SYRL and Australian Securities & Investments Commission

[2024] AATA 1370

SYRL and Australian Securities & Investments Commission [2024] AATA 1370 (3 June 2024)

Division:TAXATION AND COMMERCIAL DIVISION

File Number(s):       2024/3220

Re:  SYRL

APPLICANT

Australian Securities & Investments CommissionAnd  

RESPONDENT

DECISION

Tribunal:Deputy President Bernard J McCabe

Senior Member Diana Benk

Date:3 June 2024

Place:Brisbane

1.The reviewable decision is stayed on an interim basis pursuant to s 41(2) of the Administrative Appeals Tribunal Act 1975 (Cth) until the hearing and determination of the interlocutory application for stay orders OR until further order.

2.The stay order in (1) does not take effect unless and until the applicant offers the following express undertakings:

(a)  she will only participate in the management of the single company which was discussed in these proceedings, and no other; and 

(b)  the company will not take on any new business, and that she will within three business days of these reasons being published provide an account to ASIC of the company’s current business activities.

3.Both parties are at liberty to apply.

................................[SGD]........................................

Deputy President Bernard J McCabe

Catchwords

PRACTICE AND PROCEDURE – STAY APPLICATION – application for an interim stay order– objectives of the regulators in making a decision – protection – objective of transparency – conditional interim stay application granted

Legislation

Administrative Appeals Tribunal Act 1975
Australian Securities and Investments Commission Act 2001

Corporations Act 2001

Cases

Australian Securities and Investments Commission v Administrative Appeals Tribunal [2009] FCAFC 185
Scott and Australian Securities and Investments Commission [2009] AATA 798
Quinlivan and Australian Securities and Investments Commission [2010] AATA 113
Lee and Australian Securities and Investments Commission [2020] AATA 2661

Wang and Australian Securities and Investments Commission [2022] AATA 457

REASONS FOR DECISION

1.Section 206F of the Corporations Act 2001 (Cth) permits the Australian Securities and Investments Commission (ASIC) to disqualify a person from being involved in the management of a company where that person was previously a director of companies that have been wound up in insolvency. A delegate of ASIC has exercised the discretion under s 206F to disqualify the applicant in these proceedings from being a director for a period of 18 months. The decision has already taken effect. The applicant has asked the Tribunal to review the decision – but she has asked the Tribunal to stay the disqualification decision and make confidentiality orders while the review proceeds.

1. ASIC has opposed the stay application. The Tribunal has now made timetabling orders for the hearing of that application on 19 June. At the case management directions hearing where the timetabling orders were discussed, Ms SYRL, through her counsel, asked the Tribunal to make interim stay orders that will permit her to remain involved in the management of one company in particular. She says those orders should be made as a matter of urgency because the applicant and the company in question are both parties to proceedings in the Federal Court. The proceedings were commenced by another regulator. As we understand it, the judge hearing the proceedings has already made adverse findings against the applicant and the company, and the time has come for the parties to make submissions about penalties and other forms of redress. The timetabling orders in those proceedings anticipate both respondents (ie Ms SYRL and the company) putting on their material by 11 June 2024.

2. The applicant says the company will be unable to comply with the Court’s timetabling orders because she is (or, more accurately, was) the company’s only director. If she is unable to participate in its affairs, the company will be unable to access and prepare its material. If the company does not effectively participate in the proceedings, there is a risk that orders will be made against it and that her own defence will be compromised. Mr May, who appeared for the applicant, pointed out the regulator in those proceedings has asked for orders that will potentially impose a significant obligation on the company. The proposed orders expressly call for the applicant to meet the company’s obligation in the event the company is placed into external administration.

3. ASIC did not agree to an interim stay.

4. There was a limited amount of material provided in support of the stay application. There is no doubt because the stay application was filed hurriedly. However, Ms Graycar, who appeared for ASIC, pointed out the regulatory process which led up to the disqualification decision has been in train since November 2023 and the proceedings in the Federal Court have also been on foot for some time. In those circumstances, Ms Graycar said the Tribunal did not have sufficient material before it to make a decision at this point. She said the Tribunal should wait for the stay hearing on 19 June before considering making stay orders.

