FEDERAL COURT OF AUSTRALIA

Adams v Australian Securities & Investments Commission [2003] FCA 557

CORPORATIONS – application by convicted person under s 206G of Corporations Act 2001 (Cth) for leave to manage five named corporations – history of the automatic disqualification provision and the provision for granting of leave – principles applicable to such applications – applicant convicted of defrauding the Commonwealth of sales tax revenue amounting to $156,051.20 – only seven months remaining unexpired of the five-year period of disqualification – substantial period between circumstances giving rise to conviction and conviction (11½ years) and between those circumstances and present application (a little under 17 years) – unsatisfactory state of the evidence as to consequence of leave not being granted – failure of applicant to satisfy Court that an exception from the general prohibition should be made.

Corporations Act 2001 (Cth) s 206G

Re Altim Pty Ltd [1968] 2NSWR 762 cited

Re Australian Limousin Breeders Society Ltd (1989) 7 ACLC 426 cited

Birdseye v Companies Auditors and Liquidators Disciplinary Board (2002) 20 ACLC 805 cited

Borsboom v Australian Securities Commission, unreported, Supreme Court of Western Australia, White J, 17 January 1997 cited

Chew v NCSC [1985] WAR 337 cited

Re Ferrari Furniture Co Pty Ltd [1972] 2 NSWLR 790 cited

Re Macquarie Investments Pty Ltd (1975) 1 ACLR 40 cited

Re Maelor Jones Pty Ltd (1975) 1 ACLR 4 cited

Re Magna Alloys and Research Pty Ltd (1975) 1 ACLR 203 cited

In re Marsden (1981) 29 SASR 454 cited

Murray v Australian Securities Commission (1993) 12 ACLC 11 cited

Pace v Australian Securities & Investments Commission (1999)  17 ACLC 1764 cited

Re Seymour [2002] TASSC 85 cited

Re Zim Metal Products Pt Ltd (1977) 2 ACLR 553 cited

HAROLD JOHN ADAMS v AUSTRALIAN SECURITIES &

INVESTMENTS COMMISSION

N 3007 OF 2003

LINDGREN J

5 MAY 2003

SYDNEY

THE COURT ORDERS THAT:

1.         The application be dismissed.

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

REASONS FOR JUDGMENT

introduction

1                     By his application filed on 12 February 2003 the plaintiff (“Mr Adams”) sought:

“A declaration that the applicant be granted leave to manage proprietary companies formed under the CorporationsLaw.”

The application is one for leave under subs 206G(1) of the Corporations Act 2001 (Cth) (“the Act”).

2                     The application named “Australian Securities & Industries [sic] Commission” as defendant.  It should not have named a defendant.  Subsection 206G(2) of the Act requires an applicant for leave under subs 206G(1) to lodge notice of the proposed application with the Australian Securities and Investment Commission (“ASIC”) at least 21 days before commencing proceedings.  Mr Adams’s solicitors, Dennis & Company, wrote to ASIC on 3 January 2003 advising ASIC of their client’s intention to make the present application and this proceeding was commenced on 12 February 2003.  ASIC has filed written submissions which have assisted the Court.

3                     Section 206G occurs in Part 2D.6 of the Act, which is headed “Disqualification from managing corporations".  Mr Adams and ASIC have proceeded on the basis that Mr Adams “became” disqualified from managing corporations by the operation of s 206B(1)(b)(ii) of the Act, which provides, relevantly, that a person becomes disqualified from managing corporations if the person is convicted of an offence that involves dishonesty and is punishable by imprisonment for at least three months.  But it seems that Mr Adams “became” prohibited from managing a corporation by the predecessor provision found in found in subs 229(3) of the Corporations Law (“the Law”).  Although the two provisions are different in certain respects, nothing turns on the differences. 

4                     On 30 January 1998 Mr Adams pleaded guilty to a charge under s 86A of the Crimes Act 1914 (Cth) as in force at the relevant time, that between 1 April 1985 and 20 June 1986 at Sydney and elsewhere he conspired with Terrence Marshall Bishop and Keith Colin Gray to defraud the Commonwealth of sales tax revenue.  In consequence, on 10 June 1998 Mr Adams was sentenced to twelve months’ imprisonment with a non-parole period of six months, and was directed to be released on 8 December 1998 on a reconnaissance to be of good behaviour for a period of six months thereafter.  He was released on 8 December 1998.  The amount of sales tax in question was $156,051.20.  The sentencing judge made a reparation order in that amount against Mr Adams.

