FEDERAL COURT OF AUSTRALIA

Nenna v Australian Securities and Investments Commission [2011] FCA 1193

THE COURT DECLARES THAT:

The application under s 206G(1) of the Corporations Act 2001 (Cth) is not invalid by reason of contravention of s 206G(2).

THE COURT ORDERS THAT:

(a)    Romano George Nenna have leave to manage RGN Pty Ltd (ACN 121 372 183) on condition that RGN Pty Ltd (ACN 121 372 183) not engage in activities other than as trustee of the Nenna Family Superannuation Fund.

(b)    The applicant pay the respondent’s costs of the application, including the costs included in proceeding VID 750 of 2009 to the extent those costs relate to this application under s 206G(1) of the Corporations Act 2001 (Cth).

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

INTRODUCTION

1    In anticipation of a disqualification order being made by the Court under s 206C of the Corporations Act 2001 (Cth) (‘the Act’), by Notice of Motion dated 25 July 2011 (in proceeding VID 750 of 2009), Mr Nenna, the applicant, gave notice of an application under s 206G of the Act for leave to manage two particular corporations of which he was a director:

(a)    RGN Pty Ltd (ACN 121 372 183) (‘RGN’);

(b)    Robe Consulting Pty Ltd (‘Robe’).

2    In support of the application, Mr Nenna had sworn two affidavits (the first sworn on 14 June 2011, the second on 25 July 2011) in which he deposed that:

(a)    he and his wife, Bernadette, were the two directors of, and equally hold all the shares in, each company;

(b)    RGN was the trustee of the Nenna Family Superannuation Fund, a self managed superannuation fund in which:

(i)    Mr Nenna and his wife were the members;

(ii)    investments were managed by Pitcher Partners and the accounting work was done by Dominion Private Clients (now a part of Mutual Trust Pty Ltd);

(c)    his involvement in RGN comprised the review of the annual accounts and income tax returns, discussions from time to time with Pitcher Partners about investments in the fund and discussions with his wife about the investments;

(d)    Robe was the trustee of a trust (Robe Services Trust) established in connection with a business called Robe Consulting, which provided corporate or business consulting services;

(e)    details of the Robe Consulting business were as follows:

(i)    the place of business was the residential address of Mr and Mrs Nenna;

(ii)    Mr Nenna was an independent contractor to Robe, which provided his services to its clients;

(iii)    the primary client was KPMG under a Consulting Agreement dated 28 September 2009;

(iv)    whilst there has in the past been consulting fee income derived from work performed for the Leda Property Group, Japara Pty Ltd and the Centro Property Group, Robe had only KPMG as a client;

(v)    Mr Nenna proposed to work on bringing in further business and hoped to have two to three new clients in the next year or so;

(vi)    the expected income of the Robe Consulting business for the 2010-2011 financial year was $200,000.

3    Subject to the question of jurisdiction of the Court (to which I will return):

(a)    ASIC did not oppose Mr Nenna’s application for leave to manage (as director) RGN, subject to certain conditions; and

(b)    ASIC opposed Mr Nenna’s application for leave to manage Robe.

4    At the time of the notice of the application by Mr Nenna no disqualification order had been made by the Court. By order of the Court made on 31 August 2011, the Court ordered, in relation to Mr Nenna, that he be disqualified from managing corporations for a period of two years commencing at 4.30 pm on 10 October 2011.

5    Therefore, until 4.30 pm on 10 October 2011 or immediately thereafter, Mr Nenna was not a “person who is disqualified” within the meaning of s 206G(1) of the Act. Any application could only be made after Mr Nenna had been disqualified, namely at 4.30 pm on 10 October 2011.

6    Mr Nenna has now made an application in this proceeding after 4.30 pm on 10 October 2011 under s 206G(1), relying upon the affidavits referred to above.

7    The process that has been adopted by the Court, upon the making of the disqualification order on 31 August 2001, has been a pragmatic and practical one. All the material and submissions in support of, and in opposition to, Mr Nenna’s application by Notice of Motion dated 25 July 2011 have been considered by the Court after the making of the order leading to Mr Nenna’s disqualification. It only remained to pronounce a decision and make appropriate orders, upon the application being made under s 206G(1) by Mr Nenna immediately after 4.30 pm on 10 October 2011. Even then, (on the basis that Mr Nenna’s application under s 206G(1) being successful) there will be a moment in time (at the very least) when Mr Nenna is disqualified from managing corporations and thus cease by operation of law to be director (see s 206A(2) of the Act). Then, upon leave of the Court being granted under s 206G(1), Mr Nenna may be appointed a director through the normal processes under the Act. Therefore, whatever pragmatic approach is taken by the Court, there will be a period when Mr Nenna will cease to be a director of RGN and Robe even if leave is granted under s 206G(1). However, that period will be reduced by the approach taken in this proceeding.

8    The particular approach that has been adopted in the unusual circumstances of this proceeding is due to the fact there is no power, upon or in the course of, disqualifying a director from managing corporations under s 206C of the Act to give leave for that director to manage, inter alia, “a particular corporation” under s 206G(1). As I have said, this application can only be made after the director has been disqualified.

