Allmaster Software Pty Ltd and Australian Trade and Investment Commission
[2019] AATA 506
•21 March 2019
Allmaster Software Pty Ltd and Australian Trade and Investment Commission [2019] AATA 506 (21 March 2019)
Division:GENERAL DIVISION
File Number: 2016/5414
Re:Allmaster Software Pty Ltd
APPLICANT
AndAustralian Trade and Investment Commission
RESPONDENT
DECISION
Tribunal:Deputy President J W Constance
Date:21 March 2019
Place:Sydney
The decision under review, being the reviewable decision dated 13 September 2016, is affirmed.
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Deputy President J W Constance
CATCHWORDS
TRADE AND COMMERCE - export market development grants - whether new owner carried on business of previous owner - where new owner carried on business of previous owner directly after purchase of business - where no statutory requirement for new owner to carry on business for particular period of time - decision under review affirmed
LEGISLATION
Export Market Development Grants Act 1997 (Cth)
CASES
SECONDARY MATERIALS
REASONS FOR DECISION
Deputy President J W Constance
A. INTRODUCTION
The Export Market Development Grants Act 1997 (Cth) provides for grants to specified Australian exporters by way of reimbursement of expenses incurred in the promotion of their products in foreign markets. The scheme is administered by the Australian Trade and Investment Commission, or Austrade.
As part of the control of the statutory scheme, there are restrictions on the amount of a grant available to an applicant based on previous grants received (if any). To this end, the Act provides that where there has been a change in the ownership of a business to an applicant, the Chief Executive Officer of Austrade must treat certain particulars of the previous owner as those of the applicant (the new owner). These particulars include any previous grants received by the previous owner in the capacity of owner of the business.
In October 2015, the Applicant applied for an export market development grant.[1] By a decision dated 13 September 2016 (the reviewable decision), the Respondent confirmed its earlier decision to treat the Applicant’s grant application as a “Year 5” application, applying s 94 of the Act. This decision was based on a determination that the business to which the application related was purchased by the Applicant in 2006 from a company which had previously received grants in respect of the same business. The effect of this decision was to deny the application in respect of the 2014-2015 grant year.
[1] Exhibit R5
The Applicant has applied to the Tribunal for review of the reviewable decision. For the reasons which follow, the decision will be affirmed.
B. RELEVANT LEGISLATION
Section 94 of the Act provides, in part:
(1) Subsection (2) applies if:
(a) at any time, a person (the previous owner) carried on a particular business (the old business) in Australia; and
(b) at a later time, another person (the new owner) carries on:
(i) the business or a part of the business (the relevant part); or
(ii) a business (the new business) that, at that time, is similar to the old business, or a part of the old business (the relevant part), carried on by the previous owner before that time, to such an extent that the CEO of Austrade is satisfied that the new business should be treated as a continuation of the old business; and
(c) the new owner applies for a grant in respect of a grant year.
(2) For the purposes of this Act, the CEO of Austrade must treat particulars of the previous owner as being those of the applicant in the following ways:
…
(c) any grant, or advance on account of grant, paid or payable (whether under this Act or under the repealed Act) to the previous owner in the capacity of owner of the business (or of the relevant part) is to be treated as having been paid, or as being payable, to the new owner[.]
C. BACKGROUND
In its grant application[2] the Applicant stated that its core business was “Intellectual property (IP) or know-how”. It answered “no” to the following question:
Are you carrying on a business, or have you bought a business or a part of a business, or acquired significant assets from any other person/business that has or may have received an EMDG grant?
The application was verified by a declaration made by Mr David Blatt, the Chief Executive Officer/Managing Director of the Applicant.[3]
[2] Exhibit R5.
[3] Exhibit R6.
Mr Blatt’s evidence
Mr Blatt provided a statement dated 23 June 2017[4] and gave evidence at the hearing.
[4] Exhibit A3.
Employment by Computer Systems (Australia) Pty Limited
From February 1991 until March 2006, Mr Blatt was an employee of Computer Systems (Australia) Pty Limited (CSA). In his statement he described his role as follows:
In February 1991 I was employed by Computer Systems (Australia) Pty Limited (CSA) as a software development administrator for CSA's Quisine Product. CSA was at that time a computer software consulting company specialising in the design and integration of computer software systems.
