New South Wales Supreme Court ASIC v Elm Financial Services Pty Ltd & Ors [2005] NSWSC 1033 CITATION : This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 11/10/05 JUDGMENT DATE : 13 October 2005 Equity Division JURISDICTION : Corporations List JUDGMENT OF : Barrett J DECISION : Declarations of contravention and disqualification order made; undertaking accepted (see paragraph 8 and Schedule) CATCHWORDS : CORPORATIONS - application by ASIC for declarations of contravention of various investor protection provisions - court invited to make orders by consent on basis of statement of agreed facts - whether agreed facts warrant making of declarations - whether court should give effect to parties' agreement as to penalty LEGISLATION CITED : Corporations Act 2001 (Cth), ss.206C(1), 206D(1), 206E(1) CASES CITED : Australian Securities and Investments Commission v Elm Financial Services Pty Ltd & Ors [2005] NSWSC 1020 Australian Securities and Investments Commission - Plaintiff PARTIES : Robert John Kay - Eleventh Defendant FILE NUMBER(S) : SC 2313/04 Mr D.R. Stack - Plaintiff COUNSEL : Eleventh Defendant in person Mr Kim Turner, Solicitor for Australian Securities and Investments Commission - Plaintiff SOLICITORS : Eleventh Defendant in person LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J THURSDAY, 13 OCTOBER 2005 2313/04 AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION v ELM FINANCIAL SERVICES PTY LTD & 11 ORS JUDGMENT 1 On 11 October 2005, I made, by consent of the plaintiff (Australian Securities and Investments Commission) and the defendants concerned, declarations of contravention and consequential orders against the ninth and twelfth defendants in these proceedings: Australian Securities and Investments Commission v Elm Financial Services Pty Ltd & Ors [2005] NSWSC 1020. I am now asked by ASIC and the eleventh defendant (Robert John Kay) to make consent declarations and consequential orders in respect of that defendant. 2 ASIC and Mr Kay have tendered a statement of agreed facts (Exhibit K1). I have adopted the course outlined in my earlier judgment with a view to deciding whether, on the basis of the agreed facts, the court is satisfied that the statutory conditions for the making of declarations of contravention have been met. 3 The agreed facts establish that Mr Kay was, at material times, an "officer" of Elm Financial Services Pty Limited and a director of Elm Nominees Pty Limited, Elm Management Pty Limited and Fletcher Securities Pty Limited. They also show that each of those companies contravened provisions of the Corporations Act. In the case of Elm Financial Services and Elm Nominees together, there was one contravention of s.727(1), one contravention of s.601ED(5) and (together with another company) one contravention of each of ss.1041E(1), 1041F(1)(a) and 1041H(1). In the case of Elm Financial Services and Fletcher Securities together, there was one contravention of s.727(1). Elm Financial Services alone committed one contravention of s.601ED(5) and one contravention of s.912A(1)(f). 4 The agreed facts also show that Mr Kay, as a director or other officer, failed in every such case to take reasonable steps to prevent the contravention and thereby himself contravened ss.180(1) and 181(1). Mr Kay is thus seen to have failed in the proper discharge of the duties owed by him as a director or other officer and, in that way, to have contributed to situations in which persons invited to invest money were denied basic protections and safeguards that the law demands they be afforded. 5 The agreed facts cause the court to be satisfied that the statutory conditions for the making of the declarations of contravention of ss.180(1) and 181(1) by Mr Kay have been satisfied. 6 ASIC and Mr Kay have agreed a period of disqualification for Mr Kay (namely, five years), with the disqualification being imposed through orders under ss.206C(1), 206D(1) and 206E(1) so that s.206A(1) operates to impose criminal sanctions if prescribed activities are engaged in during the period of disqualification. The court is also invited to note and accept an undertaking by Mr Kay to comply with the terms of an undertaking given by him to ASIC under s.93AA of the Australian Securities and Investments Commission Act (a copy of that s.93AA undertaking being Exhibit K2). 7 I need not repeat here what was said at paragraphs [9] and [10] of the earlier judgment about the function of the court in such cases. It is sufficient that I record the conclusion of the court that disqualification for five years is an appropriate sanction in the context of the contraventions established on the basis of the agreed facts. 8 In relation to Robert John Kay (the eleventh defendant), the court makes by consent the declarations and orders set out in the Schedule to these reasons and notes and accepts the undertaking set out in that Schedule. In addition, I direct that Exhibit K1 and Exhibit K2 be retained as part of the record of these proceedings. Schedule With the consent of the Plaintiff (" ASIC ") and the 11th Defendant (" Robert John Kay ), THE COURT: 1. Declares that Robert John Kay was an "officer" of the 1st Defendant ("Elm Financial Services") within the meaning of sections 9, 180, 181 and 182 of the Corporations Act. 2. Declares that Robert John Kay was a director of the 2nd Defendant ("Elm Nominees") from 5 July 2002. 3. Declares that Robert John Kay was a director of the 3rd Defendant ("Elm Management") from 31 October 2002. 4. Declares that Robert John Kay was a director of the 5th Defendant ("Fletcher Securities") from 1 July 2000. 5. Declares that by promoting and causing the issue of the Elm Nominee Debentures, as pleaded in paragraphs 46 to 47 of the Amended Statement of Claim ("the Claim"), Elm Financial Services and Elm Nominees contravened ("the Elm Nominee Debenture Contravention") section 727 (1) of the Corporations Act. 6. Declares that Robert John Kay, whilst being an officer of Elm Financial Services, failed to take reasonable steps to prevent the Elm Nominee Debenture Contravention. 