1513745 (Migration)

[2016] AATA 3731

1513745 (Migration) [2016] AATA 3731 (12 April 2016)

DECISION RECORD

DIVISION:Migration & Refugee Division

APPLICANTS:  Mr Hong Bae Kim
Mrs Hyemin Choi
Mr Ho-un Kim
Ms Horan Kim

CASE NUMBER:  1513745

DIBP REFERENCE(S):  BCC2014/2878456 BCC2014/2879138 BCC2015/1703797 BCC2016/474142

MEMBER:Fraser Syme

DATE:12 April 2016

PLACE OF DECISION:  Brisbane

DECISION:The Tribunal affirms the decision not to grant the applicants Business Skills (Residence) (Class DF) visas.

Statement made on 12 April 2016 at 11:17am

STATEMENT OF DECISION AND REASONS

APPLICATION FOR REVIEW

1. This is an application for review of a decision made by a delegate of the Minister for Immigration on 22 September 2015 to refuse to grant the visa applicants Business Skills (Residence) (Class DF) Subclass 892 visas under s.65 of the Migration Act 1958 (the Act).

2. The visa applicants applied for the visa on 30 October 2014. The delegate refused to grant the visas on the basis that the first named applicant did not meet the requirements of cl.892.212 and in particular, that delegate found the applicants could not rely on an unsecured loan to demonstrate the first and second named applicants together had net assets in their main business of $75,000 or personal and business net assets in Australia of $250,000. The applicants included the delegate’s decision with the review application.

3. The first named applicant appeared before the Tribunal on 7 March 2016 to give evidence and present arguments. The Tribunal hearing was conducted with the assistance of an interpreter in the Korean and English languages.

4. The applicants were represented in relation to the review by their registered migration agent who attended the hearing.

5. For the following reasons, the Tribunal has concluded that the decision under review should be affirmed.

   CONSIDERATION OF CLAIMS AND EVIDENCE

6. The first named applicant’s main business was two different restaurants. Both restaurants were owned by 3H & Hon Pty Ltd as Trustee for the 3H & Hon Family Trust (“the trustee”). It is not in question the trustee is a main business and that the first named applicant has an ownership interest in that main business. It is also not in question the trustee employed one full-time employee to meet the requirements of cl.892.212(a).

7. Relevant to this decision is the first of those two restaurants, which traded under the name Koofoo.  The trustee entered into a franchise agreement with Koofoo Australia Pty Ltd (‘the franchisor’) in May 2012 to operate a Koofoo franchise in the Brisbane CBD. The issue in the present case is a transaction involving a payment of $95,507 from the trustee to the franchisor and whether that transaction may be treated as an asset of the trustee. An assessment of that issue requires the Tribunal to have regard to a loan agreement (dated 1 June 2012); a franchise agreement (dated 24 August 2012) and the acts and intent of the trustee and the franchisor. 

8. At the hearing, the Tribunal indicated although there was no document from the franchisor acknowledging the receipt of the $95,507. However, from the bank statements and receipts the first named applicant provided to the delegate, the Tribunal was satisfied the trustee had paid the $95,507 to the franchisor in or about 29 May 2012. The Tribunal did not agree with the decision of the delegate. It did not consider an unsecured loan must be disregarded as an asset of the trustee. However, the Tribunal had other queries about the transaction involving the $95,507.

   Nature of the transaction between the trustee and the franchisor

9. The first named applicant told the Tribunal as part of the deal under which he entered into the franchise agreement, the franchisor required him to pay the $95,507 as a security in case his business failed or the first named applicant returned to Korea. Relying on the advice of his then migration agent and solicitor, the transaction of $95,507 was documented as a loan and the parties signed the loan agreement. The first named applicant now thinks that transaction was not a loan and he was given bad advice.

10. The Tribunal noted although the loan agreement states it is between three parties, the trustee as lender, the franchisor as borrower and a director of the franchisor as guarantor, the agreement has no jurat at which the guarantor was to sign. That caused the Tribunal to question whether the agreement was enforceable against the guarantor in particular or against any of the parties generally. The first named applicant did not know why the guarantor did not sign the document. He blamed his solicitor for not doing a good job.

