JYWV and Australian Securities and Investments Commission
[2010] AATA 936
•23 November 2010
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2010] AATA 936
ADMINISTRATIVE APPEALS TRIBUNAL )
) No 2009/5187
GENERAL ADMINISTRATIVE DIVISION ) Re JYWV Applicant
And
Australian Securities and Investments Commission
Respondent
DECISION
Tribunal Deputy President D G Jarvis
Senior Member R W DunneDate23 November 2010
PlaceAdelaide
Decision The tribunal sets aside the decision under review, and in place of that decision, decides that the discretion under s 206F of the Corporations Act 2001 (Cth) not be exercised.
D G Jarvis
[Signed]
Deputy President
CATCHWORDS
CORPORATIONS – Directors and officers – order for disqualification from managing corporations – liquidation of group of 12 companies – proposals by ANZ Bank to provide finance and invest in some of group – effect of unexpected withdrawal of equity investment by ANZ – single event causing collapse of group – no dividend to unsecured creditors- limited relevance of proofs of debt – no evidence of misconduct by applicant – voluntary offer by applicant to unsecured creditors of funds from new business venture – delay in ASIC investigation not causing prejudice to applicant – decision under review set aside.
Corporations Act 2001 (Cth), ss 50, 180, 206F and 533(1)
Aon Risk Services Australian Limited v Australian National University (2009) 239 CLR 175
Culley v Australian Securities and Investments Commission (2009) 74 ACSR 604
Drake v Minister for Immigration and Ethnic Affairs (1979) 46 FLR 409
Halliday v Commissioner of Corporate Affairs (Unreported, Supreme Court of Victoria, 14 May 1990)
Kardas v Australian Securities Commission (1998) 53 ALD 303
Laycock v Forbes (1997) 150 ALR 186
McDonald v Director-General of Social Security (1984) 1 FCR 354
Minister for Immigration and Ethnic Affairs v Pochi (1980) 4 ALD 139
Murdaca v Australian Securities and Investments Commission (2009) 178 FCR 119
Piastri v Australian Securities Commission (unreported, Administrative Appeals Tribunal, Deputy President McDonald and Members JTC Brassil and CG Woodard, 20 December 1996)
Re Boyle and Australian Securities Commission [2009] AATA 122
Re Feher and Australian Securities Commission (1997) 15 ACLC 1774
Re Guss and Australian Securities and Investments Commission (2006) 90 ALD 349
Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); ASIC v Adler & Ors (2002) 42 ACSR 80
Re Kowalski and Repatriation Commission (2008) 107 ALD 447
Re Quinlivan and Australian Securities and Investments Commission (2010) 113 ALD 599
Re Sheslow and Australian Securities Commission (1994) 34 ALD 539
Rich v Australian Securities and Investments Commission (2004) 220 CLR 129
Scott v Australian Securities and Investments Commission (2010) 78 ACSR 399
Shi v Migration Agents’ Registration Authority (2008) 235 CLR 286
Pearce and Geddes, Statutory Interpretation in Australia (Lexis Nexis Butterworths, 2006, 6th Ed.)
REASONS FOR DECISION
23 November 2010 Deputy President D G Jarvis
Senior Member R W Dunne1. The applicant was a director of a group of fourteen Australian companies and three overseas companies. We will refer to the companies in these reasons as the “Elan Group”.
2. Eleven Australian companies in the Elan Group were wound up in December 2005, and a twelfth Australian company was wound up in March 2006. We will refer to these twelve companies as the “EG 12”. The liquidators of each of the EG 12 subsequently lodged reports with the Australian Securities and Investments Commission (ASIC) pursuant to s 533(1)(e) of the Corporations Act 2001 (Cth) (the Act) to the effect that the companies might be unable to make any distribution to their unsecured creditors.
3. In 2009 ASIC issued a show cause notice to the applicant under s 206F(1)(b) of the Act, requiring him to demonstrate why he should not be disqualified from managing corporations. After conducting a hearing at the request of the applicant, a delegate of ASIC decided to disqualify the applicant from managing corporations for a period of two years.
4. The applicant has applied to this tribunal for review of the delegate’s decision.
Issues before the Tribunal
5. The issue before the tribunal is whether we are satisfied that the applicant’s disqualification from managing a corporation is justified. This involves determining a number of primary issues, as follows:
(a)whether any of the companies in the EG 12 are related to one another within the meaning of s 206F(2)(a) of the Act;
(b)an evaluation of the applicant’s conduct in relation to the management, business or property of the Elan Group and the EG 12;
(c)whether the disqualification of the applicant would be in the public interest;
(d)a consideration of any other matters that we consider appropriate; and
(e)if the applicant’s disqualification from managing a corporation is justified, was the period of disqualification, namely two years, excessive.
