What’s a banning order worth?

Rodney Adler, Ray Williams and now Steve Vizard have joined the some 90 company directors and officers banned last year from managing corporations for a variety of periods. But what does it mean to say someone is disqualified from managing a company and how is it policed?
Given the complexities of the commercial environment and the necessary difficulties and delays involved in criminal prosecutions, there is a good case for ASIC having a wide range of prosecution options available to it to resolve matters. Indeed, it is the need for a wider range of enforcement options that has led to the Trade Practices Act being amended so that the ACCC can apply to the court for similar disqualifying orders.
In practice, the banning order is a relatively soft option; the banned person can still provide consulting services to companies, trade as an individual or a partnership, be excused from their banning order and hide relatively easily from a regulator that must find it difficult to monitor every banned individual. However, for former directors of public companies and high profile individuals like Mr Vizard, the reality is that the effect of the order is such that they are unlikely to ever again hold a directorship of a public company or hold any public office. It is really more akin the old public stocks than a protective order. In Mr Vizard's case, it is inconceivable that any company or government would ever again consider his appointment, he has had his public humiliation, is that enough?
WHAT IS MANAGING A CORPORATION?
The banning provisions are intended to cover a wide range of activities relating to the management of a company, each requiring an involvement of some kind in the decision-making processes.
A person who is disqualified from managing corporations commits an offence if they:
 make, or participate in making, decisions that affect the business of the corporation;
 exercise the capacity to significantly affect the corporation's financial standing; or
 communicate instructions or wishes to the directors of the corporation:
– knowing that the directors are accustomed to act in accordance with the person's instructions or wishes; or
– intending that the directors will act in accordance with those instructions or wishes.
Managing therefore requires activities involving some responsibility, but not necessarily control. Advice given to management, participation in its decision-making processes, or execution of its decisions going beyond the mere carrying out of directions will trigger non-compliance as will conveying of instructions for a particular company to sell or acquire an asset, call up a loan or commence proceedings.
In Nilant v Shenton [2001] WASCA 421 referring to Commissioner for Corporate Affairs v Bracht (1989) 7 ACLC 40, Ormiston J was dealing with a matter which fell within s 227(1) of the Companies (Victoria) Code. His Honour said at 49:
In the present section I would see the prohibition as covering a wide range of activities relating to the management of a corporation, each requiring an involvement of some kind in the decision-making processes of that corporation. That involvement must be more than passing, and certainly not of a kind where merely clerical or administrative acts are performed. It requires activities involving some responsibility, but not necessarily of an ultimate kind whereby control is exercised.
Advice given to management, participation in its decision-making processes, and execution of its decisions going beyond the mere carrying out of directions as an employee, would suffice. If the respondent had been left to negotiate terms with bankers or providers of credit, although those terms had to be confirmed, there would have been sufficient participation, but not if those acts involved only communication or were merely casual. The negotiation of matters of financial importance, such as the rent of its principal premises, may well lead to an inference that a person is concerned in the management of a company, but not if that involved merely communication of instructions on a single occasion…
The existence of a board or similar will not of itself be enough to hide the banned individual unless there is some evidence that the directors gave instructions to individual or questioned the decisions or authority to make them.
Acting as a “professional corporate advisor” while the corporation remains reliant on advice and assistance from the banned individual has in the past been found to be “no more than an artifice to avoid the consequences of his disqualification”.
Similarly, acting as a “consultant” where in fact the person had carriage of a matter and is able to deal with suppliers and act with authority to bind the company and make finance arrangements on behalf of the company would breach the prohibition.
Clearly, management of a company can take place at various levels. It is not confined to matters performed by the directors nor limited to formulation of policy and direction of the company. The key is that there must be the exercise of some decision-making power. At the end of the day, the court will generally make a determination based on the overall impression rather than engaging in a minute assessment of each activity.
WHAT ARE THE LIMITS?
A banning order for a breach of directors’ duties is limited. It doesn't apply to trusts nor partnerships, just corporations operating in Australia. It doesn't shut an offender down in a business sense. A disqualified director could feasibly take over the company’s business and operate it as a sole trader.
A person who is disqualified from managing corporations may apply to the court for permission to manage a corporation. The past conduct of the director is relevant to the exercise of the discretions which the law confers on ASIC and the court; they in turn must consider whether there has been a breach of the standards of commercial morality, whether there has been recklessness, whether there has been gross incompetence and whether the public interest requires that the person concerned should not take part in the management of a company.
PROTECTIVE V PUNITIVE
The purpose of banning orders is said to be protective and not punitive, although the courts do recognise that the provisions have some deterrent function. Indeed, the court has observed that the policy is “to protect the public and to prevent the corporate structure from being used to the financial detriment of investors, shareholders, creditors and persons dealing with the company. In its operation it is calculated to act as a safeguard against the corporate structure being used by individuals in a manner which is contrary to proper commercial standards”.