9    There is one other complication. A written notice must be lodged with ASIC at least 21 days before making the application under s 206G(1). Therefore, in this proceeding, Mr Nenna could not make the application until at least 21 days after 10 October 2011. For reasons I detail later, in the circumstances of this proceeding, this procedural matter can be overcome by the Court making an order under s 1322(4)(a) of the Act applied for by Mr Nenna.

10    Having set out this procedural approach, it is now convenient to set out the relevant legislative provisions.

Legislation

11    By s 206G(1), a disqualified person may apply to the Court for leave to manage:

(a)    corporations;

(b)    a particular class of corporation; or

(c)    a particular corporation.

The person must lodge a notice with ASIC at least 21 days before commencing the “proceedings” by which the application is made (s 206G(2)). By s 206G(3) the order granting leave may be subject to exceptions and conditions as determined by the Court.

12    According to s 206G(1), the application may not be made if the person has been disqualified from managing corporations by ASIC. There is no other relevant jurisdiction vested in the Court other than s 206G(1): see ss 1337A and 1337B(1) of the Act. The application may thus be made by a person who has been disqualified:

(a)    automatically, under s 206B because of a conviction referred to in that section, or bankruptcy or other insolvency arrangements, or by orders of foreign Courts, or under s 206EA because of a Court order under the Competition and Consumer Act 2010 (Cth) or under s 206EB because of a Court order under the Australian Securities and Investments Commission Act 2001 (Cth); or

(b)    by the Court, under s 206C because of contravention of a civil penalty provision, or under s 206D because of involvement in multiple corporate insolvencies, or under s 206E because of involvement in multiple contraventions of the Act, or under s 206EAA for a foreign disqualification.

13    Applications under s 206G may thus be made by persons whose disqualifications arise from a range of circumstances.

14    By s 206A, a person who is disqualified from managing corporations is prohibited from:

(a)    making, or participating in making, decisions that affect the whole, or a substantial part, of the business of the corporation;

(b)    exercising the capacity to affect significantly the corporation’s financial standing;

(c)    communicating instructions or wishes (other than advice given by the person in the proper performance of functions attaching to the person’s professional capacity or their business relationship with the directors or the corporation) to the directors of the corporation:

(i)    knowing that the directors are accustomed to act in accordance with the person’s instructions or wishes; or

(ii)    intending that the directors will act in accordance with those instructions or wishes.

15    By s 206A(2) a person who occupies a position as director or secretary of a company ceases to hold that position if they are disqualified and not given permission to manage that corporation. Sections 201B(2) and 204B(2) respectively operate to prevent their reappointment.

16    Section 206G reflects provisions which have been part of company law for a considerable period. In the Companies Act 1961, they were to be found in ss 117 and 124. In both cases there was provision for the leave of the Court to be given. These provisions were combined in s 227 of the Companies Act 1981 which became s 229 of the Corporations Law.

Relevant Authorities

17    A body of case law on the grant of leave under ss 117 and 124 of the Companies Act 1961 and s 227 of the Companies Act 1981 established a number of general principles which were applied in the consideration of the exercise of the discretion.

18    Protection of the public was highlighted as a relevant consideration in Re Ansett (1990) 3 ACSR 357 (an application by a bankrupt) where Brooking J (as he then was) adopted (at 358-9) the following statement by Street J in Re Altim [1968] 2 NSWR 762 at 764:

The section under which this application is made proceeds upon the basis that a person who is an undischarged bankrupt is prima facie not to be permitted to act as a director or to take part in the management of a company. The court is given jurisdiction to grant leave for such activities to be carried on, but an applicant who comes to the court seeking leave must bear the onus of establishing that the general policy of the legislature laid down in this section ought to be made the subject of an exception in his case. It should be borne in mind that the section is not in any sense a punishment of the bankrupt. Nor should a refusal to grant leave under the section be regarded as punitive. The prohibition is entirely protective, and the power of the court to grant leave is to be exercised with this consideration in the forefront.

19    A similar approach was taken to applications by those disqualified by reason of a relevant conviction: see Re Magna Alloys and Research Pty Ltd (1975) 1 ACLR 203 per Bowen CJ in Eq. at 205, adopted by the Full Court of the Victorian Supreme Court in Zuker v Commissioner for Corporate Affairs [1981] VR 72 at 78. In Magna Alloys, Bowen CJ said at 205 that:

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.

20    In Ansett, Brooking J had regard principally to the circumstances in which the applicant had become bankrupt and his involvement in the affairs of the Budget group, the collapse of which had led to the bankruptcy. Thus, although there was no offence of which the applicant had been convicted, his conduct in matters connected to the circumstances in which he was disqualified was a principal focus of the Court’s consideration of his application.