6. In addressing the issues referred to in paragraphs 5(b), (c) and (d) above the parties referred to the following sub-issues:
(a)what was the financial position of the EG 12 prior to their collapse;
(b)what was the financial position of the Elan Group prior to the collapse of the EG 12;
(c)whether the collapse of the EG 12 was the direct result of the failure of ANZ Private Equity to effect settlement of a proposed transaction involving the restructuring and refinancing of a number of companies in the Elan Group in preparation for their being floated to the public;
(d)whether the applicant had a proper understanding of the nature of inter-company loans and loans from persons associated with companies in the EG 12 or the Elan Group and their accounting treatment;
(e)whether the applicant breached his duties as a director under s 180 of the Act in consequence of the failure by certain of the EG 12 to pay debts owing to the Australian Taxation Office (ATO) and other debts arising from statutory obligations, and whether such failure was otherwise relevant;
(f)whether the notice requiring the applicant to show cause why he should not be disqualified was served on the applicant within a reasonable time, and if it was not, was the applicant prejudiced by the delay, and what are the consequences of the delay;
(g)the relevance of payments already made by the applicant and his wife to certain creditors of the EG 12; and
(h)the relevance of the size of the losses suffered by the unsecured creditors of the EG 12, and of a recent proposal to make further voluntary payments to those creditors.
Background
7. The following background facts are based on the applicant’s evidence, which we accept, and on the documentary evidence before us.
8. The applicant is aged 64. He became qualified as an accountant in 1971, and practised as an accountant from 1967 until 1975. In his early years he worked as an accountant for a company, was promoted, and became its branch accountant and residential company secretary in Papua New Guinea. He has been an active participant in academic training and education through TAFE and the Bankers’ Institute of Australia, and has lectured part-time in accounting and cost accounting. In his witness statement (exhibit A3), which he adopted as part of his evidence, he says that he is familiar with generally accepted accounting practices in Australia, is an experienced business man, and has been a director of many companies in Australia and overseas for over 30 years.
9. In 1998 the applicant established a business through a group of companies to operate in what he described as the “health and wellness industries”. The Elan Group was mainly a manufacturer of “wellness” products including coconut oil, grape seed oil, pistachio nuts, aloe vera juices and creams, and animal feeds as bi-products. It operated plants in Samoa, Vanuatu, Papua New Guinea, Solomon Islands, and in three Australian locations. According to the applicant’s submissions to the delegate, the overseas entities were profitable and enabled their Australian shareholders to develop the above “more emerging” wellness products (exhibit R1, T52, page 3). Management, financial, administration and other services to the group of companies were provided by Elan Trading Corporation Pty Ltd (ETC). The applicant was the sole director of ETC, which was wholly owned by P.O.P.A. Pty Ltd, the trustee of a family trust which the applicant controls through a right of appointment and/or removal of the trustee.
10. By 2005, the group of companies for which ETC provided the above services comprised the Elan Group, which, as mentioned above, consisted of fourteen Australian companies (including ETC) and three overseas companies. In most cases the companies are owned directly or indirectly by P.O.P.A. Pty Ltd, or in some cases, 50% owned by the applicant or P.O.P.A Pty Ltd and the remaining 50% is owned by a third party.
11. In January 2004, the applicant, three companies in the Elan Group and one Peter Boyce entered into heads of agreement with a lender called Robier Holdings Pty Limited (Robier), whereby Robier was to advance loans to certain EG 12 companies on various securities itemised in the agreement. Robier was a company owned or controlled by one Graham Hellier, a businessman resident in Gibraltar. The Hellier Group had agreed to advance funds to the Elan Group on terms that provided for the loans to be converted to equity within five years of the loans being made, at the option of the lender. Subsequent agreements were entered into with Robier and another company in the Hellier Group, namely Thunder Enterprises Pty Ltd, involving advances to various companies in the Elan Group of approximately $15 million. These loans were secured by cross-guarantees and debenture charges across the Elan Group. One of the loans, for an amount of approximately $5 million, was a bridging loan to an EG 12 company called Coonawarra Gold Facilities Pty Ltd, and was to be used as bridging finance to construct a new dryer for the business operated by that company.
12. In early 2004, in consultation with his legal and accounting advisers, the applicant decided that the Elan Group could best achieve its business objectives by undertaking an initial public offering and operating as a listed public company. Negotiations were later entered into with Pacific Equity Partners (PEP), a Sydney based equity provider. PEP produced a term sheet dated 9 March 2005 which evidenced their in principle agreement to invest in various entities in the Elan Group in return for a 50% equity interest (exhibit R1, T53, pages 1034 – 1131). Legal and accounting due diligence was subsequently undertaken. However, the transaction did not proceed because it would have involved an investment by PEP of less than their then minimum investment level.
