FEDERAL COURT OF AUSTRALIA

CORPORATIONS - investigation by Australian Securities Commission - request for reasonable assistance - person  required to execute power of attorney authorising search of company records in Mauritius - whether reasonable grounds for suspicion or belief that person can give information - whether reasonable assistance extends to physical act - whether privilege against self-incrimination applies - whether assistance reasonable if likely to prove futile

Australian Securities Commission Law  ss 19(1), 68, 70

George v Rockett (1990) 170 CLR 104  applied

Pyneboard Pty Ltd v Trade Practices Commission (1983) 152 CLR 328  cited

Controlled Consultants Pty Ltd v Commissioner for Corporate Affairs (1985) 156 CLR 385 applied

Australian Securities Commission v Ampolex Limited (1995) 14 ACLC 80  cited

AUSTRALIAN SECURITIES COMMISSION v BERND KUTZNER

NO. TG 3016 OF 1997

JUDGE:          HEEREY J

DATE:           18 DECEMBER 1997          

PLACE:          MELBOURNE

THE COURT ORDERS THAT:

The application be dismissed with costs, included reserved costs.

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

REASONS FOR JUDGMENT

The applicant Australian Securities Commission (ASC) seeks an order under s 70(3) of the Australian Securities Commission Law (the ASC Law) that the respondent Bernd Kutzner comply with a requirement of the ASC made under Pt 3. The requirement in question is that Mr Kutzner execute a power of attorney which would give the attorney power to obtain details as to the shareholding of a Mauritius company called Indian Ocean Technologies Ltd (IOT).  The ASC suspects that Mr Kutzner is a shareholder in IOT or otherwise holds a beneficial interest in that company.

The Beku Investigation

Mr Kutzner was at all material times a director of and shareholder in Beku Environmental Products Limited (Beku) which is a producer of fish oil and associated products, carrying on business at Goodwood in Tasmania.  On 1 April 1996 the ASC made a decision under s 13(1) of the ASC Law to commence an investigation into the affairs of Beku.  The contraventions which the ASC had reason to suspect may have been committed involved contraventions of s 592(6)(a) of the Corporations Law (being knowingly concerned in an act done by a company with intent to defraud creditors), ss 232(2) and 1317FA (failing to act honestly as a director) and s 1307(1) (falsifying the books of Beku).

The alleged contraventions arise out of dealings between Mr Kutzner and a Dr Charles Dragar.  Dr Dragar provided certain technology to Beku.  The suspicion is that IOT is a front for Mr Kutzner and that he set up a sham transaction whereby IOT purported to supply the same or very similar technology as Dr Dragar’s for which Beku made payment in the form of shares.  In other words, the allegation is that Mr Kutzner arranged for Beku to pay himself (via IOT) for what was in truth Dr Dragar’s technology.  Mr Kutzner claims on the other hand that Dr Dragar knows all about IOT, that he is in truth its owner and that it was set up by him as a means of avoiding tax.  It will be seen therefore that the true ownership of IOT is a factor critical to the investigations.  The problem is that Mauritius has strict secrecy laws in relation to companies registered as “international companies”. 

Progess of Investigation

Dr Dragar claims to be the owner of the intellectual property rights in an invention to produce squalene of greater than 99.9 per cent purity from crude shark liver oil.  On 25 June 1993 Beku entered into a consultancy agreement with Dr Dragar in relation to a “shark oil project”.  Payment was to be at an hourly rate for work done and once labour costs had been paid an ongoing royalty would be determined. 

Five days later, on 30 June, the manager of a company in Mauritius called International Management (Mauritius) Limited (IMM) wrote to Mr Kutzner confirming a telephone conversation the previous day to the effect that

“one of our clients has developed a unique process for extracting squalene and D.A.G.E. from shark liver oils.”

The letter stated that IMM’s client (which later turned out to be IOT) would be prepared to sell to Beku the sole rights to this technique.  In the following month correspondence passed between Beku and IMM concerning the provision of samples for analysis.  On 24 August Beku wrote to IMM confirming that the samples had arrived and laboratory analysis had proven to be “very favourable”.  Beku offered $400,000 shares of $1 each in exchange for worldwide productions rights and ownership.  On 14 September IMM forwarded a draft agreement. 

