Fairlight.AU Pty Ltd and Australian Trade Commission
[2007] AATA 1262
•27 April 2007
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2007] AATA 1262
ADMINISTRATIVE APPEALS TRIBUNAL )
) No N2006/94
GENERAL ADMINISTRATIVE DIVISION ) Re FAIRLIGHT.AU PTY LTD Applicant
And
AUSTRALIAN TRADE COMMISSION
Respondent
DECISION
Tribunal The Hon RNJ Purvis AM QC, Deputy President Date27 April 2007
PlaceSydney
Decision The decision under review is affirmed.
.................[sgd].......................
The Hon RNJ Purvis AM QC
Deputy President
INDEX TO DECISION
The Application 3
The Hearing 3
Issues for Determination 5
Relevant Legislation and Guidelines 6
Historical Perspective 9
Agreement of 11 April 2003 14
Whether the Applicant is a person within the meaning of section 94
of the Act 15
Relevant time at which Fairlight ESP Pty Ltd carried on Business Activity 16
Relevance of Business Activity Index 19
Evolution 20
The Guidelines and their Applicability 21
Applying the Guidelines 22
Beneficial Construction 26
Decision 27
CATCHWORDS
FOREIGN AFFAIRS AND TRADE – Austrade – export market development grant – Export Market Development Grants Act 1997 – eligibility for grant – nature of business activity – relevant time at which business activity carried on – “Business Activity Indexes” – characteristics of business activity – beneficial construction of section 94 of the Export Market Development Grants Act 1997 – decision to disallow Applicants’ application for an export development grant affirmed
LEGISLATION
Administrative Appeals Tribunal Act 1975 – section 37
Export Market Development Grants Act 1997 – sections 3, 5(1)(b), 6(1)(b), 94, 101(1)(b)
Export Market Development Grants Act 1947 – sections 19A, 19(1)
Acts Interpretation Act 1901 – section 22
Corporations Act 2001 – section 437BCASE LAW
Re Muirfield International Group Pty Ltd and Australian Trade Commission (2002) 70 ALD 373
R v Toohey; Ex parte Meneling Station Pty Ltd (1982) 158 CLR 327
Bull v Attorney-General (NSW) (1913) 17 CLR 370REASONS FOR DECISION
27 April 2007 The Hon RNJ Purvis AM QC, Deputy President the application
1. Fairlight.AU Pty Ltd (“the Applicant”) has applied to the Tribunal for review of a decision of an authorised officer of the Australian Trade Commission (“Austrade”) dated 10 June 2005 reconsidered on or about 16 December 2005. The decision under review was to disallow the Applicant’s application made on 30 November 2004 for an export market development grant in respect of the 2003/2004 grant year.
the hearing
2. At the hearing of the application the Applicant was represented by Mr Andrew Hourigan and Austrade by Ms Rhonda Henderson, both of counsel.
3. The documents lodged by Austrade with the Tribunal and served on the Respondent pursuant to section 37 of the Administrative Appeals Tribunal Act 1975 were admitted into evidence and marked T1 to T27 (pp 1-196). Further documentary material was tendered by the parties and admitted into evidence and marked accordingly:
Exhibit No
Description
Date
A
Statement of John Lancken
January 2007
B
Statement of Stuart Mitchell
13 October 2006
C
Affidavit of Richard Yabsley
21 July 2006
D
Affidavit of Tino Fibaek
20 July 2006
E
Profit and Loss Statement July 2003-June 2004
F
Bundle of listing of Sales Details
G
Affidavit of Stuart De Marais
20 July 2006
1
Statement of Owen Felsman
30 June 2006
2
Fairlight News - document
April 2002
3
Fairlight News - document
October 2002
4
Fairlight News - document
Archived
5
Fairlight News - document
10 June 2003
6
Decision-making Principles under s 19A – the 1974 Act
7
Witness Statement of Frank Ledwidge
12 July 2006
8
Agreement for Sale of Assets & Attachment
9
Witness Statement of David Cockerel
12 July 2006
MFI 1
Product Family Overview
MFI 2
Copy of 1 page XL 9000 K Series – Solid State Logic
4. Each of Messrs John Lancken, Stuart Mitchell, Richard Yabsley, and Stuart DeMarais on behalf of the Applicant were cross-examined on their written statements. Mr Tino Fibaek gave additional oral evidence. Messrs Owen Felsman, Frank Ledwidge and David Cockerel on behalf of Austrade were also cross-examined.
5. It should not be necessary for me to note, but I do so at an early stage of these reasons, that the conduct or attitude of any employee of or consultant to the Applicant in relation to the preparation of any documentation that might have come to the notice of Austrade and played a part in the then decision making process is not relevant to this decision. It was alleged that answers to questions may have been incomplete or misleading and that there might have been less than full disclosure or even misrepresentation in respect of the application. These matters are not of concern to the Tribunal in the context of this decision. The Tribunal will decide the application on the basis of relevant material that is placed before it. Any concern of officers of Austrade is no more than that. The matters are here mentioned only on account of the Applicant’s counsel raising them in the course of his final submissions. He quite rightly submitted that they are not relevant for the purposes of the Tribunal’s determination and no findings are accordingly made in respect of them.
issues for determination
6. The primary issues for determination in this application are whether:
· Section 94(1) of the Export Market Development Grants Act 1997 (“the Act”) applies to the Applicant; and
· An exemption should be granted to the Applicant under section 94(2) of the Act.
