Calleia v Commissioner for Fair Trading

[2005] NSWADT 42

CITATION:	Calleia v Commissioner for Fair Trading [2005] NSWADT 42
DIVISION:	General Division
PARTIES:	APPLICANT Warwick Calleia RESPONDENT Commissioner for Fair Trading, Office of Fair Trading
FILE NUMBER:	043324
HEARING DATES:	17/01/2005
SUBMISSIONS CLOSED:	01/17/2005
DATE OF DECISION:	03/02/2005
BEFORE:	Hennessy N - Magistrate (Deputy President)
APPLICATION:	Home Builder - issue of contractor licence - Home Building Act - home builder - issue of contractor licence
MATTER FOR DECISION:	Principal matter
LEGISLATION CITED:	Home Building Act 1989 Home Building Regulation 2004
CASES CITED:	Davidson v Commissioner for Fair Trading [2004] NSWADT 200 McDonald v Commissioner for Fair Trading [2004] NSWADT 124 Smart v Commissioner for Fair Trading [2005] NSWADT 33
REPRESENTATION:	APPLICANT In person RESPONDENT A Grey, solicitor
ORDERS:	The decision of the Commissioner to refuse to Mr Calleia’s application for a contractor’s licence is affirmed

1 Mr Calleia and his wife were the directors of a building renovations company, Additions and Designs R Us Pty Ltd (the company). The company undertook building work until it ceased trading on 30 June 2000. On 13 August 2002 the company was the subject of a winding up order. On 11 March 2004, Mr Calleia applied to the Commissioner for Fair Trading for an individual contractor licence. The Commissioner refused Mr Calleia’s application for two reasons. Firstly he said that Mr Calleia was not a fit and proper person to have a builder’s licence because he did not disclose on the application form that in the last three years he had been a director of a company that was the subject of a winding up order. Secondly, the Commissioner was not satisfied that Mr Calleia took “all reasonable steps” to avoid the company being wound up.

2 The Tribunal must decide whether the Commissioner made the correct and preferable decision in refusing Mr Calleia’s application for a contractor licence. Since the Commissioner made his decision some of the provisions of the HomeBuilding Act 1989 which were relevant to his decision have been repealed. The Tribunal must determine the application on the basis of the current law.

Issues

3 The two issues in this case are:

Whether or not Mr Calleia is a fit and proper person to have a contractor’s licence given the fact that he gave an incorrect answer to a question on the application form?

Whether or not the Commissioner made the correct and preferable decision in refusing Mr Calleia’s application because he was not satisfied that Mr Calleia took all reasonable steps to avoid the winding up of the company?

4 Before issuing a contractor licence the Commissioner must be satisfied that Mr Calleia “is a fit and proper person to hold the authority and is otherwise of good character”: Clause 25(1)(a)(iv) of the Home Building Regulation 2004. The only basis on which the Commissioner alleged that Mr Calleia was not a fit and proper person to hold a builder’s licence was that he gave an untruthful answer to a question on the application form. The question was:

Have you in the last 3 years been bankrupt or assigned your property to pay debts or ever been a director or manager of a company which was subject to a winding up order, placed in receivership or administration, or under official management, had a controller appointed or entered into other arrangements with creditors due to insolvency?

5 Mr Calleia answered “No” to that question. His explanation for this answer was that since it was now more than 3 years since the company had ceased trading he did not think the question related to his situation. He said he answered the question truthfully. Mr Grey, representing the Commissioner, did not cross-examine Mr Calleia in relation to his explanation.

6 The question asks whether, in the last 3 years, the applicant has been bankrupt or assigned his or her property to pay debts. The same question asks whether the applicant has ever been a director or manager of a company which was subject to a winding up order etc. The fact that the question is a combination of two questions relating to different time periods creates the potential for confusion. Mr Calleia is asking the Tribunal to accept that he made two mistakes when interpreting this question. Firstly that it related to the date the company ceased to trade, rather than the date it was wound up, and secondly that the question in relation to the company was restricted to the previous three years. Given that the question is confusing and that Mr Calleia was not cross-examined in relation to his explanation, I am satisfied that he answered the question truthfully. Consequently there is no basis for alleging that he is not a fit and proper to hold the authority.

