AUSTCORP NO 500 PTY LTD and INNOVATION AUSTRALIA MJ Carstairs, Senior Member

[2010] AATA 770

Administrative Appeals Tribunal

ORAL DECISION AND REASONS FOR DECISION [2010] AATA 770

ADMINISTRATIVE APPEALS TRIBUNAL                   )

)  No 2009/5918

GENERAL ADMINISTRATIVE DIVISION		)
Re		AUSTCORP NO 500 PTY LTD

Applicant

And INNOVATION AUSTRALIA

Respondent

ORAL DECISION

Tribunal  MJ Carstairs, Senior Member

Date           23 September 2010

Place           Brisbane

Decision The Tribunal affirms the decision under review.

....................[Sgd]..........................

Senior Member

CATCHWORDS

INNOVATION AUSTRALIA – Pooled Development Fund – Non-compliance with direction – Exercise of discretion to cancel registration of company as a Pooled Development Fund –Decision under review affirmed.

Pooled Development Funds Act 1992 (Cth), ss 3(1), 19, 20(2), 21(1)(aa), 29(1), 33, 47

Shi v Migration Agents Registration Authority (2008) 235 CLR 286

REASONS FOR ORAL DECISION

7 October 2010 MJ Carstairs, Senior Member       

1. Innovation Australia is an independent statutory body established in 2007 to administer parts of the Commonwealth’s innovation and venture capital programs including those for pooled development funds (PDFs).

2. The PDFs under these programs were encouraged to raise capital and make equity investments in Australian small and medium-sized enterprises.  Shareholders were to obtain tax benefits on the income derived from their equity investments, PDFs being taxed at 15% on gains derived from equity investments and shareholders exempt from tax on the gains derived from holding and disposing of shares.  Under the relevant legislation—the Pooled Development Funds Act 1992 (“the PDF Act”)—eligible PDF investments were to be made by acquiring only newly-issued shares in small and medium-sized enterprises.

3. The applicant company, Austcorp No 500 Pty Ltd (“Austcorp”), was registered as a PDF in 2005. On 20 August 2009 the respondent revoked Austcorp’s registration as a PDF on grounds of the company’s non-compliance with an issued direction. Austcorp, through its current managing director Barry Dixon, maintains that this was unfair and unjust treatment, given the worthy nature of the enterprises in which the company is now engaged. Mr Dixon urges that the preferable way forward would be to set aside the cancellation of Austcorp’s registration as a PDF, and give the company a “second chance” in order to demonstrate that it would comply with the requirements of the PDF Act now that it is better managed with Mr Dixon at the helm. Mr Dixon requested the granting of a trial period during which Austcorp would be under the careful supervision of Innovation Australia.

1. I have concluded that the decision to cancel Austcorp’s registration as a PDF was the correct or preferable decision, and accordingly affirm it for the reasons I set out below.  But first it is helpful to set out some of the background, as it is from this that the action to cancel registration is to be understood.

BACKGROUND

1. When Austcorp was registered as a pooled development fund in 2005, the then PDF Board which authorised the registration stated its satisfaction that the proposed investment plan was appropriate having regard to the object of the PDF Act and the requirements relating to the making and holding of investments by PDFs.[1]

   [1] T15.

2. At the time of the initial application, Austcorp had four issued ordinary shares. The proposal was that $4 million would be raised within the first two years of registration, and $7 million by the fourth year.  The proposal also suggested that the four shareholders each intended to commit $125,000 in investments.

3. The PDF board noted its satisfaction with the proposal: T13. A letter reminded Austcorp’s then manager, Mr Heath Stewart, that a PDF was required to notify the board each time it made an investment.

4. As events transpired no investments were made at all:

• T16, dated 8 January 2006;

• T20, dated 28 September 2007; and

• T29, dated September 2008.