In the meantime, discussions between Dr Dragar and Beku had been proceeding and on 27 September Dr Dragar handed Mr Kutzner a draft of an agreement under which Dr Dragar licensed his squalene process to Beku.

On 28 September Beku entered into a joint venture agreement with a Korean company called Sun In Trading Inc (Sun In).  That agreement provided for a new company called Beku-Sun Technologies Pty Ltd (Beku-Sun) to be established for the purpose of manufacturing and selling processed fish oil products.  Paid up capital was to be $1 million, one-third held by Sun In and two-thirds by Beku.  On 8 November Beku-Sun was incorporated.

On 20 May 1994 Mr Kutzner on behalf of Beku reached agreement with Dr Dragar that Beku should buy the process which Dr Dragar had established for a consideration of 175,000 shares in Beku and that Dr Dragar would commence working for a salary of $500 per week and from 1 September a salary of $45,000 per annum plus a car.  On 20 June Dr Dragar wrote to Mr Kutzner referring to an agreement which included a fee for the supervision of construction and commissioning of the first commercial plant.  The amount agreed upon was said to be 175,000Beku shares and $40,000.

To revert to IOT, on 26 August 1994 IOT entered into a formal agreement with Beku for the licensing of a process of producing squalene and a product referred to as D.A.G.E. from shark liver oil, in return for 400,000 $1 fully paid shares in Beku.   The general journal of Beku records on 15 August 1994 under the notation “acquire squalene rights” a debit of $400,000 for intellectual property and a credit of the same amount for issued capital.  The journal also records on the same day a receipt of $150,000 for the sub-licensing of those rights to Beku-Sun.  On 27 March 1995 Dr Dragar wrote to Mr Kutzner complaining that he had not received the $40,000 agreed on or the 175,000 shares and that some $21,000 was owing for work done under the salary arrangement.

On 1 May 1996 Dr Dragar was examined by the Commission.  He denied that he had any knowledge of IOT until he was told about it in late 1995 by one of the Korean directors of Beku-Sun.  In Mr Kutzner’s examination on 13 May he alleged IOT was Dr Dragar’s company and that the Beku dealings with IOT were at Dr Dragar’s request to obtain tax advantages.

In the course of their respective examinations, Dr Dragar agreed to execute a power of attorney to enable searches of the records of IOT to be carried out, but Mr Kutzner refused. 

Searches in Mauritius

Enquiries made by ASC through the Australian High Commission in Port Louis, Mauritius ascertained that IOT was registered under s 77 of the International Companies Act 1994 of Mauritius  (the Mauritius Act) which provides as follows:

“77.     Inspection of books and records

            (1)        A member of a company incorporated under this Act may, in person or by attorney and in furtherance of a proper purpose, request in writing, specifying the purposes, to inspect during normal business hours the share register or the register of members of the company, the register of directors, the register of mortgages and charges or the books, records, minutes and consents kept by the company and to take copies or extracts therefrom.

            (2)        For purposes of subsection (1), a proper purpose is a purpose reasonably related to the member’s interest as a member.

            (3)        Where a request under subsection (1) is submitted by an attorney on behalf of a member, the request shall be accompanied by a power of attorney authorizing the attorney to act for the member.

            (4)        Where the company, by a resolution of directors, determines that it is not in the best interest of the company or of any other member of the company to comply with a request under subsection (1), the company may refuse the request.

            (5)        On refusal by the company of a request under subsection (1), the member may before the expiration of a period of 90 days of his receiving notice of the refusal, apply to the Court for an order to allow the inspection.”

.

