Gilbert and Australian Securities & Investments Commission
[2020] AATA 191
•18 February 2020
Gilbert and Australian Securities & Investments Commission [2020] AATA 191 (18 February 2020)
Division:TAXATION AND COMMERCIAL DIVISION
File Number: 2019/0269
Re:Adam Gilbert
APPLICANT
Australian Securities & Investments CommissionAnd
RESPONDENT
DECISION
Tribunal:Deputy President I R Molloy
Date:18 February 2020
Place:Brisbane
The decision under review is affirmed.
.................[SGD]......................
Deputy President I R Molloy
CATCHWORDS
TAX AND COMMERCIAL – period of disqualification – purpose of disqualification - whether corporations are related – disqualification in the public interest – whether duties discharged in good faith – decision under review affirmed
LEGISLATION
Corporations Act 2001 (Cth)
Bankruptcy Act 1966 (Cth)
CASES
Australian Securities and Investments Commission v Adler [2002] NSWSC 483
Australian Securities and Investments Commission v Citrofresh International Ltd (No 3) [2010] FCA 292
Quinlivan v Australian Securities and Investments Commission [2010] FCAFC 161
Re Andrews v Australian Securities and Investments Commission [2006] AATA 25
Rich v Australian Securities and Investments Commission (2004) 220 CLR 129
REASONS FOR DECISION
Deputy President I R Molloy
18 February 2020
INTRODUCTION
This is a review of a decision of a delegate of the Respondent (“ASIC”) made on 19 December 2018 disqualifying the Applicant, Mr Gilbert, from managing corporations for four years.
The decision was made pursuant to s 206F of the Corporations Act 2001 (Cth) (“the Act”) and took effect from 20 December 2018.
Section 206F of the Act provides relevantly:
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) … 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.
(1A) …
(2) In determining whether disqualification is justified, ASIC:
(a) must have regard to whether any of the corporations mentioned in subsection (1) were related to one another; and
(b) may have regard to:
(i) the person's conduct in relation to the management, business or property of any corporation; and
(ii) whether the disqualification would be in the public interest; and
(iii) any other matters that ASIC considers appropriate.
(2A) …
(3) …
(4) …
At the time of the decision Mr Gilbert had been a director of a number of corporations, eleven of which had been wound up in the previous three years. Prominent amongst those corporations, for the purposes of this decision, were Ruark Properties Pty Ltd (“Ruark Properties”), Residual Finance Pty Ltd (“Residual Finance”), Promenade Falls Pty Ltd (“Promenade Falls”), and Griffin Mews Pty Ltd (“Griffin Mews”).
On 19 February 2016 Mr Gilbert was declared bankrupt on his own petition. In consequence, pursuant to s 206B(3) of the Act, he was disqualified whilst a bankrupt from managing corporations.
Mr Gilbert relied on his written statement[1] and also gave oral evidence. Additionally, he relied on statements of Mr Stewart Gregory Rodrigues,[2] registered tax agent, and Mr Nathan John Archer,[3] self-employed financial analyst.
[1] Exhibit 2, Statement of Adam Gilbert.
[2] Exhibit 3, Statement of Stewart Gregory Rodriugues.
[3] Exhibit 4. Affidavit of Nathan John Archer.
APPLICANT’S STATEMENT OF FACTS, ISSUES AND CONTENTIONS
After completion of the evidence, Mr Gilbert, who represented himself, produced to the Tribunal and ASIC a Statement of Facts, Issues and Contentions, apparently prepared by counsel although unsigned and undated (“Applicant’s SFIC”).
The Applicant’s SFIC,[4] which Mr Gilbert spoke to, commenced with what was described as a synopsis of the issues. The contention was “that a shorter period of disqualification was appropriate” having regard to the following matters:
(a)The financial failure of the corporations was not the fault of Mr Gilbert.
(b)There were no breaches of Mr Gilbert’s duty as a director as suggested by ASIC.
(c)Mr Gilbert has already been disqualified from being a director of a company or managing a company for a period of three years, by reason of his having been declared bankrupt on 19 February 2016.
(d)Mr Gilbert did not profit personally from the matters in question and there was no dishonesty on his part.
(e)The personal circumstances of Mr Gilbert.
[4] Applicant’s SFIC, [1-2]
The Applicant’s SFIC concluded that in all the circumstances “the period of disqualification imposed by ASIC is grossly excessive.”[5] The circumstances, as well as the above (with some overlap), were:
(a)The purpose of a disqualification under s 206F of the Act is protective rather than punitive.
