Dispute Resolution Partner, Simon Morris, and Associate, Kyla Banton, discuss the recent decision of the Administrative Appeals Tribunal (constituted by Deputy President Justice Tamberlin and Member Frost) reversing a decision of the Australian Prudential Regulation Authority (APRA) http://www.austlii.edu.au/au/cases/cth/AATA/2009/601.html
The decision had disqualified Robert Stitt QC from acting as a director or senior manager of an Australian general insurance company. Accordingly, the disqualification of Mr Stitt is to be treated as if it never came into effect.
Mr Stitt was a non-executive director of HIH Insurance Limited and a member of the Audit and Human Resources subcommittees to the HIH Board. Mr Stitt is a Queen’s Counsel and a member of the NSW Bar.
APRA disqualified Mr Stitt by administrative decision, exercising powers under the Insurance Act to disqualify persons from holding senior roles in APRA regulated organisations, on the basis that he was not a fit and proper person to hold such a role. The review of APRA’s decision in the Administrative Appeals Tribunal (AAT) was a merits review.
After the exercise of its discretion to disqualify Mr Stitt, APRA’s Insurance Act powers to disqualify as an exercise of administrative power, were removed by legislative amendment. The power to disqualify persons from holding senior roles in the Australian insurance industry is now to be undertaken judicially by the justices of the Federal Court.
APRA’s disqualification of Mr Stitt was based on APRA’s conclusions that Mr Stitt had, in the exercise of his duties, failed to act with due care and diligence. His lack of fitness was said to arise from a lack of competence. No suggestion was made that Mr Stitt’s conduct was morally blameworthy.
The breaches of duty arose in the context of Mr Stitt’s involvement in collective decisions of the HIH Board or sub-committees to the Board. The gravamen of APRA’s case was that Mr Stitt was insufficiently diligent in performing his duties and that if he had been less trusting of management and more diligent in enquiring into the detail of matters, HIH may have avoided entering commercial transactions that, with the benefit of hindsight, APRA considered were not to HIH’s commercial advantage.
The Tribunal rejected each and every one of APRA’s contentions and expressly found that Mr Stitt did not act in a manner other than one which was competent and diligent.
On one level the case of Mr Stitt is a simple one. APRA asserted deficiencies in conduct which it contended told against Mr Stitt’s competence in commercial matters and justified disqualification. The Tribunal found those allegations were without foundation and that on proper analysis Mr Stitt’s conduct was both competent and diligent. However the case does raise some points of general application and interest in the exercise of banning powers whether they be judicial or administrative.
APRA’s allegation that Mr Stitt ought to have conducted himself in the various ways alleged by APRA necessarily involves an allegation that he has fallen from some normative standard. The Tribunal’s reasons disclose that where the conduct said to ground disqualification is reflected in a standard known to the law, for example a director’s duty of care and diligence, then that is the standard which is to be applied. The Tribunal’s reasons affirm the decision in Vines v ASIC that past contraventions do not of themselves create any presumption against a person’s fitness and propriety, and stand for the proposition that a person will not be lacking in competence so as to be unfit if their conduct meets relevant normative standards. Should the outcome have been otherwise, the exercise of the discretion to disqualify would be vulnerable to idiosyncratic decision making.
The Tribunal’s reasons uphold the distinction between executive and nonexecutive directors when considering questions of duty and standards of conduct. In responding to the general contention that Mr Stitt was too accepting of management, the Tribunal noted that as a non-executive director, Mr Stitt was not involved in the everyday management of the business and that the information provided to the non-executive Board of HIH was not frank and open and did not disclose all matters necessary for a proper examination of the business of the Board. The Tribunal found that the evidence did not disclose that Mr Stitt knew or ought to have known of the management misconduct so as to arouse suspicion requiring closer scrutiny.
APRA’s case dealt with decisions to approve or advance transactions which, with the benefit of hindsight, APRA considered were not to HIH’s benefit. In that context, the Tribunal warned of the dangers of “hindsight bias” – that is, distortions when matters subsequent to the conduct emerge and consequences are seen more clearly. The Tribunal cited the decision of Senior Member Taylor in the matter of Abbott v APRA (also a matter where an APRA disqualification of an HIH non-executive director was overturned) that “Conduct that occurs without the benefit of hindsight must be evaluated with a proper and realistic regard to the subjective knowledge, belief and intentions of the persons involved”.
The observation about the dangers inherent in hindsight reasoning are not the only common features in the matters of Abbott and Stitt.
In each matter APRA’s conclusions that directors’ duties had been contravened were grounded in material before the HIH Royal Commission even though, having regard to the same evidence the HIH Royal Commissioner, Justice Neville Owen, expressly did not find breaches of duty. In the case of Mr Abbott, APRA’s contentions had, prior to the Tribunal hearing, already been dismissed in separate Court proceedings.
Having regard to the material relied on by APRA, the Royal Commissioner had concluded that HIH’s corporate governance was undesirable. In large part APRA adopted the factual basis for the Royal Commissioner’s criticisms of HIH’s management practices to ground breaches of directors’ duty. At this level the rejection by the Tribunal of APRA’s contentions illustrates that the principles underpinning concepts of corporate governance are theoretically distinct from those underpinning the content of directors’ fiduciary obligations. Corporate governance is about collective processes whereas directors’ duties are directed to individual behaviours. Corporate governance commonly is directed to articulating best practice standards and is aspirational, whereas directors’ duties are about setting minimum standards of individual conduct.
While APRA’s case against Mr Stitt did not include any adverse contention as to any blameworthy aspect of his character, Mr Stitt’s application was supported by a body of evidence attesting to his integrity and professional competence, experience and diligence in the legal profession and insurance industry. That evidence was uncontradicted by APRA and found by the Tribunal to be “particularly impressive” bespeaking of a person who in business affairs had a track record of competence such that, if APRA’s contentions had been made out, they would have been out of character.
Mr Abbott also relied on a body of evidence from persons attesting to his reputation for competence and integrity in business affairs. Having regard to that evidence Senior Member Taylor SC held “This evidence bespeaks Mr Abbott’s extensive and creditable career both in legal practice and in his corporate and business life. It testifies to his long standing and enduring capacity and reputation for honesty and competence”. As with Mr Stitt, APRA did not challenge this evidence.
While the evidence about Mr Stitt’s and Mr Abbott’s competence and integrity in business affairs were ultimately not relevant to the Tribunal’s decisions, the treatment of the evidence and the apparent willingness of the Tribunal to rely on the material can be contrasted with the weight given by Justice Gzell to material relevant to character of former James Hardie directors in his recent decision imposing periods of disqualification from managing corporations and pecuniary penalties on those directors.
In both matters, despite APRA’s disqualifications being overturned by the AAT, the absence of statutory basis for awarding costs meant that neither Stitt nor Abbott recovered legal costs of the disqualification process. There would seem no proper theoretic basis for this. Administrative proceedings of this type are, in terms of cost and approach, no different from Court proceedings. It is anomalous that under the new statutory regime these same matters would be litigated in the Federal Court and a cost order would follow the event, whereas the resolution of the same issues in the Administrative Appeals Tribunal does not attract a cost penalty for the unsuccessful party.
The absence in Tribunals of a general discretion to award costs limits access to justice in complex administrative processes to those with the financial backing to pursue their rights. This is surely inconsistent with and undermining of the intent of Commonwealth and State Tribunals to provide fair, just, economical, informal and quick merits review.