Hosken, Robert William v Australian Securities and Investments Commission
[1998] TASSC 101
•25 August 1998
101/1998
PARTIES: HOSKEN, Robert William
v
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
TITLE OF COURT: SUPREME COURT OF TASMANIA
JURISDICTION: ORIGINAL
FILE NOS: M148/1998
DELIVERED: 25 August 1998
HEARING DATES: 4 August 1998
JUDGMENT OF: Slicer J
CATCHWORDS:
Corporations - Management and administration - Directors and other officers - Disqualification - Convicted persons - Application for leave to manage company - Relevant considerations.
In Re Marsden (1982) 29 SASR 454; Zuker v Commissioner for Corporate Affairs [1981] VR 72; Re Harrison (1998) 153 ALR 369; Re Shneider (1997) 15 ACLC 90; Murray v Australian Securities Commission (1994) 12 ACLC 11, followed.
Re Magna Alloys & Research Pty Ltd (1974-1976) 1 ACLR; Re Australian Limousin Breeders Ltd (1989) 7 ACLC 426; Re Hamilton-Irvine (1989-1990) 2 ACSR 616, considered.
Aust Dig Corporations [93]
REPRESENTATION:
Counsel:
Applicant: A B Walker
Respondent: A M Blow QC
Solicitors:
Applicant: Dobson Mitchell and Allport
Respondent: Australian Securities and Investments Commission
Judgment category classification:
Court Computer Code:
Judgment ID Number: 101/1998
Number of pages: 7
Serial No 101/1998
File No M148/1998
IN THE MATTER OF EQUITY AUSTRALIA CORPORATION PTY LTD AUSTRALIAN COMPANY NUMBER: 009 590 416
and
IN THE MATTER OF TASMANIA DISTILLERY PTY LTD AUSTRALIAN COMPANY NUMBER: 009 493 663
and
IN THE MATTER OF AUSTRALIA DISTILLERY PTY LTD AUSTRALIAN COMPANY NUMBER: 009 545 493
ROBERT WILLIAM HOSKEN v AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
REASONS FOR JUDGMENT SLICER J
25 August 1998
The applicant seeks leave of the Court that he be permitted to manage Equity Australia Corporation Pty Ltd (“Equity Australia”) and Tasmania Distillery Pty Ltd (“Tasmania Distillery”). He does not pursue an application with respect to a third company, Australia Distillery Pty Ltd.
On 23 June 1998, the applicant was convicted of offences involving breaches of the Companies (Tasmania) Code, ss229(4) and 556(1), for conduct involving improper use of his position as an officer of the corporation and the incurring by a company of a debt at a time when it was improper to so do. The conduct involved a company, Launceston International Hotel Pty Ltd, and concerned the operations of an hotel in Launceston. The learned magistrate‘s summaries of the nature of the incurring of debt charges were stated in the following terms:
“In summary these counts allege that between 8th March, 1989 and 19th September, 1989 a company of which they (the other director being the wife of the applicant) were the only directors, and which is in the process of being wound up, incurred debts with 23 businesses when, immediately before the debts were incurred, there were reasonable grounds to expect that the company would not be able to pay all its debts as and when they were due.”
Considerable sums of money were involved in the various transactions and the applicant was convicted of some 490 offences. The seriousness of the charges is demonstrated by the penalty imposed. The learned magistrate imposed a fine of $150,000 and sentenced the applicant to nine months’ imprisonment, eight months of which were suspended.
The respondent has particular concern in relation to the finding of the learned magistrate that the applicant had been an unconvincing witness and had stated “misleading things” during his interview with regulatory authorities; and further with the fact that moneys had been withdrawn from corporate accounts and transferred to accounts in the names of his children. The relevant findings of the learned magistrate on the latter point were:
“1 Mr Hosken withdrew available funds from LIHPL, and other than depositing less money than he had withdrawn a day later, he did not in fact make funds available over the relevant period.
2 He never attempted nor agreed to mortgage his home and indeed gifted or otherwise disposed of it to the corporate trustee of a discretionary trust in August. The circumstances of this transactions (sic) compel a conclusion that this asset was as unavailable to LIHPL as it was to creditors. The circumstances compel a conclusion that Mr Hosken went to considerable trouble to make sure that his home was not available to either.