7. In the course of considering the factors relevant to a decision being made as to the primary issues, a number of incidental but relevant considerations arose. They are:
· Whether the Applicant is a person within the meaning of section 94(1) of the Act;
· Whether the phrase “at any time” referred to in section 94(1)(a) of the Act as being when Fairlight ESP Pty Ltd (“ESP”) carried on business is to relate to the business carried on at the time of the 1998/1999 grant year or 11 April 2003, the date of the agreement for sale, or any other time;
· Whether business activity indexes are of assistance; and
· Whether the factual situation warrants a beneficial construction being applied.
relevant legislative provisions and guidelines
8. The Export Market Development Grants Act 1997 (“the Act”) as here relevant provides:
Section 3
Object of Act
The object of this Act is to bring benefits to Australia by encouraging the creation, development and expansion of foreign markets for Australian goods, services, intellectual property and know-how. It does so by providing for an assistance scheme under which small and medium Australian exporters committed to and capable of seeking out and developing export businesses are repaid part of their expenses
incurred in promoting those products.
Section 6(1)(b)
Who is eligible for a grant?
(1) Each of the following:
…
(b) a body incorporated under the Corporations Act 2001;
…
Prior to 1 July 2006 section 94 of the Act provided:
(1) This section applies if:
(a) at any time a person (previous owner) carried on a particular business in Australia; and
(b) at a later time:
(i) the previous owner sold or transferred the business or any part (relevant part) of the business; or
(ii) in the case of a business carried on by a partnership-there was a change in the membership of the partnership that carried on the business; or
(iii) the previous owner entered into any other arrangement relating to that business; and
(c) as a result of the sale, transfer, change in membership or other arrangement, another person (new owner) carries on:
(i) the business or the relevant part of the business; or
(ii) a business that is, to any extent, similar to the business, or any part of the business, carried on by the previous owner.
(2) If:
(a) the new owner applies for a grant in respect of a grant year; and
(b) Austrade does not exempt the new owner from the operation of this section;
Subsection (3) has effect.
(3) Austrade must:
(a) treat any eligible expenses incurred by the previous owner in the capacity of owner of the business, or of the relevant part of the business, as having been incurred by the new owner; and
(b) treat any export earnings derived by the previous owner from the business, or the relevant part of the business, as export earnings of the new owner; and
(c) treat the new owner as if Austrade has decided that it had met the grants entry requirements of Austrade, had decided that the previous owner met the grants entry requirements; and
(d) treat the new owner as having passed the grants entry test if the previous owner has passed that test or the grants entry test (within the meaning of the repealed Act); and
(e) treat any grant, or advance on account of grant, paid or payable (whether under this Act or under the repealed Act) to the previous owner in the capacity of owner of the business, or of the relevant part of the business, as having been paid, or as being payable, to the new owner; and
(f) treat any other aspect of the business, or of the relevant part of the business, as if it had been carried on by the new owner.
Section 101
(1) The Minister must determine, by legislative instrument:
…
(d) guidelines to be complied with by the CEO in determining, for the purposes of subparagraph 94(1)(b)(ii), whether a business or a part of a business (the old business) that was carried on by a person is similar to a business (the new business) being carried on by another person to such an extent that the new business should be treated as a continuation of the old business.
Export Market Development Grants Act 1974
Section 19(1)
Where:
(a) at any time a particular business activity (in this section called the relevant activity) was carried on by a person (in this section called the original owner); and
(b) at a later time, (whether or not in the same grant year) because of the sale or other transfer of a business or part of a business a change in the membership of the partnership that carried on the relevant activity or any other business arrangement, the relevant activity or a business activity that is to any extend to similar to the relevant activity was carried on by a different person (in the section called the new owner).
guidelines
9. The decision making principles under section 19A of the 1974 Act which remain applicable to matters considered under section 94 of the 1997 Act are as follows:
Schedule
The Commission must grant a special exemption in relation to a business activity referred to in paragraph 19(1)(b) (“the current business activity”) where it is of the opinion that that business activity is substantially different from the business activity referred to in paragraph 19(1)(a) (“the previous business activity”), having regard to any differences between:
(a) the product of the current business activity and that of the previous activity;
(b) what is done in the course of the business of the current business activity and that of the previous business activity;
(c) the customers, including the export market customers, of the current business activity and those of the previous business activity;
(d) the directors, shareholders, and management personnel of the current business activity and those of the previous business activity;
(e) the suppliers of the current business activity and those of the previous business activity;
(f) the overseas representatives of the current business activity and those of the previous business activity;
(g) the employees of the current business activity and those of the previous business activity;
(h) the markets, including the export markets, of the current business activity and those of the previous business activity;
(i) the premises from which the current business activity is conducted and the premises from which the previous business activity was conducted;
(j) the logo of the current business activity and that of the previous business activity; and
(k) the property or assets including the intellectual property of the current business activity and those of the previous business activity.
historical perspective
10. This application is inter alia concerned with the similarity or otherwise of the business at one time carried on by ESP and the business carried on by the Applicant in the grant year. There is an issue as to whether the former time is to be that when ESP made a successful grant application in 1998/1999 or at the time when an agreement was entered into between the administrator of ESP and the Applicant viz 11 April 2003. There then follows a consideration as to the nature of the business carried on by the Applicant in the grant year and the extent to which such business “is to any extent similar to the business or any part of the business” carried on by ESP at the relevant time.