The ASC made arrangements through the international accounting firm KPMG to arrange for Dr Dragar to execute a power of attorney to inspect the registers of IOT in Mauritius.  The KPMG office in Mauritius advised KPMG Hobart on 22 October 1996 that they had:

“informally contacted IMM for some preliminary information and it appears that the company [presumably IOT] has issued only bearer shares and that Mr Kutzner Bernd [sic] is apparently the ultimate beneficial owner.”  [Emphasis in original]

IMM wrote to Mr J. Jingree of KPMG Port Louis on 15 November as follows:

“RE:  INDIAN OCEAN TECHNOLOGIES LTD.

Dear Mr Jingree,

We are in receipt of your letter dated 14th November 1996 and addressed to our Mr Ramtoola.

Section 77(1) of the International Companies Act provides that a member of an International Company may have the right to inspect certain specified corporate registers kept at the registered office of the company.  The Power of Attorney you have attached does not state whether Dr Charles Dragar is delegating the authority to inspect the books of the company in his capacity as a member.

We further wish to draw your attention to the following provisions of the section 77(2) of the International Companies Act:  ‘For the purposes of subsection (1) a proper purpose is a purpose reasonably related to the member’s interest as a member.’

In the circumstances, we regret that we are unable to accede to your request to allow your Mr Emrith to inspect the books of the above company.

Yours sincerely,

   (sgd)

Sydney Bathfield F.C.A.

Managing Director.”

[Emphasis in original]

KPMG Port Louis forwarded that letter on to KPMG Hobart stating amongst other things:

“You will certainly recall that in our fax of 22 October 1996, we did request you to confirm whether Dr Charles Dragar is a member of the company.  If you wish to pursue matters further the relationship of Dr Dragar as a member of the company will have to be established.  The power of attorney also amended accordingly.  Even if it is being envisaged to apply to the Court under Sec 77 (5) of the International Companies Act of 1994 for an order to allow the inspection it will have to be proved that Dr Dragar is a member of the company.”

The Requirement

The formal requirement of the ASC is dated 30 July 1997.  It is addressed to Mr Kutzner and recites the offences, the suspicion of which have grounded the investigation. It requires Mr Kutzner to duly execute, by signing, sealing and delivering, a power of attorney in the form annexed to the notice in the presence of a Notary Public on or before 15 August 1997 and to deliver the original executed power of attorney to the office of the ASC in Hobart.  The power of attorney is in favour of Reesan Emrith of Port Louis and is as follows:

“POWER OF ATTORNEY

By this Power of Attorney given on the           day of August 1997 I, BERND KUTZNER of 24 Nicholas Drive, Sandy Bay, Tasmania, Australia appoints REESAN EMRITH of 12 Remy Oiller Street, Port Louis, Mauritius my attorney for me and in my name or otherwise on my behalf to do and execute all or any of the following acts deeds and things in respect of the company Indian Ocean Technologies Ltd (“the Company”) which is registered as an international company pursuant to the provisions of the International Companies Act 1994 (“the Act”).

1.         To inspect books and records of the company pursuant to section 77 of the Act;

2.         To request in writing, specifying the purposes, to inspect during normal business hours the share register or the register of members of the Company, the register of directors, the register of mortgages and charges or the books, records, minutes and consents kept by the Company and to take copies or extracts therefrom;

3.         To apply pursuant to section 77(5) of the Act to the Court for an order to allow inspection;

4.         To pay any charges or fees which may lawfully be sought in connection with such an inspection;

5.         Generally to do all acts as he shall deem necessary in the execution of the duties and matters the subject of this deed.

And I declare that the power created by this deed shall be irrevocable for the space of 24 months from the date of this deed.

EXECUTED AS A DEED

SIGNED SEALED AND DELIVERED      )

by BERND KUTZNER in the                        )

presence of:                                                      )”

By certificate dated 13 October 1997 the ASC certified to the Court that it was satisfied the Mr Kutzner had failed, without reasonable excuse, to comply with the requirement.

Legislation

Section 13(1) provides that the ASC may make such investigation as it thinks expedient for the administration of a national scheme law where it has reason to suspect that there may have been committed a contravention of such a law.  Section 19 provides as follows:

“19(1)This section applies where the Commission, on reasonable grounds, suspects or believes that a person can give information relevant to a matter that it is investigating, or is to investigate, under Division 1.