21    Confidence in the Court's upholding of corporate standards was identified as a relevant consideration in Re Zim Metal Products Pty Ltd (1977) 2 ACLR 553. In this case, McInerney J permitted two former directors of a family company to take part in the management of the company, but not to be directors. They had been convicted of receiving stolen goods. They had previous good characters. He observed (at 558):

I have considered whether I should grant leave to the applicants to become directors. I have come to the conclusion I should not. The policy of the legislation is that, prima facie, the persons convicted, the applicants, should be excluded from being directors. The possible harm which might occur to the company and to the applicants if they are excluded from management is, in my view, much more real than any harm that may flow if they are not allowed to become directors. There is something to be said, I think, for the view that public morality is better vindicated if the applicants continue to be excluded from being directors. Creditors and persons dealing with the company who now know or may hereafter come to know of the convictions of the applicants, may take the view that the court views the convictions as matters of no concern, if the court allows an applicant to be reinstated as director in a case where, in my view, there is no real need for that appointment.

22    In Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80; [2002] NSWSC 483, Santow J dealt with a submission that if any disqualification order were to be made against Mr Adler under s 206C, it should be for a limited period, apply only to public companies, and at the very least permit him to manage his private company Adler Corporation Pty Ltd and its wholly owned subsidiaries. His Honour identified four problems with this course at [79]-[86]:

(a)    whilst disqualification orders are protective rather than punitive, interests to be protected include “those of the public who may unwittingly deal with companies run by people who are not suitable to be involved in the management of companies and the public interest generally in the transparency and accountability of companies and the suitability of directors to hold office” (citing Australian Securities and Investments Commission v Papotto (2000) 35 ACSR 107; [2000] WASC 201 at [22]);

(b)    it was not possible to make a qualified order under s 206C, and the Court should not lend itself to the contrivance of making an order under s 206C with a view to immediately limiting that order by leave under s 206G;

(c)    the distinction between public and private companies was a fallacious one, since the public equally needed protection in their dealings with private companies;

(d)    the alternative, an order excluding Adler Corp and its subsidiaries on condition that they only deal with ‘sophisticated’ investors, might overcome this last difficulty. However, even if limited to dealing with sophisticated investors, they still require protection.

23    Following the judgment of McHugh J in Rich v Australian Securities and Investments Commission (2004) 220 CLR 129, it has been recognised that the function of disqualification orders is not purely protective, but can include elements of retribution or punishment, and general deterrence. Thus, in Australian Securities and Investments Commission v Vizard (2005) 145 FCR 57 at [35], Finkelstein J said of the protective purpose, citing Rich:

The mistake is to treat this as the sole purpose of a disqualification order. That error has now been exposed. In Rich v Australian Securities and Investments Commission [citation omitted] the High Court made it clear that a disqualification order can be imposed not only to protect the company's shareholders against further abuse, but also by way of punishment and, importantly, for general deterrence.

24    In Australian Securities and Investments Commission v Edwards (No 3) (2006) 57 ACSR 209; [2006] NSWSC 376, Barrett J made the following observations in relation to s 206G:

[65]    It was submitted on behalf of the defendant that, if a disqualification order were made, there should also be an order under s 206G allowing him to perform management functions in relation to the Essington group of companies. The plaintiff says that, if there is to be any application for such an order, it should be made separately and subsequently by appropriate process supported by affidavit evidence.

[66]    I accept the plaintiff’s submissions on this point. A case for leave under s 206G can be sensibly made only against the background of the disqualification order and the reasons for it. There must also be evidence about the particular companies to which the application for leave relates. The court must be able to see the risks that are involved. If the defendant wishes to pursue the matter, he should initiate a separate application.

25    In Australian Securities and Investments Commission v Somerville [2009] NSWSC 1149 the defendant applied for a stay of the disqualification order pending appeal, and in the alternative for leave under s 206G to manage a particular corporation pending the appeal. Justice Barrett refused the stay and, at paragraphs [18]–[19], treated the application under s 206G as raising no different issue and also refused it. He made the observation that he doubted the Court’s power under s 206G to make an order limited in duration.

26    In Duffy; Re Westgate Ports Pty Ltd (2010) 79 ACSR 267; [2010] FCA 608 at [19], a case where the applicant had been convicted of an offence involving automatic disqualification, Gordon J usefully summarised the considerations which the cases had established as relevant in such matters in the following terms (citations omitted):

(1)    the applicant bears the onus of establishing that the court should make an exception to the legislative policy underlying the prohibition;

(2)    the legislative policy is one of protecting the public, not one of punishing the offender;

(3)    another objective is to deter others from engaging in conduct of the particular kind in question;

(4)    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;

(5)    the court in exercising its discretion will have regard to the following factors:

(i)    the nature of the offence;

(ii)    the applicant’s general character, including conduct prior to and in the period since the offence;

(iii)    any risks to shareholders, creditors, employees or to the public should the applicant assume the management position proposed;

(iv)    any acknowledgement of wrongdoing and cooperation by the applicant;

(v)    whether the applicant’s general character is such that he has never before offended, whether he is a valuable and contributing member of the community and whether re-offending is unlikely;

(vi)    the structure of the companies [and the knowledge and attitude of other shareholders and directors];

(vii)    the degree of control which the applicant would be able to exercise and the level of supervision; and

(viii)    whether the applicant has before the court a specific proposal to take part in the management of a specified corporation or corporations, and whether what is proposed accords with proper commercial standards. (Citations omitted).

