BOORER and AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
[2010] AATA 390
•26 May 2010
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2010] AATA 390
ADMINISTRATIVE APPEALS TRIBUNAL )
) No. 2009/3354
GENERAL ADMINISTRATIVE DIVISION ) Re GRAEME JEFFREY BOORER Applicant
And
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Respondent
DECISION
Tribunal The Hon B Tamberlin QC, Deputy President Date26 May 2010
PlaceSydney
Decision The decision under review is set aside. In its place the correct or preferable decision is that the applicant is disqualified from managing corporations for a period of one (1) year. The disqualification for one year is to operate from 27 June 2008. ..................[SGD]................................
The Hon B Tamberlin QC, Deputy President
CATCHWORDS
Corporations – Disqualification of Director – Power to disqualify - Related Companies – Record Keeping – Insolvent Trading – Misleading and Deceptive Conduct – Public Interest – Decision set aside – Substituted with one (1) year of disqualification.
LEGISLATION
Corporations Act 2001 – ss 50, 206F, 286, 533, 1308
Administrative Appeals Tribunal Act 1975 – ss 25, 43
CASE LAW
Re Feher and Australian Securities Commission (1997) 15 ACLC 1774
Re Guss and Australian Securities and Investments Commission (2006) 90ALD 349
REASONS FOR DECISION
Deputy President Brian Tamberlin, QC 1. Mr Boorer challenges a decision of a delegate of the Australian Securities and Investments Commission (ASIC), on 27 June 2008 that he be disqualified from managing corporations for a period two years. The decision was made under s 206F of the Corporations Act 2001 (the Act).
2. Section 206F(1) of the Act relevantly provides:
Power to disqualify
(1)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) (including that subsection as applied by section 526‑35 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006) 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 the disqualification is justified.
3. Under section 206F(2) ASIC (and this Tribunal) must have regard to whether any of the corporations are “related” to one another, and may have regard to the conduct of the person in question in relation to the management business or property of the corporation, and to whether disqualification would be in the public interest, and to any other matter which it considers appropriate. The matters to take into account are cast in very wide terms.
4. In this case there is no dispute that Mr Boorer has been an officer of two or more corporations; that while he was an officer, or within 12 months after he ceased being an officer, each of the corporations was wound up; and the liquidator lodged a report about each corporation’s inability to pay its debts. It is also common ground that ASIC has given Mr Boorer a notice in the prescribed form requiring him to demonstrate why he should not be disqualified and an opportunity was given to be heard.
5. The question for determination is whether any disqualification is justified and, if so, what should be the term of such disqualification?
6. The Tribunal has power under s 25 of the Administrative Appeals Tribunal Act 1975 (the AAT Act) to review the decision made by the delegate. Section 43 provides that the Tribunal may exercise all of the powers of the delegate and may affirm, vary or set aside the delegate’s decision.
Background
7. In the last seven years Mr Boorer was an officer of three companies that were wound up, and liquidators made reports under s 533 of the Act that each of the companies may be unable to pay unsecured creditors.
8. Mr Boorer was a director of Customer Strategies Pty Limited (Customer Strategies), and was appointed on 17 December 1997 and ceased to be a director on 3 September 2007. The company was wound up on 28 October 2004 and on 16 November 2006 the liquidator lodged with ASIC a report under s 533 of the Act, estimating that the dividend to unsecured creditors would be zero cents in the dollar.
9. Mr Boorer was also a director of Entrepo Pty Limited (Entrepo), having been appointed on 31 March 1999, and he held office up to 1 March 2004. That company was wound up on 23 March 2004 and on 4 October 2006 the liquidator lodged with ASIC a report under s 533 of the Act, estimating that the dividend would be zero.
10. He was also a director of Techontap International Limited (Techontap) and was appointed on 25 November 2003 up to 26 September 2005. The company was wound up on 14 December 2005 and on 28 November 2006 the liquidator lodged with ASIC a report under s 533 of the Act, estimating that the dividend would be zero.
Related Corporations
11. The question whether any two or more of the corporations are “related” is important because this is a factor to which ASIC must have regard in determining whether disqualification is justified. In the case of Feher v ASC (1997) 15 ACLC 1774, the Tribunal observed that where two companies are in substance a related entity ASIC should regard them as a single corporate entity when deciding whether to issue a disqualification notice. In that case the Tribunal took into account the fact that one company was a wholly owned subsidiary of the other and that the companies’ financial affairs were interdependent with common creditors and the evidence indicated that directors treated the failures of the companies as a failure of one overall operation. The facts in Feher are distinguishable from the present case.
12. The question whether the companies are “related” is relevant to the consideration whether the failure of the companies should be regarded as several discrete failures or rather as the failure of one overall operation.