My function at CSA was to oversee development of the Quisine Product. This included leading a small team of programmers and support people, and reporting on development targets and progress to the CSA management.
At no time during my employment with CSA was I a director or shareholder of CSA's Quisine division or a director or shareholder of CSA. I remained only an employee and was directed to undertake tasks as required by managers of the Quisine division … I attended management meetings when asked as a technical specialist, in the same way that any other employee would occasionally be asked for their technical opinion …
…
Between 1982 and 2005, CSA's Quisine division developed and sold the Quisine Product to large kitchen manufacturers. Large kitchen manufacturers needed software like the Quisine Product to integrate parts ordering, kitchen cabinet manufacturing, parts tracking and packing for distribution into their reporting, administration and accounting systems …
…
From the late 1990s, the kitchen design manufacturing market began to specialise with the emergence of new CNC manufacturing equipment, specifically NBM (Nested Based Manufacturing) made automated manufacturing more accessible to small kitchen manufacturers. This type of equipment allowed small kitchen manufacturers to run a factory with just one machine doing the work that was previously done by an expensive pair of machines - a beam saw and a point to point borer …
From the early 2000s, the Quisine division began to struggle with new sales to the large kitchen design manufacturing market because the cost of sale was so high and the market was very small at the top end. During that period, CSA had operating losses and reduced staff, making it increasingly difficult to further develop the Quisine Product. Staff leaving were not replaced and the programming effort reduced to me and some part time students.
Throughout the period 2000 to 2006, the competitiveness of Quisine in the large kitchen design manufacturing market had begun to decline …
…
By early 2005 Quisine had developed a terminally poor image in the market. In my view it was also defunct in the large manufacturer market without significant additional investment.
…
In early 2005, CSA tried to sell the Quisine Product to small kitchen manufacturers in part to replace declining sales to large kitchen manufacturers and in part in response to the growth of the kitchen design software market for small kitchen manufacturers.
The Quisine product sold to large kitchen manufacturers underwent some modification to try and make it suitable for the small kitchen manufacturer. CSA made some investment at this stage in product development, but without the CSA IT system integration and given the small amount invested, the modifications made were never sufficient to support the amount of development effort needed to transform the Quisine Product into a standalone software product that met the needs of the small kitchen manufacturer …
… There was only one Quisine product that CSA was selling for the large and small manufacturer … Unfortunately, this did not address the complex setup issues for what remained, and users were generally unable to setup the software in a suitable way for their small production operations.
By 2005, CSA's sales managers were receiving customer complaints that the Quisine product did not support the needs of small manufacturers … At this point, I began to understand that small manufacturers had a negative impression of the Quisine product and the Quisine brand name.
In early 2006, CSA decided to close the Quisine division due to its accumulating losses. All remaining employees were made redundant or redeployed into other areas of CSA.[5]
[5] Exhibit A3.
Ownership of the Quisine business prior to 1 March 2006
On 20 May 1997, the Applicant, then named Normrof Pty Ltd, and CSA entered an agreement in writing to define “the ownership, distribution and profit sharing for the Quisine Products”. The agreement was signed by Mr Blatt as a Director of Normrof Pty Ltd. It provided, in part:
All intellectual property rights in all current Quisine Products and in all future Quisine Products arising from or by virtue of the Quisine Project and all associated copyrights are and shall be owned jointly by Computer Systems (Australia) Pty Ltd and Normrof in equal shares. Any ambiguity in the agreement here is to be resolved in favour of equal shares and rights …[6]
[6] Exhibit A3, Annexure A.
Mr Blatt continued in his statement:
In early 2006, I decided that I would like to continue to develop kitchen design software. I could see there was a gap in the market for a different product designed specifically for the small kitchen manufacturer using the new machinery that had become available. I thought at this point that the Quisine product might be able to be revitalised in this market … Knowing that CSA was going to close the Quisine division I began to discuss with John Schneider [CSA’s Managing Director] whether I could buy the assets of CSA's Quisine division.
…
I thought that buying the intellectual property to the Quisine Product which I partly owned already, might provide a springboard to accelerate development of a kitchen design software product for the small kitchen manufacturer. I was also aware that I was under a restrictive covenant that applied for 2 years after my employment with CSA and did not want to be shackled in any way by this restriction.