In the Rodney Adler case, Mr Adler’s counsel argued that the protective purpose could be achieved if he was still allowed to be involved in the management of private, family corporations. The Court rejected this submission:
Here, concededly, Mr Adler will be impeded in his field of activity, which includes financial consultancy and investment, including joint ventures, but that is the very area where he has committed the relevant contraventions. That puts in stark relief the need to make the public protective purpose paramount over Mr Adler’s private interests …. To the extent that Adler Corporation and its wholly-owned subsidiaries are already engaged in ongoing financial or business activity, should a disqualification order be made against Mr Adler he will simply have to find others to carry on that activity or manage it, independently of him, on the basis that he must, in the public interest, be excluded wholly from that activity. That is, at least until such time as a court is persuaded to grant leave pursuant to s 206G, if it be so persuaded in light of the then known fact.
A good example of the mixed approach of courts to the protective v punitive issue is the approach of Bryson J in approving the orders agreed with Brad Keeling.
Among the matters the judge thought relevant were Brad Keeling’s age and stage of career at which disqualification would fall, the office held, the extent of his responsibilities in terms of the value of assets, the complexity of the activities and the number of people within the range of adverse effects of his breaches of duty. Clearly, these are issues that go more to punishment than protecting the public and to preventing “the corporate structure from being used to the financial detriment of investors, shareholders…”
In Rich & another v Australian Securities and Investments Commission (2004) 50 ACSR 242 McHugh J at 259 commented on this issue as follows:
It is difficult to read these passages without concluding that there is little difference in the approach of his Honour and the approach of judges making orders or imposing sentences in the criminal jurisdiction. It is hard to escape the conclusion that, in determining the period of disqualification, the courts consider that the larger the loss the longer the period of disqualification that is justified. If that is so, and I think that it is, it indicates that retribution is as much a factor as protection of the public. There is no a priori reason why the protection of the public requires a person who is responsible for the loss of $100m to be disqualified for a longer period than a person who is responsible for the loss of $100,000. The person responsible for the smaller loss may be a far greater danger to the public than the person responsible for the larger loss. Yet, given the approach of the courts, if other things are equal, the person responsible for the major loss will almost certainly receive a far longer period of disqualification.
EFFECT ON REPUTATION
Whilst Rodney Adler received a 20-year ban and Ray Williams a 10-year ban for civil breaches of their duties as directors of the failed insurer HIH, in one sense, the length of these bans is irrelevant. In Mr Vizard’s case:
The reality is that whether it was five, ten or 20 years, Vizard is unlikely to ever again hold a directorship of a public company, or hold any public office. He has demonstrated that he is untrustworthy and unfit to hold such office.
It's inconceivable that any board, or government would consider his appointment, even after he had served out his 10-year ban.
Similarly:
A ten-year ban does not stop [Vizard] from being a consultant to The Communicate Trust and its sprawling empire of media, marketing, advertising, television and PR firms which have paid Vizard plenty over the past couple of years. However, the big question is whether major corporate clients … will continue to deal with The Communicate Trust…
ENFORCEMENT
ASIC keeps a register of persons who have been disqualified from managing corporations or prohibited from managing a corporation.
Over the years ASIC has obtained orders against people like Maxwell John Reid, who was disqualified from managing corporations, stopping them from acting in any way that breaches their orders. ASIC also obtained orders restraining other parties from engaging in any conduct that amounts to aiding, abetting, counselling, or procuring Mr Reid from managing corporations while disqualified.
ASIC has had a pretty rigorous policy of enforcing these types of orders:
 In May 2004, Ms Suzanne Frugtniet was convicted and fined $5000 and ordered to complete a 200-hour community service order after managing Travel Action Pty Ltd, whilst disqualified.
 In November 2003, two company directors Mr David Christopher Novak and Ms Patricia Ellen Kenna were given a three-year good behaviour bond and penalties after pleading guilty to managing a corporation whilst disqualified.
 In April this year, Mr Stephen John Riddell was convicted of a similar offence.
In addition to referring cases in relation to bankrupts managing corporations there is no evidence that ASIC has a program to ensure that banned directors do not manage corporations. Without an active follow up program, what’s a banning order worth? Not much if you don’t fear time in the pillory.
CONCLUSION
The concept of "managing the company" involves terms quite well known … a person is managing a company if they are in any way concerned in its management, or takes part in its management, and this is so, whether the person acts directly or indirectly.
The wide arrange of offences, individuals and circumstances mean that regulators need a large number of enforcement options. Given the complexities of the market, the complexities of corporate behaviour and ongoing financial innovation, regulators need sophisticated and flexible powers like the banning power, but they need to be in a position to exercise them appropriately and to follow them up to make them stick, particularly where the profile of the matter or individual does not cause the banned individuals to stand out from the crowd. Whilst useful as a device for public humiliation and punishment, they have necessary limitations.
The banning order is however a relatively soft option. Banned individuals can continue to be involved in business outside managing a company. ASIC needs to be sure that it doesn’t pursue the soft option when the case is better dealt with through criminal conviction.