FEDERAL COURT OF AUSTRALIA

Australian Securities Commission v Roussi [1999] FCA 618

CORPORATIONS LAW – application to prohibit the respondents from managing a corporation – whether there should be differing periods of disqualification because of different roles in the conduct and management of the companies – evidence of 430 complaints by consumers and other significant failings in goods and services supplied by the respondents – debts of almost $5 million of 10 companies in liquidation – knowing and wilful offences against the Corporations Law

Corporations Law ss 229, 230

Australian Securities Commission v Reid (unreported, Jenkinson J, 10 March 1992)  cited

Australian Securities Commission v Dimitri (unreported, Burchett J, 8 May 1997)  cited

Re Minimix Industries Ltd [1982] 1 ACLC 511  cited

Re Marsden [1981] 5 ACLR 695  cited

Commissioner for Corporate Affairs (WA) v Ekamper [1987] 12 ACLR 519  followed

AUSTRALIAN SECURITIES COMMISSION V MISAGH ROUSSI AND ORS

NG 3230 OF 1997

THE HON JUSTICE MARCUS EINFELD AO

SYDNEY

11 MAY 1999

THE COURT ORDERS THAT:

1.      the first and second respondents be prohibited from managing a corporation for a period of 10 years, with immediate effect in the case of the second respondent, and with effect from his discharge from bankruptcy in the case of the first respondent.

2.      the first and second respondents pay the applicant’s costs.

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

REASONS FOR JUDGMENT

1                     By application filed on 8 October 1997 made pursuant to section 230 of the Corporations Law, the Australian Securities Commission, now the Australian Securities and Investments Commission (ASIC), sought orders prohibiting Misagh Roussi (first respondent), Rohyeh Rohani (second respondent) and Pakzad Ghafarokhi (third respondent), from managing any corporation for a period to be determined by the Court.  The case against the third respondent was not proceeded with.  Section 230(1)(b) imposes liability upon a relevant officer of a company for failing to take steps to prevent a company breaching the Corporations Law.  The power for the Court to make the orders sought is to be found in section 230(1) of the Corporations Law.  Section 229 provides that an insolvent must not manage a corporation without the leave of the Court.

2                     At material times the respondents, who are husband and wife, were directors, secretaries, and/or “relevant persons” for the purposes of section 230(1)(b) of 18 companies.  In one case the first respondent was also a general manager of the company.  He became a bankrupt on 9 June 1994 and is still undischarged by reason of the trustee’s continuing objection to his discharge.

3                     Although a number of defences to the statement of claim of the ASIC were filed, they have subsequently been withdrawn so that the matter now involves only the question of the length of disqualification.  It is therefore no longer disputed that at relevant times between 1988 and 1996 the respondents were relevant officers of these companies and were responsible for a large number of breaches of the Law by these companies.  It is alleged, and apparently admitted, that the first respondent also acted in breach of section 229 in respect of 10 of the companies which continued operations or came into existence after his bankruptcy in circumstances suggesting that he managed or was continuing to manage them.

4                     The breaches relevant to section 230(1)(b) and (c) included failures to:

·               submit annual returns of the companies

·               submit notification of appointment of office holders for one company

·               lodge reports as to affairs of several of the companies after they went into liquidation in respect of some of which matters they were convicted of offences by Magistrates or Local Courts (in 2 cases, also of continuing offences under section 1314 of the Law)

·               deliver up the books of those and other companies

5                     The respondents submitted that there should be differing periods of disqualification because of the different roles they played in the conduct and management of the companies.  They say that there is no evidence that Mrs Rohani will be Mr Roussi’s “puppet” if she again runs family companies.  On the other hand, the respondents sought to establish in their interrogation by the ASIC and in the proceedings before this Court that the second respondent was very largely a tame even formal director who had little to do with the running of the companies.  The periods of disqualification they seek are 5 years for Mr Roussi and 3 years for Mrs Rohani.  The respondents point out that as an undischarged bankrupt the first respondent has been in fact disqualified from directly or indirectly managing a company since June 1994.  Yet the evidence establishes and he apparently admits that he has been doing so.  The ASIC seeks disqualification for 10 years in each case: Australian Securities Commission v Reid (unreported, Jenkinson J, 10 March 1992 – lifetime ban); Australian Securities Commission v Dimitri (unreported, Burchett J, 8 May 1997 – 10 years ban).