3 The alleged safety deposit box and the $60,000.00 contents were never in fact made available, and beyond that, in the absence of corroboration that this source in fact existed, I am unconvinced that it did. The claim was made so vaguely and unconvincingly concerning the source and location of this money that I find it beyond reasonable doubt did not exist and that if it did, it was certainly not available.
4 Funds, from LIHPL and elsewhere, were deposited by Mr Hosken in the Bass and Equitable Building Society in his children‘s names in the period I have illustrated. This is, I think, compelling evidence of an act of ”unavailability“. It was either a gift (as Mr Blow submitted) or an act clearly designed if not to hide the money, at least to put it beyond the reach not only of Westpac as Mr Hosken claimed, but also of creditors and LIHPL. There is not a shred of evidence that it was ever promised, bindingly or otherwise to LIHPL.
5 I reach the same conclusion in the case of the alleged Trust Bank funds as I do with the alleged safety deposit box funds.
6 There is no evidence of the slightest attempt made by Mr Hosken to borrow against or surrender the life policies, either at all or in time to pay creditors when the debts fell due.”
The applicant has appealed against conviction with the appeal due to be heard within the next few months. That process may not conclude the matter since either the applicant or the respondent might seek review by the Full Court. If such were to occur, then it is unlikely that the matter will be concluded before AprilMay 1999.
The applicant does not seek leave to be permitted to act in a managerial capacity until the conclusion of the proceedings, but applies for leave for an unlimited period of time. The respondent neither consents to nor opposes the application, but contends that if the Court grants leave, such should be restricted in time and be subject to conditions. The questions are whether the applicant is entitled to unconstrained leave, or if that answer be in the negative, whether the conditions sought by the respondent are reasonable.
Basis of application
The Corporations Act 1989 (Cth) (“the Act”), s229(3), relevantly provides:
“A person who has, whether before or after the commencement of this Part, been convicted:
…
(c) of any offence for a contravention of section 232, 590, 591, 592, 595, 996 or 1307, of Part 6.6, of Division 2 of Part 7.11, or of a previous law corresponding to any of those provisions; …
…
shall not, within 5 years after the conviction or, if the person was sentenced to imprisonment, after release from prison, without the leave of the Court, manage a corporation.”
The applicant does not seek to act as a director of the companies, but wishes to remain involved in their management and day-to-day operations. The term “manage” is defined by the Act, s91A(3), in the following encompassing terms:
“91A(3) [Corporation other than a local corporation] A person manages a corporation (other than a local corporation) if the person:
(a) in this jurisdiction, does an act as a director or promoter of, or is in any way (whether directly or indirectly) concerned in or takes part in the management of, the corporation; or
(b) in this jurisdiction or elsewhere, does an act as a director or promoter of, or is in any way (whether directly or indirectly) concerned in or takes part in the management of, the corporation in connection with:
(i) the corporation carrying on business in this jurisdiction; or
(ii) an act that the corporation does, or proposes to do, in this jurisdiction; or
(iii) a decision by the corporation whether or not to do, or to refrain from doing, an act in this jurisdiction.”
The offences for which the applicant was convicted correspond with ss232 and 592 of the current legislation. The provision is designed as a safeguard to protect the public, investors, shareholders, creditors and others against the use of a corporate structure contrary to commercial standards, In Re Marsden (1982) 29 SASR 454.
Equity Australia Corporation Pty Ltd
The Corporation is the owner of commercial premises at 2 Macquarie Street, Hobart, which consist of some fourteen stratum title areas available for leasing as shops, restaurants and the like. It has no employees and the applicant has been responsible for the management of the company on an unpaid basis. Two of the sites have attached licences under the Liquor and Accommodation Act 1990, and the applicant claims that since there are no employees of the company, it would be impossible to effect their transfer. Some of the sites are currently leased, but it would appear that the continued viability of the company depends on a proposed transaction involving eight sites which are to be leased to James Bleasel for an expected return in excess of $190,000 per annum. However, there have been difficulties in the obtaining of planning approval and the transaction is dependent upon the successful outcome of an appeal. The applicant further states that the site has been advertised for sale and if he is unable to remain involved in the management of the company, the absence of the specific knowledge which he possesses could impede both the transaction with Bleasel and the prospect of sale. In his affidavit he deposes:
“13 If I am unable to act as manager for Equity, the liquor licenses for these two premises will be lost. No other party is currently aware of the state of negotiations with Mr Bleasel nor able to continue in those negotiations. The licences could take weeks to transfer to another party, assuming that an appropriately qualified person to hold those licences could be found.