…
The 20 May 1997 Agreement also sets out the terms under which Normrof would share in any profits of the Quisine division. Normrof did not receive any financial benefit from CSA in relation to this agreement at any time. The Quisine division did not make a profit at any time from the date I was employed by CSA in 1990 until CSA sold the assets of the Quisine division to Normrof in March 2006.
About the time of the purchase, Normrof Pty Ltd changed its name to Quisine Software Pty Ltd.
The transfer of the Quisine business on 1 March 2006
Mr Blatt stated further:
In March 2006 Normrof purchased the assets of the Quisine division from CSA for $280,000 under the Agreement ... Originally, the purchase price was $180,000, but at the last minute this was increased to $280,000.
…
I did not at any stage receive any legal advice in relation to this transaction. The agreement was drafted by CSA and an addendum appended to protect CSA's interests by limiting their future liability in relation to old customer claims and possible GST issues … I borrowed money against my house to start the new business. Furthermore, the events following 2006 with QST [Pty Limited] needing to fully dump Quisine as a product, meant that I misjudged the value of the assets which were worth very little anyhow.[7]
A copy of the agreement for sale of Quisine between CSA and Normrof Pty Ltd is marked Exhibit A5 in these proceedings.
[7] Exhibit A3.
The Applicant’s business activity after 1 March 2006
Of the period following his purchase of the Quisine assets, Mr Blatt stated:
After buying the assets of the CSA's Quisine business, I met with Ray Clarke to work out how to develop kitchen design software product for the small kitchen manufacturer. Ray had begun another business to sell NBM / CNC machines and related manufacturing equipment to small kitchen manufacturers. Working with me to develop a new business selling kitchen design software to the small kitchen manufacturer was complementary to this business. Ray Clarke also knew the small kitchen manufacturing market well.
Around this time, Ray Clarke formed a new company, QST Pty Limited, to develop all marketing collateral for and market and distribute kitchen design software for the small manufacturer. He agreed to handle all customer contact, service and maintenance issues. He would feed customer feedback to me in relation to product performance and design. I undertook to develop the kitchen design software product through Quisine Software Pty Limited (formerly Normrof) …
From March 2006 to June 2006 QST tried to continue to sell the old CSA Quisine product to small kitchen manufacturers. Whilst there were limited sales, those inevitably led to more unhappy customers and confirmed the situation that Quisine was toxic in this market and had to be dumped.
By June 2006, it was clear from information I received from Ray Clarke that the old CSA Quisine product was not suitable for the small kitchen manufacturing market and that the Quisine brand had become toxic in the marketplace. Around this time, Ray Clarke and I both concluded that the Quisine product would never work for the small kitchen manufacturer no matter how we might modify it, and that the best thing to do was to start from scratch and develop a completely new product specifically for the small kitchen manufacturer. Ray stopped promoting Quisine in the market …
It took 12 months to completely erase the Quisine name from all marketing materials and advertising. In 2008 Quisine Software Pty Limited (formerly Normrof) changed its name to AllMaster Software Pty Limited as CabMaster was released to the market.
…
I and Ray Clarke formally launched the new CabMaster product at the biannual trade show AWISA in July 2008.[8]
[8] Exhibit A3.
Mr Clarke’s evidence
Mr Clarke provided a statement dated 13 June 2017[9] and gave evidence at the hearing.
[9] Exhibit A11.
He stated, in part:
I have been the managing director and an experienced machine systems integration expert servicing Australian manufacturers for 25 years, and also have worked in the kitchen design manufacturing industry for over 15 years from 1996 to 2012 servicing and selling kitchen design software and production machinery to the small kitchen design manufacturer.
…
By 2005, Quisine had an extremely bad name in the market. I was aware of this reputation from my regular contact with small kitchen manufacturer customers …
…
I observed that CSA's struggles led to a complete shutdown of the Quisine project, and in early 2006, David Blatt told me that he and all employees had been terminated.
During this period I discussed the situation with David Blatt, and we planned that he would create a new software company, now All Master Software (AMS), to develop small kitchen manufacturing software while I set up a new business (QST Systems Pty Limited) for selling and servicing the machinery and design needs of small kitchen manufacturers.
I agreed with David Blatt that QST would distribute the product and manage all marketing, customer enquiries, sales, complaints, and any customer interactions, and also design libraries for customers, and that David Blatt and AMS would develop the software. This agreement resulted in a formal Master Distributorship Agreement of which the latest signed version is a Master Distributorship Agreement dated 2 July 2012 between QST and AMS [marked Exhibit A7].