11. The Tribunal further noted the loan agreement entitled the trustee to interest on the loan, but the profit and loss statements did not record the trustee ever received any interest payments. The first named applicant confirmed no interest was ever paid. He explained that was due to a problem with sauces. The first named applicant was not satisfied with sauces provided by the franchisor and wished to prepare his own sauces. That meant the first named applicant need not pay the franchisor for the sauce. In lieu of not purchasing the sauce from it, the franchisor required the first named applicant to agree to waive the interest payments under the loan. The Tribunal commented that was a strange arrangement, as the franchisor was obligated to pay the interest and the first named applicant still had to incur cost to make his own sauce. He explained making his own sauce was cheaper than buying the sauce from the franchisor. So he agreed to forgo the interest payments.

12. The Tribunal next discussed with the first named applicant the terms of the franchise agreement. It noted there was no requirement in the standard terms of the franchise agreement for the trustee to pay the $95,507. He agreed that was correct. The Tribunal noted the special conditions regarding an option for the trustee to acquire ‘the business’ on or before 23 August 2015. The Tribunal queried if the trustee was already the franchisee, it already owned the business and that left the question what was it that the option entitled the trustee to acquire. The first named applicant firstly explained it was the Sydney business, then he mentioned another Koofoo franchise located at Garden City shopping centre. Then he said he was unsure. The migration agent submitted the fittings and equipment of the ‘business’ at the Brisbane CBD Koofoo franchise were the franchisor’s and the option entitled the trustee to buy those fixtures and fittings from the franchisor. The Tribunal considers this is yet another instance of their being a very strange arrangement between the trustee and the franchisor. However, in the absence of strong evidence to the contrary, the Tribunal accepts the explanation that intention of the special conditions was to entitle the trustee to acquire the fittings and fixtures of the premises at which the trustee operated the Koofoo franchise in the Brisbane CBD. The Tribunal reaches that conclusion on the basis of the franchise agreement in cl.11 requiring the franchisee to select the premises, enter into the lease and carry out fit-out. The evidence before the Tribunal is though the trustee took over a lease entered into by the franchisor and the premises were already fitted out. In effect then, the trustee took over a franchisor operated franchise – a transaction of which nature is not provided for elsewhere in the franchise agreement.

13. The special condition goes on to set out what would happen if the trustee elected to exercise the option to buy the business – it would have to pay an additional $140,000 to the franchisor. Or if the trustee elected not to buy the business – the franchisor would repay $100,000.  The first named applicant explained that meant if he bought the business, the franchisor would not repay the $95,507, so the total purchase price would be $235,507. He also explained the $100,000 payable on non-exercise of the option would mean the franchisor would pay the $95,507 back to the trustee.

14. As events turned out, the trustee was unable to exercise the option under the franchise agreement due to the landlord taking back the premises from which Koofoo operated prior to the option date. The trustee then set up the second of its restaurants at a different location. The second restaurant was not a Koofoo franchise and is not otherwise relevant to the issues before the Tribunal. The applicant provided at the hearing evidence to show the franchisor repaid $91,014 to the trustee in February 2016. The reduction from the loan amount of $95,507 he explained was due to expenses related to air conditioner repairs at the Koofoo Brisbane CBD premises.

15. The Tribunal put to the first named applicant it did not appear the transaction involving the $95,507 was one which could be properly described as a loan. It appeared the loan agreement was never actually relied upon and did not accurately reflect the nature of the transaction between trust and the franchisor. Rather, the payment of $95,507 appeared to be a conditional, part-payment towards the purchase of the business, which in certain circumstances would be repaid to the trustee. The first named applicant replied with what the Tribunal considered to be a very reasonable view on his part, the $95,000 was an investment in his business. He emphasised too the money had eventually been repaid (less the air-conditioning repair expenses).

    Post hearing accounting advice

16. The Tribunal invited the first named applicant to provide to it within 14 days after the hearing evidence from an accountant setting out whether a transaction of the nature of the trustee entered into with the franchisor could be properly treated as an asset of the trustee.   After the hearing, the first named applicant provided letters from the trustee’s accountant and an independent accountant. Both accountants’ advice is the transaction in question was a loan and therefore was an asset of the trustee. The independent accountant’s letter lists the documents to which that accountant had regard. The franchise agreement is not included in that list. The second advice makes no reference to what documents the second accountant had regard to but starts with the premise a loan is an asset and the loan was repaid.