1. There were some hearty and, as events transpired, overly confident notes sent to the respondent from time to time:

• T17, dated November 2006;

• T18, dated January 2007—when Austcorp was about to make its first investment; and

• T20 (the annual return for 2007) dated 28 September 2007, reported no new investments, indeed no activity at all.  Likewise the annual report for 2008.

1. There were no investments made.  Mr Stewart nevertheless confidently assured Innovation Australia that Austcorp was “on the cusp of pushing forward” but “finding it maddening to get some ideas ironed out”.[2]

   [2] T 21.

2. The chairman of the Venture Capital Registration Board on 26 September 2007 expressed concern that the company had been registered for over two years and not made investments.  Mr Stewart was now given until 31 October 2007 to explain.  Mr Stewart—although past the required deadline—gave confident assurances that the original investors stood by their promised commitments of capital, and stated in addition that there were now another two investors each also proposing to invest $1 million.  Sadly, he reported, two other possible investors had pulled out.

3. Around this time, the papers reveal, the respondent had started to become concerned that a number of PDFs were inactive. The PDF program had been closed to new registrations from the middle of 2007. It was decided that s 33 of the PDF Act would be used to direct that a PDF that wished to remain registered must take action with respect to investments, giving a reasonable time in which to do so. On 13 May 2008[3] the direction was given that Austcorp was to take action to implement its approved investment plan and make at least one eligible investment within 12 months, that is, by 9 May 2009.

   [3] T27.

4. The papers further reveal that that date of 9 May 2009 also passed, and nothing was done. Mr Stewart was reminded when the year was nearly up that Innovation Australia would be considering at its next meeting whether Austcorp had complied with the direction. Mr Stewart's e-mail response was brief: “good news is that we have got funds and investments ready to go (gee whiz it's been a long hard slog but we are ready to go)”.  That confident account also proved not to be true. 

5. I would pause here to observe that Mr Dixon did not contest the accuracy of these facts, as appear from the documents filed with the Tribunal.  He said in oral evidence that Mr Stewart had kept everyone involved with the PDF and potential investments totally in the dark.  He had not told anyone involved that Innovation Australia had effectively given Austcorp an ultimatum in the deadline of 9 May 2009.  Mr Stewart, according to Mr Dixon, had now simply walked away from the problems, providing no assistance or explanation and not responding to telephone calls.  Mr Dixon took over the running of Austcorp in early 2010.

6. To return to the time of the cancellation of Austcorp’s PDF status, the meeting of the committee that convened to consider whether Austcorp's registration should continue took place on 20 August 2009.  Amongst the T-documents for the hearing before this Tribunal, there were investment warrants dated 11 August 2009,[4] certifying:

   §  that the PDF (Austcorp) had shareholders funds of $145,004; and

   §  the PDF had invested $30,000 in each of two companies, Bioessential Extracts Pty Ltd and Biodiesel  Pty Ltd.

In the ordinary course, it would be expected that documents bearing that date would come before the committee.

[4] T35.

1. It became tolerably clear in the course of the hearing that these investment warrants could not have come into existence on the date that they bore.  The arrangement represented in them was not discussed between Mr Stewart and Mr Dixon until 22 August 2009, the day after they were notified of the cancellation decision.  The documents themselves were not filed with the respondent until well after the cancellation decision.  Bioessential and Biodiesel were companies of which Mr Dixon was a director and shareholder.  

2. Mr Dixon openly acknowledged in the hearing that there were no actual investments made, such as were represented in the warrants, and said it was ridiculous to suggest that Austcorp had actually invested $30,000 in either company.  Mr Dixon also agreed that the share valuations of $1000 per share were a nonsense.

SHOULD THE DISCRETION BE EXERCISED TO RE-REGISTER AUSTCORP AS A PDF?