      (2)The Commission may, by written notice in the prescribed form given to the person, require the person:

 (a)      to give to the Commission all reasonable assistance in connection with the investigation; and

 (b)      to appear before a specified member or staff member for examination on oath and to answer questions.

     (3)  A notice given under subsection (2) shall

 (a)      state the general nature of the matter referred to in subsection (1); and

 (b)      set out the effect of subsection 23(1) and section 68.”

“Giving information” is defined in s 6 to include a reference to:

“(a)     explaining or stating a matter;

  (b)     identifying a person, matter or thing;

  (c)      disclosing information; or

  (d)     answering a question.”

Section 20 provides that the remaining provisions of Div 2 of Pt 3 apply where, pursuant to a requirement made under s19, a person appears before another person for examination.  Those provisions concern oath, affirmation and requirement to answer (s 21), examination in private (s 22), right of legal representation (s 23), record of examination (s 24), providing copies of record (s 25), conditions on giving of copies (s 26) and a requirement that a record should accompany a report of an investigation (s 27).  Section 68  relating to self incrimination is as follows:

“68(1)For the purposes of this Part, of Division 3 of Part 10, and of Division 2 of Part 11, it is not a reasonable excuse for a person to refuse or fail:

(a)       to give information;

(b)       to sign a record; or

(c)        to produce a book;

in accordance with a requirement made of the person, that the information, signing the record or production of the book, as the case may be, might tend to incriminate the person or make the person liable to a penalty.

     (2)  Subsection (3) applies where:

(a)       before:

            (i)         making an oral statement giving information;

            (ii)        signing a record;

pursuant to a requirement made under this Part, Division 3 of Part 10 or Division 2 of Part 11, or under a corresponding law of another jurisdiction, a person (other than a body corporate) claims that the statement, or signing the record, as the case may be, might tend to incriminate the person or make the person liable to a penalty; and

(b)       the statement, or signing the record, as the case may be, might in fact tend to incriminate the person or make the person so liable.

    (3)   The statement, or the fact that the person has signed the record, as the case may be, is not admissible in evidence against the person in:

(a)       a criminal proceeding; or

(b)       a proceeding for the imposition of a penalty;

other than a proceeding in respect of:

(c)        in the case of the making of a statement - the falsity of the statement; or

(d)       in the case of the signing of a record- the falsity of any statement contained in the record.”

Section 70 provides:

“70(1)  This section applies where the Commission is satisfied that a person has, without reasonable excuse, failed to comply with a requirement made under this Part (other than Division 8).

    (2)   The Commission may be writing certify the failure to the Court.

   (3)   If the Commission does so, the Court may inquire into the case and may order the person to comply with the requirement as specified in the order.”

I now turn to deal with the arguments advanced on behalf of Mr Kutzner. 

Discretion under s 70(3)

I accept the submission that the Court has a discretion as to whether an order should be made under s 70(3).  That is indicated not only by the use of the words “may order” but also by the mandate of the Court to “enquire into the case”.  Amongst other things, the Court can consider whether the person concerned has a “reasonable excuse” for not complying with the requirement.

“Reasonable Grounds” under s 19(1)

Counsel for Mr Kutzner did not challenge the decision under s 13(1) to make the investigation.  However he argued that there were not “reasonable grounds” within the meaning of s 19(1) for the ASC suspecting or believing that Mr Kutzner could give information relevant to the matter it was investigating.  He argued that the material could not establish precisely what was the intellectual property that Dr Dragar owned, or that it was the same as that provided by IOT.  He said that in any case Beku had by virtue of its contract with Dr Dragar become the owner of the intellectual property. 

In George v Rockett (1990) 170 CLR 104 the High Court dealt with the question of reasonable grounds for suspicion in the context of the issue of a warrant by a Justice of the Peace.  In a unanimous judgment the Court said (at 115):

“3.       The facts to be established.