11. It is necessary in order for the business activity at the various times to be appreciated to have in mind the growth and development of ESP, so that the business activity carried on by it at the relevant time can be determined. Once this is done, a comparison can be made with the business activity carried on by the Applicant in the grant year.
12. The Tribunal is assisted in this regard by the recitation of facts not in dispute detailed in a chronology of events prepared by Austrade and undisputed facts set forth in the Applicant’s written submissions. Subject to minor alterations and additions made by the Tribunal to the chronology and submissions the events relevant to the above considerations are as follows.
13. It was in about 1979 that a predecessor to ESP, Fairlight Investments Pty Ltd developed digital synthesisers in the form of musical keyboards. It was known as the Fairlight CMI, that is, a computer musical instrument. From that time until 1989 a number of applications were made and granted for export grants. In October 1988 ESP was registered, this company thereafter applying for a grant in respect of the 1989/1990 year. In 1990 ESP assumed the branding that had been used by its predecessor and developed and created what became known as a Digital Audio Workstation (“DAW”).
14. An application made by ESP in 1991/1992 in respect of DAWs was disallowed, but subsequent applications in respect of DAWs over the period 1992 to 1999 were allowed. The last of such applications was made in respect of the 1998/1999 grant year.
15. ESP operated internationally with offices inter alia in USA, UK, France, Germany and Japan.
16. ESP developed its products consistent with demand. By April 2002 it had sold its first DREAM (Digital Recording Editing and Mixing) Console and indeed in that month the DREAM Satellite, DREAM Station and DREAM Console received an award from the Standards Australia International “for Excellence in Software and Electronic Design”. The above sale was followed in August 2002 by that of a DREAM Satellite in Japan and in October 2002 DREAM Consoles and a DREAM Station were installed in the USA.
17. On 13 March 2003 ESP was placed under administration. On 3 April 2003 the Applicant was registered and on 6 April 2003 Mr John Lancken, a one time international sales manager and USA representative of ESP, was quoted as saying:
“John Lancken has emailed this to two fellow customers-but not press.
Just a quick note to let you know that after an uncertain month for all Fairlight owners I am pleased to announce that Fairlight is back… We have retained the experience of KRND personnel to ensure there is continuity in product development, support and manufacturing. We have also purchased all the essential assets… we will contact you shortly to announce the availability of an entire suite of software upgrades for the “DREAM” family as well as for products such as FAME/Prodigy and MF MFX3.8.”
18. On 11 April 2003 an agreement was entered into between ESP and the Applicant for the sale of all of the assets and property of ESP to the Applicant. It was submitted on behalf of the Applicant that the acquisition from ESP by Mr Lancken and others on behalf of the Applicant was “with a view to moving away from the previous business producing DAWs and developing the intellectual property to commercialise or export large format consoles mixers”. However the business activity of ESP prior to 11 April 2003, and of the Applicant after 11 April 2003, and in the grant year, can be gleaned from media articles and advertisements that are in evidence.
19. Following the sale and transfer and on or about 1 May 2003 it was reported:
“Just weeks after the mid-March announcement that Fairlight ESP in Australia had gone into administration following the withdrawal of the company’s underlying venture capital and its consequent inability to meet ongoing financial obligations, news has emerged that the company is back in business.
…
News has now emerged that Lancken and his new business partner, an Australian studio owner, have purchased the essential assets of the company and acquired the intellectual property rights—the brand, trademarks, patents and software—in an agreement signed April 11.
The new company plans to hit the ground running, according to Lancken, who left Fairlight in December 2001. In Australia, business premises have been secured in Sydney and key R&D, manufacturing, administration, and sales and marketing staff retained from the old company… (T5/73)”
Again in May 2003 it is reported that Mr Lancken said: “I’ve also spoken to many of Fairlight’s customers who are very happy with the new arrangement. In the meantime the industry waits to see how Mr Lancken will fare in his attempts to reorganise manufacturing of the Fairlight product which includes the highly popular DREAM series of Digital Audio Editing and Recording Technologies which was launched at the AES in New York in 2001 and has proven to be one of Fairlight’s most affordable and popular production environments with high profile sales world wide.” In an interview Mr Lancken is reported as saying: “Our subcontractors have a considerable amount of work in progress, so we can buy parts that are fully assembled and make new machines.” Mr Lancken was also reported as saying that: “there is already a backlog of 20 orders for Fairlight’s DREAM Console… The DREAM series will be the new venture’s core product.” And on 10 June 2003 in a press release by the Applicant it was stated:
“According to Fairlight CEO John Lancken, the company has been producing product since the middle of May and has already shipped its first orders of DREAM Satellite and Station systems…
In addition to the above the company today announced it has received an order for two DREAM consoles, from…and the backlog of orders received to date is over 20 systems at an estimated value of over $1 million.” (Ex 5)
20. In a press release on 12 June 2003 it was stated:
“Fairlight.AU announced that it has officially reopened for business at the company’s former Sydney, Australia manufacturing and operations centre.
