Re Harrison

[1998] FCA 302

FEDERAL COURT OF AUSTRALIA

CORPORATIONS - companies - director convicted of offence - application for leave to be involved in management of a corporation - whether s.229 of the Corporations Law confers a power to make a general order permitting applicant to be involved in the management of corporations not specifically identified - whether power should be exercised

Corporations Law s.229

Re: Magna Alloys and Research Pty Ltd (1975) 1 ACLR 203, applied
Re: Marsden  (1981) 29 SASR 454, applied
Re: Schneider (1997) 15 ACLC 90, discussed

Matter No:  SG 3031 of 1997

MICHAEL JEFFREY HARRISON

VON DOUSSA J
ADELAIDE
6 MARCH 1998

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SG 3031  of   1997

BETWEEN:	MICHAEL JEFFREY HARRISON APPLICANT
JUDGE:		VON DOUSSA J
DATE OF ORDER:		6 MARCH 1998
WHERE MADE:		ADELAIDE

THE COURT ORDERS THAT:

1. Leave to the applicant pursuant to s.229(3) of the Corporations Law to be involved in the management of Winning Sales Systems Pty Ltd (“the company”) subject to the condition that he enter into a deed of indemnity between himself and the company whereby he agrees upon demand either of the company or its successors or assigns to discharge the debts of the company. 

1. Leave to the applicant pursuant to s.229(3) of the Corporations Law to be involved in the management of a corporation where either (a) that corporation is a not‑for‑profit community service organisation with a board of five or more members or (b) he is appointed to the position of director or board member of the corporation by ministerial or other government appointment. 

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	SG 3031 of 1997

BETWEEN: MICHAEL JEFFREY HARRISON
APPLICANT

JUDGE:	VON DOUSSA J
DATE:	6 MARCH 1998
PLACE:	ADELAIDE

REASONS FOR JUDGMENT

This is an application pursuant to section 229 of the Corporations Law by Michael Jeffrey Harrison, seeking leave of the Court to be involved in the management of a corporation or corporations either without limitation or, alternatively, in respect of certain companies identified in a schedule to the application.

On 19 January 1996, in the Adelaide Magistrates Court, Mr Harrison was convicted of a single offence contrary to section 229(1)(a) and 570 of the Companies (South Australia) Code. In respect of that offence he was fined $3750, but in consequence of the provisions of what is now s.229(3) of the Corporations Law he is not permitted without leave of the court to manage a corporation for a period of five years after the conviction.

The purpose of the restriction imposed by the precursor of s.229 was described by Bowen CJ in Re: Magna Alloys and Research Pty Ltd (1975) 1 ACLR 203 at 205, as follows:

“The policy to which s.122 gives effect is that a person convicted of an offence of any of the type 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 a 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 principles recognised in that passage have been helpfully summarised and expanded upon in a number of judgments.  For present purposes the parties are agreed that those principles are correctly identified by Legoe J in Re: Marsden  (1981) 29 SASR 454 at 459, 460.

The starting point in considering whether leave should be given is to look at the nature of the offence for which the conviction was entered, and the nature of the applicant's involvement in that offence.  An agreed statement of fact which was placed before the Adelaide Magistrates Court is exhibited to Mr Harrison's affidavit.  In short, on about 31 May 1990, as an officer of Harrisons Australia Ltd, he authorised and facilitated the making of a loan of $85,000 from the funds of Harrisons Australia Ltd to an other company, Headingly Pty Ltd. 

The particulars of the offence charged were that at the time he did not act honestly in the exercise of his powers and the discharge of his duties as a director in authorising the loan in that he was aware that there was a grave risk that the loan would not be repaid.  When one looks at the facts, to describe the risk as grave is perhaps an underestimate.  It seems fairly plain that if Mr Harrison had reflected upon the position, it would have been apparent that it was extremely unlikely that the amount could ever have been repaid by Headingly Pty Ltd.