27    In Edwards and Somerville, both Santow J and Barrett J were of the view that an application under s 206G should not be made or determined at the stage of the s 206C order but rather should follow it and be considered in the light of that order. On the face of the language of s 206G(1), which requires that the application be made by a person who has been disqualified, the approach of Santow J and Barrett J accords with the statutory language.

28    There is some indication of a contrary intention in s 206A(2), which appears to contemplate that an order under s 206G could prevent the cessation of office as a director at the point at which a disqualification order was made. It could only have that effect if it came into operation at the same time as the disqualification order. Any tension between ss 206A(2) and 206G should be resolved in favour of the clear intention of s 206G. This intention is reinforced by s 206G(2), which requires notice of the intention to apply to be lodged with ASIC at least 21 days before the proceeding is commenced.

29    As a matter of principle, it is necessary for the Court to take into account the extent to which the disqualification order was intended to serve a protective, retributive or deterrent purpose. Such considerations may affect the relevance and weight to be given to many of the considerations summarised by Gordon J in Duffy.

30    Even if there appears to be little need to protect the public from the corporate activities of the applicant, it would defeat the retributive and deterrent aspects of withdrawing his privilege to conduct his affairs through company structures by making a disqualification order, and to then give leave to manage the only companies that the applicant wishes to manage anyway.

31    It is relevant in this context to observe that the need to protect the public from repeated conduct or like conduct of others must be balanced against the hardship imposed on the applicant. However, hardship to the applicant alone is not a persuasive ground for the granting of leave by the Court: Adams v Australian Securities and Investments Commission (2003) 46 ACSR 68; [2003] FCA 557 at [8].

Application of the Law to the Facts

Leave to manage RGN

32    In the case of RGN as trustee of the Nenna Family Superannuation Fund, ASIC pointed to the following factors in favour of granting leave to Mr Nenna under s 206G:

(a)    the nature of the conduct leading to the disqualification, being serious breaches of duty under ss 180 and 601FD(1)(b) and serious failures to take all reasonable steps under s 601FD(1)(f) of the Act, are of less significance with a trustee of a self managed superannuation fund of the kind here because RGN deals with a very limited section of the public, being primarily advisors and accountants;

(b)    the nature of Mr Nenna’s managerial involvement was very limited;

(c)    Mr Nenna’s general character was well supported, he has never before offended, he was a valuable and contributing member of the community and is unlikely again to offend;

(d)    the company has two members and two directors;

(e)    Mr Nenna has acknowledged his wrong-doing;

(f)    the degree of control he would exercise over the management of the trustee is less relevant in the case of a self managed superannuation fund;

(g)    neither protection of the public nor general deterrence is served by his being prevented from continuing as a director, as it is unlikely that members of the public will come into contact with him in his capacity as a director or otherwise in the management of the company;

(h)    having regard to the nature of decisions that Mrs Nenna would ‘alone’ make from time to time during the period of Mr Nenna’s disqualification (if she were to be appointed as director instead of Mr Nenna under a power of attorney) and her consultation with Mr Nenna in relation to investment decisions in particular, it is likely that Mr Nenna will be involved in management of RGN whether or not he is granted leave and it would not be desirable in the circumstances:

(i)    to leave Mrs Nenna in a position where she may be knowingly concerned in a breach of the law by Mr Nenna;

(ii)    to leave Mr Nenna in a position where he may be acting contrary to the Court’s disqualification order.

33    The factors against Mr Nenna continuing as a director or otherwise managing RGN were that:

(a)    the need for him to be a director as a matter of the actual operations of the company may be avoided, in particular if both he and Mrs Nenna appoint a “legal personal representative” as director while he is subject to the Court’s disqualification order (but this would probably operate unfairly to punish Mrs Nenna); and

(b)    the need for him to be a director under the Superannuation Industry (Supervision) Act 1993 (Cth) might be overcome by granting Mrs Nenna an enduring power of attorney (but this may give rise to practical problems).

34    Taking these considerations into account, I consider that leave should be granted to Mr Nenna to manage RGN and, for that purpose, remain as a director of it, subject to the condition that during the period of Mr Nenna’s disqualification RGN should not be permitted to engage in any activities other than as trustee of the Nenna Family Superannuation Fund.

Leave to manage Robe

35    ASIC submitted that people dealing with Robe, who come to know of the contraventions of the Act by Mr Nenna, may think that the Court views the contraventions as matters of little concern if the Court allows Mr Nenna to be a director of Robe, in particular, where there is no real need for that appointment. It was submitted that Mr Nenna had not provided evidence to the Court that demonstrated that Mr Nenna's consulting services must be delivered via a corporate structure or that, even if that would be necessary or desirable for him, Robe required that he remain a director. I accept this submission.