   In considering the sufficiency of a sworn complaint to show reasonable grounds for the suspicion and belief to which s.679 refers, it is necessary to bear in mind that suspicion and belief are different states of mind (Homes v. Thorpe); Seven Seas Publishing Pty. Ltd. v. Sullivan) and the section prescribes distinct subject maters of suspicion on the one hand and belief on the other.  The justice must be satisfied that there are reasonable grounds for suspecting that ‘there is in any house, vessel, vehicle, aircraft, or place - Anything’ and that there are reasonable grounds for believing that the thing ‘will ... afford evidence as to the commission of any offence.’

   Suspicion, as Lord Devlin said in Hussien v. Chong Fook Kam, ‘in its ordinary meaning is a state of conjecture or surmise where proof is lacking:  ‘I suspect but I cannot prove.’”  The facts which can reasonably ground a suspicion may be quite insufficient reasonably to ground a belief, yet some factual basis for the suspicion must be shown.  In Queensland Bacon Pty. Ltd. V. Rees, a question was raised as to whether a payee had reason to suspect that the payer, a debtor, ‘was unable to pay [its] debts as they became due’ as that phrase was used in s.95(4) of the Bankruptcy Act 1924 (Cth). Kitto J. said:

‘A suspicion that something exists is more than a mere idle wondering whether it exists or not; it is a positive feeling of actual apprehension or mistrust, amounting to ‘a slight opinion, but without sufficient evidence’, as Chamber’s Dictionary expresses it.  Consequently, a reason to suspect that a fact exists is more than a reason to consider or look into the possibility of its existence.  The notion which ‘reason to suspect’ expresses in sub-s. (4) is, I think, of something which in all the circumstances would create in the mind of a reasonable person in the position of the payee an actual apprehension or fear that the situation of the payer is in actual fact that which the sub-section describes - a mistrust of the payer’s ability to pay his debts as they become due and of the effect which acceptance of the payment would have as between the payee and the other creditors.’

The objective circumstances sufficient to show a reason to believe something need to point more clearly to the subject matter of the belief, but that is not to say that the objective circumstances must establish on the balance of probabilities that the subject matter in fact occurred or exists: the assent of belief is given on more slender evidence than proof.  Belief is an inclination of the mind towards assenting to, rather than rejecting, a proposition and the grounds which can reasonably induce that inclination of the mind may, depending on the circumstances, leave something to surmise or conjecture.”

[citations omitted]

In my opinion that statement is directly applicable to s 19(1).

The contentions of counsel for Mr Kutzner might be appropriate in a pleading summons in civil litigation between Dr Dragar, Beku and Mr Kutzner, but are not to the point in the present case.  The issue is not whether the ASC had reason to suspect a contravention for the purposes of making an investigation under s 13(1).  As already noted, Mr Kutzner does not challenge the decision to make the investigation.  Rather, the question is whether the ASC has reasonable grounds for suspecting or believing that a person (Mr Kutzner) can give information relevant to the matter being investigated, namely the alleged contraventions.  (“The person” referred to in s 19(1) need not necessarily be suspected of the alleged contravention, the suspicion of which has lead to the investigation; as it happens in the present case, Mr Kutzner is a suspect.)  For the purposes of s 19(1) there must be a suspicion or belief, on reasonable grounds, that Mr Kutzner can give information as to what is disclosed in the records of IOT as to its ownership.  Such information would be relevant to the matter being investigated because the interest (if any) of Mr Kutzner in IOT is obviously central to the alleged contraventions. 

In my opinion the ASC has reasonable grounds for at least a suspicion that Mr Kutzner was a shareholder in IOT and therefore could obtain information confirming that ownership in the IOT’s records.  Those grounds include:

            •           the extraordinary coincidence of the IOT approach coming a few days               after that of Dr Dragar;

            •           Mr Kutzner falsely attributing ownership to Dr Dragar (assuming Dr                   Dragar’s denial is accepted);

            •           the informal information obtained by KPMG Port Louis.

Reasonable Assistance

Counsel for Mr Kutzner argued that “reasonable assistance” does not extend to doing a physical act but is limited to assistance by way of answering questions in the course of the examination under s 19(2)(b).  He said that sub-s (2) should be read as though the words “for that purpose” appeared after the word “and” at the end of par (a).