6                     It has been held that the purpose of banning orders under section 230 is protective not punitive: Re Minimix Industries Ltd [1982] 1 ACLC 511 at 512; Re Marsden [1981] 5 ACLR 695 at 699.  Those included in the protective umbrella are the public who are seen by the Law as interested in the transparency and accountability of companies and in the suitability of directors to hold office:  Commissioner for Corporate Affairs (WA) v Ekamper [1987] 12 ACLR 519 at 525.

7                     The respondents’ businesses retailed computers and software.  There was evidence from the Department of Fair Trading which I accept that between 1995 and 1998 there had been 430 complaints from consumers.  There were also some 12,000 issued warranties.  The Department had given the respondents frequent warnings about the unsatisfactory quality of their goods and services but they did not satisfactorily address the matters raised.  This evidence suggests that considerable protection of consumers from the business activities of the respondents is required.

8                     Creditors must also be protected.  None of the companies in liquidation have been able to make a payment to creditors.  9 companies of which the first respondent was a director owed more than $1m.  Another company, Empire Systems Pty Ltd, has an expected deficiency of liabilities over assets in excess of $3.5 million.  The first respondent was not a director of this company but there is evidence which I accept that he has fulfilled the role of director and managed the corporation (s.60(1); s.91A(2)) and that he has previously engaged in similar activity.  Thus the amount owing by the 10 companies in liquidation is almost $5 million.  This debt level suggests that a high degree of protection for future creditors of any corporations hoped to be run by this couple is warranted.  Moreover, the evidence establishes beyond doubt that the respondents have shown complete disdain for their responsibilities and for the interests of creditors.  Company directors are in effect trustees of earned funds for people who originally supplied them with the means to earn the funds or whose work enabled them to do so.  On the evidence presented, these respondents have blatantly abused their trust.

9                     Ekamper, a case dealing with the forerunner to section 230, was concerned with procedural breaches from which no adverse consequences to others flowed.  Justice Franklyn in the Western Australian Supreme Court pronounced a 6 month ban and in the process identified 8 criteria (at 525) which should govern the exercise of the Court’s powers of disqualification under section 230:

1.            Character of the offenders

2.            Nature of the breaches

3.            Structure of the companies and the nature of their business

4.            Interests of shareholders, creditors and employees

5.            Risks to others from continuation of offenders as company directors

6.            Honesty and competence of offenders

7.            Hardship to offenders and their personal and commercial interests

8.            Offenders’ appreciation that future breaches could result in future proceedings

10                  I respectfully agree with this formulation.   The first respondent has 4 and the second respondent 3 convictions in 1995 and 1996 for offences against the Law but they have each continued to flout their obligations in, amongst other ways, failing to co-operate with liquidators and denying creditors their entitlements.  The overwhelming inference from the evidence is that they have done so knowingly and wilfully.  They have not attempted to remedy the breaches and have shown  no appreciation of the gravity of their conduct.

11                  Neither of the respondents gave evidence in these proceedings and were therefore not available for cross examination.  The number and repetitive nature of the breaches and the way in which companies were born immediately another one died of indebtedness and gross inefficiency is thus even more suggestive of a deliberate course of conduct designed to serve and enrich the respondents at other people’s expense.  In the circumstances this activity cannot be characterised in any other way than intentionally dishonest and a reckless disregard of the law and the respondents’ legal obligations.

12                  Although it must be said that if the second respondent was a mere “puppet” who did merely what she was told, the first respondent would fall foul of section 229 as a de facto director during his bankruptcy, I do not accept the attempt to distance the second respondent from the impugned conduct.  She knowingly accepted the position of director time and again when she must have known that the multiplication of companies was brought about by their indebtedness and at least incompetent management.  Yet there is no evidence to suggest that she gave even a moment’s thought to needed changes, still less to the victims of this manipulation of her and her husband’s corporate empire.  On the other hand, there is evidence that she was actively involved in more than mere formalities, at least of some of the companies.   In any case, a director cannot take the rewards of her companies while disowning her responsibilities to them and the community.  I shall give effect to her slightly lesser role in the offences by varying the starting time of her disqualification period.

13                  This case is a gross case of abuse of company law by directors.  It deserves and requires the clearest and most serious response from the Court in protection of the affected community.  I order that both respondents be prohibited from managing any corporations for a period of 10 years with immediate effect in the case of the second respondent, and from his discharge from bankruptcy in the case of the first respondent.  Were it not for ASIC’s request for no more than those periods, I would have contemplated even longer disqualifications as I do not believe that these respondents are ever likely to act honestly as company directors or to comply with their legal obligations as company directors at any time.  The respondents will pay ASIC’s costs.

Associate:

Dated:              11 May 1999