14 The Old Gasworks Village is currently being advertised for sale. Annexed and marked ”G“ is a copy of an advertisement which was published in the Saturday Mercury on 4th July 1998. There is no other party who can deal with the Real Estate agent on behalf of the company concerning this sale, or provide it with the information essential to complete the sale, or answer any queries which may be raised by potential purchasers.
15 Unless the contracts with Mr Bleasel are completed I expect that Equity will be placed into voluntary liquidation. Sale of the Old Gasworks Village would then only achieve a fraction of its current value. If I am unable to continue to manage the operations of Equity, the reduction in value of the assets of that company could be in excess of 1 million dollars.”
An examination of the financial statements of Equity Australia for the years ending 30 June 1996-1998 does not afford grounds for optimism. The company made a loss for the year ending 30 June 1998, and it is a matter of concern that the statements for the preceding years disclose that significant loans have been made to the applicant and his wife and the related company Tasmania Distillery. Conversely, the statements show the existence of significant loans from two trusts associated with the family and three companies formerly controlled by the applicant and his wife. On current figures, the liabilities of the company exceed its assets by some $368,000. It is the state of the loans both by and to the company which is the cause for concern. The ability to move moneys between related corporate structures or the facility to restructure such loans might result in advantage to the “controller” of the company and the detriment of others. The previous conduct of the applicant ought not be ignored. The factors affecting the exercise of discretion have been stated by Bowen CJ in Re Magna Alloys & Research Pty Ltd (1974-1976) 1 ACLR 203 (a decision approved by the Full Court of the Supreme Court of Victoria in Zuker v Commissioner for Corporate Affairs [1981] VR 72 at 78) in the following terms:
“The court in exercising its discretion will have regard to the nature of the offence of which the applicant has been convicted, the nature of his involvement, and the general character of the applicant, including his conduct in the intervening period since he was removed from the board and from management. Where, as here, the applicant seeks leave to become a director and to take part in the management of particular companies the court will consider the structure of those companies, the nature of their business and the interests of their shareholders, creditors and employees. One matter to be considered will be the assessment of any risks to those persons or to the public which may appear to be involved in the applicant’s assuming positions on the board or in management.”
The current financial circumstances of the company, the contingent nature of the intended transaction with Bleasel, the former nature of the loan structure linked to the applicant or entities with which he is associated, and the previous conduct of the applicant require the Court to ensure that the public is not put at risk from the activity of a person who has been shown to lack the required level of conduct (Re Australian Limousin Breeders Ltd (1989) 7 ACLC 426). Continued unconstrained managerial power afforded the applicant could pose such a risk.
Tasmania Distillery Pty Ltd
Tasmania Distillery operates a whisky distillery and conducts sales and marketing of whisky and other beverages. It was developed by the applicant between 1991 and 1994 and employs some twenty persons. It is the holder of some five licences issued by the Australian Customs Service which depend on the skill and expertise of the person responsible for the commercial operation of the company. The Court accepts that the applicant possesses such skills, that it will prove difficult to find a suitable replacement and that the continued viability of the company depends on the
experience and knowledge of the applicant. Nevertheless, the financial statements of the company raise matters of concern. The company made a substantial profit for the year ending 30 June 1998, whilst its liabilities exceeded assets by some $8,000. It has significant non-current liabilities in excess of $750,000 in loans to the applicant, his wife and trusts associated with the family. It would appear that it is owed some $26,000 by Equity Australia. The financial statements of Equity Australia for the year ending 30 June 1997 disclose that at that time it had an outstanding loan to Tasmania Distillery of $810,000. That sum is not shown as a liability of Tasmania Distillery in its records for the following year. That change indicates a facility to transfer or restructure loans over a short period of time. The capacity to transfer moneys between associated companies, or those with common management, requires trust in those exercising financial power. The level of profit enjoyed by Tasmania Distillery might result in pressure to allocate some portion of it, by loan or otherwise, to preserve the viability of another entity. The remaining director of Tasmania Distillery is the sister of the applicant who, it would appear, possesses little advanced managerial skill and might not be able to ensure sufficient control of conduct.
For the reasons expressed in relation to Equity Australia, the application for leave to manage Tasmania Distillery ought be refused.