(b)The time Mr Gilbert has already been disqualified from managing a corporation by reason of s 206B(3) of the Bankruptcy Act 1966 (Cth) is a relevant consideration.
(c)Mr Gilbert has not benefitted from the corporate structure at all.
(d)He has given his guarantee and been declared bankrupt as a result: “Is he to be punished twice for having done so?”
(e)There has been no wrongful use of the corporate structure. [6]
[5] Applicant’s SFIC, [43].
[6] Applicant’s SFIC, [41]-[42].
Mr Gilbert confirmed that the issue before the Tribunal was whether the period of disqualification was excessive.[7] In view of some of the issues raised by Mr Gilbert, however, for example in paragraph 8(b) above, it is necessary to go into matters beyond just the period of disqualification.
[7] Transcript 7 November 2019, pages 76.18 to 79.9.
PRECONDITIONS FOR DISQUALIFICATION - RELATED CORPORATIONS
There was no dispute, and I am satisfied, that the preconditions contained in s 206F(1)(a) and (b) of the Act were satisfied.
Under s 206F(2)(a) of the Act, in determining whether disqualification is justified, regard must be had to whether any of the corporations mentioned in subsection (1) were related to one another.
I accept ASIC’s contention that a related corporation includes a body corporate related by virtue of s 50 of the Act.[8] Under this provision body corporates are related where one is the holding company or subsidiary of the other. That is not the case here.
[8] Corporations Act 2001 (Cth), s 9.
Further, for the purposes of s 206F of the Act, body corporates may also be related if they are related operationally,[9] or they are a part of one failure.[10]
[9] Quinlivan v Australian Securities and Investments Commission [2010] FCAFC 161 (“Quinlivan”), [39].
[10] Re Andrews v Australian Securities and Investments Commission [2006] AATA 25, [23].
ASIC contends that none of the eleven corporations were related operationally in that they were established for distinct purposes and, so far as they carried on business, were involved in distinct projects.[11]
[11] Respondent’s SFIC, [19].
I accept this, except in respect of Ruark Properties, described as “the managing entity for all projects and [to have] failed with the projects it managed”, and Residual Finance, said to have been “the finance company for the projects”.[12] These corporations were operationally related at least to some of the other failed entities.
[12] Exhibit 1, T documents, T5, page 1220.
ASIC also contends that the eleven corporations were not part of the one failure. In this respect Mr Gilbert attributed the failures of all the corporations to three main factors:
·an alleged failure by Westpac Bank to advance a loan that was promised;
·the downturn in the mining industry; and
·his own bankruptcy (consequent upon personal guarantees) which prevented him from attending to the affairs of the corporations.[13]
[13] Transcript 7 November 2019, page 4.37-47.
This is Mr Gilbert’s view of events but I am not satisfied that it is correct. There was no “promised” loan from Westpac as Mr Gilbert alleges. I will refer to this in more detail below. As to the second factor, I am satisfied the corporations, for the most part, were involved in different projects. None of them were directly involved in or dependent on mining.
The most that can be said, as Mr Archer states, is that Mr Gilbert in respect of some projects or developments counted “on the perceived profitability of the mining industry” and “demand from [miners].”[14] I am satisfied that Mr Gilbert has overstated these matters in the collapse of the corporations.
[14] Exhibit 4, Affidavit of Nathan John Archer, [7].
Mr Gilbert’s bankruptcy obviously prevented him from managing the corporations. I am not satisfied, however, this was a factor in the failures as Mr Gilbert claims. Rather it was an event along the way.
I accept ASIC’s submission that each corporation failed in its own way, with the exceptions again of Ruark Property and Residual Finance, whose operations and therefore their failures, were related to some of the other corporations.
The purpose of s 206F(2)(a) of the Act is to ensure that a person is not disqualified simply because two or more corporations engaged in the same enterprise have failed.[15] That is not the case before the Tribunal.
[15] Quinlivan, [39].
Ruark Property and Residual Finance were operationally related to some of the other corporations and, in the way I have described, could be regarded as part of the same failures. I have taken these matters into account.
In all the circumstances they do not cause me to take a different view of Mr Gilbert’s conduct as a director or, in particular, whether disqualification is justified.
JUSTIFICATIONS FOR DISQUALIFICATION
ASIC contends that Mr Gilbert’s disqualification is justified based on what it submits was his conduct in relation to the management, business and property of the corporations, in particular, Promenade Falls and Griffin Mews.