…
The initial months following the formation of QST and AMS were very challenging. The old Quisine software which was picked up by AMS from the CSA shut down, had an extremely bad name in the market place. QST initially sold Quisine to a few customers, and one after another, angry customers showed us that the software simply did not work properly. Incorrectly cut up parts led to lots of manufacturing problems as parts did not fit together and kitchens could not be installed on site.
… Based on my conversations with them, many other customers simply put the software "in the bottom drawer" after a few months of attempting to use it.
…
I decided that this situation could not continue and from early 2006, I decided not to advertise the old Quisine product, which was never fit for purpose for this market, and never market ready. From early 2006 QST began to remove any trace of the Quisine name from all product logos, advertising, and wherever else it may have appeared. The Quisine name was so bad that QST had to distance itself from it. At the same time, work was underway to develop the new CabMaster product.
I used my expertise and knowledge of the needs of small manufacturers to begin to develop brand new design libraries for CabMaster, while David Blatt and AMS developed a new software product that worked in this market …
D. THE ISSUE
The issue in this matter is whether the requirements of subsection 94(1) are met in relation to the Applicant’s application for a grant. If so, subsection 94(2) applies to the application.
To determine the issue the following questions arise:
(a)Did Computer Systems (Australia) Pty Ltd carry on a relevant business at any time?
(b)If the answer to (a) is “yes”, did the Applicant, Allmaster Software Pty Ltd, carry on the business or part of the business at a later time?
E. REASONING
E1: Did Computer Systems (Australia) Pty Ltd carry on a relevant business at any time?
Based on the evidence of Mr Blatt I am satisfied that, between 1982 and 2006, Computer Systems (Australia) Pty Ltd carried on the business of the development and sale of software for the manufacture of kitchens.[10] This is not in dispute. The product was described as Quisine software.
E2: Did the Applicant, Allmaster Software Pty Ltd, carry on the business or part of the business at a later time?
[10] Exhibit A3 at [8].
The 1 March 2006 agreement for the purchase of Quisine
The terms of the agreement make it clear that the Applicant (then Normrof Pty Ltd) purchased CSA’s share of the business known as Quisine, including the intellectual property, in 2006. The purchase price was $280,000.00.
The agreement provided that the “Quisine business” included:
1. the Quisine software, intellectual property, brands, software source codes and executables, associated construction libraries, documentation.
2. It is agreed that due to the issues along the development cycle there has been no goodwill in the business to speak of, and is therefore not part of this agreement.
3. The following equipment currently belonging to CSA:-
Blatt’s Dell 9100 laptop
Bender server
Figaro server
Web domain names quisinesoftware.com and designersmate.com (except that any transfer costs will be borne by Normrof)
MYOB software
The two old test PCs currently in Blatt’s office (junk)
Multi CD burner and PC in use with it
Shrink wrapper and any materials currently in stock as Quisine boxes etc
(all of the above in 3 having nominal depreciated value in the order of $1,000)
Carrying on of the business by the Applicant after 1 March 2006
On the basis of the evidence of Mr Clarke and Mr Blatt I am satisfied that for about six months after the Applicant purchased the Quisine business it continued to operate it by engaging the marketing and distribution services of QST Systems Pty Limited and endeavouring to sell the Quisine product.
Mr Clarke’s evidence is consistent with Mr Blatt’s statement that in early 2006 he thought “the Quisine product might be able to be revitalised”[11] in the small kitchen manufacturing market. He thought “buying the intellectual property to the Quisine Product which I partly owned already, might provide a springboard to accelerate development of a kitchen design software product for the small kitchen manufacturer”.[12]
[11] Exhibit A3 at [24].
[12] Exhibit A3 at [26].
Further, Mr Blatt gave evidence that, between March and June 2006, QST Systems Pty Limited “tried to continue to sell the old CSA Quisine product to small kitchen manufacturers,” and that limited sales were achieved.[13]
[13] Exhibit A3 at [37].
The reviewable decision will be affirmed
Although marketing of the Quisine product continued for only a short period after the Applicant’s purchase of the business, this is sufficient to meet the requirements of subsection 94(1). The subsection requires only that the business be carried on “at a later time” to the time in which it was carried on by the previous owner; there is no requirement for the business to be carried on for any particular period of time.