7. Declares that by promoting and causing the issue of the Elm Property Debentures, as pleaded in paragraphs 54 to 55 of the Claim, Elm Financial Services and Fletcher Securities contravened ("the Elm Property Debenture Contravention") section 727 (1) of the Corporations Act. 8. Declares that Robert John Kay, whilst being an officer of Elm Financial Services and Fletcher Securities, failed to take reasonable steps to prevent the Elm Property Debenture Contravention. 9. Declares that by promoting and causing the issue of units in the Elm Unit Trust, as pleaded in paragraphs 62 to 65 of the Claim, Elm Financial Services and Elm Nominees contravened ("the Elm Unit Trust Contravention") section 601ED (5) of the Corporations Act. 10. Declares that Robert John Kay, whilst being an officer of Elm Financial Services and Elm Nominees, failed to take reasonable steps to prevent the Elm Unit Trust Contravention. 11. Declares that promoting and causing the issue of the Ann Street Offer, as pleaded in paragraphs 70 to 73 of the Claim, Elm Financial Services contravened ("the Ann Street Contravention") section 601ED (5) of the Corporations Act. 12. Declares that Robert John Kay, whilst being an officer of Elm Financial Services, failed to take reasonable steps to prevent the Ann Street Contravention. 13. Declares that that by making the Elm Property Statements, as defined in paragraph 249 of the Claim, Elm Financial Services, Elm Property and Fletcher Securities contravened ("the Elm Property Contravention"): (a) section 1041E (1) of the Corporations Act ; (b) section 1041F (1) (a) of the Corporations Act ; and (c) section 1041H (1) of the Corporations Act . 14. Declares that Robert John Kay, whilst being an officer of Elm Financial Services and Fletcher Securities, failed to take reasonable steps to prevent the Elm Property Contravention. 15. Declares that between June 2002 and April 2004, Elm Financial Services contravened ("the Training Contravention") section 912A (1) (f) of the Corporations Act by failing to ensure that its authorised representatives were trained or properly trained and were otherwise competent to provide financial services in respect of the following: (a) the Elm Nominees Offers, as defined in paragraph 46 of the Claim; (b) the Elm Property Offers, as defined in paragraph 54 of the Claim; (c) the Elm Unit Trust Offers, as defined in paragraph 62 of the Claim; and (d) the Ann Street Offers, as defined in paragraph 70 of the Claim. 16. Declares that Robert John Kay, whilst being an officer of Elm Financial Services, failed to take reasonable steps to prevent the Training Contravention. 17. Declares that by reason of the facts, matters and circumstances giving rise to the declarations in paragraphs 6, 8, 10, 12 and 16 above, Robert John Kay, in contravention of section 180 (1) of the Corporations Act, failed to exercise his powers and discharge his duties as an officer of Elm Financial Services, with the requisite degree of care and diligence. 18. Declares that by reason of the facts, matters and circumstances giving rise to the declarations in paragraphs 6, 8, 10, 12 and 16 to 19 above, Robert John Kay, in contravention of section 181 (1) of the Corporations Act, failed to exercise his powers and discharge his duties as an officer of Elm Financial Services, in good faith in the best interests of that corporation and for a proper purpose. 19. Declares that by reason of the facts, matters and circumstances giving rise to the declarations in paragraphs 6 and 10 above, Robert John Kay, in contravention of section 180 (1) of the Corporations Act, failed to exercise his powers and discharge his duties as an officer of Elm Nominees with the requisite degree of care and diligence. 20. Declares that by reason of the facts, matters and circumstances giving rise to the declarations in paragraphs 6 and 10 above, Robert John Kay, in contravention of section 181 (1) of the Corporations Act, failed to exercise his powers and discharge his duties as an officer of Elm Nominees, in good faith in the best interests of that corporation and for a proper purpose. 21. Declares that by reason of the facts, matters and circumstances giving rise to the declarations in paragraphs 8 and 14 above, Robert John Kay, in contravention of section 180 (1) of the Corporations Act, failed to exercise his powers and discharge his duties as an officer of Fletcher Securities with the requisite degree of care and diligence. 22. Declares that by reason of the facts, matters and circumstances giving rise to the declarations in paragraphs 8 and 14 above, Robert John Kay, in contravention of section 181 (1) of the Corporations Act, failed to exercise his powers and discharge his duties as an officer of Fletcher Securities, in good faith in the best interests of that corporation and for a proper purpose. 23. Orders, pursuant to sections 206C (1), 206D(1) and 206E (1) of the Corporations Act, that Robert John Kay be disqualified from managing corporations for a period of five (5) years commencing on the date when this Order is made. 24. Orders that otherwise these Proceedings, so far as they concern ASIC and Robert John Kay, be dismissed. 25. Orders that each of ASIC and Robert John Kay pay their own costs. 26. Orders that all other orders relating to Robert John Kay predating the Orders set out herein be set aside, dissolved and discharged. AND THE COURT NOTES AND ACCEPTS THE UNDERTAKING GIVEN TO IT BY AND ON BEHALF OF ROBERT JOHN KAY THAT: 27. Robert John Kay will comply with the terms of the undertaking given by him to ASIC pursuant to section 93AA of the Australian Securities and Investments Commission Act, a copy of which is Exhibit 2 in these proceedings. ********** 18/10/2005 - Incorrect date of judgment on cover sheet - Paragraph(s) No paragraph number DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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