Harrisons Australia Ltd was carrying on the business at the time of a merchant bank.  It was a subsidiary of Harrison Securities Ltd which in turn was a company owned by Mr Harrison and his immediate family, through a complicated structure of trusts and other companies. Headingly Pty Ltd conducted a restaurant business.  It was owned as to 42½ per cent by Mr Harrison and family interests, as to 42½ per cent by another participant in the venture, and as to 15 per cent by another couple who were husband and wife.

Headingly Pty Ltd was obviously in financial difficulties and was unable to meet a number of very pressing commitments.  The sum of $85,000 enabled those commitments to be met.  The effect of Headingly Pty Ltd meeting those commitments was to pay immediately about $82,500 to a company, Pinnacle Estates Ltd.  Pinnacle Estates Ltd was another subsidiary company of Harrison Securities Ltd.  In practical terms, there was a movement of the money from one subsidiary of Harrison Securities Ltd to another, with the passing benefit that the restaurant business was saved from immediate failure.  As it turned out, that business later failed anyway.

At the time that the loan transaction was made, Harrison Australia Ltd was itself encountering considerable difficulties in its business.  The extent of those difficulties Mr Harrison says was not fully known to him at the time, but by September 1990 he and his fellow directors found it necessary to consult Arthur Andersen & Co for advice regarding the financial position of his whole group of companies, including Harrison Australia Ltd.

There is before the Court a report from Arthur Andersen & Co dated 12 September 1990 which summarised the financial position of the companies.  Harrisons Australia Ltd, at that stage, was shown as having assets of nearly $15 million, almost all of those assets being sundry debtors to whom moneys had been lent in the course of the banking business.  The liabilities of the company consisted of $13 million (in round figures) owing to secured creditors who held a floating charge over the assets of the company.  There were unsecured creditors of some $480,000.

As the result of advice received from Arthur Andersen & Co, the directors of the Harrison Securities group made immediate application to the Supreme Court for the appointment of a receiver.  A receiver was appointed, but shortly afterwards the holders of the security over the assets of Harrisons Australia Ltd appointed a receiver and manager to that company.  The receiver and manager is still in place and the Court has been informed that so far the realisation of assets indicates that there will be a shortfall such that the unsecured creditors and shareholders are unlikely to recover anything. 

At the present time the secured creditors have received about 50 cents in the dollar.  At least in a theoretical sense the offence therefore caused loss to the secured creditors.  Whether it was a direct loss of $85,000 is impossible to tell - but at least theoretically, insofar as a loss was caused to anyone by the transaction, that is where it ultimately fell. 

If, in the abstract, a legal analysis of the transaction is undertaken, Mr Harrison was guilty of a very plain breach of fiduciary duty as a director and office-holder of Harrisons Australia Ltd.  It is, of course, on that footing that he was charged and convicted.  But the seriousness of a director's breach of fiduciary duty must be assessed in the total factual context.  In this case the movement of money was perceived by Mr Harrison to be a movement of family money because, he says, Harrisons Australia Ltd appeared to be solvent at the time with a considerable excess of assets over liabilities.

Like so many business people at that time, Mr Harrison was imbued with enthusiasm and apparently thought that by propping up the restaurant business for the time being, good times would come. But if they did not, according to Mr Harrison he treated the transaction as one involving family money, so that if anyone incurred loss as a result of it, it would be primarily himself and his family. That, of course, does not alter the legal situation, but when one comes to assess the seriousness of the offence in the context of an application under section 229, it is necessary to have regard to those factual circumstances.

In my opinion, so viewed, the breach of duty in this case was serious, but it was not of the kind that has the potential to cause great loss to shareholders and to unsecured creditors who deal in good faith with the company.

A similar view of the offending seems to have been taken by the magistrate who imposed the conviction and sentence upon Mr Harrison. The magistrate expressed the view that this was not an offence of the most serious kind possible under section 229, and drew a clear distinction between section 229(1)(a) (under which the charge was laid and conviction entered), and section 229(1)(b), which the Magistrate referred to as encompassing offences involving moral turpitude.

