Amrollah Aghili and Australian Securities and Investments Commission
[2012] AATA 353
•14 June 2012
[2012] AATA 353
Division GENERAL ADMINISTRATIVE DIVISION File Number(s)
2010/0615
Re
Amrollah Aghili
APPLICANT
And
Australian Securities and Investments Commission
RESPONDENT
DECISION
Tribunal The Hon. Brian Tamberlin QC, Deputy President
Date 14 June 2012 Place Sydney The Tribunal varies the decision of the respondent and decides that the applicant ought to be disqualified for a three year period from 21 January 2010.
................[sgd]........................................................
The Hon. Brian Tamberlin QC, Deputy President
Catchwords
CORPORATIONS – disqualification – disqualifying a person from managing corporations for up to five years – whether corporate entities related – failure of corporate entities – failure to keep proper books and records – failure to act in interests of the company – failure to exercise due care and diligence – failure to prevent companies trading while insolvent – failure to assist the liquidator – what period of disqualification is appropriate – decision under review varied.
Legislation
Corporations Act 2001 ss 50, 206F, 533
Cases
Australian Securities and Investments Commission v Adler & Anors [2002] NSWSC 483
Catena v Australian Securities and Investments Commission [2011] FCAFC 32
Kazar, in the matter of Frontier Architects Pty Limited (in liq) [2010] FCA 1381
Manning v Cory; Manning v Summer [1974] WAR 60
McDonald v Director-General of Social Security (1984) 1 FCR 354
Murdaca v Australian Securities and Investments Commission (2009) 178 FCR 119
Quinlivian and Australian Securities and Investments Commission (2010) 113 ALD 599REASONS FOR DECISION
The Hon. Brian Tamberlin QC, Deputy President
14 June 2012
This is an application to review a decision of a delegate of the Australian Securities and Investments Commission (ASIC) of 15 January 2010 which disqualified the applicant from managing a corporation for five years.
The decision was made under s 206F of the Corporations Act 2001 (the Act) having regard to his conduct whilst an officer and controlling entity of corporations namely Techno Build Developments Pty Ltd (TBD), Frontier Architects Pty Ltd (Frontier), Greenway Waters Suites Pty Ltd (Greenway) and Frontline Architects Pty Ltd (Frontline). The five year disqualification period began on 21 January 2010. Accordingly, more than two years of the five year period has now lapsed. There has been no application for a stay of the decision.
Each of the companies was wound up whilst the applicant was a director of the companies or within 12 months of him ceasing to hold that position. TBD was wound up on 20 September 2007 and Frontier on 15 August 2007. Frontline commenced provisional liquidation on 21 December 2007 and Greenway was wound up on 18 April 2008.
The liquidator of three of the companies, Mr Kazar, in a report to ASIC under s 533 of the Act, found that the company may be unable to pay its unsecured creditors. There were two reports by Mr Kazar; one was lodged on 6 March 2008 and one on 7 October 2008.
ASIC sent a notice to the applicant under s 206F on 11 September 2009 requiring the applicant to demonstrate why he should not be disqualified.
Section 206F(1) provides:
ASIC may disqualify a person from managing corporations for up to 5 years if:
(a)Within 7 years immediately before ASIC gives a notice under paragraph (b)(i):
(i)The person has been an officer of 2 or more corporations; and
(ii)While the person was an officer, or within 12 months after the person ceased to be an officer of those corporations, each of the corporations was wound up and a liquidator lodged a report under subsection 533(1) … about the corporation’s inability to pay its debts; and
(b)ASIC has given the person:
(i)A notice in the prescribed form requiring them to demonstrate why they should not be disqualified; and
(ii)An opportunity to be heard on the question, and
(c)ASIC is satisfied that disqualification is justified.
Section 206F(3) provides:
If ASIC disqualifies a person from managing corporations under this section, ASIC must serve a notice on the person advising them of the disqualification. The notice must be in the prescribed form.