ASIC contends that Mr Gilbert failed to observe his duties as a director by: [16]
(a)raising funds from investors in Promenade Falls which were then paid to other corporations of which Mr Gilbert was a director;
(b)projecting a 59% return in the Griffin Mews project plan for investors but over-subscribing the project;
(c)charging higher fees than forecast in the Griffith Mews project plan;
(d)causing investors to believe that their investment would be honoured by the company which took over the Griffin Mews project;
(e)failing to lodge BAS activity statements and income tax returns (below reference);
(f)failing to take all reasonable steps to ensure that Promenade Falls and Griffin Mews kept accurate written financial records; and
(g)causing or permitting the eleven corporations to accumulate significant deficiencies and tax debts.
[16] Respondent’s SFIC, [6].
I accept ASIC’s submissions that Mr Gilbert breached his duties as it claims, described in more detail below. I also accept its submission that in all the circumstances disqualification is in the public interest.
Raising funds for Promenade Falls which were paid to other corporations
In 2012, Promenade Falls purchased what has been described as the Springfield Lakes property for $1,400,000.[17] The original intention was twenty-five residential units.[18]
[17] Exhibit 1, T documents, T3.5, page 141.
[18] Exhibit 1, T documents, T3.5, page 141; Transcript, 7 November 2019, page 7.1-5
Mr Gilbert’s evidence was that the original loans to acquire the property were refinanced by Westpac.[19] Westpac also agreed to provide construction finance to Promenade Falls in tranches, subject to conditions being satisfied.
[19] Exhibit 1, T documents, T5, page 1211.
By June 2015, however, Promenade Falls was unable to satisfy Westpac’s conditions. And by at least 30 June 2015, according to the liquidator, Promenade Falls was insolvent.
Westpac did not fail to provide promised finance as Mr Gilbert claims. Its position remained consistent. Furthermore, Mr Gilbert did not have an offer of mezzanine finance, another of his claims.[20] This was clear.
[20] See Transcript 7 November 2019, pages 16.1-17.22 and 25.39-41.
Notwithstanding Promenade Falls’ inability to obtain finance from Westpac, no offer of any other finance, and its insolvent financial position, Mr Gilbert continued to raise funding from investors post June 2015. The amount raised was $961,772.50.[21]
[21] Exhibit 1, T documents, T3.5, page 146.
These investor funds raised post June 2015 were used to repay related party loans and pay what were described as “pre-sale commissions” to related parties. The liquidator’s report said there was no evidence requiring payment of the so-called pre-sale commissions, and the monies were not repaid following the sale of the property to a third party.[22]
[22] Exhibit 1, T documents, T3.5, page 147.
Mr Gilbert was evasive when cross-examined about these monies paid to his other corporations. At one stage he said Ruark Properties was owed money as project manager.[23] He seemed to say it owed monies to electrical and other contractors. When quizzed about this, which seemed a new claim, and whether Ruark was liable to trade creditors, he answered “partly”. His evidence was quite unsatisfactory.[24]
[23] Transcript 7 November 2019, page 19.39.
[24] Transcript 7 November 2019, pages 22.30 to 23.25.
In total, of a sum of $961,772.50 raised post June 2015, $916,804.90 was paid to corporations of which Mr Gilbert was a director and shareholder.[25]
[25] Exhibit 1, T documents, T3.5, pages 146-147.
I accept ASIC’s submission that, given the ratio of assets to liabilities of Promenade Falls as at 30 June 2015, and the inability of Promenade Falls to meet the funding conditions of Westpac, and the absence of any other finance, it was at least careless of Mr Gilbert to continue raising funds of almost $1,000,000 from investors.[26]
[26] Respondent’s SFIC, [35].
Furthermore, Mr Gilbert used his position as a director of Promenade Falls to gain an advantage for corporations he controlled, by paying investor funds to those corporations (including payment of “commissions” and other so-called “costs” which I am not satisfied he was obliged to pay) in the circumstances described.
I accept ASIC’s submission that pursuant to s 181 of the Act, Mr Gilbert was obliged, as a director, to exercise his powers and discharge his duties in good faith in the best interests of Promenade Falls and for a proper purpose, and that in the circumstances he breached those duties. [27]
[27] Respondent’s SFIC, [38].
Projection of 59% return in Griffin Mews project plan
On 9 August 2014, Griffin Mews published a project plan for investors. Relevantly, the project plan read:[28]
[28] Exhibit 1, T documents, T3.10, page 698.
The Offer
…
Set out below are the headline numbers and on the following pages is a profit and loss statement for the development.