17. Attached to the advice of the independent accountant are extracts from three accounting textbooks. One of these relates to option contracts, one is a definition of receivables (selling goods or services on credit) and the third is related to difficulty in obtaining unsecured loans. Only then the first of the extracts is relevant to the issues before the Tribunal. The independent accountant oddly does not make any express reliance on the first extract in the advice letter. The first extract sets out an example where a buyer pays a seller an option fee for the right to buy something in future at an agreed future price. Under Australian accounting standards, the extract states that right is an asset of the buyer and a liability of the seller. However, the example in the first extract relates to the buyer forgoing the option fee to the seller if the buyer does not exercise the option. That is not the terms of the special conditions in the franchise agreement. The franchisor was not entitled to retain any money if the trustee elected not to purchase the business. So the example provided by the independent accountant in the first extract has little assistance to the Tribunal.

18. If the payment of $95,507 by the trustee to the franchisor was indeed a loan, the Tribunal accepts the advice of the two accountants, that figure can be counted towards the assets of the trustee. The question before the Tribunal though is, whether the transaction was a loan, or something else. And, if it was something else, what was that something else and can that something else be an asset of the applicant’s business. Unfortunately, neither accountant turned their mind to this question. This leaves the Tribunal in the position it has no expert accounting evidence before it on which it can find the advance payment of a sum of money, which will form part of the purchase price if a future option is exercised to purchase a business, but, is refundable if that option to purchase is not exercised can be counted as an asset of the applicant’s trust.

    Is there a loan?

19. There is evidence leaning both in favour and not in favour of finding the transaction was a loan. The Tribunal has had regard to both the documents and the acts and intentions of the first named applicant and the franchisor.

20. Factors in favour of finding the transaction was a loan include:

    a.the parties purported to enter into a loan agreement, and

    b.the franchisor repaid the money (after deducting the air conditioner repair costs) to the trustee, although well after the date repayment was due in August 2015 under that loan agreement.

21. Factors in favour of not finding the transaction was a loan include:

    a.The parties relying on misguided advice to enter into the loan agreement as a way to document the bargain between the parties;

    b.The loan agreement is voidable for uncertainty due to the guarantor not signing it;

    c.The loan agreement was not complied with in the trustee not receiving interest payable under the loan; and,

    d.The special conditions in the franchise agreement to the transaction being part of the purchase price of the business, were it the case the trustee elected to exercise what appears to be an option to purchase the business and refundable to the trustee if it elected not to purchase the business.

22. The last of these weighs heavily on the Tribunal. Also weighing on the Tribunal is the first named applicant’s evidence it was the lawyer who recommended the parties enter the loan agreement as a way to document the bargain the parties had struck between them regarding the option to purchase the business/guarantee to perform the duties under the franchise agreement. From the Tribunal’s experience of commercial transactions, it would appear to the Tribunal more appropriate agreements for the parties to enter into would have been an option agreement or a conditional instalment contract to purchase the business. The Tribunal though has considered too whether the transaction was a ‘security’ to guarantee the trustee’s performance under the franchise.

23. The Tribunal considers the actions of the parties reveal the terms of the loan agreement have been more ignored than complied with. It reaches that conclusion noting the non-payment of interest, the non-signing of the agreement by the guarantor and the deduction of air-conditioning repairs at the time of repayment, as well as the franchisor repaying the loan long after the due date for repayment. It appears to the Tribunal the franchisor has at every opportunity sought to take advantage of the applicants. Whenever there has been any contentious issue between the parties (the sauce, the surrender of the lease, the air-conditioning repair costs), the franchisor has sought to vary its obligations under the so called loan in the franchisor’s favour. That is not consistent with the franchisor considering itself bound by the terms of the loan agreement.