Section 533(1) provides:
If it appears to the liquidator of a company, in the course of a winding up of the company, that:
…
(c) the company may be unable to pay its unsecured creditors more than 50 cents in the dollar;
The liquidator must:
(d) … lodge a report in respect of the matter …
Section 206(F)(2), which is headed “Grounds for Disqualification”, provides:
In determining whether disqualification is justified, ASIC:
(a) must have regard to whether any of the corporations … were related to one another; and
(b) may have regard to:
(i) the person’s conduct in relation to the management, business or property of any corporation; and
(ii) whether the disqualification would be in the public interest; …
(Emphasis added)
Section 50 of the Act sets out circumstances in which corporations are to be regarded as being “related” to each other. This relation exists where a body corporate is a holding company of another body corporate, or a subsidiary of another body corporate, or is a subsidiary of a holding company of another body corporate.
There was some discussion during the hearing as to whether the companies were “related” within the meaning of the Act, but it is conceded by the applicant that, according to the definitions in the Act, the companies were not related. Nevertheless, it was contended by the applicant they should be regarded in a “holistic” or as a single commercial operation in a practical sense when deciding whether the conduct of the corporations should be examined as a whole or as a series of discrete but connected courses of conduct. Notwithstanding the concession that the operations were not related for the purposes of s 50 of the Act, the applicant submits, correctly in my view, that this is not determinative, and regard could be had to the fact that the group was actually operated as a single unitary commercial operation and that failure of the corporations in the group came about as a result of a single action, namely the appointment of an administrator.
I therefore proceed on the basis that that the corporations are not “related” but I consider that it is open to the Tribunal to look at the conduct of the whole group in forming a decision as to disqualification notwithstanding that the entities are not related in the statutory sense. In this connection I note that the accountant for Mr Aghili, Mr Robert Johnson, is recorded as having stated that that it was always Mr Aghili’s understanding that the companies operated independently.
APPROACH
The interpretation of s 206F and the approach to be taken to a liquidator’s report under s 533 of the Act was considered by the Full Federal Court in Murdaca v Australian Securities and Investment Commission (2009) 178 FCR 119 at [86] – [120]. In the course of that consideration the Court observed that s 206F does not require that ASIC conduct an investigation into the truth of the contents of each report under s 533. To satisfy the preliminary requirements of the section all that is required is that the liquidator should lodge a report in respect of each corporation relied on for the purposes of s 206F, which appears to be regular on its face and which appears to comply with the terms of s 533 in that it is about the corporation’s inability to pay its debts. The liquidator is required to act bona fide and must not express views which are not genuinely held, but it does not require that the liquidator have reasonable grounds for the views, opinions and statements expressed in the report.
However, ASIC must assess the worth of the report in the light of all the evidence and decide whether disqualification is justified. Section 533 does not give reports prepared by liquidators any particular status or weight. It must be borne in mind that s 533 does not contemplate that concrete facts be proven to the liquidator before he is obliged to report, nor does it require the liquidator to make a final finding in relation to the subject matters. What is required is that it should appear to the liquidator that certain things may have occurred or may be the fact. The liquidator is not required to express any particular views or conclusions in a s 533 report. Nor is the liquidator obliged to have reasonable grounds for holding such opinions or views before articulating them.
Liquidators are officers of the court and the use to which a s 533 report can be put is to alert ASIC to potential delinquent or aberrant behaviour and to provide information to ASIC. The reports do not have any particular evidentiary status. Lodgement of a report under s 533 is the trigger for potential future action by ASIC. Its future effect is a matter for ASIC.
Further observations were made by their Honours in Murdaca as to a submission by the appellant that the report should be rejected as being an effective trigger to disqualification because the report was not based on reasonable grounds for the views, opinions and statements expressed in it. They rejected this submission. In the view of the court, the role of ASIC, and therefore of the Tribunal, is to form a decision as to the weight to be given to the report with regard to all of the evidence placed before it and in the light of that to decide whether disqualification is justified and for what period.
It is clear that in deciding whether to disqualify, the Tribunal is not obliged to identify specific breaches or contraventions of the law in order to pass judgement on the adequacy of the officer’s performance for the purposes of s 206F; see Quinlivian and Australian Securities and Investments Commission (2010) 113 ALD 599. Evidence going to contraventions is relevant to a decision to disqualify but they do not delimit the breadth of the power or discretion. Operation of the section is usually triggered by evidence of a pattern of failure. The threshold which gives rise to the power under s 206F is relatively low. The concept of onus of proof does not enter into the determination of claims under legislation. There is no onus of proof in the legal sense which arises; see McDonald v Director-General of Social Security (1984) 1 FCR 354 at 366 and 356-358; see also Catena v Australian Securities and Investments Commission [2011] FCAFC 32 at 33.