Subscriber funds required $1,844,220 Bank funds required $6,500,000 Gross income $13,276,400 Cost to Complete $10,286,976 Profit $2,989,424 Subscriber Interest $331,960 Subscriber profit share $747,356 Total return to subscriber $1,079,316 Return on subscriber funds 59% Term 1.5 years
By May 2015, a total of approximately $4,087,310 of investor funds had been collected.[29] That is to say, an amount in excess of the “Subscriber funds required”.
[29] Exhibit 1, T documents, T3.10, page 591.
Of that sum, Mr Gilbert said that $1,627,539 was from unsecured creditors from previous projects.[30] He claimed that those creditors had entered into “rollover agreements” whereby they agreed to be paid from the profits of the Griffin Mews project.[31]
[30] Exhibit 1, T documents, T3.10, page 1219.
[31] Exhibit 1, T documents, T5, page 1219.
However, as ASIC contends, even leaving aside the $1,627,539 attributable to the alleged rollover agreements, Griffin Mews received a total of $2,459,771 of investor funds to May 2015.[32] Accordingly, there was an additional $615,551 of investor funds received, above the “Subscriber funds required”.[33]
[32] Exhibit 1, T documents, T3.10, page 591.
[33] Respondent’s SFIC, [44].
Once the project was oversubscribed, the basis for the projected return was diluted, but Mr Gilbert did nothing to correct this or inform the investors. Mr Gilbert said that investors ought to have obtained their own financial advice and that not every investor was provided with a copy of the project plan.[34]
[34] Exhibit 1, T documents, T5, pages 1217 to 1220.
He said that investors would not have relied on or been influenced by the “Offer” in making an investment decision. Mr Gilbert was either unable or unwilling to acknowledge the obvious. His evidence was evasive and contradictory.
Mr Gilbert asserted that all the investors were informed that the amount of “Subscriber funds required” was exceeded. The evidence as to when and how this occurred varied.[35] His evidence on this was also evasive and ultimately unconvincing.
[35] Transcript 7 November 2019, pages 30.15 – 32.25.
As ASIC contends Mr Gilbert ought to have ceased receiving funds from investors under the same projection of a 59% return, when this was becoming increasingly unachievable based on the significant over subscription.[36] This is with or without the rollover funds, although I am not sure how the source of the so-called rollover funds makes any difference.
[36] Respondent’s SFIC, [48].
I accept ASIC’s contention that in breach of s 181 of the Act, Mr Gilbert failed to exercise his powers and discharge his duties as a director in good faith by causing or permitting the Griffin Mews project to be over-subscribed, and failing to inform investors.[37]
[37] Respondent’s SFIC, [49].
Higher fees than forecast in the Griffin Mews project plan
The Griffin Mews project plan described how Ruark Properties was to be remunerated for the services it provided as each of the four benchmarks was achieved.
In relation to benchmark 1, the project plan provided that Ruark Properties was to be paid $3,300.00 per lot, plus $12,000.00.[38] The development did not achieve benchmark 2, so Ruark Properties was only entitled to remuneration for benchmark 1.
[38] Exhibit 1, T documents, T3.10, page 711.
The Griffin Mews project plan contemplated 90 townhouse lots.[39] Accordingly, for benchmark 1, Ruark Properties should have been paid a maximum of $309,000.00 (i.e. 90 lots x $3,300.00 per lot + $12,000.00).
[39] Exhibit 1, T documents, T3.10, page 697.
The actual payments received by Ruark Properties for the Griffin Mews project totalled approximately $1,346,407.[40] The liquidator’s report concludes that the substantial payments to Ruark Properties were likely to have “significantly influenced [Griffin Mews’] insolvency.”[41]
[40] Exhibit 1, T documents, T3.10, page 595.
[41] Exhibit 1, T documents, T3.10, page 595.
In evidence, Mr Gilbert placed an interpretation on the documentation in an attempt to justify the payments of approximately $1,000.000 to Ruark Properties in excess of what was contemplated by the project plan.
Mr Gilbert said he could see the document was not clear.[42] The document, however, is clear. I do not accept Mr Gilbert’s interpretation as reasonable. I do not accept that anyone reading the project plan, including Mr Gilbert, could have believed that Ruark Properties was entitled to the amounts it was ultimately paid.
[42] Transcript 7 November 2019, page 33.40-41.
Nothing was done by way of correction of the information available to investors concerning the payments which Ruark Properties did or was to receive. Once again Mr Gilbert said that the document would not have been relied on by individual lenders.[43] I do not accept that assertion at all.