5                     Subsection 206B(2) of the Act provides for the period of disqualification.  In Mr Adams’s case that period started on the day of conviction and lasted for five years after the day of release from prison (cf the former subs 229(3) of the Law, which also referred to a period of five years after release from prison).  That period will come to an end at midnight on 7 December 2003.  Subsection 206G(1) of the Act provides that:

“A person who is disqualified from managing corporations may apply to the Court for leave to manage:

(a)       corporations; or

(b)       a particular class of corporations; or

(c)        a particular corporation

if the person was not disqualified by ASIC.”

(Section 206F of the Act provides for disqualification by ASIC.)

6                     At the commencement of the hearing, Mr Adams’s counsel announced that the application would be pressed, not as an application for leave to manage corporations generally as stated in the application, but as an application for leave to manage the following five corporations:

1.         Nuline Marketing Tasmania Pty Limited

2.         Nuline Fishing International Pty Limited

3.         Nuline Marketing International Pty Limited

4.         Nuline Australia Group Pty Limited

5.         SZAP Overseas Australia Fishing Pty Limited

Perhaps the reduction in the scope of the relief sought was prompted by what Hill J said in Birdseye v Companies Auditors and Liquidators Disciplinary Board (2002) 20 ACLC 805 at [8].

LEGAL PRINCIPLES

7                     The automatic statutory prohibition against certain convicted persons being a director or promoter of, or being in any way (whether directly or indirectly) concerned in or taking part the management of corporations (s 206B of the Act does not expressly invoke those terms but this is of no present significance) originated in s 122 of the Uniform Companies Acts of 1961 and 1962.  The legislative history of the prohibition and the provision for the granting of leave is as follows:

8                     The following principles relevant to an application of the present kind have been consistently recognised and applied in the authorities:

1.         The applicant bears the onus of establishing that the Court should make an exception to the legislative policy underlying the prohibition:  Re Altim Pty Ltd [1968] 2NSWR 762 (“Altim”) at 764 as applied in Re Ferrari Furniture Co Pty Ltd [1972] 2 NSWLR 790 (“Ferrari”) at 792;  Re Macquarie Investments Pty Ltd (1975) 1 ACLR 40 at 42;  Re Maelor Jones Pty Ltd (1975) 1 ACLR 4 at 13;  Re Magna Alloys and Research Pty Ltd (1975) 1 ACLR 203 at 205;  Re Zim Metal Products Pt Ltd (1977) 2 ACLR 553 (“Zim”) at 555;  In re Marsden (1981) 29 SASR 454 (“Marsden”) at 460;  Re Australian Limousin Breeders Society Ltd (1989) 7 ACLC 426 at 429—430;  Murray v Australian Securities Commission (1993) 12 ACLC 11 (“Murray”) at 13;  Pace v Australian Securities & Investments Commission (1999) 17 ACLC 1764 (“Pace”) at [21];  Re Seymour [2002] TASSC 85 at [6].

2.         That legislative policy is one of protecting the public, not one of punishing the offender:  Altim at 764, as applied in Ferrari at 791—792;  Zim at 555;  Murray at 13:  Chew v National Companies and Securities Commission [1985] WAR 337 (“Chew”) at 340—341;  Pace at [21];  Re Seymour at 2;  Borsboom v Australian Securities Commission, unreported, Supreme Court of Western Australia, White J, 17 January 1997.

3.         Another objective is to deter others from engaging in conduct of the particular kind in question:  Chew at 340—341;  Zim at 555;  Murray v ASC at 13;  Pace at [21];  Re Seymour, above, at [6].

4.         A further objective is the more general one of deterring others from abusing the corporate structure to the disadvantage of investors, shareholders and others dealing with a company:  Re Marsden,above at 459;  Zim at 555;  Murray at 13;  Re Magna Alloys at 205;  Pace at [21];  Re Seymour, above, at [6].

5.         The prohibition itself contemplates that there will be hardship to the offender.  Therefore hardship to the offender alone is not a persuasive ground for the granting of leave:  Chew at 340—341; Re Maelor Jones Pty Ltd (1975) 1 ACLR 4 at 13;  Murray at 14.