13. Under s 50 of the Act the expression “related” is defined by reference to whether a body corporate is a holding company of another body corporate, or a subsidiary of another body corporate, or a subsidiary of a holding company of another body corporate, then the first mentioned body corporate. In this case the evidence from company records does not establish that the corporations are “related” within the meaning of s 50 of the Act.
14. Mr Boorer refers to the definition of “subsidiary” in s 46 of the Act, to the effect that a body corporate is a subsidiary of another body corporate only if the other body controls the composition of the first body’s board, or can control the casting of more than 50 per cent of the votes at a general meeting, or holds more than half the issued capital.
15. Mr Boorer submits that besides equity ownership, the companies were financially interdependent, were in substance a single entity and that it is necessary to have regard to the totality of the circumstances. Mr Boorer also says that it is appropriate to ask whether the companies should be considered as a “group” by virtue of their connections in shareholding, directors and commercial activities. He says that in the circumstances of this case, Customer Strategies, Entrepo and Techontap ought to be regarded as one entity, because they were each in the same lines of business, namely consulting and technology, shared the same premises, accountants, mobile phones and chief executive, and the cash flow from one entity provided capital and loans to the other in circumstances where the entity known as Corporate Investments Unit Trust (CUIT) was the holding entity. The company records referred to do not establish that at the relevant times there was any holding company or subsidiary relationship between the three companies or any of them. CUIT did not hold shares in Entrepo or Techontap and only held the shares of Customer Strategies prior to 2002.
16. The evidence does not satisfy me that the companies were interdependent financially, nor am I satisfied that, but for the failure of Techontap, the other two companies would not have failed. The business of Customer Strategies was as a specialist in database marketing and in customer relationship management. It engaged in giving seminars on customer relationship management. The business ceased trading as a result of global factors in 2002. The company Entrepo was engaged in the communications and services industry. Techontap was referred to as a new technology services provider, which provided a range of telecommunications software, online websites, data storage, video conferencing, security and other technologies of high speed broadband.
17. I am satisfied that the three companies conducted different businesses. Having regard to the different periods during which the companies carried on and ceased operation, I am not satisfied that the other alleged relationships concerning sharing of premises, mobile phones, and chief executive, or inter-company financing are sufficient to bring the companies within the description of “related” companies. In particular I am not satisfied that CUIT operated as a holding company in respect of the three companies in question at the relevant times. I have also taken into account that the three companies went into liquidation at different points in time.
18. The question whether any of the corporations are “related” is a matter which must be taken into account but is not of itself determinative of the question whether the person should be disqualified. It is one of a wide range of matters to be considered.
19. Having regard to the above considerations, I am satisfied that these corporations are not “related” corporations within the meaning of s 206F(2) of the Act and should not be treated as a single breach of obligations required of a person managing a corporation. In this case there were three corporate failures and not the collapse of a single operation or entity.
20. Even if I am wrong in considering the issue on the basis that the three companies are “related”, for the reasons given below, I consider that Mr Boorer should, nevertheless, be disqualified for a period of one year.
Record Keeping
21. Section 286 of the Act obliges a company to keep written financial records that correctly record and explain the transactions, financial position and performance of a company, so as to enable a fair and true financial statement to be prepared and audited. These records include invoices, receipts, orders, promissory notes, documents of prime entry and working papers and other documents of an explanatory nature.
22. Mr Boorer says that he took reasonable steps in respect of each of the three companies to ensure proper books and records were maintained. He used the latest computerised accounting and bookkeeping software and contracted experienced bookkeepers to enter transactions and perform accounting tasks. He appointed and liaised with chartered accountants. He reviewed the bookkeeper’s work and he lodged returns. He says that he kept original documents of Entrepo and Customer Strategies at his family home and in self-storage facilities. These were damaged by damp and water seepage.
23. What few records of the companies he saved he says he retained and filed. He says that ASIC was unreasonable in requiring that he replace the source records that were damaged or lost, having regard to the prohibitive cost. He says that he kept good records while the companies traded, and that detailed accurate and professionally stored electronic records were at all times maintained.
24. It is common ground that Mr Boorer replied to a questionnaire from the liquidators of Customer Strategies and Entrepo indicating that records were lost or missing. He also said that “filing is not [his] forte”.
25. The important consideration is that in fact Mr Boorer did not maintain the necessary financial records, and did not take any steps to replace those which were lost or damaged as a result of water in the foundations of his home.
