When exdirectors do a deal Law Reporter

The collapse of One.Tel has already spawned some spectacular cases. A civil case brought by the Australian Securities and Investments Commission (ASIC) against Rich and others will be going back to the courts to evaluate the different responsibilities of directors (the chairman of directors and non-executive directors).

We have already commented briefly on this decision of Austin J in an earlier issue [ASIC v John David Rich Early Warner, March]

When ex-directors do a deal

Disqualifying directors – some guidelines from the One. The collapse of One.Tel has already spawned some spectacular cases. A civil case brought by the Australian Securities and Investments Commission (ASIC) against Rich and others will be going back to the courts to evaluate the different responsibilities of directors (the chairman of directors and non-executive directors). We have already commented briefly on this decision of Austin J in an earlier issue [ASIC v John David Rich Early Warner, March]

Brad Keeling, one of the directors of One.Tel, rather than fighting the civil litigation, decided to "do a deal" with ASIC. One of the terms of the deal was that Keeling would not resist the ASIC prosecution. He and ASIC approached the Supreme Court of New South Wales for "agreed" declarations and orders that would effectively dispose of the action. The other directors were not parties to the proposed orders or to the statement of agreed facts.

As part of the agreement (reported in ASIC v Rich & Ors (No 2) (2003) 21 ACLC 672) the following are the relevant facts, (as taken from the CCH Law Report).

Keeling noted that certain activities on his part regarding One.Tel's financial position and its performance amounted to a contravention of his duties of care and diligence imposed by section 180 of the Corporations Law (now the Corporations Act). His admissions in respect of these declarations were extensive.

With Keeling's consent the court was asked to make a number of declarations and orders under section 1317E of the Corporations Act to establish certain failures on his part, certain declarations establishing contraventions of section 180(1) of the Corporations Law (which was then in place – see now the Corporations Act) and other declarations relating to a number of other matters.

The court was also asked to make an order pursuant to sections 206C and 206E of the Corporations Act prohibiting Keeling from managing a corporation for a period of 10 years. The court was also asked to impose an order requiring him to pay compensation to One.Tel in the amount of $92,000,000. There were ancillary orders made relating to these matters and an order for costs.

Importantly, the court was asked to make an order that the declarations and orders made would not constitute a full satisfaction of ASIC's claims in relation to the proceedings against other directors. There was also a statement to the effect that the declarations and orders were only intended to be operative between ASIC and Keeling. They were not intended to be binding on any other directors. The declarations regarding conduct contravening either the Law (or the Act) were not binding or conclusive evidence of facts against any of the other directors in the relevant proceedings.

Justice Bryson of the NSW Supreme Court in agreeing to the relevant orders also made a number of statements concerning the role of ASIC as a guardian of public interest in relation to breaches of the Act. He further commented on the value of orders made against directors in the way of disqualification and monetary awards.

In view of the importance of these matters and in the light of earlier litigation involving the collapse of the HIH organisation (ASIC v Adler (2002) 20 ACLC 1146), it is useful to discuss the statements made by Justice Bryson.

Turning first to the breaches of the Law and their importance in the context of the operations of the Stock Exchange, the judge noted that the failure on the part of the relevant director impacted on thousands of persons as creditors, investors and employees of One.Tel as well as companies associated with it. There were a very large number of persons who were to some degree involved as customers in the business entity of One.Tel. Justice Bryson added:

"All of these persons had something to lose, at least in the terms of inconvenience and for thousands of them much more, if the business failed. Taken together the breaches of duty which Mr Keeling has acknowledged have brought about a commercial enormity, a corporate collapse on a very large scale in the context of the Australian economy. The remedies which Mr Keeling has joined in proposing the court should award against him are also impressive. Rare indeed is so ample an acknowledgment of failure, and rarer still is acknowledgment of failure accompanied by submission to such ample amends." (at paragraph 21)

The judge felt that ASIC, as guardian of the public interest in this particular context and knowing all of the relevant facts, was making its decision that the remedy against Keeling was $92,000,000 was appropriate because it was based "on a fuller knowledge and understanding of the losses which Mr Keeling's failure have caused than I am able to form on the material in evidence ...".