6.         “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”, per Bowen CJ in Eq in Re Magna Alloys at 205, followed in Zim at 555—556.

This passage does not purport to be an exhaustive statement of the matters appropriate to be taken into account by the Court as relevant to the exercise of its discretion under the section.  Clearly, there can be no such exhaustive statement.

FACTS AND REASONING

9                     Mr Adams sought leave to appeal against the sentence imposed on him.  On 25 November 1998 the New South Wales Court of Criminal Appeal refused leave to appeal in proceeding 60367/98.  The reasons for judgment of the Court of Criminal Appeal contain the following passages relevant to the circumstances of Mr Adams’s offence:

“In his remarks on sentence, Judge Davidson traced the events by which the applicant and his co-conspirators carried through their scheme to defraud the Commonwealth of sales tax revenue.  Relevantly, the sales tax legislation as in force at the material time required the manufacturer of goods sold and manufactured in Australia to pay sales tax on the full wholesale value of goods manufactured and sold in Australia to persons such as the conspirators who were not registered as manufacturers or wholesale merchants.  The manufacturers’ liability was met by including the amount of sales tax in the price of goods so sold, so that it might collect the amount and remit it to the Commissioner of Taxation.

The goods in question were soft drinks.  The general rate of sales tax was 20 percent unless the goods were conditionally exempted.  Goods sold by a manufacturer for export by the purchaser were exempt.  The applicant devised a scheme, in which he was subsequently joined by the other conspirators, between the dates charged to purchase soft drinks from various companies, including well-known soft drink companies, under the pretext that they were for export and then sell the goods on the local domestic market.  The sentencing Judge said that the steps taken by the applicant, by Mr Gray, and to a much lesser extent by Mr Bishop, in carrying out this fraud on the revenue, indicated that for the prolonged period of about fourteen months the applicant deceived officers of reputable suppliers of soft drinks to the belief that orders being placed with their companies for the supply of soft drinks were for the purposes of export when the applicant well knew and, indeed, it was his intention, that those goods should be [sold] locally.  This also involved false documentation and a relatively high degree of organisation so that the applicant might profit at the expense of the revenue to the degree referred to when making the order for reparation.  This was a serious fraud on the revenue.

It is unnecessary, for present purposes, to repeat the detail of the transactions which the applicant engaged in and which are set out in the remarks on sentence.  The offence charged was a serious one which under the legislation, prior to its amendment on 24 June 1986, carried a maximum penalty of five years imprisonment.  Mr Gray pleaded guilty to a charge for the same conspiracy for the period from 1 June 1985 to 31 October 1986.  This meant that under the legislative amendment of s 86A the maximum penalty for that charge became twenty years imprisonment.  Apparently, the charge against the applicant was deliberately re-framed to reduce the maximum penalty and encourage a plea of guilty.  On 13 December 1993, after a sentence indication, his Honour Judge Herron QC sentenced Mr Gray to twelve months imprisonment with a non-parole period of six months and release on recognizance after six months.

Mr Bishop was sentenced to 500 hours community service on 30 July 1993 by his Honour Judge Ford after pleading guilty to a single charge of conspiracy to defraud.  It was common ground that having regard to Mr Bishop’s lesser role in the conspiracy, this sentence was not relevant for parity purposes.”

The Court of Criminal Appeal noted that the sentencing judge had made the following observations:

“I accept that the breakdown of your family relationship and the unavailability it would seem now, at any event on any regular basis, of any contact between yourself and your children is a matter of considerable anguish to you, although whilst recognising the strain which a prolonged delay or this kind can have on such relationships, I am not satisfied on the balance of probabilities that it was any more than a contributing factor to the destruction of those relationships ultimately, and I think this is a position which Mr Cook of counsel accepts.”

and

“The fact that [the applicant] conceived the scheme and took active steps to put in into effect placed [him] in the top category of seriousness of involvement as between [himself], Mr Gray, and of course Mr Bishop.  Nevertheless it would seem that Mr Gray was dealt with on the basis that he did take a deal of active involvement in carrying into effect this conspiracy.”

10                  Clearly, the circumstances of the case were serious, Mr Adams’s fraudulent activity was persisted in over a lengthy period, and the amount involved was large.