24. As noted above, what weighs heavily on the mind of the Tribunal is the very odd special conditions in the franchise agreement whereby the franchisor would effectively end its obligation to repay the loan to the trustee – if on 23 August 2015 the trustee exercised the option to purchase the business. But, the money is repayable to the trustee if he does not exercise the option to buy the business. The repayment date in that case is 30 days after the trustee notified the franchisor it did not wish to purchase the business. That  post-dates the repayment date under the loan agreement, namely 5 August 2015. As noted above the first named applicant was frustrated from ever exercising the option when the lease over the premises had to be surrendered. Notwithstanding the chance of exercising the option being frustrated – the money which was sitting there both as a so called loan and as a partial payment towards purchase of the business was not repaid to the trustee at the time of surrendering the lease. It would appear at that time, it was convenient for the franchisor to ignore its obligation under the franchise agreement to repay the money to the trustee and rather, to revert to relying on the loan agreement, again, to the detriment of the applicants.

25. The acts of the franchisor demonstrate it treated the money as part payment by the first named applicant towards the purchase of the business when it suited the franchisor to treat the money that way and then, when that no longer suited the franchisor, because it meant it should return the money to the trustee earlier, the franchisor then sought to revert to the money being advanced to it under the loan agreement.  The acts of the first named applicant indicate he did whatever the franchisor enforced upon him and considered the money was an investment he made towards his ‘business’ and he did so in the absence of any useful advice from his professional advisors.

26. Having regard to all of that, the Tribunal is not satisfied the transaction in which the trustee advanced the $95,507 to the franchisor was a loan. It considers the loan document only exists because of very questionable advice by the lawyer who prepared the document, and who prepared that document very poorly. The Tribunal considers the bargain struck between the parties is better reflected in the terms of the (again, however poorly drafted) special conditions of the franchise agreement – that is, the trustee advanced the $95,507 to the franchisor as part payment towards purchase of the business and part as guarantee of performance under the franchise agreement. That accords with the view of the first named applicant giving that money to the franchisor was an investment in the trustee’s business.

27. That the franchisor did not repay the $95,507 at the time the landlord took back the lease is strong evidence that money was not a ‘security’ either. Otherwise no there would be no ongoing entitlement of the franchisor to retain those funds once the franchise agreement was effectively at an end. Furthermore, if the bargain between the parties was that the $95,507 was a security, it is reasonable to expect the special conditions in the franchise would reflect so, but that is not the case. For those reasons the Tribunal does finds the $95,507 was not a security. In reaching that finding, the Tribunal is mindful the franchisor may have been in part motivated to agree to the trustee becoming a franchisee due to the provision of the $95,507, but that does not make the $95,507 a security.

28. The Tribunal has had regard to the advice letters of the two accountants. It is incumbent on the first named applicant to make his own case. As noted above, both letters effectively start with the premise the transaction was a loan. Neither letter explains why. The Tribunal put its concern to the first named applicant at the hearing regarding the transaction not being a loan and it allowed him additional time after the hearing to obtain relevant accounting evidence for the Tribunal to have regard to. The evidence before the Tribunal though does not satisfy it the $95,507 whether that transaction best be classified as an option fee or a conditional instalment payment towards the purchase of a business, can be considered an asset of the trustee.

29. The Tribunal finds the transaction was not a loan. On the evidence before it, the Tribunal is not satisfied the transaction of $95,507 is an asset of the trustee. It is not in question that deducting the sum of $95,507 as an asset from the balance sheet of the trustee has the consequence that at the time of application:

    a.the business and personal assets in Australia of the first and second named applicants together did not have a net value of at least $250,000; and

    b.the assets owned by the first and second named applicants together in the trustee in Australia did not have a net value of at least $75,000.

1. It follows then the first named applicant does not meet the requirements of cl.892.212(b) or (c) and therefore is unable to meet cl.892.212 overall.  

2. As the first named applicant does not meet a mandatory criterion for the grant of the visa, the Tribunal must affirm the decision.

   Secondary applicants

3. On the basis of the identity documents on the departmental file, the Tribunal accepts the second named applicant is the spouse of the first named applicant and the third and fourth named applicants are their children. The secondary applicants are therefore members of the family unit of the first named applicant.

4. Given the Tribunal has found above the first named applicant does not meet the criteria for grant of the visa, the Tribunal finds the secondary applicants are not able to meet the secondary criteria for grant of the visa.

   DECISION

5. The Tribunal affirms the decision not to grant the applicants Business Skills (Residence) (Class DF) visas.

   Fraser Syme
   Member