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Australia – ASIC’s Role And Obligations When Authorising Examinations Clarified.

11 July, 2012

 

Legal News & Analysis – Asia Pacific – Australia – Dispute Resolution

 

Saraceni v ASIC [2012] FCA 688

 

In brief

 

  • The decision in Saraceni v ASIC [2012] FCA 688 shows the difficulties in successfully challenging a decision of the Australian Securities and Investments Commission (ASIC) to authorise a person to apply for the issue of an examination summons under Part 5.9 of the Corporations Act 2001 (Cth). Helpfully, it also clarifies ASIC's role and obligations when deciding to authorise such an applicant.
  • In this case, Mr Saraceni argued that ASIC had made an invalid decision in authorising the receivers and managers of a number of companies to apply to the Supreme Court of Western Australia for his compulsory examination. He contended that ASIC had denied him procedural fairness by failing to consult with him prior to making its decision, and that it had also failed to take account of a number of other matters such as the existence of litigation between him and the appointor of the receivers and managers. Mr Saraceni also raised the same constitutional argument raised and (later) determined adversely to him in the separate case of Saraceni v Jones [2012] WASCA 59 (discussed in our Restructuring & Insolvency Alert dated 19 March 2012.)
  • The Federal Court found that ASIC had no obligation to do any of the things contended by the applicant, and that there was nothing to suggest ASIC had improperly exercised its powers. The Court considered that the constitutional issue could not be maintained in light of Saraceni v Jones. It summarily dismissed the judicial review proceeding as having no reasonable prospect of success.

 

What happened?

 

The Bank of Western Australia Ltd (Bankwest) held various securities over assets of three companies, of which Mr Luke Saraceni was a director. The companies were Newport Securities Pty Ltd, Mayport Nominees Pty Ltd and Seaport Pty Ltd.

 

In early 2011, Bankwest appointed Ferrier Hodgson as receivers and managers of certain assets of each of the companies. In addition, Bankwest entered into possession of certain real property owned by Newport as mortgagee, and appointed Ferrier Hodgson as its agents.

 

Subsequent to their appointment, Ferrier Hodgson applied to ASIC for authorisation to seek the issue of an examination summons against Mr Saraceni. ASIC granted that authorisation, and Ferrier Hodgson obtained orders from the Supreme Court of Western Australia for the issue of an examination summons to Mr Saraceni under section 596A of the Corporations Act 2001 (Cth).

 

In addition to mounting a constitutional challenge to the Supreme Court’s ability to order and conduct his examination (later determined in Saraceni v Jones), Mr Saraceni separately applied to the Federal Court for judicial review to set aside ASIC’s prior authorisation decision that ultimately led to the issue of the summons for his examination. The receivers and managers were also joined to the proceeding.

 

What did the Federal Court decide?

 

The receivers and managers, supported by ASIC, applied to dismiss the proceedings summarily. They argued that ASIC was not obliged to give Mr Saraceni notice, or to consider his submissions, before deciding to authorise the receivers and managers. They also argued that there was no basis for the claim that ASIC had improperly exercised its powers. Barker J granted summary judgment and dismissed the proceeding.

 

Justice Barker made the following observations on the general nature of ASIC’s powers of authorisation.

 

The question for ASIC was whether a person seeking authorisation was an appropriate person to make an application to the Court for an examination to take place. That required consideration of the relationship which that applicant had to the corporation in relation to which an examination may take place, although it might also encompass matters personal to that applicant that might make them unsuitable to be authorised by ASIC (such as a prior relationship with persons to be examined or the corporation itself).

 

Receivers and managers appointed over assets of a corporation were generally suitable persons to be authorised by ASIC to make a Court application for a compulsory examination.

 

His Honour considered that Mr Saraceni’s argument that ASIC had to consult with him, prior to making an authorisation decision, could not succeed for the following reasons.

 

The authorisation was but the first stage of a two stage process, potentially culminating in the issue of a summons by a Court for compulsory examination. The authorisation stage did not affect the interests of a potential examinee “in a direct and immediate way”, since potential examinees might constitute a large and potentially indeterminate class of people. This meant there was no obligation to afford procedural fairness to potential examinees.

 

If a potential examinee had an entitlement to be heard, that might delay the sensible administration of the Corporations Act. It would also provide a target examinee with two opportunities, at least, to challenge ASIC’s decision – both at the first stage authorisation decision and then in the course of resisting the second stage examination in a court.

 

Mr Saraceni had separately argued that the authorisations were an improper exercise of power conferred on ASIC. Mr Saraceni said that ASIC was bound to take account of submissions or comments that might have been made by him about the suitability of the receivers and managers to conduct his examination. Mr Saraceni also argued ASIC had to take account of ongoing litigation between him and Bankwest. Barker J also concluded that these contentions had no reasonable prospect of success for the following reasons.

 

Since ASIC did not have a legal duty to consult the applicant before making a decision, there was nothing improper about it not seeking out and regarding his views about the suitability of the receivers and managers.

 

There was nothing personal to the receivers and managers which could make them unsuitable to be authorised by ASIC. Pending litigation between Mr Saraceni and Bankwest had no bearing whatsoever on the suitability of the receivers and managers, who were not parties to that litigation, to conduct a compulsory examination. It was not something that ASIC had to consider.

 

Mr Saraceni also made a further argument that ASIC had failed to take account of the fact that the receivers and managers were only appointed over some (and not all) of the assets of the relevant companies. Barker J considered that this was a meaningless distinction that ASIC did not need to have regard to. There was no relevant difference between the responsibilities, interests or objectives of a receiver and manager appointed to some of a corporation’s assets, rather than one appointed to all such assets.

 

What is the significance of the decision?

 

The decision in Saraceni v ASIC demonstrates the considerable difficulties that will be encountered by potential examinees seeking to challenge ASIC’s decision to authorise a person to approach the Court to apply for and conduct a compulsory examination under Part 5.9 of the Corporations Act.

 

ASIC is not required to give reasons for an authorisation decision. Further, ASIC does not have to consult potential examinees prior to making such a decision. These matters mean that potential examinees are unlikely to have access to any specific information about what ASIC took into account in granting an authorisation for their public examination, or any entitlement to obtain it. Combined with the very broad power of authorisation which ASIC exercises, which largely depends on ASIC’s assessment of how suitable the person is to be authorised as an eligible applicant, this leaves very little room for a judicial review challenge to succeed.

 

The decision is also significant for receivers and managers seeking to conduct compulsory examinations, since they require authorisation from ASIC before being able to do so. The Court confirmed that receivers and managers are likely to be suitable for authorisation in most cases, irrespective of the scope of their receivership or the potential existence of litigation between their appointor and potential examinees. Saraceni v ASIC should be welcomed by insolvency administrators, and is likely to discourage further attempts by examinees to avoid being examined in public about the examinable affairs of corporations in external administration by raising judicial review challenges to ASIC’s authorisation decision. It may also assist in enabling any judicial review challenges by examinees to be brought to an early resolution by summary dismissal.

 

 

For further information, please contact:

 

Adrian Chai, Partner, Ashurst

adrian.chai@ashurst.com

 

Paul Walker, Ashurst

paul.walker@ashurst.com

 

 

Homegrown Dispute Resolution Law Firms – Australia

 

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