In addition to the above the company today announced it has received an order for two DREAM Consoles…
‘This is a really great start for the new Fairlight’, Lancken said today. ‘We have received a tremendous amount of support and encouragement from Fairlight customers around the world, and we are grateful for both. A lot of people worked very hard to keep the Fairlight DREAM alive...
Toward this end, Lancken announced that Fairlight has formed a worldwide network of independently owned and operated distributorships. In every instance these distributorships have been formed with the support of Fairlight’s previous staff, meaning that there will be a continuity of Fairlight experience in each of the regional markets.” (T5/76-77)
21. The Applicant, in October 2003, advertised the DREAM Constellation, DREAM Satellite and DREAM Station in a brochure which inter alia stated:
“For 30 years Fairlight has helped the customers build sound businesses by providing digital audio solutions that make sound business sense. That’s why we continue to enjoy the support of more than 3500 customer partners.”
22. On 6 October 2003 Mr Lancken and Mr Fibaek travelled to the USA to “solicit business”. The event was noted in the media as follows:
“Fairlight returned to AES this year, marking six months since the company was rescued from its financial struggles. John Lancken, Fairlight CEO, says the company has sold 45 systems since its revival and has generated nearly a million dollars in profits.
At AES, the company was showing off six new products, including the entirely new DREAM Constellation System, a large-format Digital Audio Mixer that is now shipping and is based around the company’s QDC engine. The 7.1 capable Constellation replaces Fairlight’s DREAM console and features the company’s Binnacle intuitive, ergonomic work surface…
The tool provides disk-based, random access picture to DREAM DAWs and mixers.” (T2/72)
23. Even be it outside of the grant year, it is noted that in August 2004 it was reported:
“Working on a typical PC - or Mac-based DAW isn’t very intuitive or often even comfortable for long sessions requiring lots of mousing around. Fairlight says it has solved this problem with its Dream Satellite. This DAW employs a new editing model the company calls Binnacle Editing…
The jog wheel-based Binnacle controller and multifunction LCD screen reduce keystrokes by 30 to 50 percent over previous Fairlight DAWs, the company says”. (T5/71)
24. The Applicant lodged its application for a grant in respect of the 2003/2004 grant year on 30 November 2004. The application was in respect of expenditure of $143,999. It was said on behalf of the Applicant that exports in the year were predominantly “large format console mixers” in a cost range of $100,000 to $300,000. The items are customised and produced on a “made to order” basis. The application was also said to be solely in respect of “export promotion expenses related to mixers which were custom made and transported to trade shows generally in the USA or Europe”.
25. The Tribunal agrees with the submission made on behalf of Austrade as to the nature of the expenses detailed, namely that the Act refers to the business of the Applicant and a previous owner such as ESP, and not to the nature of the products in respect of which a claim is made. That is, the decision-maker is required to look to the business overall in making a “similar” or “substantially different” assessment.
agreement of 11 april 2003
26. The agreement executed on behalf of ESP and the Applicant on 11 April 2003 (Exhibit 8) was described as an “Agreement for the Sale of Assets”, the latter being defined as referring to intellectual property (designs, software, hardware, containers of intellectual property, the Trade Marks), all sales and marketing material, plant equipment and stock as detailed in annexures to the agreement.
27. The effect of the agreement was to transfer to the Applicant the intellectual property, plant, furniture and equipment and stock of ESP. The details of the assets so sold or transferred were contained in the Annexures to the agreement. Of significance in the context of the transfer of business was the covenants given by the Applicant to provide warranty software and service support to persons who had been customers of ESP and who had purchased ESP’s products in the preceding 12 months.
28. From the point of view of the Applicant and according to Mr Lancken, its CEO, the agreements ensured that the Applicant purchased all of the intellectual property of ESP because “that was how it was put up for sale, everything or nothing” (T65).
29. It is noted that a list of the persons who had purchased Fairlight systems were part of the intellectual property that the Applicant acquired on 11 April 2003 as a consequence of the purchase agreement.
30. Mr Lancken, further in his evidence before the Tribunal, said that the Applicant had “selected what [it] felt was required to start up… a 12 to 15 man company in terms of the computer equipment and the manufacturing tools.” (T66) and that the Applicant retained eleven key personnel, who had previously worked for or with ESP (T105). The Applicant used ESP’s metal work supplier and ESP’s surface manufacturer but used a different supplier of printed circuit boards (T105).
31. On behalf of the Applicant, Mr Lancken sent an email to the customers appearing on the above mentioned list announcing that:
“The Fairlight is back” and that he would “apply my experience to a company that not only do I love but also has been a huge part of my life”.
On 10 June 2003, two months after the acquisition, a press release was issued, stating as already noted that support and encouragement from Fairlight customers around the world had been received. The support of Fairlight’s previous staff was assured, meaning “that there will be a continuity of Fairlight experience in each of the regional markets”. The Applicant shortly after 11 April 2003 established overseas distributorships within some territories with persons who had been the staff of ESP’s overseas branches (T71).
32. The Applicant, as already noted in the above historical perspective, sold the DREAM Satellite (a “stand alone DAW” (T81)), the DREAM Station (an “integrated mixer with a disc recorder” (T81)) and the DREAM Console (a “mixer” (T78)), all of which were products that ESP had produced prior to the sale. So far as the Consoles were concerned the sale was to fulfil an order taken by ESP. As already noted in October 2003 the “new” DREAM Constellation (described as a “large format mixing console”) replaced the DREAM Console, the DREAM Satellite and the DREAM Station still being marketed.