The inference from the reasons of the learned special magistrate is that he did not treat the offence as one involving moral turpitude.  More importantly he noted in the fixing of penalty that it was necessary for him to impose a significant fine that would deter would-be offenders in a similar position.  However, he expressed the view that it was not necessary to impose a penalty to deter Mr Harrison himself, because he accepted that it was, on the agreed facts that had been put before him, highly unlikely that Mr Harrison would reoffend.

On the information before this Court that, in my view, is the proper inference to be drawn from the facts.  Mr Harrison, in evidence today, has observed that what he did was stupid and I interpreted his evidence to mean that it was a thoughtless activity of the kind that can occur from time to time in the course of a family business.

The offence, as I have indicated, occurred in May 1990.  It was not until about November 1995 that the complaint was laid against him and the conviction entered in January 1996.  In the meantime Mr Harrison had set about rebuilding his standing in the community.  He had, as a result of the collapse of his own family company structure, suffered a very large personal loss.  Notwithstanding that he continued to operate an advisory business in the area of sales and management and he continued to involve himself in a number of community-based organisations. 

In particular, in the period between 1990 and 1996, he was a member of the Corporation of the City of Adelaide and a member of the City of Adelaide Planning Commission. Either by reason of his appointment as a member of the Corporation of the City of Adelaide, or by government appointment, he became a member of the State Theatre Co of South Australia, a member of the Adelaide Festival Trust, deputy chairman of the Adelaide Convention Centre, a member of the Adelaide Formula I Grand Prix board, a member of the Adelaide Convention and Tourism Authority, a member of the Adelaide Convention Bureau and a member of the Adelaide Festival of Arts. Most of those bodies are, by their statutory structure, corporations for the purpose of the Corporations Law.

Upon the charge being laid, and in anticipation of a conviction, Mr Harrison withdrew from such of those bodies as he was then still a member.  It is clear from a number of references that have been placed before the Court that his reputation as a businessman and as a sales and management consultant, has remained intact and that he is held in high regard in the Adelaide community.  Since his conviction Mr Harrison has participated in a professional capacity as a seminar participant and provider of advice to some major companies and organisations, including the Business Centre, which is an arm of the State Government Economic Development Authority.  He has also assisted with a program put on for the financial services industry by the ACCC.

I think it is important in considering the present application that a substantial period of time has elapsed between the offending and the conviction, and that during that period Mr Harrison has involved himself in the activities that I have mentioned.  At a personal level he has continued acting as a sales and marketing consultant.  Prior to his conviction he was carrying out that pursuit as an employee of his family company Winning Sales Systems Pty Ltd.  However, in anticipation of the conviction he established a trust known as 21st Century Sales Trust which under the name of 21st Century Sales Strategies has carried on the same business.  Mr Harrison manages that business and leases equipment  from Winning Sales Systems Pty Ltd for that purpose.  The business is one which involves Mr Harrison as a consultant, giving advice.  That advice is tendered in some instances to very large companies on sales and marketing programs, and in other instances to small businesses.  In some instances the advice is offered in respect of a particular transaction, and in other instances it is offered more generally on an ongoing basis.

The Court has been told that in the course of giving advice there will be occasions where, perhaps on a monthly basis, Mr Harrison will participate in a round table discussion with a client where he offers advice on strategies which are likely to further the interests of the client.  Mr Harrison questions whether those activities are of the kind that might come within the notion of his being involved in the management of the company.  To illustrate the nature of his concern, the Court was referred to the decision of Commissioner for Corporate Affairs v Bracht (1989) 7 ACLC 40.

Against that background this application is made.  Mr Harrison seeks to be involved in the management of corporations in each of three categories of cases, and seeks orders that would accommodate that involvement. 

The first category involves the circumstances in which Mr Harrison would act as a director or board member of corporations that constitute semi-government authorities or community organisations providing community service.  In relation to that category, reference was made by analogy to the positions that Mr Harrison held immediately before 1996.  Mr Harrison has indicated that he would like to make his services available, if and when they are requested, to assist, often on a voluntary basis, on community organisations of that kind. 