Taking all reasonable steps to avoid the winding up order

7 The general rule under the current legislation is that before issuing an authority, the Commissioner must be satisfied that the applicant was not, within the period of 3 years before the application, a director or person concerned in the management of a company when the company was the subject of a winding up order: Cl 25(1)(a)(xiii) of the Home Building Regulation 2004. The exception to that general rule is that the Commissioner may issue a contractor licence if he is satisfied that the applicant took all reasonable steps to avoid the liquidation or appointment of a controller or administrator: Cl 26(3) of the Home Building Regulation 2004.

What does “all reasonable steps to avoid the liquidation” mean?

8 The Tribunal has previously considered similar provisions in other cases. The relevant principles can be summarised as follows:

- The relevant time for determining whether an applicant took all reasonable steps to avoid the liquidation is when he or she was ‘faced with the possibility’ of the bankruptcy or insolvency ( Davidson v Commissioner for Fair Trading [2004] NSWADT 200 at [20]) or was ‘aware’ or ‘should have been aware’ ( McDonald v Commissioner for Fair Trading [2004] NSWADT 124 at [21]) of that possibility.

- The focus must be on the steps the person took to avoid the bankruptcy (or liquidation) in question, not bankruptcy (or liquidation) at large: Smart v Commissioner for Fair Trading [2005] NSWADT 33 per Rice JM.

- In assessing the reasonableness of the steps taken to avoid liquidation, the Tribunal must examine all the relevant facts and circumstances. (McDonald at [25].)

- The steps taken by the applicant must be objectively reasonable in the sense that they would be those taken by a ‘ reasonable person endowed with the knowledge and experience of the [applicant]’. (McDonald at [26]-[27].)

- The applicant must satisfy the Commissioner (and ultimately the Tribunal) that he or she took all reasonable steps to avoid the liquidation. (Clarke v Commissioner of Fair Trading, Office of Fair Trading [2004] NSWADT 273 at [11].)

9 Consequently, the questions which the Tribunal must ask itself are:

i) When did Mr Calleia become aware, or when should he have become aware, of the possibility of the liquidation in question?

ii) What steps did Mr Calleia take, or fail to take, after that time?

iii) Has Mr Calleia satisfied the Tribunal that those steps were objectively reasonable in all the circumstances?

10 In order to answer these questions, the circumstances which led to the company being placed in liquidation need to be examined.

Circumstances leading to the liquidation

11 Additions and Designs R Us Pty Ltd ceased trading at the end of June 2000 mainly because it was not profitable. Mr Calleia attributes this lack of profitability partly to inaccurate accounting practices adopted by the company’s accountant, Ms Hill. Ms Hill was engaged in April 1997 and had regular contact with Mr Calleia. She prepared the company’s tax return for the financial year ending June 1998. That tax return reported that the company had made a profit of about $22,000. Essentially Mr Calleia’s objection to her advice appears to be that she reported on”cash” rather than an “accruals” basis and that her reporting gave a misleadingly optimistic impression of the company’s financial position. Mr Calleia refused to pay the fee of approximately $1,790.00, for her professional services and on 7 June 1999 Ms Hill lodged a Statement of Liquidated Claim against the company in the Local Court.

12 A few weeks after the Statement of Liquidated Claim was lodged, Mr Calleia sought advice from his father, who is a chartered accountant. His father’s firm, Calleia Chapman Chartered Accountants, provided him with an unaudited financial statement for the year ended 30th June 1998. Unlike Ms Hill’s statement, which reported that the company had made a profit in that financial year of approximately $22,0000, Calleia Chapman reported that the company had made a loss of some $20,000. Mr Calleia then filed a defence to Ms Hill’s claim saying that Ms Hill failed to exercise reasonable care and competence and cross-claimed for the loss he said Ms Hill caused the company.

13 When Mr Calleia received the advice from his father’s firm, he realised his company was in some financial difficulty. Around that time he re-financed his home by taking out a second mortgage for $40,000 in order to pay bills and improve his cash flow. In February 2000, Mr Calleia obtained a report from Strik and Associates, Chartered Accountants. That report also found that the company was operating at a loss rather than a profit for the financial year ended June 1998. In her conclusion Ms Strik states that “the financial and tax return (for 1998) prepared by Deborah Hill were incorrect and neglected to take into account relevant information and reliable and correct accounts.” Ms Strik stated that “the incorrect matching of revenue and expenses led the directors to believe that the company was making profits when in fact it had made a loss.”