36    ASIC also submitted that, by contrast to RGN, in the case of Robe as trustee of the Robe Services Trust, some of the factors mentioned above may be seen in a different light, as follows:

(a)    the nature of the offences, being serious breaches of duty under ss 180 and 601FD(1)(b) and serious failures to take all reasonable steps under s 601FD(1)(f) of the Act, are of greater significance in respect of Robe because Robe deals with a potentially wider section of the public, being KPMG and other possible clients;

(b)    the nature of Mr Nenna’s involvement in Robe is much greater as, so far as the facts presently reveal, he will be the sole provider of the consulting services. It is an instance of a company dealing with a section of the public where the disqualified person will be the main individual representing the company in all its dealings;

(c)    the degree of control he would exercise over the management of Robe is, by reason of the matters in paragraph (b) above, more relevant than in the case of RGN;

(d)    Mr Nenna has not established an inability to continue to provide consulting services through Robe if he is not a director or manager of that company, nor has he demonstrated that the company will not be able to conduct its affairs without him being granted leave to manage Robe.

37    Other factors in favour Mr Nenna being granted leave are as follows:

(a)    Mr Nenna’s general character has been well supported, he has never before offended, he is a valuable and contributing member of the community and is unlikely again to offend;

(b)    the company has two members who are also its two directors;

(c)    Mr Nenna has acknowledged his wrongdoing;

(d)    there is no evidence before the Court that Mr Nenna’s attitude and management skills were in any way deficient at the time of his admitted error. The character evidence on his behalf was to the effect that his attitude and management skills were exemplary. Evidence that Mr Nenna and others gave emphasised the unusual and unfortunate circumstances that gave rise to his error and the improvement in his condition since that time.

38    I consider that the factors against Mr Nenna being granted leave in relation to Robe lead to a refusal of this application in relation to that company. In particular:

(a)    Mr Nenna has not established a need to provide consulting services through Robe, as opposed to providing them personally, and if he does provide them through Robe, he does not need to be a director of Robe in order to do so; and

(b)    the grant of leave may encourage the perception in the eyes of the public with whom Mr Nenna comes into contact, and the public at large, that the Court views the contraventions as matters of little or no concern, particularly where there is no real need for that appointment.

39    Accordingly, leave to manage Robe is refused.

The notice requirement and s 1322 of the act

40    As I have already indicated, in order for Mr Nenna to apply for leave under s 206G(1) of the Act, he must have already been disqualified from managing corporations. It was only once Mr Nenna was disqualified at 4.30 pm on 10 October 2011 that he could apply to the Court for leave to manage RGN and Robe.

41    Section 206G(2) requires Mr Nenna to lodge a notice with ASIC at least 21 days before commencing the proceedings relating to his application. The notice must also be in the prescribed form.

42    The application made after 4.30 pm on 10 October 2011, evidently, did not comply with the notice requirement in s 206G(2), both in terms of failure to give notice in the prescribed form and to give 21 days notice to ASIC in this form.

43    ASIC, however, had been ‘notified’ – in the sense that they were aware – of Mr Nenna’s intention to make the application under s 206G(1) nearly three months before the application came before the Court. Mr Nenna’s intention to make the application has been widely publicised. No useful purpose, in the particular circumstances of this application, would be served by insisting on compliance with s 206G(2). Certainly, no substantial injustice has been or is likely to be caused to any person if the notification is not made to ASIC as prescribed. It would be just and equitable to ‘excuse’ the failure to give the notification.

44    There is an avenue for Mr Nenna’s current application to succeed despite his failure to comply with the notice requirement in s 206G(2). Section 1322 of the Act contemplates that instances of non-compliance will occur in relation to the Act and, to this end, s 1322 can facilitate the validation of non-compliance in specified circumstances.

45    Mr Nenna sought an order under s 1322(4)(a) declaring that his failure to comply with s 206G(2) did not invalidate his application for leave to manage RGN and Robe under s 206G(1). It may be that no such declaration is necessary, as s 1322(2) would automatically validate the proceeding. However, I proceed to deal with the application brought under s 1322(4).

46    Section 1322(4) gives the Court power to make orders upon the application of an “interested person”. Relevantly, under s 1322(4)(a), the Court can make:

… an order declaring that any act, matter or thing purporting to have been done, or any proceeding purporting to have been instituted or taken, under this Act or in relation to a corporation is not invalid by reason of any contravention of a provision of this Act or a provision of the constitution of a corporation.

47    In order for an order to be made pursuant to s 1322(4)(a), one of three requirements in s 1322(6)(a) must be met. They are:

(i)    that the act, matter or thing, or the proceeding, referred to in that paragraph is essentially of a procedural nature;

(ii)    that the person or persons concerned in or party to the contravention or failure acted honestly; or

(iii)    that it is just and equitable that the order be made.

48    Under s 1322(6)(c), an order under s 1322 cannot be made unless “no substantial injustice has been or is likely to be caused to any person”. It is to be noted that s 1322(6)(c) must be complied with no matter which subsection of s 1322 is called in aid.

49    On the basis of my views expressed in [43] above, I would grant the order declaring the proceeding not to be invalid on the basis that it is just and equitable that the order be made (s 1322(6)(a)(iii)) and no substantial injustice has been, or is likely to be caused to any person (s 1322(6)(c)).