[43] Transcript 7 November 2019, page 33.41-44.
I accept ASIC’s contention that Mr Gilbert did not exercise his powers and discharge his duties in good faith and in the best interests of Griffin Mews in allowing investors to be misled by the project plan and, in particular, the true quantum of money being paid to Ruark Properties.[44]
[44] Respondent’s SFIC, [57].
Investments in Griffin Mews project to be honoured
In December 2015, Mr Gilbert (through Ruark Properties) corresponded with investors of Griffin Mews as follows:[45]
The purpose of this report is to provide an overview of the current status of the Griffin Mews Project. The Griffin Mews project has currently stalled due to issues across affecting [sic] the development manager, Ruark Properties Pty Ltd…
As director of Ruark Properties and also Griffin Mews, I deemed it necessary to cease trading in line with Australian laws…Hence on the 28th September 2015 Griffin Mews Pty Ltd ceased trading.
The advice has been to proceed to administration but in the meantime, secure our various lending partners as per our agreements with them.
To secure the lending partners in the Griffin Mews project we have moved to a land sales contract with IPP whom have the most significant investment in the project…Should this contract conclude, then IPP will seek to structure an equity arrangement for lenders of the project. This mean that as the project progresses that the first goal will be to recover the capital lent to the project... (Emphasis added)
[45] Exhibit 1, T documents, T6, page 2196.
On 3 February 2016, the property, the subject of the Griffin Mews project, was sold for $1,888,173.37 to an unrelated third party.[46]
[46] Respondent’s SFIC, [59].
Mr Griffin was not able to refer to a single document that would see the investors repaid following the sale. In evidence Mr Gilbert referred to a verbal agreement although even on this he was evasive.[47] The third-party purchaser, for its part, has unequivocally denied any obligation to the lenders.
[47] Transcript 7 November 2019, pages 39.44 to 40-40, and 43.31 to 44.7.
Having seen and heard Mr Griffin give evidence I am not satisfied that he did anything at all “to structure an equity arrangement for lenders of the project.”[48] Specifically, I do not believe his evidence of a verbal agreement or undertaking.
[48] Transcript 7 November 2019, pages 39.33 to 40.30.
Mr Gilbert gave evidence that, as a part of the sale, he offered his “services [to the purchaser] to market the properties on the basis [he] would give over 50% of marketing fees back to the lenders to ensure that they were paid back…”.[49] He produced no evidence of when or how this “Offer” was made. It is of course vastly different to what he represented to the lenders.
[49] Exhibit 1, T documents, T5, page 1218.
Having seen and heard Mr Gilbert’s give evidence, I am not satisfied that he ever genuinely or reasonably believed or intended that he could secure such an arrangement.
In the circumstances I am satisfied Mr Gilbert did not exercise his powers and discharge his duties in good faith in allowing or causing investors to be misled.
Failure to lodge BAS and tax returns
Promenade Falls failed to lodge BAS activity statements for the period September 2015 to August 2016 and also failed to lodge income tax returns for the financial years ending 30 June 2015 and 30 June 2016.[50]
[50] Exhibit 1, T documents, T3.5, page 148.
As a consequence of the failure to lodge a BAS activity statement for the month ending November 2015, the Deputy Commissioner of Taxation made an assessment of the tax liability owing for the period totalling $154,454.00 (relating to the sale of the Springfield Lakes property). This resulted in Promenade Falls incurring general interest charges on a retrospective and ongoing basis, of at least $9,931.65.[51]
[51] Exhibit 1, T documents, T3.5, page 148.
Griffin Mews failed to lodge BAS activity statements for the period September 2015 to June 2016 and also failed to lodge income tax returns for the financial years ending 30 June 2015 and 30 June 2016.[52] Griffin Mews had outstanding debts to the Australian Tax Office of $171,652.00 as at 29 February 2016 and $300,391.00 as at 1 July 2016. [53] Griffin Mews also incurred penalty interest.
[52] Exhibit 1, T documents, T3.10, page 589.
[53] Exhibit 1, T documents, T3.10, page 590.
An explanation offered by Mr Gilbert for Promenade Falls’ failure to lodge BAS activity statements or income tax returns was that “we did not have funds to engage sufficient staff or accountants to do the necessary work”.[54] Another explanation was that, as a consequence of an ATO audit which began in May 2015 in relation to 16 of his entities, staff were “occupied in responding to the ATO audit”.[55] These are not satisfactory explanations for the defaults which occurred.