13. The applicant gave evidence that the ANZ Bank, whose premises were in the same building as the Elan Group, had previously expressed interest in providing a loan to Coonawarra Gold Facilities Pty Ltd, but this did not proceed because the bridging loan had by then been arranged with the Hellier Group. However, when the PEP transaction did not proceed, the Elan Group entered into negotiations with the ANZ Bank and one of its divisions, ANZ Private Equity, in relation to the proposal to float certain of the companies in the Elan Group. Agreement in principle was reached, and ANZ Private Equity entered into an Investment Term Sheet dated 1 August 2005 with ETC (exhibit R1, T56, pages 1132 – 1148). This contemplated an investment by ANZ Private Equity of $7.4 million. The ANZ Bank also agreed to make advances totalling $13.9 million, and later to increase their loan to approximately $14.3 million to meet the funding required at settlement. We will refer to the proposals entailing the ANZ Bank and ANZ Private Equity as the “ANZ transaction”.
14. Legal and accounting due diligence was completed in connection with the ANZ transaction. Extensive documentation was prepared, and arrangements were made for settlement to occur in mid-October 2005. However, on the night before settlement, and without any prior warning, ANZ Private Equity withdrew from the transaction. Settlement did not proceed. This caused a breach of the bridging loan to Coonawarra Gold Facilities Pty Ltd. On 11 November 2005 the Hellier lender appointed receivers and managers to that company and most of the EG 12 companies, which had given cross-guarantees and securities in respect of the bridging loan.
15. This caused the collapse of the Elan Group, and on 17 November 2005 the directors of eleven of the EG 12 companies placed those companies into voluntary administration. In December 2005, eleven of the EG 12 companies were wound up, and the twelfth EG 12 company, Easy Life Management Pty Ltd, was wound up on 21 March 2006.
16. On 23 November 2006, the liquidators of ten of the twelve EG 12 companies that had been wound up lodged reports under s 533(1) of the Act, whereby each liquidator reported that unsecured creditors of the companies would receive “nil” cents in the dollar. A s 533(1) report in respect of Easy Life Management Pty Ltd to the same effect was lodged on 23 July 2007, and a s 533(1) report to the same effect in respect of the twelfth company, Pegara Pty Ltd, was lodged on 23 November 2008.
17. The EG 12 (being the companies that were the subject of the s 533(1) reports) were Pacific Wellness Pty Ltd, Wellness Inside Limited, Perpetual Plantations of Australia Pty Ltd, Welfare Strategies Pty Ltd, Coonawarra Gold Pty Ltd, Ransom Records Pty Ltd, Coonawarra Gold Facilities Pty Ltd, Life Productions Pty Ltd, Brownlie Pistachio Nuts Pty Ltd, ETC, Easy Life Management Pty Ltd, and Pegara Pty Ltd.
18. Under s 533(2) of the Act, a liquidator may, in addition to lodging the report required by s 533(1), lodge further reports specifying any other matter that, in his or her opinion, it is desirable to bring to the notice of ASIC. On 14 December 2006 s 533(2) reports were lodged in respect of three of the EG 12 companies, on 26 February 2007 s 533(2) reports were lodged in respect of a further eight EG 12 companies, and on 27 February 2008 a s 533(2) report was lodged in respect of the twelfth EG 12 company, Easy Life Management Pty Ltd.
19. On 27 April 2009 show cause notices were issued to the applicant in respect of all twelve EG 12 companies in respect of which s 533(1) reports had been lodged (exhibit R1, T7, pages 65 – 89). The show cause notices were served on 25 May 2009. The hearing before the delegate took place pursuant to s 206F(1)(b)(ii) of the Act on 19, 27 and 28 August 2009, and he delivered his decision, and served it on the applicant, on 13 October 2009.
Legislation
20. Section 206F of the Act contains power for ASIC to disqualify a person from managing corporations. It provides relevantly as follows:
“Power to disqualify
(1) ASIC may disqualify a person from managing corporations for up to 5 years if:
(a)within 7 years immediately before ASIC gives a notice under paragraph (b)(i):
(i) the person has been an officer of 2 or more corporations; and
(ii)while the person was an officer, or within 12 months after the person ceased to be an officer of those corporations, each of the corporations was wound up and a liquidator lodged a report under subsection 533(1) (including that subsection as applied by section 526-35 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006) about the corporation’s inability to pay its debts; and
(b)ASIC has given the person:
(i)a notice in the prescribed form requiring them to demonstrate why they should not be disqualified; and
(ii)an opportunity to be heard on the question; and
(c)ASIC is satisfied that the disqualification is justified.
…
Grounds for disqualification
(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.”