11                  Mr Adams relies on the fact that a long period elapsed between the conduct which gave rise to his conviction and the imposition of the sentence (some 11½ years) and, of course, the yet longer period between that conduct and the present time (a little under 17 years).  He also relies on certain character evidence in affidavits by his solicitor, Noel Norman Dennis, Judith Blacker, and Gerald Kron.  However, of these persons, only Mr Kron has no interest in the companies concerned:  Mr Dennis and Ms Blacker do have an interest in them, as will appear below.

12                  Mr Adams also relies on the fact that on or about 27 May 1998 ASIC decided not to serve on Mr Adams, a notice under subs 600(3) of the Law prohibiting him from managing a corporation for a period “not exceeding five years” specified in the notice.  On 10 December 1997 ASIC had previously served on Mr Adams a notice under subs 600(2) of the Law to show cause why ASIC should not serve such a notice upon him.  In general terms, such a notice under subs 600(3) would have been based on Mr Adams’s having been a director of an insolvent body which went into liquidation at any time during the period of twelve months ending on the day of the beginning of the winding up.

13                  I do not think ASIC’s decision not to serve a notice of prohibition shows that something less than the self-executing statutory five year period of disqualification applicable to persons convicted of certain kinds of offences is appropriate in the present case.  Indeed, for all that is known, ASIC’s decision that it was not appropriate to serve a notice under subs 600(3) may have been based on an application that Mr Adams, who had been convicted shortly after service of the notice to show cause, was now automatically disqualified for a full period of five years by the operation of the statute.

14                  ASIC submits that there is no demonstrated need for Mr Adams to manage the companies referred to and that mere inconvenience to Ms Blacker does not constitute hardship.  ASIC submits that there is no obvious reason why Mr Adams could not continue to liaise with Ms Blacker in the making of decisions, or, alternatively, obtain approval to bind the companies within pre‑determined parameters.

15                  ASIC’s submission must be understood in the light an aspect of the case which Mr Adams has sought to make, namely, that it is important that he be able to be a director of the five named companies in connection with securing a joint venture arrangement with certain Chinese interests.  I have found the evidence in this respect unsatisfactory.

16                  The historical company extracts relating to the five companies reveal as follows:

1.  Nuline Marketing Tasmania Pty Limited

17                  The directors of this company are Mr Dennis and Ms Blacker, Mr Dennis having been a director since 27 May 1999 and Ms Blacker since 8 April 1999.  Ms Blacker is the secretary of the company, having held that office also since 8 April 1999.  There are 441,121 issued shares in the capital of the company, of which 410,000 are held by Ms Blacker and Mr Dennis.  Of these, Mr Dennis holds 100,000 and Ms Blacker 310,000, of which she holds 300,000 as “executor for Adams family trust”.  There is no evidence of the terms of that trust and I do not know who its beneficiaries are.  Ms Blacker says that she is the Managing Director of the company.

2.  Nuline Fishing International Pty Limited

18                  The only director of this company is Barbara Anne Adams, the wife of Mr Adams.  She has been a director since 5 December 2002 when she replaced Ms Blacker.  Ms Adams has also been secretary of the company since 5 December 2002.

19                  All shares in this company are held by Ms Blacker.  Ms Adams says that she is the Managing Director of this company and Ms Blacker says that she is its General Manager.

3.  Nuline Marketing International Pty Limited

20                  There are two directors of this company, namely, Vladimir Rebikov, who has been a director since 14 January 2000, and Ms Blacker, who has been a director since 8 April 1999.  Ms Blacker has also been the company secretary since that date.

21                  There are 200 issued shares in the capital of the company of which 100 are held by Rina Vostok of Korea and 100 by Ms Blacker.  Ms Blacker says that she is the Managing Director of the company.

4.  Nuline Australia Group Pty Limited

22                  It seemed to me that there was no historical company extract relating to this company in evidence, until I worked out that it is one and the same company as Nuline Nominees Pty Limited.  Ms Adams became the sole director of this company on 17 February 2003, replacing Ms Blacker.  On the same date, Ms Adams also replaced Ms Blacker as company secretary.  There are 100 issued shares in the company of which 51 are held by Nuline Fishing International Pty Limited and 49 by Nuline Marketing Tasmania Pty Limited.  Ms Blacker says that she is the General Manager of this company.

