Forge v Australian Securities and Investments Commission [2004] NSWCA 448
Dismissing, save on the procedure for fixing penalty, an appeal against civil penalty declarations, disqualification orders and penalties for contraventions of sections 232 and 243ZE of the Corporations Law, the New South Wales Court of Appeal held that the proceedings, begun under that Law, were validly continued under the Corporations Act 2001 (Cth); that a non-director was an officer because he was concerned in the company's management; that the finding of a failure to act honestly stood even on a subjective test; and that the shareholders' post-judgment ratification was ineffective, in part because shareholders could not ratify contraventions of civil penalty provisions, but it remitted the matter for a separate hearing on penalty.
What the court decided
McColl JA gave the only reasons, and Handley JA and Santow JA each agreed with McColl JA [1]–[3].
The Australian Securities and Investments Commission (ASIC) brought civil penalty proceedings against four individuals and two family companies, the appellants, though the case against one company was stayed [3]–[5]. They concerned eight transactions by CTC Resources NL (CTC) in favour of those companies, four fee payments and four unsecured loans [6], [15]. CTC had received those funds from the Commonwealth in April 1998, characterised as payment for preference shares [13]–[14]. Foster AJ declared contraventions of sections 232(2), (4) and (6) and 243ZE of the Corporations Law, disqualified each individual for up to sixteen years and imposed pecuniary penalties [3].
ASIC began the proceedings in April 2001, before the Corporations Act 2001 (Cth) came into force [7]. Liability for contravening sections 232 and 243ZE arose under Part 9.4B of the Corporations Law as in force before 13 March 2000 [60]. That Part had been repealed but was preserved by section 1473 of the Corporations Law [58]. Applying section 1401 of the Act, the Court treated the Act as including those sections and the Part under which liability was incurred [60]–[62]. Both sides had argued under section 1383, but section 1384 applied because these were federal corporations proceedings, though little turned on it [63]–[64]. The provisions taken to be included were identical, so they corresponded [65]. The proceedings were validly continued under Chapter 10 of the Act [71].
One individual appellant was not a director of CTC, but the trial judge found that he was its officer [152], [166]. The Court found it unnecessary to choose between a wide and a narrower reading of "take part in the management" [199]. Ormiston J had construed both taking part in and being concerned in the management, for another provision, in Commissioner for Corporate Affairs (Vic) v Bracht [1989] VR 821, and his was the wide reading [186]–[189]. Accepting his approach to the width of being concerned in management, the Court held that conceiving and promoting CTC's main activity made him an executive officer, as did his conduct of CTC's relationship with its banker [200]. The challenge to the finding that he was an officer failed [201].
The trial judgment, read closely, found the section 232 contraventions against the appellants as principals, not on an accessorial basis [180]–[182]. The appellants relied on a test under which involvement in the related party contraventions required knowledge of the essential facts [170], [202]. The Court held the test amply made out, since each appellant had been found to know all the material facts of the transactions [203]–[204]. The appellants also failed to upset the related party findings, because the appellants had not shown that the fee payments were reasonable remuneration or that the transactions were on arm's length terms [300]–[303].
The appellants argued that liability for failing to act honestly under section 232(2) required subjective dishonesty, as held in Marchesi v Barnes [1970] VR 434, and that the trial judge had wrongly applied an objective test [223]. Gowans J had there construed section 124 of the Companies Act 1961 (Vic), a precursor of section 232(2) [244]. Assuming in the appellants' favour that the subjective test was correct, the Court read the trial judge's findings as findings of subjective dishonesty [247]. His findings showed that they approved the transactions knowing them not to be in CTC's interests [248]. No error was shown in the findings under sections 232(4) and (6) [250], [252].
In June 2003, after judgment, CTC's shareholders passed resolutions purporting to ratify all the transactions [330]–[331], [347]. The Court found the ratification resolutions ineffective on several grounds [370]. They sought to cure a wrongful taking of CTC's resources, and the shareholders, not asked to consider the Commonwealth, did not vote for the benefit of the company as a whole [376]. Even if the private law breaches could be ratified, the breaches of statutory duty could not be cured [384]. Civil penalty proceedings involve public rights, and the only relief to escape liability is the relief the legislature provided [381]–[382]. Ratification must come within a reasonable time [386]. Resolutions passed after judgment and never put to the trial judge came too late [387]–[389]. Nor were the shareholders told of CTC's statutory and equitable rights against the appellants, or that ratification could cost CTC those rights [401]–[402].
Fixing the penalties bore the hallmarks of the sentencing process [414]. The Court relied on Hall v New South Wales Trotting Club Ltd [1977] 1 NSWLR 378, where a domestic tribunal was held bound to hear a person found guilty on penalty [418]. Applying that principle, it held that the appellants were entitled to be heard separately on penalty once they knew what contraventions had been found [424]. The trial judge should have taken that two-stage course and told the appellants of their right [425], and ASIC should have raised the principles [426].
The appeal was dismissed save on ground 22 (the penalty procedure) and the matter was remitted to the Equity Division for a hearing on penalty only [435]. That hearing was to be before a different judge [427]. The appellants were ordered to pay three-quarters of the costs of the appeal, and the trial costs order was left undisturbed [437]–[438].
Why it matters
Under the Corporations Law definition, a person who was not a director could still owe an officer's duties if concerned in the company's management [158]–[159], [200]. The decision leaves open whether section 232(2) called for a subjective or objective test, as the Court proceeded on an assumption [247].
In my view the ratification reasoning is the most practical part for solicitors advising boards. Independently of timing and disclosure, the Court held that shareholders could not ratify contraventions of the civil penalty provisions, whatever the private law position [382], [384]. This vote also failed because it came after judgment and its material repeated rejected explanations and did not adequately refer to the company's claims against the appellants [389], [396], [398], [402]. The penalty ruling applied New South Wales authority: once contraventions were found, the judge should have offered a separate hearing on penalty [424]–[425]. The Court put the duty on the judge [425] and, in the circumstances of the case, on ASIC to draw the judge's attention to the principles [426]. Hutley JA in Hall, as the Court reported, accepted that the right can be waived [419]. A party who wants that hearing should still ask for it.
The case applied the Corporations Law and New South Wales procedure, so readers should check the current text of the Corporations Act 2001 (Cth), Victorian procedure and any later treatment of the decision.
Numbers in square brackets are paragraph numbers of the judgment. This note summarises a decided case for education and is not legal advice. See how the notes are written.