1. I would say at the outset that Mr Dixon's case rests primarily upon the submission that Austcorp is now involved with, and promoting, pursuits that would have such beneficial outcomes for the indigenous communities of Lockhart River that the past defaults should be put behind.  He submitted that there was an “old Austcorp” and a “new Austcorp” and that it was important not to loiter on the past history of non-performance all documented, as he phrased it, over five long boring years.[5]

   [5] Exhibit A1: Applicant’s Statement of Facts and Contentions.

2. As Mr TM Howe QC, counsel for the respondent, submitted, the notion that there are two companies to be considered here, reflected simply by the change in directorship from Mr Stewart to Mr Dixon, finds no support in the law.  As Mr Howe submitted, there is no justification for lifting the corporate veil.  There is only one company here: Austcorp, and it was required to comply with the legislative requirements and is to be charged accordingly. 

3. I would note that the PDF Act provided a regulated environment in which PDFs were to operate. But it was also primarily a self-regulated environment: PDFs were required to self-assess compliance with the legislation.  PDF reporting requirements consist of investment notifications and an annual report to the Board. It was abundantly clear to me that the relevant power—to consider cancellation—was properly activated in the present circumstances, where Austcorp had during five years not entered into a single investment activity. Notice had been properly served on Austcorp in accordance with the requirements of the PDF Act.

4. However, it is important to appreciate that although the discretion to revoke a PDF’s registration is available in order to take into account all relevant considerations, it is a discretion that exists in a particular legislative setting. Section 47 of the PDF Act provides:

   Subject to this section, the Board may revoke a PDF’s registration declaration if:

   (a)the Board is satisfied that a provision of this Act has been contravened by, or in relation to, the PDF; or …

5. It is also true as a general proposition, subject to contrary indications in a particular enactment, that when this Tribunal reviews a decision the review is carried out on the merits, taking into account all the material available to it, not just the material before the original decision-maker.  That is, the review is based on facts as they stand at the time of the Tribunal's decision, not at the time of the original decision. [6] This is because good administrative practice supports using the best and most current information. There is nothing in the PDF Act that limits the available discretion to facts as they stood at the time of the original decision. So in that regard I can take into account what Mr Dixon says about the changes that he has wrought to the company’s operations since taking over the directorship in April 2010.

   [6]  Shi v Migration Agents Registration Authority (2008) 235 CLR 286 per Kirby J at 298-299 [34]-[37]; Hayne and Haydon JJ at 314-316 [96]-[101].

6. Accordingly, I now turn to the matters that must be weighed up when considering whether the PDF registration should be reinstated despite its non-compliance with the issued direction.

7. Mr Dixon pressed his submission that what Austcorp is now involved with at Lockhart River will have positive outcomes for indigenous communities and is consistent with government initiatives promoting the environment. In that regard, I had the advantage of the evidence from many lay witnesses who support what Mr Dixon is doing and who are confident that the proposed developments of Biodiesel and Bioessential will advance indigenous interests. These witnesses clearly hold Mr Dixon in high regard, but their evidence does not persuade me that Mr Dixon could be relied upon to ensure that the regulatory requirements of the PDF Act would be adhered to.

8. I placed most importance upon the events that took place in August 2009.  At that time, the one-year period allowed to Austcorp to progress its investment activity had expired, and the respondent was about to carry out its review in order to consider whether to cancel.   About this time, Mr Stewart forwarded the two investment notifications and compliance warrants, purporting to be dated 11 August 2009.  They stated that Austcorp had on 11 August 2009 invested in :

§Bioessential Extracts Pty Ltd, the type of investment being in 30 new ordinary shares, for the investee company to “Roll out new extraction technology in coal mining and high end pharmaceutical oil extraction”, and warranted that the investee company had $60,000 dollars in assets, and that the PDF shareholder funds were $145,004;[7] and

§Biodiesel Extracts Pty Ltd, essentially repeating the same information as above apart from a different intended use for the capital—namely “Stage III Development of new algal technology for use in conjunction with coal mining sites and technology as sites are wound down, algal growth stores carbon from the mine which is then extracted for fuel”.[8]

[7] T35 at 133-134.