In my opinion this contention is untenable.  The ordinary meaning of the term “assistance” extends to a physical act.  It is not difficult to imagine circumstances that would have been in the contemplation of those drafting the ASC Law, for example, providing the key to a locked safe or calling up information stored on a computer.  The power to require reasonable assistance under par (a) is quite independent of the power to require appearance for examination under par (b).  That latter function is the subject of detailed regulation in ss 20 to 27.

Privilege against self-incrimination

Counsel for Mr Kutzner argued that the requirement to execute the power of attorney was not the giving of information, the signing of a record, or the producing of a book within the meaning of s 68(1)(a), (b) or (c) and therefore the privilege against self-incrimination applied. 

I agree with the first limb of that argument, but I think the conclusion does not apply.  The plain words of s 19(2) do not in my opinion admit of an argument that assistance is not “reasonable” because it may lead to the incrimination of the person giving it.  Nor does the privilege against self-incrimination provide a “reasonable excuse” for the purposes of s 70. This conclusion follows from the approach adopted by the High Court in cases such as Pyneboard Pty Ltd v Trade Practices Commission (1983) 152 CLR 328 and Controlled Consultants Pty Ltd v Commissioner for Corporate Affairs (1985) 156 CLR 385.  In the latter case the High Court was concerned with a statutory requirement to produce books which provided for a defence of “reasonable excuse”.  Gibbs CJ, Mason and Dawson JJ said (at 392):

“So far as the actual production of books is concerned, it really goes without saying that a requirement that they be produced in relation to a contravention or failure to comply with a provision of the Code, which is what the Code authorizes is quite inconsistent with the maintenance of the privilege against self-incrimination in relation to their production and, that being so, the absence of any provision dealing with the privilege, such as is to be found in s. 10(5), is a clear indication of an intention to exclude the privilege completely.

For these reasons, the defence of reasonable excuse provided by s.10(1) does not, in our view, include the privilege against self-incrimination so far as production of the books is concerned and is directed to other matters, such as the physical or practical difficulties which may be involved in their production.”

See also Australian Securities Commission v Ampolex Limited (1995) 14 ACLC 80 at 92.

There was an amendment to s 68 in 1992 introduced by the Corporations Legislation (Evidence) Amendment Act 1992 (Cth).  Prior to that amendment s 68(2)(a) included as sub-par (iii) the words “to produce a book” and s 68(3) gave protection to a person who produced the book, as well as a person who signed a record or made a statement.  However I do not regard this as significant for present purposes.

Futility

Counsel for Mr Kutzner argued that discretion to order compliance under s 70(3) should not be exercised unless such an order would promote the objects of the statute.  He argued that in the present case even if Mr Kutzner were to execute the power, it would be a fruitless exercise deemed to failure.

I accept this argument.  The experience with Dr Dragar’s power of attorney shows that, as one might expect from the terms of s 77 of the Mauritius Act, no information will be provided unless the request is made by a member.  The power of attorney does not assert that Mr Kutzner is a member.  He has denied on oath that he is.  Counsel for the ASC did not urge that the Court should direct Mr Kutzner to make a statement which would be contrary to his evidence on oath.  Therefore the power of attorney in its proposed form would, as far as I can see, meet the same fate as Dr Dragar’s.

Further, there is in the proposed power of attorney specific power to make application under s 77(5) of the Mauritius Act to a court in that country for what on its face would be an application without any prospects of success, given that no evidence could be provided that Mr Kutzner was a member of IOT.  Mr Kutzner would be liable for the cost of any such application and, at least arguably, for the costs of any successful opposition.

I do not think assistance is reasonable if it requires the person concerned to authorise someone in a foreign country to act as the person’s attorney, to incur costs and expenses without limitation, and with no prospects of providing any assistance to the investigation. 

Orders

The application will be dismissed with costs, included reserved costs.

Associate:

Dated:              18 December 1997