Turning to the period of disqualification the judge expressed some concern as to whether 10 years was an appropriate period of prohibition for Keeling to manage a corporation. He added:

"Selection of the appropriate period is not within the control of the parties or of ASIC. It was this aspect of the orders which caused me to reserve my decision and extend my consideration ." (at paragraph 21)

In this context he examined Keeling's position, his business experience, and the nature of the collapse. He was impressed by the fact that Keeling believed that he had not tried to mislead any members of the One.Tel board or the market, although he may have failed to have taken appropriate action to apprise himself of the true financial position of the company during the relevant period. Keeling had made a confession which the court was impressed by:

"He feels a sense of deep personal regret over the impact the collapse of One.Tel has had on so many people's lives and sincerely hopes that all parties, both regulatory and individual, continue to recognise the importance of delivering a maximum return to creditors as the collection and distribution of assets progresses." (at paragraph 22)

The court was particularly impressed by the way in which Keeling had conducted himself following his decision to co-operate. Justice Bryson added (at paragraph 24):

"His contrition is further expressed in his positive co-operation with ASIC. ... Mr Keeling has come to terms with ASIC at an intermediate stage in the litigation, and his co-operation at this time has reduced in a significant way the amount of legal costs and attention imposed on ASIC and the requirement for use of the Court's time. His admission and acceptance of responsibility have been made in a clear and public manner. This is not something that anybody could ever live down; it will follow him for the rest of his life. I accept the sincerity of Mr Keeling's expressions of contrition. Contrition is a significant matter when considering whether future breaches of duty are likely, and what protection against future breaches the public interest requires."

The judge then turned to look at the issues relating to disqualification. He recognised that disqualification impacted both '[to protect] the public and also.... the operation of disqualification as a penalty on the person disqualified" (at paragraph 25). He examined briefly the relevant legislation and the terms of disqualification imposed by Santow J in ASIC v Adler.

In discussing whether disqualification was either corrective or punitive Justice Bryson noted: "The punitive impact of such an order must be recognised; courts apply punitive measures with care, avoid excessive measures and have regard to the circumstances of individuals. No one should be sacrificed to the public interest." (at paragraph 26)

Recognising that the parties had come to the court with an agreed set of possible orders the judge made an important comment which is relevant not only in this area but also in other areas of the law including the operation of the Trade Practices Act.

"Decisions can only be made by the Court, and cannot be delegated to anyone else; it cannot be delegated to the parties, which would in effect happen if the Court adopted an agreed form of consent orders without giving genuine consideration to what the Court should do. The fact that parties join in proposing a discretionary order to be made by consent is a consideration favouring a discretionary decision to make it; this is a particularly powerful consideration [on ASIC's part as] it [is] the guardian of the public interest, ..... . However, [the decision] is for the Court, not for the parties. The approach to the Court made by the parties in the present case has accorded with what I have said; not trying to control the Court's decision." (at paragraph 27)

The court then considered whether the 10 year period of disqualification was adequate. He added these sobering comments:

"If disqualification is considered as a measure for protection of the public, keeping Mr Keeling away from managing corporations for ten years is a powerful protection indeed, particularly considering he is aged 47 years and the stage of his career at which the disqualification falls. While not impossible, it would be a striking phenomenon if, after ten years of disqualification, he ever retained management responsibilities again, and if he did it is to be expected that great care would be used by anyone who decided to give them to him. It would be unrealistic to suppose that he may have any further career as a director of companies listed on ASX." (at paragraph 29)

In the circumstances, and bearing in mind the term of disqualification, Justice Bryson added that he did not think "that it would be right to impose a term of disqualification which, in practical terms, would close off for ever a return to the kind of management occupation he has followed for the last two decades." (at paragraph 29)

In conclusion, he suggested that it would be futile to try to classify periods of disqualification in other cases. He noted that breaches of the legislation could take many forms; the circumstances occurring are very different scenarios; the number of persons affected and the interests impacted upon will vary from cases to case. He added that, having regard to Keeling's personal circumstances "including his age, and the enormity of the events, Mr Keeling was exposed to the possibility of a very lengthy disqualification, possibly somewhat longer than 10 years, if the facts now established by agreement had been established at a contested hearing. Even so, however, it is unlikely that a period of disqualification would have been imposed so long as to close off, in terms of practicality, the possibility that he would ever again take part in the management of a corporation." (at paragraph 30)

He recognised that by joining in with ASIC and putting a submission to the court he had probably gained for himself a less harsher disqualification period than might otherwise have occurred.

The decision is clearly one that will have an impact in many other decisions involving disqualification of directors. There are a number of cases in the pipeline and we will await with interest the way in which the judges in those cases deal with these matters.

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