[8] T35 at 135-136.

1. At the hearing, Mr Dixon gave oral evidence insisting that he had no knowledge at that time of (the then director) Heath Stewart’s intentions to carry out a share swap between Austcorp and the two companies Biodiesel and Bioessential.  Mr Dixon was insistent that he had not learned of this until he received the T-documents, that is, documents filed at the Tribunal in February 2010—apart from making some vague reference to having memory problems.  Mr Dixon variously described the content of the T-documents as being “a complete eye-opener” and said that he could not believe Mr Stewart had done this.  He said that he had no idea that Mr Stewart would take such action to (falsely) give the appearance that Austcorp had made an investment when it in fact had not.

2. However when Mr Dixon was taken in cross-examination to exhibit R4, his evidence about lack of knowledge completely changed.  Exhibit R4 was an email dated 23 May 2010, in which Mr Dixon told the Australian Government Solicitors office that:

   I was informed by Heath Stuart on the 21 August that the PDF Licence for Austcorp 500 had been revoked … The share swap was OKd by me in a 10 minute phone conversation with Heath on the Saturday morning.  I was not involved in the valuation of the shares or the number of shares allocated. I just needed Austcorp to survive.

3. Mr Dixon acknowledges now that all key information in the compliance warrants was untrue or misleading.  Mr Dixon agreed that even the date of 11 August 2009 on the documents could not have been right as the plan formulated between Mr Dixon and Mr Stewart was not discussed until 22 August 2009, the day after learning of the revocation of Austcorp’s PDF registration.   From the evidence given at the hearing, Mr Dixon acknowledges that he was involved with the share swap but suggests that it is in some way mitigated by his primary purpose being to keep Austcorp alive, and set it on a better track.

4. It is rarely the case that the end will justify the means, and I am satisfied that the real “end” in view here was to mislead the respondent into believing that investments in accordance with the PDF Act had taken place. I do not accept that Mr Dixon can stand back from his actions with respect to the share swap and simply claim that Mr Stewart was the one who should bear the responsibility as Mr Stewart was a qualified chartered accountant. Both Mr Dixon and Mr Stewart were engaged in a conscious plan to mislead the respondent. It was a requirement of the PDF Act that the PDF must believe, on reasonable grounds, that the investment by shares was for the “sole or principal purpose” of raising money: s 21(1)(aa) of the PDF Act. That clearly was not the case, and Mr Dixon acknowledged this in his evidence. I agree with the respondent’s submission that the whole purpose of the transaction was an attempt to deceive the respondent.

5. Section 19 of the PDF Act provides that a PDF must not make an investment, except in accordance with Division 1 of Part 4. There are only three kinds of allowable investments, one being to acquire shares that must not be pre-owned unless approval is given (s20(2)). So it is unquestionably true that, even if the documents at T35 had not been a complete fabrication, the share swaps could not be investments in accordance with the provisions of the PDF Act.

6. It is also the case that investments are to be made in accordance with a PDF’s approved investment plan, which in this case was to invest in the coal mining and export sector with a specific focus on small/medium mining support companies.  I do not accept that Austcorp’s new directions in “high end margin extractions associated with the perfume, cosmetics, aromatherapy, incense, and traditional medicines segments”[9], and other socially responsible projects such as taking over the tenements of departing mining companies, meaningfully come within Austcorp’s approved investment plan, however worthy the proposals might be in themselves.

   [9]  Exhibit A1.

7. As a general proposition, an exercise of the discretion to revoke a PDF’s registration must be consistent with the objectives referred to in s 3(1) of the PDF Act:

   The object of this Act is to develop, and demonstrate the potential of, the market for providing patient equity capital (including venture capital) to small or medium-sized Australian enterprises that carry on eligible businesses.