The second category is where Mr Harrison would be involved in the management of one of his family companies, Winning Sales Systems Pty Ltd.  In that respect he has explained that the company was one that has been in operation for some time.  It has tax losses and it would be of advantage to him and his family if he were able to continue operating the business of that company so as to take advantage of those losses.  He also submitted that as a matter of appearance his business would look better in the corporate world if it were conducted through a corporate structure.  He describes this as a credibility issue, and it is one that I think is understandable.

The third category of cases concerns companies controlled by clients that consult him for sales and marketing advice.  He says that occasions arise where he may be invited to become a director of a client.  Alternatively, he is concerned that by becoming closely involved in the giving of advice - situations such as I have described where that advice is given in consultation with the client’s decision-makers on a regular basis - he may be said to be involved in a the management of the client company.

Mr Harrison has given evidence that on occasions since his conviction he has been approached to accept a position on a community service organisation or on the board of a client corporation that has consulted him in a private capacity for advice. On these occasions he has simply declined the invitation. He has explained, and I find this explanation entirely plausible, that it would not be feasible upon such a request being made, particularly in the case of a community service organisation, for him to explain that he would have to give particulars of that corporation to the court on an application made under section 229 specifically in relation to his involvement in the management of that corporation. Mr Harrison seeks therefore an order of a general kind in respect of both the first and the third of the categories of matters that I have described.

Counsel for the Australian Securities Commission argues that the court either does not have power, of if it has power should not exercise it, under section 229, to make a general order that permits management of unspecified corporations. On the contrary it is contended that the power should only be exercised on application in respect of a specific corporation. Reference is made to the decision of Drummond J in Re: Schneider (1997) 15 ACLC 90 in support of that submission.

In my view s.229(3) does not limit the jurisdiction of the court in a way that prevents it from making an order that applies either generally, or to a group of corporations, where particular corporate entities are not described individually, but are merely described by some description of the features of corporations that would come within the group.

The section has been applied in many instances to grant leave to be involved in the management of several corporations, each of which has been specified.  I do not think it is possible to read the section so that it only permits leave in respect of one corporation.  Once it is accepted that it permits leave to be given in respect of a number of corporations there is, in my view, no reason to construe the provision in a way that would not allow a general order.

On the other hand, the circumstances in which the Court would think it appropriate, having regard to the policy considerations underlying the section, to make an order in general terms would, in my view, be very rare, for the very reasons that are explained by Drummond J in Re: Schneider at 93 - 94. This is particularly so in the case of trading companies. Without knowing the particulars of the type of companies, the nature of their business, the nature of their management structure, and the intended involvement of the applicant in their management, it would be impossible to know whether it was appropriate to make an order in general terms that did not specify particular corporations by name.

In the present case, turning to the first category of corporations in respect of which leave is sought, it seems to me that many of the considerations which would normally be matters of great concern on an application of this kind do not arise, or do not arise in a way that is of practical significance.  The corporations falling within that category are ones which are likely to receive substantial public exposure in the conduct of their affairs.  They are likely to have many board members, so that control would not fall in the hands of any one person, and because, generally speaking, they are not‑for‑profit corporations many of the risks that might otherwise arise, simply do not exist.

In my view uncertainties exist with respect to the description of the corporations of the first category, as formulated in submissions.  However, if the category were limited to not-for-profit organisations of a community service kind, and if there were a further condition requiring that the relevant board have four or more members, in addition to Mr Harrison if he were appointed, I think the concerns which have been expressed by the courts about granting leave would not arise in any practical sense.

Coupled with that is the fact that Mr Harrison is a person who has held a high public profile and continues to be held in high regard.  He is person who obviously has skills.  He is one of those people in the community who is prepared to make themselves available for community service, and I think it is in the public interest that he should be permitted to do so.  I think it is highly likely that those that would be minded to either elect him to such a position or appoint him to such a position would be fully aware of his background, including both his skills and the misfortunes that befell him around 1990.  They would be well able to form a proper judgment as to whether he was an appropriate person to be appointed.