50    However, there may be an argument that s 1322(4)(a) only concerns “irregularities”. This argument arises because of the heading to s 1322. The heading to s 1322 is “Irregularities”. Nowhere in s 1322(4) and (6) is there reference to “irregularities” or “procedural irregularity” in express terms. Section 1322(2), by contrast, expressly validates “procedural irregularity”. However, a heading may inform the interpretation to be given to legislative provisions: see Pearce DC and Geddes RS, Statutory Interpretation in Australia (7th ed, LexisNexis Butterworths, 2011) at [4.50].

51    I observe that the authors of Ford’s Principles of Corporations Law (14th ed, LexisNexis Butterworths, 2010) at p 325 conclude:

Under s 1322(4) any “interested person” may apply to the court to make a validation order in respect of irregularities generally. This subsection is not confined to procedural irregularities [citations omitted].

52    If s 1322(4) only concerns irregularities, it would encompass procedural irregularities, although it would not be so confined.

53    If this is the correct way to interpret s 1322(4), then a line of authority may preclude an order being made by the Court in favour of Mr Nenna under s 1322. That line of authority is to the effect that the term “irregularity” does not include deliberate acts of non-compliance with the Act. Undoubtedly, Mr Nenna was well aware of the requirements of s 206G(2) before making his application. By making an oral application to the Court without giving ASIC 21 days notice of the proceeding in the prescribed form, Mr Nenna has deliberately not complied with the Act.

54    By contrast, there is another line of authority which considers that the term “irregularity” does include instances of deliberate non-compliance with the Act. For reasons outlined below, this construction of the term is, in my view, correct.

55    In P W Saddington & Sons Pty Ltd and the Companies Code (1990) 19 NSWLR 674, Young J in Eq. construed the predecessor to s 1322 (s 539 of the Companies (New South Wales) Code) narrowly. His Honour said s 539 could only be invoked when the parties seeking to rely on it were “without fault”, or perhaps when it became impractical to comply with the Act. At 675 his Honour said:

I am quite sure that if a meeting proceeds and then afterwards it is realised that there was no quorum, the court could make an order under s 539. One can well see that happening without fault on any party, where, for instance, one of the members of the quorum has to be a person who holds a particular class of share. There would be an interesting situation if a meeting was held where members had come very long distances and it was realised at the commencement of the meeting that there was no quorum, but the people present decided to hold a meeting with a view either to it being ratified later by a valid meeting or by the court. Perhaps s 539 would cover that situation. However, I am quite sure that s 539 does not cover the situation where parties actually know that the meeting that they are convening is invalid and attend to purport to pass resolutions which they know can only have any validity at all if the court acts under s 539. A deliberate choice to convene an invalid meeting is not a procedural irregularity within s 539.

56    Shortly after Saddington, Byrne J in Re Pembury Pty Ltd [1993] 1 Qd R 125, held that the term “procedural irregularity” did encompass deliberate instances of non-compliance with the Act. At 126-127 his Honour said:

Nothing in the language of s 1322 indicates that the defects and deficiencies which it identifies as procedural irregularities must arise from inadvertence. And as I construe s 1322, according to its provisions the liberal interpretation their evident purpose requires, the section should not be restricted in scope to instances of inadvertence or accidental non-compliance. This was the view of a precursor to s 1322 take by Lee J, then Master Lee QC, in Re Clearwater Pty Ltd (1981) 6 ACLR 201 (see at 208-210) and is, in my opinion, to be preferred to the remarks of Young J in Re P W Saddington & Sons Pty Ltd (1990) 2 ACSR 158 to the effect that the section does not apply to irregularities resulting from a deliberate choice: at 159.

57    In Pembury, a director of Pembury Pty Ltd gave two days notice to a second director of that company that a general meeting was to be held. The Corporations Law required 14 days notice. The director also gave the notice knowing that the second director was unlikely to attend. The second director did not attend. As a result, there was an insufficient quorum. His Honour found that the decisions to give the deficient notice and to continue with an inquorate meeting were “deliberately made with an informed appreciation of the deficiency of notice and that East would probably stay away” (at 126). However, Byrne J considered that the correct approach under s 1322(2) was to first identify the occurrence of a procedural irregularity however deliberate, and then to consider whether the irregularity has caused, or may cause “substantial injustice” (at 127).

58    Indeed, it is often unnecessary to consider whether the irregularity was deliberate as the possibility, or occurrence of substantial injustice, may prevent s 1322 from validating something that would otherwise be invalid. Under s 1322(2), the Court can block a procedural irregularity from being validated automatically if the irregularity “has caused or may cause substantial injustice that cannot be remedied by any order of the Court”. As outlined above, s 1322(6) states that an order under any subsection of s 1322 cannot be made unless “no substantial injustice has been or is likely to be caused to any person”.

59    In Mamouney v Soliman (1992) 9 ACSR 63, Hodgson J found that there was substantial injustice in the terms of s 1322(2). Hodgson J declined to consider whether a procedural irregularity could be an instance of deliberate non-compliance with the Act. Though, at 68, his Honour noted that Young J’s remarks in Saddington on the issue were dictum, and that Byrne J did not follow Saddington in Pembury. His Honour, however, stated at 72 that the relationship between the type and degree of procedural irregularity would bear on whether the Court would ultimately find substantial injustice:

However, I do accept that the more significant the resolutions passed at the meeting, and the greater the procedural defects, the more ready the court will be to say that they have caused or may cause substantial injustice…

In this case, if there is sufficient nexus between the procedural irregularities and the passing of the resolutions, I think it is clear that substantial injustice has been caused or may be caused.