26. In Re Guss and Australian Securities and Investments Commission (2006) 90 ALD 349 at [46] Deputy President Olney emphasised the importance of keeping books of account in accordance with the legislation for the following reasons:
The keeping of complete and accurate records of a company’s affairs is a fundamental requirement to underpin sound management and in this regard the applicant’s conduct in relation to multiple corporations over an extended period of time demonstrates either an inability, or an unwillingness to comply with his obligations. It is all very well to claim, as the Applicant did at the hearing before the ASIC delegate, that he had computer software problems, but if this is so, it does not explain why proper records in some other form were not kept. The Applicant’s persistent failure to comply with the statutory requirements in relation to maintaining books of account justifies the imposition of a period of disqualification from managing corporations.
27. Those remarks are relevant to the present case.
28. In this case, notwithstanding the explanations advanced by Mr Boorer, the fact is that source records were not available or maintained. I find that this ground has been made out.
29. In considering the weight to be given to this ground, I have taken into account the submissions of Mr Boorer as to the circumstances in which the records were lost as a consequence of water damage and the asserted cost of reconstructing those records.
Insolvent Trading - Techontap
30. In the period from late 2004, when Mr Boorer realised there was an urgent need for working capital, to September 2005, when he clearly formed the view that Techontap was insolvent, a number of funding, joint-venture and finance proposals had failed to come to fruition. These proposed ventures were intended to provide necessary working capital. He appreciated the lack of funds and understood that there was an urgent need to generate funds to finance the expansion of the Techontap enterprise. He was seeking short term funding and strategic sales or mergers. To achieve this result he submits that he had reasonable grounds to believe Techontap was solvent when it incurred debts and that it would be able to repay all debts from monies from these proposals. He says that about 97 percent of the company’s debts were shareholder loans or contracted recurring liabilities that could not be prevented. He also says that during the time Techontap traded he was not warned by any finance, accounting, or company expert that the business was trading whilst insolvent.
31. It is apparent that Mr Boorer well understood the urgent need for capital yet he allowed Techontap to continue o incur ongoing debts whilst the proposals for finance canvassed in this period turned out to be fruitless.
32. He injected personal funds but these were grossly insufficient. The attempts he made included seeking loans; the injection of personal funds; the leaseback of equipment; proposed sales and the use of a research and development grant originally said to be worth $500,000. The proceeds of this grant which were in the order of $385,000, out of an anticipated sum of $500,000 were never paid to Techontap. He relied on the assets of the company being worth more than they realised on sale, which was less than $10,000. He asserts that he could not have acted to avoid incurring recurring liabilities because he was already contracted to meet these and that there would have been penalties to pay. Instead, he allowed these debts to continue to accumulate pending his unsuccessful attempts to obtain working capital in order to meet commitments and to finance the implementation of the business of Techontap. He refers to a proposal to refinance loans proposed, leasebacks approved in principle, the research and development grants and the imminent sales; none of which produced funds for Techontap in any significant amount. In the period up to September 2005 he prepared the business for trade, sale, or joint-venture and made approaches to a number of prospective purchasers and investors some of whom expressed interest but none of these efforts resulted in the injection of finance after they had been further investigated by the parties he approached.
33. The evidence satisfies me that although subjectively Mr Boorer believed that there would be sufficient working capital from the proposed ventures, he did not act reasonably in relation to the incurring of debts at a time when there were reasonable grounds to suspect that Techontap was insolvent; and that such debts may not be paid; and at a time when he was aware of the need to an urgent injection of funds.
34. It is not necessary to establish that Mr Boorer acted intentionally to incur debts which would not be paid; however, I find that he did not act as a reasonable manager in his position should have acted in relation to the incurring of debts in the six month period up to September 2005; furthermore, that he failed to take proper steps to curtail the incurring of those debts as a result of his unreasonable and misplaced enthusiasm and optimism as to the possibilities of obtaining finance. Accordingly, I consider that this ground has been made out.
Misleading and Deceptive Conduct – false and misleading statement
35. It is an offence under s 1308(2) of the Act to make a statement in a document which to the person’s knowledge is false and misleading in a material particular or which omits a matter without which the document is to the person’s knowledge misleading. ASIC contends that Mr Boorer signed documents without the consent of Mr Leonard King and Mr Brett King, and informed advisors HLB Mann Judd (Accountants) that they had consented to become directors when in fact no unconditional consent had been given and they had not signed consent forms as required. The documents were signed on 26 July 2004.
36. Mr Boorer contends that the making of the statement was an honest and reasonable mistake; that he did not intend to mislead or deceive anyone or gain any benefit from it. He says that he signed documents by reference to stickers on the documents placed there by HLB Mann Judd in reliance on the information having been checked by that firm. He admits that he signed an incorrect statement because he failed to read each part individually and that he had assumed his instructions had been followed to get such consent. He concedes that he failed to interrogate his advisors on the documents and demand written proof of consent. However, he contends that the mistake was made by his accountants, and that he did not appreciate that the papers presented were inaccurate or not fully compliant. He says he made an honest mistake of fact.