33. On the basis of the evidence tendered before the Tribunal and discussed above, I am satisfied that the transaction that took place on 11 April 2003 between ESP and the Applicant constituted a sale and entailed a transfer, let alone an arrangement, as a result of which the business carried on by ESP was then carried on by the Applicant. As alluded to in Re Muirfield International Group Pty Ltd and Australian Trade Commission (2002) 70 ALD 373 at paragraphs 33-37, the terms “transfer” and “arrangement” are broad. They are apposite to the ESP/Applicant transaction.
whether the applicant is a person within the meaning of section 94 of the act
34. It was submitted on behalf of the Applicant that section 94 of the Act did not apply to the claim made by it “as ESP, i.e. the company, did not sell or transfer the business” or “enter into any other arrangement relating to the business”. This submission, as I understand it, was made on the premise that ESP was under administration at the time of the sale and transfer, and not under the control of its director or directors. It was also said that a corporation, ESP, was not a person.
35. The latter submission is clearly not sustainable. Section 22 of the Acts Interpretation Act 1901, as well as section 6(1)(b) of the Act, clearly enable a corporation to be equated with a person for the purposes of the Act.
36. There is nothing in the Act qualifying the nature of the “sale, transfer, change in membership or other arrangement”, the precursor to the issue of similarity raised in section 94(1)(c) of the Act. The sale/transfer agreement was between ESP and the Applicant. The corporation clearly had the necessary power to enter into the agreement. The appointment of the administrator does not preclude ESP from entering into the agreement or disposing of its business and property. (See section 437B of the Corporations Act 2001). There is, as appears from the analysis of the agreement, a “movement of the business” (and its property) from ESP to the Applicant (Re Muirfield International Group Pty Ltd v ATC supra). There was a transfer from ESP to the Applicant.
37. The fact of ESP being under the control of an Administrator did not deprive ESP of the power, be it in the hands of the Administrator, to direct such power to dispose of its business. A business arrangement was entered into between the parties.
the relevant time at which esp carried on business activity
38. The Tribunal was invited by the Applicant to consider in detail the business carried on by ESP in the 1998/1999 grant year in order to make a comparison of that business and the business carried on four or five years later by the Applicant.
39. The purpose of the grants scheme, the object of the Act, is to encourage “the creation, development and expansion of foreign markets” and the “seeking out and developing” of export business. The subsidising of “expenses incurred in promoting” a company’s products is in aid of enabling the company to expand its business beyond being a “small and medium Australian” exporter. Implicit in this intent is the growth of a business and the likelihood that in doing so the nature of the products being exported may change by reason of market demand and/or technological research and product development. It is expected that the assistance afforded under the Act will assist exporters in meeting the needs of foreign markets by increasing the supply of goods and also adjusting or changing the nature of exports to satisfy the needs of overseas customers.
40. Thus the nature of a business may well change over years as a consequence, at least in part, of the receipt in a prior year of an export market development grant. If the earlier grant year was used for comparative purposes, this may negate the purpose of the grant being made in the first place. That is disregarding the growth and variation in products that may have resulted from the creation, development and expansion of foreign markets consequent upon the making of the earlier grant.
41.
The above does not say that an earlier grant year cannot be a relevant time. The “time” must depend upon the circumstances and as to whether, at the time of an earlier grant or since that time, the previous owner carried on
“a particular business”which, as to the whole or a part, was sold or transferred or an arrangement entered into as a result of which a new owner carried on, as here relevant, “a business that is to any extent, similar to the business or any part of the business carried on by” the earlier, previous owner.
42. In the present instance, and having regard to the development activities of ESP since the 1998/1999 grant, it seems appropriate to choose the time of the administrator disposing of the business of ESP as the relevant “any time”. It is the business carried on at that time by ESP which is to be looked at in reaching or not reaching a “similar assessment”.
43. It is the time at which the business of the previous owner was transferred, etc, to the new owner, that is, the time at which ESP conducted “a particular business” that it sold or transferred to the Applicant.
44. As has already been noted, in the circumstances of the present application, to make a comparison at any time other than that of the time of sale and transfer would be to ignore, and certainly not take into consideration, the developments in technology and product design, etc, that occurred between 1998/1999, the time of transfer and the grant year. These developments were manifest at the time of sale and were passed on to the Applicant.
45. The Applicant relied upon Administrative Guideline 8.2.12 in support of its contention that the relevant time was that of the most recent grant assistance. These guidelines are not legislative guidelines but nevertheless may be of assistance. However in this instance where a period of time has ensued and the business activity at the time of sale is a progression of that carried on by ESP over a number of years a measure of the similarity or otherwise is more appropriate as at the latter time.
46. It seems to me that section 94(1)(a), (1)(b) and (1)(c)(i) of the Act refer to the same business. Section 94(1)(c)(ii), where it designates “the business”, is also referring to the same business. It is “the business” that was carried on by the previous owner that is sold or transferred. Whether the new owner carries on “a business” that is similar to “the business” warrants a different consideration.