[54] Exhibit 1, T documents, T5, page 1217.
[55] Exhibit 1, T documents, T5, page 1217.
At the hearing Mr Gilbert pointed out that the 2015 annual tax returns were not due for lodgement until May 2016, and that his bankruptcy intervened.[56] I have taken that into account. Of course, this is no explanation for the failures before February 2016, when he became bankrupt. It is also curious that Mr Rodrigues states he was instructed by Mr Gilbert to advise him inter alia concerning the various affairs of the corporations in July 2016 not earlier.[57]
[56] Transcript 7 November 2019, pages 68.45 to 69.2.
[57] Exhibit 3, Statement of Stewart Gregory Rodrigues, [4].
I accept ASIC’s submission that as the sole director of Promenade Falls and Griffin Mews, it was Mr Gilbert’s duty to ensure that the corporations lodged their returns on time.[58] I also accept that he failed in this duty and, for the most part, the explanations offered are insufficient.
[58] Respondent’s SFIC, [68].
As ASIC contends, by failing in his duties, Mr Gilbert exposed Promenade Falls and Griffin Mews to penalties and breached his statutory obligation to discharge his duties as a director with the requisite degree of care and diligence, as required by s 180 of the Act.
Failure to keep accurate written financial records
Section 286 of the Act requires corporations to keep and retain written financial records that correctly record and explain its transactions and financial position and performance, and would enable true and fair financial statements to be prepared and audited.
With respect to Promenade Falls, as ASIC submits, the liquidator reported that the corporation’s books and records were “insufficient to accurately reflect the financial position of the Company”.[59] The liquidator also identified discrepancies in the accounts for the financial year ending 30 June 2015, which included:
·no record of a $995,938.05 advance made by Westpac to Promenade Falls in February 2015;
·record of a debt owed to Doyle Family Nominees in the sum of $1,000,000 despite that loan having been repaid (by the Westpac advance) in February 2015; and
·various omissions of money advanced by investors during the period of 31 August 2015 to October 2015, totalling $238,000.[60]
[59] Exhibit 1, T documents, T3.5, page 156.
[60] Exhibit 1, T documents, T3.5, page 157.
There were also no records provided to the liquidator in relation to the $916,804.90 in payments made to Ruark Properties and other related corporations post June 2015.[61] Documentation in relation to Promenade Fall’s dealings with Westpac were also insufficient.[62]
[61] Exhibit 1, T documents, T3.5, page 157.
[62] Exhibit 1, T documents, T3.5, page 157.
With respect to Griffin Mews, as ASIC submits, the liquidator reported that the corporation’s books and records were insufficient to determine the solvency of the corporation and that the information provided was not prepared in a form to “reflect the true financial position of the company”.[63]
[63] Exhibit 1, T documents, T3.10, page 596.
Here again the liquidator also identified discrepancies as between the corporation’s bank statements and the MYOB files provided, including discrepancies having the effect of overstating Griffin Mews’ true financial position.
Significant debts accumulated by Promenade Falls and Griffin Mews
In respect of Promenade Falls, the liquidator estimates that its deficiency totals $4,868,769.11, all of which was owed to unsecured creditors.[64] In respect of Griffin Mews, the liquidator estimates that its deficiency totals $4,450,908, again, all of which was owed to unsecured creditors.[65] The total deficiency between only these two corporations was therefore $9,319,677.11.
[64] Exhibit 1, T documents, T3.5, page 145.
[65] Exhibit 1, T documents, T3.10, page 589.
These and the other matters to which I have referred satisfy me as to Mr Gilbert’s inability effectively to manage corporations.
Disqualification in the public interest
ASIC submits[66] that the public has an interest in ensuring that directors of corporations conduct the corporation’s affairs with basic levels of honesty, diligence and skill.[67] The public also has an interest in ensuring that corporations are managed in accordance with the law and, in particular, the Act.
[66] Respondent’s SFIC, [79].
[67] Respondent’s SFIC, [79].
ASIC submits[68] that persistent demonstration by a person of their inability to meet these basic interests of the public in turn demonstrates why disqualification would be in the public interest.[69] I agree with those submissions. And I am satisfied in the circumstances that disqualification of Mr Gilbert is in the public interest.
[68] Respondent’s SFIC, [79].
[69] Respondent’s SFIC, [79].
LENGTH OF DISQUALIFICATION
In a case relied on by Mr Gilbert, Australian Securities and Investments Commission v Adler,[70] Santow J set out fifteen propositions which may be derived from the cases in determining the length of disqualification. His Honour was referring to disqualification or banning orders ranging from three years to life whereas under s 206F of the Act the maximum is five years, so that the factors considered by Santow J must be considered in this context.