ISSUES
The evidence and submissions of the parties, in light of the statutory provisions, raised the following issues:
(a)Are the corporations related;
(b)Did the applicant fail to keep proper books and records;
(c)Did the applicant fail to act, as director, in the interests of the company;
(d)Did the applicant fail to exercise due care and diligence as a director;
(e)Did the applicant fail to prevent the companies from trading whilst insolvent;
(f)Did the applicant fail to assist the liquidator; and
(g)What period of disqualification, if any, is appropriate?
I now turn to those issues.
As mentioned above, it is not disputed that the companies are not related for the purposes of s 50 of the Act. I am satisfied from the evidence that the applicant has asserted on a number of occasions that the companies are separate and stand-alone entities responsible and liable for their own assets. The applicant has said that TBD is an independent entity operating as an independent entity within the group, and that it has operated with other companies within the group without compromising its independence.
THE GROUP
The structure of the Aghili Group of Companies is described in the following diagram:
The diagram cannot be taken to show the actual amounts of debt between the companies in the group, but it illustrates the complexity of the relationships between the companies and some of the ventures in which they were involved. It supports the submission that in such a group it is most important to keep detailed records in respect of each of the companies within the group.
FACTUAL BACKGROUND
Mr Aghili has been a director of the following companies:
Company Name ACN Status* Date Appointed Director Date Ceased as Director Current or Former Shareholder
(Yes/No)
Date External Administration Commenced (ADM/LIQ/RM) Name of External Administrator Building Maintenance & Protective Coatings Pty Ltd 003 200 637 SOFF 24/3/1995 1/4/2005 Yes n/a n/a Frontier Architects Pty Ltd 099 631 982 EXAD 19/2/2002 18/6/2007 No 19/7/2007 Henry Kazar, Kazar Slaven Chartered Accountants Frontline Architects Pty Ltd 098 301 261 EXAD 28/9/2001 4/5/2007 No 20/12/2007 Grant Thornton Sydney Level Professional Concrete Pty Ltd 101 563 759 REGD 1/8/2002 9/2/2004 Yes n/a n/a Pacific Developers Pty Ltd 104 337 939 REGD 7/4/2003 4/2/2008 No n/a n/a Roland Painting & Wallpapering Pty Ltd 055 125 543 DRGD 13/2/1992 9/6/2002 Yes n/a n/a Techno Build Developments Pty Ltd 066 616 091 EXAD 8/12/1994 18/6/2007 Yes 26/6/2007 Henry Kazar, Kazar Slaven Chartered Accountants Techno Developers Pty Ltd 105 876 659 EXAD 12/8/2003 4/5/2007 Yes 27/2/2008 Justin Walsh & Phillip Campbell-Wilson, Ernst & Young Brisbane *Status: SOFF – Strike off action in progress
EXAD – Under external administration
DRGD – Deregistered
REGD – Registered
I am satisfied that despite Mr Aghili’s resignation from TBD on 18 June 2007 he maintained effective control over TBD until the date of Mr Kazar’s appointment as administrator.
TBD operated a building construction and project management business for the duration of its registration. It was initially involved in the development of parcels of land in the ACT and NSW for the construction of residential dwellings, and expanded from about 2003 into the development and construction of commercial premises at Greenway in the ACT.
For the projects, TBD was engaged by related entities for the purpose of the developments. The related entity was the owner of the land and contracted TBD to undertake the construction of the project. These arrangements were carried out on the basis of costs plus contracts which meant that in each project TBD would generate a profit of a stated percentage of the construction costs, less its costs for accounting, administration and supplies. The margin charged was in the order of 8 per cent on the Frontier projects and 10 per cent for the Frontline projects.
Mr Aghili was in control of the day to day operations of Frontline and Frontier throughout the period during which TBD traded. It is not disputed that Mr Aghili was the sole directing mind of TBD during the period of its operations.
Mr Aghili was directly responsible for: bringing in contracts for supply with third party contractors; instructing lawyers and accountants in relation to the management of legal and financial affairs; the entering of financial information into the accounting system; and, the assignment of expenses and revenues. He also liaised with government and statutory authorities in relation to the development projects with banks and other financiers. The related entities with which TBD operated were Frontier, Frontline, related third parties and Mr and Mrs Kargarian.