47. I appreciate the situation identified by Mr Mitchell on behalf of the Applicant, and the observations of Mr Owen Felsman as to the relevance of the date of the earlier grant and that of Messrs David Cockerel and Frank Ledwidge as to the relevance of the date of sale. In the circumstances of the present application and for the above reasons I find the position taken by the latter the more persuasive. I do not consider that it is appropriate to disregard four or five years of technological development and market appreciation. To do so would not implement a beneficial interpretation as submitted by the Applicant, but fail to recognise a reality.
48. Further to say, as does the Applicant, that in deciding upon the time of sale as the relevant time, this is “to disregard to the Applicant’s extreme detriment, the period of research and development which went into mixers during the period 1.7.1999 to 11.4.2003”, is to be unmindful of the intent of the grant scheme. ESP had received assistance by way of the earlier grants towards its research and development.
relevance of business activity index
49. I consider that the comparisons to be made pursuant to the Ministerial Guidelines provide the Tribunal with sufficient material for it to arrive at a decision in this matter. I should however mention the Administrative Guidelines that have been developed by Austrade to assist its officers in arriving at assessment decisions under the Act. These guidelines, unlike the Ministers Directions under section 101 of the Act, do not have the force of law.
50. The Administrative Guidelines provide for an index as a means of assisting, as an adjunct to the Minister’s Direction, an officer in reaching a decision. The Applicant and the Respondent caused indices to be prepared in this matter. As might have been anticipated the Applicant’s witnesses provided figures favourable to its case. The Respondent’s officers also produced indices favourable to its position, even be it that in the course of cross-examination the officers were prepared to alter some indices to a position more favourable to the Applicant.
51. Nevertheless the variations between the indices, even within the Applicant’s witnesses, and the variations between the officers, even within Austrade’s officers, were substantial. A clear conclusion did not emerge. Each of the exercises was dependent upon subjective appreciation, even to the extent of one witness speaking of a “gut feel” (T25).
52. The Administrative Guidelines do not contain a percentage at which it may be concluded that a substantial difference exists and an exemption should be granted. Again evidence before the Tribunal was to the effect that there is no official or recognised threshold for granting exemption. There was no assistance given to the Tribunal as to how a threshold percentage or indicator might be properly calculated. Indeed Mr Felsman stated that he did not think that “there is any correct percentage”, “no pass mark”.
53. I am satisfied that the Tribunal is better assisted by following the guidelines in the Minister’s Directions. As was stated by Mr Felsman, the index is an analytical tool in which he “did not have a lot of faith” (T12) and which “is not a particularly useful tool” (T12). But where, in a case such as the present, six individuals, five of whom have had extensive experience in grant applications, the sixth being Mr Lancken, divide into seeming affiliations and as with “specific product” each arrives at a different score, little assistance is afforded to the Tribunal. I propose to disregard the BAIs (Business Activities Indexes). This is also because the “at any time” was in some cases taken as being the time when ESP last received a grant, this contrary to the determination made in these reasons, the scoring then being of no assistance to the Tribunal.
54. It is true that Mr Ledwidge considered the BAI as helpful, particularly in “a finally balanced” situation (T284/285). If there was a commonality of assessments in this matter, the use of BAIs might be useful. Unfortunately that is not the case.
evolution
55. The concept of products evolving over time was raised in the proceedings primarily because of the fact that mention was made of it in Austrade’s reasons for decision. In my opinion the use of the word “evolving” is not useful. Section 94 of the Act is concerned with business. The introduction of the Ministerial Guidelines refers to “business activity”. It is an exercise of comparison of businesses and business activity at particular times that is warranted by the section.
56. Whether one business has evolved from another should not be the focal point for consideration, rather the situation as it relevantly exists. It is the object of the Act that the provision of grant assistance should bring “benefits to Australia”, this by encouraging the “creation and development and expansion of foreign markets”. It should be a logical consequence of the receipt of grant assistance that a business would develop, in the course of which it might well modify, develop or vary the nature of the products it intends to export. This is a natural corollary of the implementation of the statutory intent.
57. But again it is the businesses as they exist at particular times that are to be compared and not only the products that are or were produced. Thus in accord with the Ministerial Guidelines there are a number of factors to consider apart from a product, when making the comparison.
the guidelines and their applicability
58. Pursuant to section 94(2) of the Act, Austrade has the ability to exempt the Applicant from the otherwise operation of section 94 of the Act. That is, even be there a transfer, etc, of the business between ESP and the Applicant that is in accord with section 94, an exemption may be granted. However the exemption can only be granted if the decision-maker, in this instance the Tribunal, decides that exemption is warranted pursuant to the guidelines determined by the Minister pursuant to s101(1)(d) of the Act.
59. The introduction to the guidelines provides that:
“8.2.8
The Commission must grant a special exemption in relation to a business activity referred to in paragraph 94(1)(b) (“the current business activity”) where it is of the opinion that that business activity is substantially different from the business activity referred to in paragraph 94(1)(a) (“the previous business activity”), having regard to any differences …”
60. Consideration of the differences between the factors as they are enumerated in subparagraph (a) to (k) of paragraph 8.2.8 of the Guidelines (supra) entails taking these differences into account and giving weight to them. This exercise is fundamental to the making of a determination (See R v Toohey; Ex parte Meneling Station Pty Ltd (1982) 158 CLR 327 at 333). As I have elsewhere decided in these reasons, in the present circumstances the comparison is to be made between the business activity factors of the Applicant in the grant year and the business activity factors of ESP at the time of the ESP/Applicant sale and transfer.