In my view, therefore, even though to make an order authorising involvement in the management of organisations within the first category of cases would involve making an order in general terms, that would not specify particular organisations in advance, I think this is one of those rare cases where it would be proper to do so.

The second category concerns the single company Winning Sales Systems Pty Ltd.  The onus of establishing that it is appropriate to make the order sought rests upon Mr Harrison.  I consider that in the circumstances of this case the onus has been fulfilled.  Again, I take into account that a long period of time elapsed between the offence and the conviction.  During that time Winning Sales Systems Pty Ltd was operated by Mr Harrison, apparently without any ill-effects on anybody with whom the company has dealt.  Since the conviction, Mr Harrison has continued to conduct the business himself.  It is not a business that is involved in the purchase and sale of merchandise.  It’s only trading activities that incur credit are in respect of the provision of office requirements, such as paper, and the debts incurred in the course of that aspect of the business do not exceed a few thousand dollars per month.  Winning Sales Systems Pty Ltd is not a company that has outside shareholders beyond Mr Harrison’s family.  I consider he should be allowed to operate his business through its pre-existing corporate structure.

In respect of the application to carry on the business of Winning Sales Systems Pty Ltd, Mr Harrison offered to enter into a deed of indemnity between himself and the company, undertaking upon demand either from the company or its successors and assigns to discharge the debts of the company.  In that way he sought to assure the Court that he was not seeking to use the corporate structure to gain limited liability.  That offer having been made, I think the Court should accept it as one of the conditions for granting Mr Harrison leave to be involved in the management of Winning Sales Systems Pty Ltd.

The third category of cases would concern Mr Harrison’s involvement in the management of the businesses of clients.  That is a matter which causes me concern.  I think this category of cases falls fairly and squarely within considerations of a kind mentioned by Drummond J, in Re: Schneider, to which I have already referred.  I do not think that the Court should make a blanket order where the characteristics of the corporations, in respect of which there might be management, are unknown, and consequently where the nature of the businesses, their size, their management structure and so on, is not known.

The underlying policy considerations that have prompted parliament to introduce the restriction on management provided for in s.229 are important ones. It must be a clear and appropriate case before the court gives leave so as to remove what parliament prima facie thought was a necessary restriction. In this case I have seen fit to do so in the case of not-for-profit corporations, and I have seen fit to do so in respect of the personal company of Mr Harrison. However, I do not think that leave should be given at large where the corporations may be great or small, where the other personalities likely to be involved are not known, and where the management structure and the nature of the business of those corporations is not known.

I am conscious of the potential difficulty which Mr Harrison has referred to in determining whether in the ordinary course of his advising business he approaches, or perhaps stands in, the grey area between being involved in management, and not being involved in management. That, however, is the kind of difficulty that arises in one form or another in the provision of many professional services. It is usually the function of professional people to make sure that they tender objective and dispassionate advice, and to this end they endeavour to remain aloof from the day‑to-day management of particular clients. I accept that difficulties of the kind identified by Mr Harrison can arise in the course of his consultancy work, but in my view such difficulties are not unusual ones and he will have to make sure he does not become involved in the management of his corporate clients contrary to s.229.

For those reasons, there will be orders as follows:

1. Leave to the applicant pursuant to s.229(3) of the Corporations Law to be involved in the management of Winning Sales Systems Pty Ltd (“the company”) subject to the condition that he enter into a deed of indemnity between himself and the company whereby he agrees upon demand either of the company or its successors or assigns to discharge the debts of the company. 

1. Leave to the applicant pursuant to s.229(3) of the Corporations Law to be involved in the management of a corporation where either (a) that corporation is a not‑for‑profit community service organisation with a board of five or more members or (b) he is appointed to the position of director or board member of the corporation by ministerial or other government appointment. 

I certify that this and the preceding ten (10) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice von Doussa

Associate:

Dated:             6 March 1998

Counsel for the Applicant:	Mr M F Blue
Solicitor for the Applicant:	Thomson Playford
Counsel for the ASC:	Ms D Sheldon
Date of Hearing:	6 March 1998
Date of Judgment:	6 March 1998