intended to exact further punishment on the convicted person.
The section also has as an object that a corporate structure should not be abused to the financial detriment of investors, shareholders, creditors and other persons dealing with the company. There is of course the additional element of general deterrence so that would-be offenders are discouraged from conduct of the type complained of.
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- The applicant bears the onus of establishing grounds for an exception to the general legislative policy underlying s 229."
22 In Re Magna Alloys & Research Pty Ltd (1975) CLC 40-227 Bowen CJ in Equity said at 28354:
"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."
23 In Re Marsden (1981) CLC 40-720 Legoe J added a reference to additional relevant matters, the degree of control which the applicant would be able to exercise over the subject company, the value to the company of the knowledge which the applicant had acquired over the years and the fact that the applicant had (lawfully) taken part in the management of companies without complaint.
24 The offences committed by the applicant were in my opinion clear cases of fraud, although in fact, no loss was caused to any person or entity. Nonetheless, they were offences of blatant dishonesty committed over an extended period of time and in their commission they required the involvement of the consultants who provided the false receipts. I accept, of course, that the applicant did not personally benefit, although of course, as the holder of the majority interest in Canon Foods, he received a very direct benefit in the continued operation of the company which was contributed to by the commission of the offences. Their motivation appears to have been the applicant's desire to secure the continued successful operation of the company and its expansion in the face of its cash flow problems.
25 I accept of course that until the time when these offences were committed, the applicant had otherwise an unblemished character, but his behaviour in continuing to be directly involved as a director and manager
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- of Canon Foods since it was discovered that, at least in the opinion of the respondent, s 229 prevented that involvement, counts substantially against his character. Again, it is the case that the applicant has declined to obey the law with respect to the management of this company. Again, his motivation appears to be his desire for the continued success of the company and his perception that without his continued contribution as the primary manager of the company's affairs, its very existence will be placed in jeopardy, a proposition which I doubt, although it is of course clear that his managerial role to date has been of central importance in the company achieving the successes it has and I think I should conclude that it would be difficult for the company as it is presently structured to replace the applicant's contribution from another source.
26 Further, I must be careful in having regard to what I would conclude on the evidence before me amounts to a continuing breach of s 229 not to approach the exercise of my discretion from a punitive point of view, but to have regard to the protective purpose of the section. I have already found that at least as at the present time, there is little likelihood that the applicant would offend again in a way which would be likely to imperil the company, those who are interested in it, or those who deal with it.
27 Clearly I must have regard to the interests of those who own Canon Foods, who are employed by it and who are its creditors, and I think the evidence does establish that if the applicant were not permitted to participate in the management of this company the interests of all those people might be jeopardised. Of course I must not overlook the public interest and the importance of the prima facie position that the law takes in the view that for the protection of the public generally, and persons interested in companies in the various forms which such interests may take, persons who are convicted of offences of the type described in s 229 will generally speaking be subjected to the bar upon their participation in the management of corporations for the period of five years specified in the section. In the context of such a period it is of course the case that the applicant's conviction of these serious offences occurred relatively recently.
28 I have mentioned the matters of fact which bear upon all those considerations. It is unnecessary I think to do more than say that despite the negative aspects of the case to which I have referred, and despite my view that the case advanced by the applicant is not of a persuasive power sufficient to cause me to grant him leave to be a director of either of the companies the subject of the application, there is a case that he should be allowed to take part in the management of those corporations. I take that
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- view because I think that despite the convictions and his behaviour since they occurred, there is relatively little risk that the applicant's participation in the management of those companies, in each case if it is so wished as their General Manager, with or without particular responsibilities for sales and marketing, will jeopardise the companies, those interested in them, employed by them, or dealing with them, and there is no other public interest requiring his exclusion.
29 I see no reason to impose audit controls on the financial affairs of either company and think that the justice of the case will be met, as it was by Drummond J in Re Shneider (1997) 15 ACLC 90, in refusing leave to the applicant to be a director, but in granting him leave to take part in the management of the two companies in any capacity other than that of a director. In that way additional protection will be afforded in that the applicant will in future be subject to the guidance and control of the board whose decisions he will be able to influence by his advice, but in which decisions he will not be able to participate directly. Of course, as the companies' senior manager, the applicant would have the capacity in many important ways to directly dictate the course of the companies' activities as well as indirectly in respect of those matters where a board decision is required. Further, to make the order in that form reinforces the proposition that the court will not be lightly moved to grant unconditional leave under the section.
5