[70] [2002] NSWSC 483, [56].
Santow J said the propositions that may be derived from the cases include:
(i)Disqualification orders are designed to protect the public from the harmful use of the corporate structure or from use that is contrary to proper commercial standards … ;
(ii)The banning order is designed to protect the public by seeking to safeguard the public interest in the transparency and accountability of companies and in the suitability of directors to hold office …;
(iii)Protection of the public also envisages protection of individuals that deal with companies, including consumers, creditors, shareholders and investors … ;
(iv)The banning order is protective against present and future misuse of the corporate structure … ;
(v)The order has a motive of personal deterrence, though it is not punitive … ;
(vi)The objects of general deterrence are also sought to be achieved … ;
(vii)In assessing the fitness of an individual to manage a company, it is necessary that they have an understanding of the proper role of the company director and the duty of due diligence that is owed to the company … ;
(viii)Longer periods of disqualification are reserved for cases where contraventions have been of a serious nature such as those involving dishonesty … ;
(ix)In assessing an appropriate length of prohibition, consideration has been given to the degree of seriousness of the contraventions, the propensity that the [person] may engage in similar conduct in the future and the likely harm that may be caused to the public … ;
(x)It is necessary to balance the personal hardship to the individual against the public interest and the need for protection of the public from any repeat of the conduct … ;
(xi)A mitigating factor in considering a period of disqualification is the likelihood of the person reforming … ;
(xii)The eight criteria to govern the exercise of the court’s powers of disqualification set out in Commissioner for Corporate Affairs v Ekamper (1987) 12 ACLR 519 have been influential. It was held that in making such an order it is necessary to assess:
·character of the offenders;
·nature of the breaches;
·structure of the companies and the nature of their business;
·interests of shareholders, creditors and employees;
·risks to others from the continuation of offenders as company directors;
·honesty and competence of offenders;
·hardship to offenders and their personal and commercial interests; and
·offenders’ appreciation that future breaches could result in future proceedings.
…;
(xiii)Factors which lead to the imposition of the longest periods of disqualification (that is disqualifications of 25 years or more) were:
·large financial losses;
·high propensity that individuals may engage in similar activities or conduct;
·activities undertaken in fields in which there was potential to do great financial damage such as in management and financial consultancy;
·lack of contrition or remorse;
·disregard for law and compliance with corporate regulations;
·dishonesty and intent to defraud; and
·previous convictions and contraventions for similar activities.
… ;(xiv)In cases in which the period of disqualification ranged from 7 years to 12 years, the factors evident and which lead to the conclusion that these cases were serious though not “worst cases”, included:
·serious incompetence and irresponsibility;
·substantial loss;
·[persons] had engaged in deliberate courses of conduct to enrich themselves at others’ expense, but with lesser degrees of dishonesty;
·continued, knowing and wilful contraventions of the law and disregard for legal obligations; and
·lack of contrition or acceptance of responsibility, but as against that, the prospect that the individual may reform … ;
(xv)The factors leading to the shortest disqualifications, that is disqualifications for up to 3 years were:
·although the [individuals] had personally gained from the conduct, they had endeavoured to repay or partially repay the amounts misappropriated;
·the persons had no immediate or discernible future intention to hold a position as manager of a company; and
·…the person had expressed remorse and contrition, acted on advice of professionals, and had not contested the proceedings.
In Rich v Australian Securities and Investments Commission,[71] a case also referred to by Mr Gilbert, McHugh J said that although judges frequently say that the purpose of the disqualification provisions is protective, “what they do in practice is little different from what judges do in determining what orders or penalty should be made for offences against the criminal law.”[72] His Honour referred to Santow J’s fifteen propositions with approval, and set them out.[73]
[71] (2004) 220 CLR 129.
[72] Ibid, [41].
[73] Ibid, [49].
McHugh J remarked that some of the propositions go to the protection of the public, while others relate to considerations that reduce the period of disqualification and therefore benefit the individual, and still others (such as propositions (v) and (vi)) recognise that the disqualification provisions also have objectives of personal and general deterrence, strongly resembling sentencing principles under the criminal law.[74]
[74] Ibid, [50].
His Honour enumerated some factors that the courts take into account, in what he referred to as a “synthesis from which the judges make a value judgment concerning whether to order disqualification and, if so, the period of disqualification that should be imposed”:[75]
[75] Ibid, [43].