Frontier was a joint venture established for the purpose of undertaking residential dwelling developments in and around the ACT. This joint venture was between the Aghili family and the Kargarian family, to engage TBD to undertake the construction of the principle development and was the owner of the relevant land and contracted with TBD for construction.
The records indicate that no written contract existed between Frontier and TBD, but the relationship between the entities was in the form of a family understanding or agreement. Investigations by Mr Kazar indicated an absence of any formal joint venture agreement between the Aghilis and the Kargarians outlining how proceeds of the joint venture were to be distributed and the liabilities of the joint venture paid. I note that Mr Aghili has asserted that a document does exist but it has not been produced to the Tribunal. Mr Aghili was in control of the day to day operations of Frontier for the duration of its operations. Mr Aghili stated that Mr Kargarian was an investor in Frontier and that the shareholding of Mrs Kargarian was beneficially held on Mr Kargarian’s behalf or on behalf of one of his related entities.
Frontier began operations in the ACT in February 2002 and entered into contracts with TBD for the construction of residential dwellings in the suburbs of Dunlop and Amaroo. This latter development (the Dunlop project) was funded jointly by the Kargarians and TBD. Frontier provided cross-collateral guarantees in relation to borrowings of other related entities, namely Frontline and Pacific.
The liquidator in his s 533 report stated:
I had formed the view that the heart of the failure of TBD lies with the failure to properly and adequately manage the project construction by both Frontline and TBD, in relation to the GWP, contrary to the allegations by Mr Aghili that the delays in completion of the GWP were a direct result of TBD’s failure to properly manage the project.
I note that the person directly in control of the day-to-day management of both Frontline (as the developer), and TBD (as the builder) at all material times was Mr Aghili, who seems to have operated without a construction planning and cost management system and in an environment without a documented accounting system.
Mr Kazar also referred in his report to the failure of Frontier and noted that the financial statements of Frontier reveal that significant loans had been made to TBD by Frontier in the order of $2.7 million. This amount was the only significant asset of Frontier and represented the cumulative prior year pre-tax retained earnings of Frontier. The only funds available to TBD were through its contract with Frontline and once Mr Aghili had determined that Frontline would not pay TBD, TBD became unable to pay its debts, and accordingly was unable to repay its loan to Frontier. This failure of TBD necessarily brought on the failure of Frontier.
FAILURE TO KEEP PROPER BOOKS AND RECORDS
Under s 286 of the Act, a company must keep written financial records that correctly record and explain its transactions, financial performance and position such as would enable a true and accurate financial statement to be prepared and audited. Failure to do so is an offence under the Act and one of strict liability. A director contravenes this section, if he or she fails to take all reasonable steps to comply with or secure compliance with the requirements: see s 344. The obligation to keep financial records and proper accounts is directed to ensure that the accounts and the financial position of the company are at all times sufficient to enable a person to say where in a financial sense the company is placed. It is not enough that records kept might enable a competent accountant to reconstruct and produce accounts long after the happening of the events to which the primary records relate such as cheque books, receipts and the like. The section is designed to prevent officers from “flying the company blind” and upon its crash, and without having information capable of sustaining the opinion, then claiming they thought they were in a better financial position: see Manning v Cory [1974] WAR 60 at 62.
In this case I am satisfied that the applicant did not comply with the statutory obligation to ensure proper books and records were kept.
In reaching this conclusion, I note that in the case of Kazar, in the matter of Frontier Architects Pty Limited (in liq) [2010] FCA 1381 the court found that the group had failed to keep financial records as required. Flick J at [145] – [148] referred to the large sums of money involved and noted that there was little documentary evidence supporting the payments made or the basis on which they were paid, and that the lack of expected documentation led to uncertainty in determining the rights of the parties. There is ample evidence before me for the conclusions reached by the liquidator as to the absence of books and records of TBD. For example, it is clear that to discover the true financial position of that company required a detailed oral explanation of the transactions and the financial dealings by the applicant. The documentation was clearly insufficient.