Conditional leave
Different considerations apply in a grant of constrained leave. There is clear authority and support of leave being given subject to conditions (Re Harrison (1998) 153 ALR 369; Re Shneider (1997) 15 ACLC 90).
In considering a grant of constrained leave, the Court ought pay regard to the interests of the companies sought to be managed (Murray v Australian Securities Commission (1994) 12 ACLC 11). The collapse of Tasmania Distillery could result in the loss of employment of some twenty persons. The company appears to be viable (at least in relation to its income flow) and much of its continued viability depends on the skill and experience of the applicant. It is in the interests of Equity Australia and its creditors that the leasing of the unoccupied units be effected, and, if possible, the transaction with Bleasel concluded. The applicant claims that he is seeking to sell the whole of the property in Hobart owned by Equity Australia as soon as practicable, but, given the current state of the economy and in particular the property market, such task will take some time. The Court is prepared to make orders in the form of “protective steps” to preserve the viability and opportunity for sale of each. In doing so, it is mindful that the applicant is engaged in an appeal process which might not conclude until AprilMay 1999. It is also mindful that the marketing and sale of Equity Australia will be complex and take some time. However, it does not wish to afford an unfettered right on the applicant, and the Court should retain a supervisory role. Given the competing interests, the appropriate order is that the applicant be permitted to remain involved in the two companies until 30 June 1999. It may be that, on review, the time constraint will be extended, but much will depend on intervening circumstances. If the applicant is successful in his appeal, there will be no basis for the continuation of the order. If the appeal process is prolonged through no fault of the applicant, or there is an impending sale, there might exist reason for continuation. The extent of the order is designed to permit further attempts to complete the Bleasel transaction and the subsequent sale of Equity Australia and to maintain the viability of Tasmania Distillery. But time will not be the only constraint. There ought be responsibility for continuing supervision of the financial affairs of both companies. The power exists to require an applicant to bear the cost of the services of an independent scrutineer of the companies (Re Hamilton-Irvine (1989-1990) 2 ACSR 616) and to require access to the financial records of the company by such scrutineer. Further constraint ought be imposed in relation to the financial authority of the applicant. The respondent has advised the Court that an accountant, John Woods, is a person in whom a supervisory role might be properly granted.
Giving effect to the above considerations, the Court is prepared to afford leave in the following general terms.
1 That the applicant have leave to manage each of Equity Australia Corporation Pty Ltd and Tasmania Distillery Pty Ltd until either:
(a) twenty-one days after the determination of the motions to review numbered LCA 541998 and LCA 551998, or the determination of any subsequent appeal to the Full Court of the Supreme Court of Tasmania; or
(b) in the case of each such corporation, the completion of the sale of its business; or
(c) until 30 June 1999;
whichever is the earliest, conditionally upon the appointment of an agent in accordance with order no 2 below and whilst such appointment remains in force.
2 That the grant of leave be conditional upon the said corporations, within seven days of the date of pronouncement of this order, each appointing John Woods at its expense as its agent to supervise the operation of its business upon the following terms:
(a) the agent is to have access to the corporation‘s premises and accounting records during business hours on all working days;
(b) no cheque for over $6,000 is to be issued by the corporation except with the prior written approvals of the agent or his delegate;
(c) that no cash payment for over $500 is to be made by the corporation without the prior written approval of the agent or his delegate;
(d) the agent is to provide information to the respondent as and when requested, and whenever he becomes aware of any apparent irregularity or matter of concern to him.
3 That the grant of leave be conditional upon the applicant forwarding to the said agent within fourteen days:
(a) a budget for each of the said corporations setting out its budgeted income and expenditure for each month to the 30 June 1999, divided into categories of income and expenditure; and
(b) an aged list of each of the said corporations’ creditors.
4 That the grant of leave be conditional upon the applicant providing to the said agent:
(a) on or before the seventh day of each calendar month a list of all receipts and payments of each corporation during the previous calendar month; and
(b) within seven days of their receipt, copies of all the bank statements of each corporation.
5 Liberty to apply generally.
The orders are conditional in nature since they cannot bind either Woods or the two companies involved. It is for the applicant to seek the respective consents to the conditions attached to these proposed orders.
Leave will be afforded the parties to make submissions in relation to the terms of the proposed orders and any subsequent orders which might be necessary.
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