Having decided that the Applicant carried on the Quisine business after it was purchased from the previous owner, and it being accepted that the Applicant thereafter applied for a grant in respect of the 2014-2015 grant year, the requirements of subsection 94(1) are satisfied. Subsection 94(2) therefore applies.
For these reasons, the reviewable decision will be affirmed.
Further evidence of continued operation of the business
The Respondent argued that other actions of the Applicant indicated that it continued to carry on the Quisine business for several years after its purchase. In view of the conclusion I have reached above it is unnecessary to determine the length of time in which the Applicant continued to operate the business. However, as the parties spent considerable time in putting this evidence before the Tribunal, I shall refer to it briefly.
Commercialisation Australia application form completed on behalf of the Applicant[14]
[14] Exhibit R13.
In this application for a grant made in July 2012, the Applicant provided the following information in relation to the intellectual property which would be accessed in furtherance of the project for which the grant was sought:
AMS software consists of a large collection of software code, primarily in C++. There is [sic] around 400,000 lines of code, developed over a period of 15 years in a project led by David Blatt. The software is the property of AllMaster Software. All employees with access to the software have signed non-disclosure agreements.
This statement indicates that for the 15 years from about 1998 to 2012, the Applicant (through the services of Mr Blatt) had been developing the software which it proposed to use in a project in 2012. This is not consistent with the evidence of Mr Blatt that within about six months, the source code purchased in March 2006 “had become more of a liability than an asset”.[15] On the contrary, it points to a continued operation of the Quisine business six years after it was purchased.
[15] Transcript, 5 March 2018, at 54.
Evidence of Mr Liu, Senior Grants Auditor
Mr Liu gave evidence at the hearing. He interviewed Mr Blatt on 19 November 2015 in relation to the application for the grant the subject of these proceedings.
When he gave evidence, Mr Liu confirmed the accuracy of the following statement he recorded in an email he sent on the day of the interview to his supervisor:
He [Mr Blatt] argued that the product promoted is now substantially different to the one he bought in 2006 whilst as a matter of fact, before the discussions shift to s 94, he just said all his software products being sold now are all rooted in the old Quisine Software engine he developed back then. The difference was only ‘superficial as the mathematical level has not changed’.[16]
[16] Transcript, 7 March 2018, at 159-160. See also Exhibit R7.
Mr Blatt denied that he made the statement attributed to him. However, having listened to Mr Liu give evidence, and taking into account the temporal proximity of the creation of the email to the interview, based on notes made during the interview, I prefer and accept the evidence of Mr Liu.
On this basis, I am satisfied that the Applicant continued developing the software underlying the Quisine business at least until late 2015.
The Applicant’s Balance Sheet as at June 2015[17]
[17] Exhibit R12.
The Balance Sheet as at June 2015, submitted by the Applicant as part of the grant application, shows a fixed asset, “Purchase Business”, of $280,000.00. Mr Blatt signed a declaration that the information supplied in the application and accompanying documents was complete and accurate.[18]
[18] Exhibit R6.
Mr Blatt agreed that the asset referred to is the business purchased in 2006, but said that he expected that at some point the Applicant’s accountant would have sought to write the asset down.[19]
[19] Transcript, 6 March 2018, at 119.
I did not find Mr Blatt’s explanation as to why this asset remained on the Applicant’s Balance Sheet nine years after purchase satisfactory. I accept the proposition put on behalf of the Respondent that the business continued to have value to the Applicant because of the capacity to use the Quisine software engine in all of the products then being marketed by the Applicant. This is consistent with the statement made by Mr Blatt to Mr Liu which I have extracted at paragraph 31 of these reasons.
As noted earlier, the additional findings made in the preceding 9 paragraphs are not essential to the conclusion I have reached in determining the application for review of the reviewable decision.
F. CONCLUSION
The decision of Austrade dated 13 September 2016, confirming its earlier decision to treat the application made by Allmaster Software Pty Ltd for an export market development grant as a ”Year 5” application, will be affirmed.
I certify that the preceding 37 (thirty seven) paragraphs are a true copy of the reasons for the decision herein of Deputy President J W Constance
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Associate
Dated: 21 March 2019
Date(s) of hearing: 5-7 March 2018, 18 April 2018 Advocate for the Applicant: Mr J Pooley Solicitors for the Respondent: DLA Piper Australia
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