The fact that the applicant operated the group of companies from a single bank account, while it is not in itself a breach, gives rise to an increased and clear need for detailed documentation to transactions between those companies in order to assess the current profitability of the complex group projects. Failure to do this will result in serious prejudice to creditors, shareholders, investors and members of the public. For example, in this case, there was such a failure. There were no regular bank reconciliation statements identifying funds on a monthly basis or separate accounts for each of the relevant companies and no separation of projects in the internal accounts so as to disclose or enable investigation of the financial soundness of the group or any member from time to time.
In addition to the conclusions reached by the liquidator, which I accept as clearly made out; a similar view as to inadequacy of records was reached in relation to Greenway by the liquidator of that corporation. Mr Morelli, the accountant to the company, has noted the “very poor state of information” provided by Mr Aghili, and considered that this lack of detail had negative implications for the lodgement of tax returns. These observations by persons experienced in keeping and analysing corporate books and records is of significant weight.
FAILURE TO ACT IN THE BEST INTERESTS OF THE COMPANY
The evidence discloses there were large inter-company loans claimed to have been made. However, in the absence of documentation the details as to amounts and terms cannot be ascertained. The applicant has stated that he had relevant documents, but these were not produced at the hearing. He was therefore unable to verify agreements and clarify questions at the hearing. In particular there was a lack of documents in relation to the TBD bank account from which payments were made for the benefit of the applicant and his wife personally under the description of “loans to directors” amounting to $600,000 in 2006-2007. There were no contractual documents recording an agreement whereby TBD undertook construction work on the home of the applicant.
The grouping of the companies’ affairs together with the operation of the companies through a joint bank account without keeping records, documents and books of account gave rise to a substantial risk of inaccuracy and confusion with respect to the rights of the individual companies. The necessary reliance on the recollections and accounts by the applicant are not sufficient to meet the problems posed by the absence of records. In the absence of records it is difficult to prepare fair and accurate accounts of the companies’ affairs. These are fundamental requirements to proper corporate governance. The applicant has failed to produce documents when requested on numerous occasions. As director and controlling mind of the companies the applicant must be held responsible for the failure to maintain the records and the failure to implement processes or procedures to ensure proper accountability. He has failed to act in the interests of the individual companies. Directors have an obligation to act in the interests of the company and to avoid conflicts of interest which may lead to the detriment of the company. The failure to document the transactions of himself and his wife with the companies by way of loans gives rise to the danger of a conflict of interest.
The evidence supports a conclusion that TBD made payments for the benefit of the applicant and his wife to the detriment of the company.
Payments to the wife of the applicant for a substantial period are confirmed by bank statements and there are references in the documents to “loans to directors”. The companies do not appear to have received adequate consideration for those payments. It is difficult to reach a definitive conclusion on these questions so as to make an affirmative finding of a breach of the Act, because there are insufficient documents to establish the reasons for the payment or the benefits to the company.
It is apparent from the evidence that the applicant has failed to raise questions concerning conflicts of interest in relation to these transactions. There are documents indicating that TBD constructed a house on property owned by his sister and brother-in-law. In Kazar, Flick J found that the construction on the Nicholls land amounted to an unreasonable director-related transaction because there was no equivalent benefit accruing to TBD, which had incurred substantial costs and conferred benefits on a relation, namely Mrs Kagarian. There was also work on the home of the applicant in the Australian Capital Territory which is inadequately documented: see [150] – [153] of Kazar.
DUE CARE AND DILIGENCE
Under s 180 of the Act a director must act with the degree of care and diligence that a reasonable person would exercise if they were an officer of a corporation in the corporation’s circumstances.
The absence of proper records and the transactions giving rise to conflicts of interest provide the circumstances against which the exercise of due care and diligence should be considered. Having regard to the mixture of funds of the individual companies the need for separation of their transactions in the accounts was evident. The evidence strongly supports the conclusion of the liquidator, but it was extremely difficult because of the interweaving of the affairs of TBD with the other companies, to analyse the true financial position and the respective rights concerning joint borrowings. The liquidator formed the view that the deficiency could be properly described as reckless and I agree with this characterisation.
As was pointed out by counsel for the respondent, arrangements for the intermingling of the transactions between the companies left each of them vulnerable to the failure of other members of the group. The extent of the indebtedness of TBD is in excess of $11 million and the total amount owing to the Australian Taxation Office was over $9 million. This is a very significant amount. The authorities indicate that failure to make proper arrangements to pay tax raises an important public interest consideration.