14 From February to June 2000 Mr Calleia continued to trade and satisfactorily completed or terminated his outstanding building contracts. He provided the Tribunal with testimonials from clients and his competence as a builder is not in issue. He stopped trading in June 2000 but did not de-register the company because he was given legal advice that it was necessary for the company to maintain its legal entity in order to bring or defend legal proceedings. In October 2000 Mr Calleia had a conference with a barrister who advised him that the company had “poor prospects” of successfully defending Ms Hill’s claim for her professional fees or succeeding on the cross claim. Despite that advice, which Mr Calleia says was given without sufficient information being provided, he refused an offer of settlement from Ms Hill for $1000 with each party paying their own costs. Mr Calleia concedes that, in hindsight, he should have accepted the offer. In May 2001, Mr Calleia’s solicitors ceased to act for him but Mr Calleia continued to defend the action and prosecute the cross claim in person.

15 On 14 August 2001 Mr Calleia received a letter from the solicitors for Ms Hill asking him to lodge the sum of $16,848.00 at the Local Court for security for the costs of the cross claim. When Mr Calleia failed to do so, Ms Hill’s solicitors filed a Notice of Motion requesting an order that Mr Calleia pay security for costs within 14 days. On 27 September 2001 the Local Court ordered Mr Calleia to pay $16,848.00 for security for costs. It was then that Mr Calleia said he knew that he would not be able to continue with the case and that the company owed money which it would be unable to pay.

16 The Report to Creditors by the Official Liquidator states that the company had a net deficiency of $29,660 as at 30 June 2001; $59,716 as at 30 June 2002 and $70,450 as at the date of liquidation, 13 August 2002. Mr Calleia said he disagreed with these figures but did not elaborate. The liquidator reported that the portion of the deficiency attributable to unsecured creditors related predominantly to the amount of money owed to Ms Hill’s solicitors in relation to the legal proceedings. The amount also included approximately $5,000 owing the Government Insurance Office. Mr Calleia said that he did not know that he owed the GIO money for workers compensation insurance because they did not send the bill to his new address even though he advised them of the change. When Mr Calleia ultimately became aware of the debt, he negotiated with the GIO who agreed to reduce the amount payable from $5,500 to $675. Mr Calleia paid the $675 but did not pay GIO’s costs. Mr Calleia says that he sought leave to pay by instalments but that application was refused.

17 The Australian Taxation Office also claimed the sum of $18,710. The company had not filed a tax return for the 1998/99, 2000/2001 and 2001/2002 financial years. The liquidator was unable to confirm the amount owing to the ATO.

Time of awareness of possibility of the company being the subject of a winding up order

18 Mr Calleia says that at the time of the conference with counsel in October 2000, he had not been able to give the barrister all the relevant information and so was not surprised by his negative advice. Mr Calleia claims that he was always certain that he would win against Ms Hill because the advice given to him in the Strik Report was that she was at fault. Despite Mr Calleia’s confidence, we are satisfied that he was aware of the possibility of the company being the subject of a winding up order following the conference with counsel in October 2000. The company had ceased trading in June of that year and was not generating income. As far as we know, the company had no significant assets. Mr Calleia should have known at least by that stage that there was a very real possibility that he would lose and that if he lost the company would be liable, not only for the debt, but for Ms Hill’s legal costs. That is not a matter which would only become apparent in hindsight. It is a matter which Mr Calleia should have been well aware of at the time.

What steps did Mr Calleia take or fail to take to avoid liquidation?

19 After October 2000, Mr Calleia did not take any steps to avoid the company being the subject of a winding up order. He chose to proceed with his defence and cross claim until the Local Court made an order for him to pay security for costs. It was only when that order was made that Mr Calleia finally withdrew his defence and cross claim. If he had accepted Ms Hill’s offer of settlement, he may have avoided the company being the subject of a winding up order. However, given the fact that the company had other creditors, particularly the Australian Tax Office and the Government Insurance Office, it is by no means certain that acceptance of that offer would have avoided the company going into liquidation. Mr Calleia has not satisfied the Tribunal that he took steps to avoid liquidation that were objectively reasonable in all the circumstances.

Order

20 The decision of the Commissioner to refuse to Mr Calleia’s application for a contractor’s licence is affirmed.