37. Mr Leonard King has sworn an affidavit in which he states that in July 2004 he had discussions with Mr Boorer, at which his son Brett King was present, whereby Mr Leonard King and his son agreed to provide management consulting services to Techontap in return for founder shares. There was an agreement that in the event that Techontap raised adequate capital, Mr Brett King and Mr Leonard King would accept an invitation to become directors of the company when formally invited. On 23 July Mr Leonard King gave information to Mr Boorer to enable preparation of consent forms to act as director. In late July he received a letter from HLB Mann Judd requesting him to send an enclosed pre-completed consent to act form but did not sign or return that form. It was not until 5 September 2005 that Mr King became aware that Brett and he had been listed as directors in ASIC records after which he contacted Mr Boorer regarding the mistake.
38. Mr King states that an employee of HLB Mann Judd admitted that she had not received consent forms signed by Brett or Leonard King and that lodgement with ASIC showing them as directors was an error on their part. Having regard to the evidence of Mr King, I am satisfied that the misleading statement was made, but that it was explicable by a fact that arose from an error on the part of the accountants and miscommunications which were not intentional. I find that no adverse conclusion can be drawn as to the conduct of Mr Boorer in relation to this matter. I accept that it was an honest mistake.
Fault of the Liquidator
39. Mr Boorer has made an allegation that the liquidator failed to adequately and properly perform his duties and acted in bad faith, with negligence, and without due care. He has also made allegations that one of the liquidator’s associates was alleged to not have complied with his duties as a liquidator and that this should be taken into account by the Tribunal.
40. On the evidence before me, there is no material that would justify, even remotely, such an allegation. I therefore do not give it any weight.
41. More specifically, I do not find that there is any evidence which could justify an allegation that there had been a sale of technology equipment and software at a gross undervalue by disposing of it for a figure in the order of $10,000.00, when it was alleged to have a value of millions of dollars.
Conclusions on Disqualification
42. I am satisfied that it is not appropriate in this case to treat the three companies as related companies or their activities in fact as constituting a single enterprise or operation in relation to the alleged breaches.
43. I conclude that some period of disqualification is justified in the present case, having regard to the need to protect the public and to safeguard the public interest in the transparency and accountability of companies, and the suitability of directors including individuals, dealing with other companies, consumers, creditors, shareholders and investors. In this case I am satisfied that a one (1) year disqualification is a proper period to protect those interests and I have taken into account that he has not acted as manager of any corporation for a period in excess of that.
44. I am satisfied that there have been significant breaches by Mr Boorer in failing to keep and conserve adequate financial records under s 286 of the Act.
45. I accept that he has given explanations which to some extent explain how these failures came about, but I am nevertheless satisfied that he did not make sufficient efforts and exercise proper diligence in relation to the keeping, conserving and ensuring availability of the company accounts.
46. I do not accept that he has engaged in blameworthy, false or misleading conducting in relation to the lodgement of documents nominating Mr Leonard King and Mr Brett King as directors. Incorrect statements were made but they were consequence of an honest mistake.
47. I am satisfied that Mr Boorer allowed Techontap to trade while it was insolvent to the detriment of creditors of Techontap, but I accept his explanation that he had a subjective conviction; however he was unreasonably optimistic that the company ventures would be a success and that there would be adequate funds. Nevertheless, Mr Boorer as director of Techontap allowed the company to incur debts at a time when there were reasonable grounds to suspect the company was insolvent, and when there were reasonable grounds in the six month period before September 2005 for suspecting that the company was insolvent or would become insolvent and that such debts would not be paid. The subjective beliefs of Mr Boorer were grossly exaggerated as to the ability of the company to pay its debts and were not based on reasonable grounds.
48. In particular Mr Boorer took no steps to prevent the increase of debts which were the subject of ongoing contractual commitments.
49. In all the circumstances I am satisfied that the decision under review should be set aside and the correct or preferable decision in this case is that Mr Boorer should be disqualified from managing corporations for a period of one (1) year and I so decide. The disqualification for one year is to operate from 27 June 2008.
I certify that the 49 preceding paragraphs are a true copy of the reasons for the decision herein of Deputy President Brian Tamberlin, QC.
Signed: .......................[SGD]..............................................................
AssociateDate/s of Hearing 14 December 2009; 15 December 2009; 24 December 2009; and 28 January 2010.
Date of Decision 26 May 2010
Applicant Appeared in Person.
Solicitor for the Respondent Ms Emman Faroukh
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