61. An exemption is to be granted from the operation of s 94(1) of the Act to the Applicant if its business activity is “substantially different” to the “particular business” of ESP. In the present application a comparison is then to be made between the business activity of ESP at the time at which it conducted a “particular business” that it sold or transferred, that is, as at the time of the agreement for sale and transfer, and the business activity of the Applicant during the grant year.
applying the guidelines
62. Many of the matters now to be made the subject of comparison have been earlier mentioned in these reasons. Any duplication is regretted. It is necessary however to now relate the 2003 previous business activities of ESP to the grant year current business activities of the Applicant.
(a) The product of the current business activity and that of the previous business activity
The Applicant bases its contention that exemption should be granted to it primarily upon the basis that “mixers and DAWs are fundamentally and substantially different” and that the business of ESP was that of the development, production and export of DAWs, that of the Applicant development production and export of mixers.
63. ESP and the Applicant produced and produce innovative and expensive equipment for use by the audio industry. The development of such equipment culminating in the launch of the DREAM Constellation in October 2003 has been discussed in the above historical perspective. After November 2003 the Applicant, having acquired the plant and equipment of ESP, further developed it, be that by innovative means. The products became bigger and more expensive; they became more effective in their objectives and different in their configuration.
64. But the Applicant still maintained the DAW side of the business that it had acquired. It sold both DAWs and Mixers seemingly by the end of the grant year in proportions of 25 per cent and 75 per cent respectively. DREAM Plant including DREAM Consoles and DREAM Satellites were in the plant and equipment comprised in the agreement for sale. As was stated by Mr Lancken:
“The Satellite is a stand alone DAW…The DREAM Constellation is not only a powerful mixing system but also a complete recording and entertaining environment…In addition to housing the Fairlight Binnacle Controller, the editor panel provides dedicated controls…the panel provides all the functionality of a DREAM Satellite system…key features…binnacle editing power.” (T81, 129, 131, 133)
65. Evidence was before the Tribunal as to the technical qualities of each of a DAW and a Mixer. There is not any evidence to the effect that these qualities were not possessed by the DAWs and Mixers that were the property of ESP. As Mr Fibaek said (Exhibit D, para 9):
“In 1999 I was employed by Fairlight ESP Pty Limited, Australia (“ESP”) as team leader in charge of a team or research and development engineers. My responsibilities included software and hardware development to assist in developing mixing consoles which were an entirely new range of digital audio products and associated DSP engine developments. My employment with ESP finished upon its liquidation in early 2003.”
Again at paragraph 15 of Exhibit D Mr Fibaek said:
“Upon my commencement of employment with Fairlight.AU [the Applicant] in April 2003 I was appointed Chief Technical Officer and provided with the main objectives to:
· Continue and conclude development of mixing products using the intellectual property acquired from ESP’s liquidation”
66. The products were developed further by the Applicant. The products may, as Mr Fibaek also stated be “very different” and “used for different purposes”, “designed technically and ergonomically completely different”. This is only to be expected. The one was not intended to be the same as the other. But they were to generally serve the same end users, both being digital, audio equipment. It is to the overall activities of the Applicant and ESP that attention is to be directed.
(b) What is done in the course of the current business activity and that of the previous business activity
The above historical perspective illustrates the extent to which ESP and the Applicant each sought to accommodate the needs of end users who were seeking to acquire digital audio equipment. The annexures to the sale agreement detail the DREAM equipment that was sold and transferred, both DAWs and Mixers. The DREAM Consoles as acquired by the Applicant were developed by it. The DREAM Constellation was unveiled only seven months after the sale.
(c) The customers including the export market customers of the current business activity and those of the previous business activity
In an annexure to the agreement for sale the customers of ESP who had purchased equipment were set forth. The Applicant contacted each such customer seeking a continuance of business. This continuance eventuated in that in the grant year no less than one half of export earnings comprised sales to Fairlight France and Fairlight Japan each of whom had been clients of ESP.
(d) The directors, shareholders and management personnel of the current business activity and those of the previous business activity
As was noted by Austrade in its final submissions, from August 2002 ESP had two directors, one of whom was Mr Kengi Fukuda. The Applicant has four directors, one of whom is Mr Kengi Fukuda. Mr Fukuda was an ESP shareholder and is a shareholder of the Applicant. Mr John Lancken was a member of ESP’s management personnel from January 1992 to December 2001. He has been the CEO of the Applicant since April 2003.
(e) The suppliers of the current business activity and those of the previous business activity
As Mr Lancken stated in his evidence:
“We had to re-engage some customers that ESP was using. We had to change the PCB manufacturer and we had to change the methodology of making the consoles…the metal works supply and the surface manufacturer were used but PCBs [printed circuit boards] were changed. “
(f) The overseas representatives of the current business activity and those of the previous business activity
ESP had established overseas branches and it was the cost associated with their maintenance that in measurable part caused its financial difficulties. The Applicant sought to avoid this problem by relying upon independent distributorships. But as Mr Lancken acknowledged in some territories “the old staff lined up to become overseas distributors” (transcript, p 71). This was desirable as they knew “the types of customers we were looking for” (transcript, p 72).
