Disqualification a mighty judicial blow Law Reporter

The courts will ban directors for a considerable period of time for illegal and misleading conduct

The disqualif-ication of directors in the HIH litigation, which was of course very high profile, suggests that the courts will ban directors for a considerable period of time if appropriate to do so. Now, in Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd & Anor ((2002) 41 ACSR 561) the New South Wales Supreme Court has once again made a very lengthy banning order against a person who the court held had been engaged in illegal and misleading and deceptive conduct. The facts of the case as taken from the Butterworths Law Report were briefly these. The defendant company, Pegasus Leveraged Options Group (Pegasus), was established in July 2000 by the second defendant in this case. It attracted investments from a large number of people offering high rates of return. ASIC was unable to locate any evidence of the investment of the funds raised by the defendant company and its directors other than in gambling. ASIC sought declarations from the Supreme Court that the defendants had committed breaches of the Corporations Act and ancillary and consequential orders including injunctions and disqualifications. The evidence was that "the relevant company and its director had in each case offered an astronomical rate of return for investments in the company. Generally the rate of return was 5 percent per week, sometimes 2 percent per week and sometimes 8 percent per week. What was to be the subject of the investment was never made entirely clear. Sometimes reference was made to US Treasury Bonds, sometimes to options in relation to US Treasury Bonds, sometimes to trading programs and so on. The description given to the proposed investment does not matter a great deal for there is no acceptable evidence that the investments were so used." (see para 12)

What the judge held was that each investor was informed that his or her moneys "would be used together with the moneys of other investors in a business transaction or transactions which would create profits sufficient to enable [the company] to pay the rate of interest which was promised" (at para 20). It turned out that the relevant director had been convicted in the District Court of New South Wales in 1995 for obtaining funds by deception and was later disqualified from acting as a director by virtue of the operations of the Corporations Act. The court held, in all these circumstances, that further breaches had been committed because the relevant director operated a managed investment scheme in breach of certain provisions of the Corporations Act which prevented them participating in such schemes. ASIC sought injunctions against the relevant director from continuing to act in this fashion as well as certain other remedies. Instead, what the Supreme Court did was to impose a significant disqualification order.

After discussing a number of important recent cases in which disqualification of directors had been considered the judge, although noting that the Corporations Act did give the court power to issue injunctions to prevent persons from behaving in a particular way, that no purpose would be served "by granting an injunction against the company". Furthermore no court order would be useful with respect to the management of the managed investment scheme in relation to the director. Instead, he was disqualified from managing a corporation for 30 years. The judge, Acting Justice Davies, in deciding to go down this particular road, rather than seeking to issue injunctions against individuals or companies, made these comments: "It is generally not useful to attempt to restrain future fraudulent activity, which has not been identified or threatened, by relying upon the powers of the civil court to grant declarations and injunctions and to punish for contempt. Fraudulent activity calls for criminal prosecution and punishment. I see no benefit in granting an injunction restraining [the relevant director] from contravening [the relevant provisions of the Act]. The court has already expressed its disapproval of his activities. If, in the future, he contravenes [the relevant provisions of the Act] he should be prosecuted.

In my opinion, the court's power to grant an injunction should be exercised only when it appears that the injunction would serve a useful end. In the present case, the grant of an injunction would not do so. An injunction is not the appropriate way to restrain the activities in which [the relevant person] may engage in the future. Only awards of damages, the imposition of penalties, prosecution and punishment are likely to restrain him." (para 113-114) In this case ASIC was not seeking penalties but rather civil remedies because it can act more speedily and effectively in those circumstances. The case illustrates that ASIC and other regulators do have sufficient flexibility to tackle activities that breach the law and to ensure that important remedies are awarded.

Professor Baxt is a partner of Allens Arthur Robinson

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