5. We have decided to order an interim stay on conditions under s 41(2) which will run until the stay application is decided, or until further order. We explain our reasons below.

   The power under s 41(2) of the Administrative Appeals Tribunal Act 1975 (the AAT Act)

6. The stay power in s 41(2) is available “for the purpose of securing the effectiveness of the hearing and determination of the application for review”. The Tribunal can make a stay order (including an order with conditions attached) where it forms “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”. As it goes about forming that opinion, the Tribunal will typically have regard to a range of factors like those suggested by Downes J in his reasons in Scott and Australian Securities and Investments Commission [2009] AATA 798 at [4]. Both parties agree those factors are relevant even on an application for interim stay – although the material before us at the case management directions hearing was limited in scope.

7. Section 41 contemplates the possibility that it may be necessary to act quickly in response to a stay application. Section 41(4) says the Tribunal would not ordinarily make a stay order without giving the decision-maker the opportunity to make submissions but exceptions to that general rule might be made where it is not practicable in urgent circumstances: s 41(5).

8. The decision-maker did appear and make submissions, so there is no need to consider whether s 41(5) applies; we refer to that sub-section only because it demonstrates the need for the Tribunal to adapt its processes to the exigencies of the particular case. Whereas the applicant would ordinarily be expected to produce material in support of their request for a stay order, sometimes the Tribunal might, on balance, see fit to make its decision on less fulsome material.

9. We note the applicant has also asked for non-publication orders under s 35 of the AAT Act. There is no need to deal with that request for now as ASIC has given an undertaking that it will not publicise its reviewable decision before the stay application is decided following the interlocutory hearing on 19 June.

   The purpose of the stay

10. We have already pointed out the stay power is available for a particular purpose. To use the vernacular, it is intended to preserve the status quo (at least in some respects) in order to secure the efficacy of the Tribunal’s hearing. In this case, the applicant says her current inability to manage the company in question will compromise that entity’s defence in the Court proceedings. In her application for review, it was said:

    Without a director, [the company] will be unable to operate, and its right to defend the penalty hearing and prosecute the appeal will be lost. This prejudice supports a stay being made in circumstances where the Applicant has given an undertaking not to assume directorships of any other company.

11. That explains why a stay order would help secure the effectiveness of the Court proceedings, but it is not immediately obvious from that request how a stay order would preserve the efficacy of the Tribunal’s proceedings – and we must be concerned at first instance with the efficacy of the Tribunal proceedings.

12. Mr May attempted to address this point in his oral submissions at the directions hearing as we discussed the interim stay. He argued the company’s inaction in the Court proceedings might rebound on the applicant since she will be potentially liable if the company cannot meet its obligations. In making that submission, Mr May was effectively giving evidence from the bar table. We do not criticise him for doing so, as that inference was probably available from the terms of the proposed orders the regulator seeks against the applicant in the other proceedings.

13. As we understand the argument, the applicant says the liability which might be visited upon her if she cannot participate in the company’s defence in the Court proceedings in the very short term is so great that she might be overwhelmed in her conduct of the Tribunal proceedings. It is also possible an adverse outcome for the company in the Court proceedings would so seriously impact on her personal circumstances that there would be no point contesting her disqualification before the Tribunal.

14. This last point might provide a basis for the Tribunal being satisfied orders are appropriate for a purpose contemplated by s 41(2). To form such a view, we would ordinarily expect some material (a sworn statement, perhaps) that described the magnitude of the likely financial risk relative to the applicant’s resources.

15. That material would also presumably describe the affairs of the company in question. We were told from the bar table the company does not currently deal with the public. It provides services to other companies in the corporate group controlled by the applicant. But we were also told the company has seven or eight employees, confirming it is active. The material might also shed light on how the company’s defence might be impaired given the applicant is able to defend herself in the court proceedings in any event.