The fact that the overall projects entered into by the companies amounted to over $53 million, is also relevant to take into account when considering the significance of the failure to keep proper records and to take proper steps with a view to ensuring the viability of the companies. In these circumstances, there is a need to keep proper track and control over financial relations between the companies.
The Tribunal’s conclusion is that the applicant failed to apply the degree of due care and diligence required by the Act of an officer in his position in relation to these large scale development projects.
INSOLVENT TRADING
Section 588G requires a company director to prevent insolvent trading. It is necessary for a director to see that the company is not involved in trading in the market place when unable to pay debts out of its own resources.
I do not find, largely because of the absence of records, the applicant fully appreciated the financial problems of the companies prior to August 2006. The applicant has referred to letters from various finance sources in support of an argument that there were reasonable grounds for him to believe in the solvency of the company. However, a close and realistic analysis of the terms of the finance which was being discussed in that period indicates that there were no clear and firm commitments to the financing of projects. In July and August 2006 there was a substantial increase in trade creditors and a very substantial reduction in the amount of funding available.
However, considering the evidence as a whole, I am not persuaded there are reasonable grounds for concluding that the applicant ought to have reasonably suspected that there was danger of insolvency in latter half of 2006 and that he failed to do so. In my opinion the records were not sufficient to justify such a conclusion.
FAILURE TO ASSIST THE LIQUIDATOR
Evidence of the liquidator satisfies me that the applicant has on numerous occasions failed to help in the winding up of the company in a proper and diligent manner, and assist in the exercise of the liquidator’s functions and powers within the meaning of s 530A of the Act. The liquidator has enumerated a number of instances which I agree supports the conclusion that there have been failures by the applicant to keep records and provide information in a focused or timely manner or at all in some instances.
PERIOD OF THE DISQUALIFICATION
Disqualification is directed primarily to protect the public. I have considered the principles set out by Santow J in Australian Securities and Investments Commission v Adler & Anors [2002] NSWSC 483 at [56]. The power is designed to safeguard and secure the public interest in transparency and accountability of companies, and the suitability of directors to hold office, and also to protect individuals dealing with companies including customers, creditors, shareholders and investors.
The section sets a high standard as can be seen from the fact that the power to disqualify is enlivened if the person concerned has been an officer of only two failed corporations within a seven year period. There does not have to be any proven breach of the law in that the provision is not designed to punish an offender; it is designed to be preventative against future harm.
In this case, the failures arising from the conduct of Mr Aghili have been significant. There have been four failed companies two of which were under the control of the applicant during the relevant period and very large deficiencies have been caused as a consequence of his failures.
I am not persuaded that the applicant planned in any way to cause the companies to fail; nor is there any question of fraudulent design but rather the failure of the companies is attributable to the lack of care, diligence and maintenance of proper records and failure to separate the interests of the companies so to delineate their respective obligations and entitlements.
The applicant was cross-examined over a substantial period of time and he impressed me as a person who has come to appreciate the magnitude and significance of his failures to effectively implement his statutory duties. He has suffered substantial financial losses. I am persuaded that he has come to appreciate the gravity of his conduct and this will drive home the importance of future compliance. I have also taken into account the lack of documentation in relation to directors’ loans and construction projects for the benefit of himself and his wife.
Taking all the above matters into account, I consider that the applicant ought to be disqualified for a period of three years from 21 January 2010.
I therefore decide that the correct and preferable decision is that the applicant be disqualified for a period of three years from the above date and that this decision be substituted for that of the respondent. The decision of the respondent is varied only as to the period of disqualification.
I certify that the preceding 58 (fifty-eight) paragraphs are a true copy of the reasons for the decision herein of The Hon. Brian Tamberlin QC, Deputy President.
..........[sgd]..............................................................
Associate
Dated 14 June 2012
Date(s) of hearing 12, 13 and 15 March 2012 Counsel for the Applicant Chris Stomo Solicitors for the Applicant David Milne, David Milne & Associates Counsel for the Respondent Greg O'Mahoney Solicitors for the Respondent Fiona McCord, Australian Securities and Investments Commission
2
5
0