60    It may be, then, that deliberate non-compliance with the Act is more likely to be an irregularity which will result in a finding that substantial injustice has been, or is likely to be caused.

61    Justice Young in Eq. referred to the first part of Hodgson J’s passage cited above in National Australia Bank Ltd v Market Holdings Pty Ltd (2000) 50 NSWLR 465 at [58]. His Honour said that Hodgson J’s remarks were “significant”, after noting there had not been “wholesale acceptance” of Saddington and that Saddington may not be adopted as law (at [58]).

62    Market Holdings was another case that turned on a finding of substantial injustice, apparently under s 1322(6)(c). It was therefore unnecessary for Young J to consider whether there was a deliberate irregularity or not. Nonetheless, Young J repeated his view that a deliberate omission to give proper notice of a meeting in accordance with the Act was not a procedural irregularity: at [59]-[60].

63    In Whitehouse v Capital Radio Network Pty Ltd (2004) 13 Tas R 27, a decision of two judges of the Full Court of the Supreme Court of Tasmania, Cox CJ considered the position in Saddington and Pembury before adding at [14]-[15]:

Byrne J placed particular reliance upon the absence of any qualification of the words “absence of quorum” [in s 1322(1)(b)(i)] with the words such as “inadvertent” or “accidental” when the legislators had inserted such a qualification in subs (3) which refers to the “accidental omission to give notice” of a meeting.

I agree with the learned primary judge’s view that there is no warrant for writing words in to s 1322(1) and (2) that are not there and with his conclusion that the absence of a quorum at the meeting of directors of 11 April 2002 was a procedural irregularity within the meaning of s 1322(2) even if:

•    the meeting was called in the knowledge that it was extremely unlikely that there would be a quorum;

•    the purpose of calling the meeting was to attempt to circumvent the effect of the orders made in the Family Court; and

•    the meeting proceeded in the full knowledge of those present that there was no quorum. (Citations omitted).

64    At [27], Slicer J said that he preferred the broader construction of “procedural irregularity”, though noted it was unnecessary to finally make a determination. Both Cox CJ’s and Slicer J’s decision ultimately rested on the finding that substantial injustice had occurred under s 1322(6).

65    In Cheerine Group (International) Pty Ltd v Yeung [2006] NSWSC 1047, Young J in Eq. reiterated his view that “procedural irregularity” does not include acts or omissions deliberately done contrary to the Act (at [18]). Although in Market Holdings his Honour said that Saddington may not be adopted as law, in Cheerine his Honour says that Saddington has indeed been followed by other cases. His Honour does not cite any such cases, although his Honour made the following observation about Whitehouse at [18]:

… it would appear at first reading of the decision of a two judge Full Court of the Supreme Court of Tasmania, Whitehouse v Capital Radio Network Pty Ltd (2004) 48 ACSR 568, that [Saddington] was not followed in that court. However, one can see why when one reads paragraph [12] of the decision where the Chief Justice says:

“Re Saddington… differs from the present case in that there was here no deliberate choice to convene an invalid meeting”

Accordingly, in situations where there is a deliberate choice to convene an invalid meeting, Saddington would have appeared to have passed muster with the Full Tasmanian Supreme Court.

66    It is difficult to reconcile Cox CJ’s remarks in Whitehouse and Young J’s dictum in Saddington. The issue on appeal in Whitehouse was whether a meeting which did not have a sufficient quorum could be declared valid under s 1322(4) of the Act. Whilst there was no deliberate decision to convene an inquorate meeting from the outset, there was still a deliberate decision to continue the meeting when it became obvious – albeit at the last minute – that the meeting lacked a quorum. As indicated previously, it seems that Cox CJ did proceed on the basis that the decision of Byrne J in Pembury was correct.

67    That Whitehouse stands for a different proposition than Saddington seems to have been accepted in Gangemi v Osborne [2009] VSCA 297, a decision of the Victorian Court of Appeal: see Nettle and Harper JJA [63] (footnote 50).

68    In MTQ Holdings Pty Ltd v RCR Tomlinson Ltd [2006] WASC 96, Le Miere J adopted the broad definition of “procedural irregularity”. In that case, the procedural irregularity complained of was the failure of a chairperson to allow a person to object to proxy votes, which was permitted under the company’s constitution. After a discussion of the authorities, Le Miere J said that he preferred Byrne J’s liberal interpretation of “procedural irregularity” in Pembury (at [108]). However, this conclusion ultimately had no bearing on the matter, as his Honour found that the chairperson believed he had complied with the company’s constitution. There was no deliberate act of non-compliance.