16. We accept the applicant points out the stay is required urgently, which might impact on her ability to prepare detailed material in support of the request for an interim stay. But we also acknowledge Ms Graycar’s point that the disqualification process has been in train for some time, and the Court proceedings have been on foot even longer. In those circumstances, the awkwardness of the applicant’s position (such as it is) can be attributed to her approach to the litigation.

    The Scott factors

17. We will assume for present purposes the order is sought for a proper purpose and consider the exercise of the discretion. In doing so, we will revisit the question of purpose (below).

    Merits of the substantive application for review

18. The Tribunal will conventionally have regard to the prospects of success when forming its opinion as to the desirability of ordering stay. In doing so, the Tribunal will avoid being drawn into a mini-trial in which it grapples with the (raw) material before us. There is no danger of that here: the factual material is sparse and the cases that each party will run before us have not begun to take shape. It is not clear at this point whether the applicant has an arguable case. It follows this consideration does not count in favour of exercising the discretion.

    The consequences for the applicant

19. We have already explained the applicant says her defence of the Court proceedings may be impaired if she cannot participate in the affairs of the company as it prepares its own defence. She might also be fixed with residual liability if the Court makes orders against the company which it cannot satisfy. There is limited material before us but we think it probably follows the applicant has reason to be concerned. Having said that, we do not know what the Court might do if an application were made to modify or extend the timetabling orders in circumstances where the company’s non-compliance with orders (if that is what occurs) is the result of regulatory action.

20. Additional material would be desirable before we reached a final view about what would happen if we did not order the stay. It would also be desirable to see and hear more about whether ordering a stay would make a practical difference to the company’s conduct of the Court proceedings in circumstances where the applicant is a party to those proceedings with a right to be heard and present evidence in her own right.

21. We should add there are others whose interests might be affected if a stay order is (or is not) made, such as the employees of the company and other group entities. Once again, the paucity of material before us makes it difficult to form a view on this point.

22. For the purposes of an interim stay, we say this factor counts in favour of the exercise of the discretion – but not heavily.

    The public interest

23. In exercising our discretion, we are necessarily informed by the objectives of the disqualification regime in Part 2D.6. Those objectives have been described in other cases, including Lee and Australian Securities and Investments Commission [2020] AATA 2661 where the Tribunal explained (at [37]-[38]):

    …General incorporation is a privilege that is widely available to businesses precisely because business is generally in the interests of the community. Businesses generate jobs and opportunities. They are expected to obey the law, pay taxes and contribute to economic growth. Corporate collapses can be immensely costly to individual creditors and other stakeholders, and they can wreak havoc in the wider economy. While business failures are an established feature of a free enterprise system, failures as a consequence of bad management are particularly regrettable – especially where they can be avoided if directors follow a few basic rules. It follows there is a public interest in ensuring the proper management of companies, albeit there is also an interest in encouraging (or at least not inhibiting) free enterprise.

    Section 206F permits the regulator to weed out directors who have demonstrated they fall short on their basic obligations. It helps ASIC protect the public from actors who have already demonstrated they are bad, or at least unacceptably risky. The prospect of action under s 206F also provides a deterrent effect. There is the potential for specific deterrence: disqualification provides an opportunity to teach an errant director to be more careful in the future. Disqualifying a director also provides an example pour encourager les autres. It follows a decision in a particular case may serve the purpose of general deterrence.

24. We acknowledge we must also be conscious of ASIC’s objectives as a regulator which are set out in s 1 of the Australian Securities and Investments Commission Act 2001 (Cth).