5.  SZAP Overseas Australia Pty Limited

23                  There is no historical company extract in evidence in respect of this company.  Ms Blacker says that she is the General Manager of a company called “SZAP Overseas Australia Fishing Pty Limited”.  I do not know if this is the same company.  Another company referred to by Ms Blacker is AMBA Investment Company Limited, of which Ms Blacker says she is the General Manager, but although this company was mentioned once in Mr Adams’s affidavit, he no longer seeks leave to manage it.

24                  Importantly, there is no evidence making plain the business or commercial relationships between the various companies or the functions they respectively perform, except for evidence that the activity of the group is that of fishing in Tasmania, that Nuline Marketing Tasmania Pty Ltd is the “operating” company in the group and that Nuline Marketing International Pty Ltd owns factory premises at 77 Chapel Street, Glenorchy, Tasmania.  Otherwise, the only evidence relevant to the interrelationships of the companies is that found in the historical company extracts referred to above.

25                  The evidence suggests that a joint venture is about to be entered into with Chinese interests and I am asked to accept that the Chinese say that if Mr Adams does not become a director this venture will not go ahead.  I do not find this vague assertion, which is made in an affidavit by Ms Adams, Mr Adams’s wife, persuasive.  (The less extravagant affidavits of Mr Dennis and Ms Blacker are merely to the effect that it would be beneficial to the joint venture if Mr Adams were a director.)

26                  I am asked to accept that Mr Adams has been acting only as a consultant to one or other of the Nuline companies.  According to an affidavit of Ms Blacker, sworn 6 February 2003, she (Ms Blacker) engaged Mr Adams to act as a consultant to the four Nuline companies previously mentioned, and to AMBA Investment Company Limited and SZAP Overseas Australia Fishing Pty Limited. 

27                  There are documents in evidence which suggest that Mr Adams may have been doing more than acting as a consultant.  While the evidence may not establish beyond question that he has in fact been managing any of the companies, he seems to have had no difficulty in bringing to conclusion, or close to conclusion, the alleged negotiations with the Chinese interests.

28                  There is in evidence a written agreement dated 21 January 2002 between Shenzhen SZAP Overseas Fisheries Co Ltd, China, of the one part, and Nuline Marketing Tasmania Pty Ltd of the other part.  Mr Adams signed this document as “Legal Representative” of the latter company.  There is also in evidence a written summary of a meeting held on 14 August 2001 between Ye Shaoyong and Mr Adams, which is signed by both of those persons.  Finally, there is in evidence a written agreement dated 13 August 2001, signed by Mr Shaoyong and signed by Mr Adams as “CEO” of Nuline Marketing Tasmania Pty Limited.  The affidavit evidence does not make clear the significance of these documents.  I am left to make of them what I can.

29                  I find it difficult to accept that the Chinese interests have, out of the blue, stated that they will not enter into any transaction with the companies with which Mr Adams is associated unless he is made a director of them.  There is evidence that Mr and Mrs Adams have travelled to China and, as already mentioned, there is evidence that Mr Adams has been productively negotiating on behalf of the Australian companies.  The evidence is that the Chinese interests do not know that Mr Adams is disqualified from being a director.  In these circumstances one would not expect that they would unilaterally impose a requirement that he be made one.

30                  Only seven months remain of the five-year disqualification period.  I am asked to accept that a Chinese investment of millions of dollars will not come to fruition if Mr Adams is not made a director within that period.

31                  The brevity of the unexpired residue of the period is a double-edged sword.   It can be said, on the one hand, that Mr Adams has already been disqualified for some four years and five months of the total five-year period and that the loss of protection of the public will be small indeed, if that period is shortened by only seven months.  On the other hand, it can be said that no significant harm will be done to the members of the companies if the prohibition continues to operate for a period as short as seven months.

32                  On the unsatisfactory state of the evidence to which I have referred earlier, I am simply not persuaded that a case is made out for any shortening of the statutory period. 

33                  For this reason the application will be dismissed.  It will remain open to Mr Adams to make a fresh application if evidence becomes available that there will, indeed, be a great disadvantage to the interests with which he is associated if he is not granted leave to manage the companies during the remainder of the five year period.  I find it hard to accept that there will be, but there is always the possibility that additional circumstances may arise.

CONCLUSION

34                  For the above reasons the application will be dismissed.

Associate:

Dated:              11 June 2003