69    It is true that deliberate contraventions of the Act should not be encouraged under normal circumstances. In Amlaki FZ LCC v Pinnacle Network (Australia) Pty Ltd [2008] FCA 1491, Finkelstein J said at [8] that it is “clearly undesirable for a member of a company to convene a meeting where the member knows that a quorum will not be present”. In that case, a meeting was held to remove a director of Amlaki Australia. At the time of the meeting, the plaintiffs had actual knowledge that there was an insufficient quorum. They sought to validate a resolution purportedly made removing the director.

70    His Honour mentioned the debate over the two interpretations of “procedural irregularity”, but said it was unnecessary to enter the debate to decide the matter before him (at [7]-[8]).

71    Despite these remarks and his Honour’s disapproval of the plaintiffs’ deliberate conduct, Finkelstein J made a declaration, apparently under s 1322, that the resolution was valid.

72    His Honour said that the circumstances called for a “pragmatic approach”, saying “it would have been an exercise in futility (and wasteful of costs) to require another meeting to achieve a known result” (at [8]). So, his Honour did not rule out the possibility of validating procedural irregularities where there was deliberate non-compliance with the Act.

73    In BI Constructions Pty Ltd v George Shad and Chikal Pty Ltd [2010] NSWSC 484 Slattery J considered both Pembury and Saddington and concluded that (at [37]):

Where the irregularity arises from a deliberate informed decision to create an irregularity s 1322 will not able to be used to excuse the irregularity: Re P W Saddington & Sons Pty Ltd (1990) 19 NSWLR 674; (1990) 8 ACLC 1722.

74    Like Saddington, BI Constructions involved a failure to give notice of a meeting. In BI Constructions, it was clear that the omission to give notice to a director deprived him of his right defend his position as a director at the meeting (at [37]-[38]). Justice Slattery said that such serious conduct would fail to attract the Court’s intervention to validate the irregularity: at [38].

75    Recently, in this Court, Dowsett J briefly discussed “procedural irregularities” in Premium Income Fund v Premium Income Fund Action Group Incorporated [2011] FCA 781. His Honour said there was “much to be said” for the proposition in Saddington (at [51]-[52]). Justice Dowsett did not, however, mention any competing authorities such as Pembury or Whitehouse. Again, that case did not turn on the preliminary question of whether a procedural irregularity was deliberate. Rather, Dowsett J made a declaration under s 1322(2) that the procedural irregularity had caused, or may have caused substantial injustice which could not otherwise be remedied by the Court.

76    In my view, the issue of whether an “irregularity” or “procedural irregularity” can be one which is a deliberate act of non-compliance with the Act can be resolved by construing its meaning in its context. Three points can be made in this regard.

77    The first is that “irregularity”, by definition, means:

Want of conformity to rule; deviation from or violation of a rule, law, or principle; disorderliness in action; deviation from what is usual or normal; abnormality, anomalousness.

And:

An instance of this; a breach of rule or principle; an irregular, lawless, or disorderly act.

See Oxford English Dictionary (2nd ed, Clarendon Press 1989) vol VIII at 94.

78    The definition does not include an express or implied requirement that an irregularity must be inadvertent or accidental. An irregularity (as defined) could occur as the result of a deliberate act or omission.

79    Secondly, s 1322(3) contemplates that “accidental omission to give notice” of a meeting in accordance with the Act will be automatically validated by s 1322(3). That the Act specifically refers to “accidental omissions” in s 1322(3) but fails to refer to accidents or omissions in s 1322(2), (4) or (6) tends to indicate that these subsections are not so confined.

80    Thirdly, s 1322(6)(a) envisages that the Court can make an order under s 1322 even where the Court is not satisfied that the person concerned in the contravention acted honestly. So even where a person acts dishonestly, which would normally involve an element of deliberate behaviour, the legislation will permit the Court to make an order under s 1322(4)(a). For instance, if the Court is satisfied that it is just and equitable that the order sought be made (see s 1322(6)(a)(iii)), then an order under s 1322(4)(a) can be made, even though an element of dishonesty is involved. The Court, of course, may not make the order sought, but s 1322(6) does not prevent the Court from doing so in the appropriate circumstance.

81    In my view, the terms “irregularities” and “procedural irregularity” can involve deliberate acts of non-compliance. The question will then arise, if the act is deliberate, whether the requirements of s 1322(6) are otherwise complied with so the Court can make an order under s 1322. This latter enquiry is quite separate from whether there was an irregularity.

82    I have come to the view that an order can be made under s 1322(4)(a) even if that provision is concerned with “irregularities” and the order is to declare a deliberate irregularity valid.

Conclusion

83    Therefore, the Court did for the above reasons on 10 October 2011 after 4.30 pm:

(a)    declare that the application under s 206G(1) of the Act is not invalid by reason of contravention of s 206G(2);

(b)    order that Mr Nenna have leave to manage RGN on condition that RGN not engage in activities other than as trustee of the Nenna Family Superannuation Fund.

84    As Mr Nenna has required an indulgence and the favourable exercise of the Court’s discretion, it was appropriate to order that Mr Nenna pay ASIC’s costs of the application. These costs will include the costs included in proceeding VID 750 of 2009 to the extent those costs relate to this application under s 206G(1) of the Act.

Associate:

Dated:    20 October 2011