·whether the person now is or in future will be a fit and proper person to manage corporations;
·the size of any losses suffered by the corporation, its creditors and consumers;
·legislative objectives of personal and general deterrence;
·contrition on the part of the person;
·the gravity of the misconduct;
·the person’s previous good character;
·prejudice to the defendant’s business interests;
·personal hardship; and
·the willingness of the person to render assistance to statutory authorities and administrators.
Mr Gilbert continues to attribute the failures of the corporations to facts or circumstances seemingly outside his control. The Applicant’s SFIC claims the Promenade Falls project’s failure “was caused almost entirely by the decision of Westpac Banking Corporation not to continue to finance the project and/or its failure to co-operate with certain mezzanine financiers.”[76]
[76] Applicant’s SFIC, [12].
As I have said, Westpac acted consistently, and its position was made known throughout. It did not fail to co-operate with mezzanine lenders, because there were no mezzanine lenders.
In respect of the Griffin Mews project Mr Gilbert blames the purchaser for failing to honour an undertaking to “look after” a small group of Australian private lenders.[77] As Mr Gilbert acknowledges, there was nothing in writing, and my assessment of his evidence is there was no oral undertaking.
[77] Applicant’s SFIC, [14]
Mr Gilbert claims he was “to put it simply, unlucky in the manner in which events unfolded.”[78] These matters indicate an absence of an honest and realistic appreciation of how his own conduct caused and exacerbated the losses suffered by investors. The consequences of his conduct to which I have referred were to cause significant harm.
[78] Applicant’s SFIC, [8].
Mr Gilbert says he has not “personally received any monies from these [corporations] in any wrongful manner.”[79] Monies were, however, directed from the Promenade Falls project, for example, for a time almost as quickly as they were received, to benefit other corporations he controlled.
[79] Applicant’s SFIC, [38].
In several respects Mr Gilbert engaged in conduct which was misleading. In several respects he failed to inform investors of the true or the changed situation, known only to him, where basic honesty called for candour on his part.
Mr Rodrigues and Mr Archer each speak of Mr Gilbert acting honestly and for the benefit of stakeholders. Obviously they were not aware of the matters I have described.
Mr Gilbert says he now works as a real estate salesman in his wife’s business. He says he “would like to be able to run a business, but not necessarily a development business.”[80] I do not accept as a mitigating factor that the likelihood of him engaging in similar conduct in the future is low. The public needs to be protected from any repeat of his conduct.
[80] Transcript 7 November 2019, page 48.40-41.
I do not accept as a mitigating factor that he will suffer personal hardship from a continued period of disqualification. The period of disqualification is not disproportionate to the effect of the disqualification on the ability of Mr Gilbert to be gainfully employed. At the same time the losses which were suffered by others were significant.
I do not accept the submission that the length of Mr Gilbert’s disqualification should be reduced because of his disqualification in consequence of his bankruptcy. He is not being punished twice over for the same conduct.
His disqualification under s 206F of the Corporations Act is not for giving guarantees, which is what he describes as the cause of his bankruptcy. There is no evidence of a causal relationship between Mr Gilbert’s conduct which gives rise to liability for disqualification under s 206F and his bankruptcy.[81]
[81] Australian Securities and Investments Commission v Citrofresh International Ltd (No 3) [2010] FCA 292, [41], per Goldberg J.
I take into account that Mr Gilbert was previously of good character.
It is submitted that Mr Gilbert is remorseful. I am not satisfied as to any remorse or contrition he may have in respect of his conduct.
It is appropriate to impose a significant period of disqualification which will operate as a specific deterrent on Mr Gilbert in respect of any future conduct by him as a director of a corporation.
I consider that it is in the public interest, that in such circumstances, a significant period of disqualification be imposed so as to bring to the attention of directors of corporations that they must take their duties and responsibilities as directors very seriously.
It is also in the public interest that such a period of disqualification be imposed in order to protect the public.
I have taken into account all of the considerations referred to above so far as they relate to this case.
I consider that in all the circumstances a period of disqualification of four years is appropriate.
CONCLUSION
The decision under review is affirmed.
I certify that the preceding 102 (one hundred and two) paragraphs are a true copy of the reasons for the decision herein of Deputy President I R Molloy
……[SGD]…………..
Associate
Dated: 18 February 2020
Date of hearing: 7 November 2019
Applicant: In person
Solicitor for Respondent: Australian Securities and Investment Commission
Counsel for Respondent: Mr Brent Reading
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