8. That objects clause refers to the development of “small or medium-sized” businesses. In accordance with its object, the PDF Act absolutely requires (section 29(1)) that a PDF carry on the business of making and holding PDF investments. We know from its undisputed history that in the five years of registration as a PDF, Austcorp did not carry on the required business at all.

9. When considering whether to grant the benefit of a favourable exercise of the discretion in a manner consistent with the objects of the PDF Act, one needs to consider whether, by exercising the discretion in a particular case, the decision-maker will be achieving or frustrating the objects of the PDF Act. That consideration is in addition to what Mr Dixon relies upon in support of his case which, reduced to its essence, is that refusing to grant re-registration of PDF status would lead to unfairness in this particular case.

10. There are, it will be appreciated, no limiting words to the discretion here under review. The words are only that the decision maker “may” cancel if satisfied of the matters set out in the PDF Act. It is also true that that the Act’s object is expressed in quite wide terms. But, as I have observed, the PDF Act clearly provides for a highly regulated environment within which its objects are to be achieved and, on the part of PDFs, benefits are to be obtained

11. I am satisfied that a favourable exercise of the discretion here is not warranted for the following reasons:

§Austcorp had registration as a PDF for five years and did not carry out its obligation to carry on the business of investing.

§It was clearly the case that Austcorp was afforded every opportunity to comply with the direction to undertake investment activity and was allowed the generous period of a year to do so, and did not comply.

§Since then, having failed to comply with the direction which in my view was a sufficient basis taken on it own upon which to cancel registration, Austcorp has provided in the Compliance Warrants misleading information about investments that amounted to sham transactions, and were in no sense real investments as required under the PDF Act.

1. I am satisfied that exercising a discretion in a way that would allow Austcorp to regain its status as a PDF, even on a trial basis as proposed by Mr Dixon, would be to frustrate the objects of the PDF Act, because Austcorp has not complied with the primary requirement that it undertake the business of investing. What is now evidenced is more than simply a non-compliance with the direction under s 33 of the PDF Act. It is clear that the discretion to cancel under s 47 was enlivened on the grounds of contravention of other provisions in the PDF Act, in addition to the original ground of failure to comply with the direction.

2. I would not be confident that Mr Dixon, as director, would steer the company towards compliance if, as he requests, Austcorp were allowed its PDF status back. His behaviour to date and at the hearing did not give grounds for any such confidence. I note that he continued to refer to Austcorp’s PDF status when encouraging investments well after that status was lost. He claimed no real knowledge of obligations under the PDF Act. He took little interest, so he claimed, in the defaults that had occurred. He attempted to deflect as much attention away from himself as possible until forced to acknowledge his involvement. Once confronted he side-stepped with disingenuous remarks such as “everyone makes mistakes” and “I'm not perfect”. He was unprepared to address the errors of the past, and suggested, at one place in his evidence, that this was nitpicking.

3. In the event, Mr Dixon was quite clearly prepared to engage in whatever behaviour might be useful to “save the day” for Austcorp and secure his own purposes, which, as I have indicated, do not align with the approved investment proposal upon which PDF status was granted.

4. I agree with Mr Howe's submission that unleashing the so-called “new” Austcorp onto the public, when the PDF Act requires a high degree of compliance to protect the interests of investors and investee companies, would run counter to the protective effects of the PDF Act . Accordingly I would affirm the decision under review.

DECISION

1. The Tribunal affirms the decision under review.

I certify that the 41 preceding paragraphs are a true copy of the reasons for the oral decision herein of MJ Carstairs, Senior Member.

Signed:     ......................[Sgd]...............................................
  Mátyás Kochárdy, Associate

Dates of Hearing  21 & 22 September 2010
Date of Oral Decision  23 September 2010
Date of request for Written Reasons   24 September 2010
Advocate for the Applicant                   Mr B Dixon 
Counsel for the Respondent                Mr TM Howe QC
Solicitor for the Respondent                Australian Government Solicitor