(g) The employees of the current business activity and those of the previous business activity
Following its acquisition of the ESP business the Applicant engaged 11 employees, most of whom had worked for ESP. They were the key personnel of ESP.
(h) The markets including the export markets of the current business activity and those of the previous business activity
In the 1998/1999 year the main export markets of ESP were stated in its grant application to be the USA, UK, Japan, China, Germany and India. There was not any market exposure and evidence for year 2003. It may be assumed that the market exposure in 2003 was much the same as in 1999. According to Mr Yabsley, a Chartered Accountant and consultant to the Applicant, the Applicant’s market areas in the grant year were the USA, UK, Japan and China.
(i) The premises from which the current business activity is conducted and the premises from which the previous business activity was conducted
Seemingly the Applicant did not take over the premises of ESP. It is noted however that in a press release of 12 June 2003 it is stated inter alia:
“Fairlight.AU announced that it has officially reopened for business at the company’s former Sydney Australia Manufacturing and Operation Centre. According to Fairlight CEO John Lancken the company has been producing products since of middle of May and has already shipped its first orders of Dream satellites and Stations systems to.”
(j) The logo of the business activity and that of the previous business activity
The Applicant did develop its own logo but made and makes extensive use of the word “Fairlight” which is commonly written with the logo. The Applicant also uses the word “Fairlight” alone. Contemporaneous with the execution of the agreement for sale of assets dated 11 April 2003, an assignment of the trademark to the Applicant was also executed.
(k) The property or assets including the intellectual property of the current business activity and those of the previous business activity
As indicated elsewhere in these reasons the Applicant acquired all of the assets of ESP including all of its intellectual property.
Having regard to all of the factors referred to above and the differences as indicated in relation to each one of them I am not satisfied that the business activity of the Applicant is at the relevant time substantially different from the business activity of ESP. It is different but not substantially different. That is, the businesses are not essentially or basically different or different to a considerable extent (Macquarie Dictionary).
beneficial construction
67. The context of section 3 of the Act is intended to enable grant assistance to be afforded to Applicants. To this extent it is beneficial. Section 94 of the Act, whilst seeking to prevent successors to prior Applicants obtaining assistance where such assistance may not have been available to the prior Applicant, if that Applicant had itself applied, does contain provision for exemption where the business of the successor is substantially different to that of the earlier Applicant.
68. As submitted on behalf of Austrade, “it would… be erroneous to impute… an intention to have s 94(2) and the Guidelines used to give Applicants affected by s 94(1) an entitlement that no other Applicants have under the terms of the Act”. And further section 94(2) should not be “applied to defeat the operation” of the Act in cases where an Applicant would be disqualified from receiving a grant.
69. An assessment of the entitlement to exemption is, it is said on behalf of the Applicant, to take into consideration the legislative beneficial intent. This may well be so, but only if a significant case for exemption is made out and perhaps a decision could go one way or the other. That is not the case in the present application. The Act is to “be construed so as to give the fullest relief which the fair meaning of its language will allow” (Re Bull v Attorney-General (NSW) (1913) 17 CLR 370 at 384).
70. The Tribunal is to apply the provisions of the Act and the Guidelines to the factual situation as it has emerged from the material placed before it. The differences between the business activities of ESP and the business activities of the Applicant are to be examined. In the present instance as illustrated elsewhere in these reasons the differences are not substantial. There is no warrant to apply other than a factual determination to the relevant circumstances.
decision
71. As determined in the above reasons the Tribunal is of the opinion that the relevant “at any time” (section 94(1)(a)) in the present application is at or about the time of the sale/transfer agreement between ESP and the Applicant.
72. The Tribunal does not accept, as was submitted on behalf of the Applicant, that by deciding upon the time of the sale/transfer agreement as being the relevant time there was created “a fiction of irrelevance in relation to the intervening period during which time the Applicant, as well as its predecessor, did not benefit from any export market development grant and substantially changed business activity”. The business activity of ESP should have, as already discussed, benefited from the earlier grant(s). Otherwise there would have been a negation of the legislative intent.
73. The Tribunal is also satisfied that as a result of the sale/transfer agreement the business previously operated by ESP was transferred to the Applicant and that thereafter the Applicant carried on a business that was “to any extent similar to the business or any part of the business” carried on by ESP. It is further satisfied that in accord with the Ministerial Guidelines the business activity of the Applicant in the grant year was not substantially different from the business activity of ESP.
74. There was not any issue between the parties that the Applicant “is an Australian pioneer in the manufacture and export of large format mixing consoles” as was submitted on its behalf. But this situation did not just happen over night. It was the consequence of ESP engaging in research and reaching a stage in the development of its business which was taken over, carried on and enhanced by the Applicant. The Applicant carried into effect the activities put in train by ESP and such as ESP may well have pursued if the administration had not intervened.
75. For the reasons set forth above, the decision under review is affirmed.
I certify that the 75 preceding paragraphs are a true copy of the reasons for the decision herein of The Hon R N J Purvis AM QC, Deputy President.
Signed: ………..[sgd]………………………….
Associate
Dates of Hearing 13 -16 February; 20 March 2007
Date of Decision 27 April 2007
Representative for the Applicant Mr Hourigan, Garfield Barwick Chambers
Representative for the Respondent Mr Tucker, Collins House Legal
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