25. The discussion makes clear there is a public interest in being protected from poor quality directors. The nature of the power in s 206F must be born in mind, however. It is not like many of the disqualification and banning orders made pursuant to other provisions. Many of those powers are exercised having regard to quite specific instances of misconduct or failure. The power in s 206F is exercised for prophylactic effect considering the applicant’s involvement in corporate collapses. That was made clear in Quinlivan and Australian Securities and Investments Commission [2010] AATA 113 at [70]:

    We are not obliged to identify specific breaches of duty or contraventions of the law in order to pass judgment on the adequacy of Mr Quinlivan’s performance for the purposes of s 206F: see Re Guss and Australian Securities and Investments Commission [2006] AATA 401; (2006) 90 ALD 349 at [48] per Deputy President Olney. While evidence of contraventions will obviously be relevant to a decision to disqualify, the section has a different focus. The operation of the section is triggered by evidence of a pattern of failure. As the Tribunal explained in Re Andrews and Australian Securities and Investments Commission [2006] AATA 25 at [23]:

    The provision was apparently enacted on the assumption that involvement in one failure might simply be unfortunate, but involvement in two or more separate failures could suggest carelessness or other breach of duty.

26. We have already noted the disqualification process commenced around November 2023 when ASIC issued the applicant with a ‘show cause’ notice. ASIC’s reviewable decision under s 206F was only made about six months later. It is difficult to see how the public interest would be compromised if the applicant were permitted to remain in charge of a single company for a further two weeks for the limited purpose of managing litigation.

27. It would be preferable if we had more material that enabled us to confirm the company in question did not in fact undertake other activities. Our concerns in that regard might however be addressed through the imposition of appropriate conditions on a stay. We will have more to say about that possibility below. Subject to those conditions being agreeable, we accept these concerns do not weigh against granting an interim stay.

    Consequences for the respondent

28. Ms Graycar acknowledged there were unlikely to be any adverse consequences for the respondent as it performed its regulatory function if we made an interim stay. This consideration does not count against the exercise of the stay.

    Would the application for review be rendered nugatory if the stay were not granted?

29. This factor arguably captures the enquiry as to purpose we described earlier in these reasons. It is not clear on the material before us that the review would be rendered entirely nugatory but we accept there is an argument that the applicant might be exposed in the short term to a risk (ie that there might be serious implications for the applicant in the Court proceedings if the company did not participate effectively) if the stay were not granted, and that it might be difficult to recover from any resulting loss. That difficulty might call into question whether there is any point persisting with these proceedings: the applicant’s inability to manage the company so that it can effectively participate in the Court proceedings may have such serious consequences for the applicant the Tribunal proceedings will be pointless. This consideration counts in favour of ordering the interim stay, although the applicant will need to do more to explain this consideration at the interlocutory hearing of stay.

    Other considerations?

30. These reasons relate to a request for an interim stay. The whole question will shortly be revisited at the stay hearing in under three weeks. That consideration counts in favour of a stay.

    Conclusion

31. We are satisfied, on balance, it would be appropriate to order an interim stay of the disqualification decision under review provided the applicant is agreeable to certain conditions. The first condition requires the applicant to undertake she will only participate in the management of the single company discussed in these proceedings, and no other. Second, she must agree the company will not take on any new business, and she will within three business days of these reasons being published provide an account to ASIC of the company’s business activities. If those business activities are more expansive than those described in the application for an interim stay, we expect ASIC will make an urgent application to dissolve the interim stay.

32. The applicant’s agreement to the second of these conditions will presumably depend on her satisfying herself that she can comply with the conditions while continuing to act as a director in accordance with her duties to the company in question. If giving that undertaking would be inconsistent with her duties to the companies, we assume she will not offer the undertaking.

34.     I certify that the preceding 33 (thirty-three) paragraphs are a true copy of the reasons for the decision herein of

.................................[SGD].......................................

Associate

Dated:  3 June 2024

Date(s) of hearing: 31 May 2024
Counsel for the Applicant:	Brendan May
Solicitors for the Applicant:	Assure Lawyers
Counsel for the Respondent:	Reg Graycar
Solicitors for the Respondent:	Australian Securities and Investments Commission