21. Section 533 of the Act provides for circumstances when reports by liquidators are to be lodged with ASIC. It provides relevantly as follows:
“(1)If it appears to the liquidator of a company, in the course of a winding up of the company, that:
…
(c)the company may be unable to pay its unsecured creditors more than 50 cents in the dollar;
the liquidator must:
(d)as soon as practicable, and in any event within 6 months, after it so appears to him or her, lodge a report with respect to the matter and state in the report whether he or she proposes to make an application for an examination or order under section 597; and
(e)give ASIC such information, and give to it such access to and facilities for inspecting and taking copies of any documents, as ASIC requires.
(2)The liquidator may also, if he or she thinks fit, lodge further reports specifying any other matter that, in his or her opinion, it is desirable to bring to the notice of ASIC.”
Consideration
22. When this tribunal reviews a reviewable decision, it conducts a hearing de novo; that is, the matters in issue between the parties are examined afresh, and the tribunal reaches its own decision upon the material before it, which might, and often does, include new, further or different material than was before the decision-maker whose decision is under review. The tribunal may exercise all of the powers and discretions conferred upon that decision-maker; it stands in the shoes of the decision-maker, and its function is to arrive at the correct or preferable decision on all of the material before it: see Shi v Migration Agents’ Registration Authority (2008) 235 CLR 286 at [34] – [39] and [98] – [99]; Drake v Minister for Immigration and Ethnic Affairs (1979) 46 FLR 409 at 419; and Minister for Immigration and Ethnic Affairs v Pochi (1980) 4 ALD 139 at 143.
23. In Murdaca v Australian Securities and Investments Commission (2009) 178 FCR 119 a Full Court of the Federal Court (North, Kenny and Foster JJ) explained at [101] that the structure and purpose of s 206F is as follows (omitting references):
“(a) Subsection (1) of s 206F comprises, in ascending order of importance:
(i)A trigger mechanism (the conditions, filters or gateway) embodied in subs (1)(a) (stage 1);
(ii)A procedural fairness requirement (the giving of a show cause notice and an opportunity to be heard): subs (1)(b) (stage 2); and
(iii)A merits decision captured in the requirement that ASIC be satisfied that disqualification is justified: subs (1)(c) read with s 206F(2) (stage 3).
(b)ASIC’s power to disqualify a person from the management of corporations must be exercised for the purposes for which it was granted. Those purposes are the protection of all those persons who deal with corporations from the consequences of the actions of those corporate officeholders who, either through incompetence or dishonesty or a combination of the two, bring about the failure of corporations and thus cause loss to others … and the maintenance of professional management standards in the public interest ... .”
24. The Court went on to say that s 206F does not give reports prepared by liquidators pursuant to s 533 of the Act any particular status or weight, and that ASIC is not obliged to have regard to the s 533 report(s) that triggered the disqualification process when considering whether disqualification is justified. Rather, it is to make a decision on the merits as to whether disqualification is justified. Their Honours added at [103] and [104] that s 533 itself does not require that “concrete facts” be presented to the liquidator before he is obliged to report, or that the liquidator form a “concrete opinion” in relation to the topics addressed by the section, since s 533 merely requires it to “appear” to the liquidator that certain things “may” have occurred or “may” be the fact.
25. In determining whether or not the applicant should be disqualified from managing corporations pursuant to s 206F, we also take into account the propositions referred to by Santow J in Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); ASIC v Adler & Ors (2002) 42 ACSR 80 at [56]. In particular, in considering the exercise of the power of disqualification in the present matter, we take into account the need to protect the public and persons who deal with companies; the deterrent effect of disqualification on the applicant; the need to deter other persons engaged in the management of corporations from engaging in inappropriate conduct in managing corporations; the maintenance of public confidence by ensuring that persons whose conduct falls short of the appropriate standards will be disqualified for an appropriate period from managing corporations; that disqualification should not be used as a punitive measure; and that it is necessary to balance against the foregoing considerations personal hardship to the applicant that would result from disqualification.
26. Santow J’s judgment in Re HIH Insurance Ltd (in prov liq) (supra) was described by McHugh J in Rich v Australian Securities and Investments Commission (2004) 220 CLR 129 at [48] as the leading authority on the reasons for a court exercising its powers under other corresponding provisions of the Act that empower a court to disqualify a director where it is satisfied that disqualification is justified. His Honour also said at [43] that courts take into account a wide variety of factors in determining whether disqualification is justified, and if so, the period of disqualification that should be imposed. He said:
“They consider more than the present and future fitness of the defendant to manage corporations. They take into account factors such as 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 defendant, the gravity of the misconduct, the defendant’s previous good character, prejudice to the defendant’s business interests, personal hardship and the willingness of the defendant to render assistance to statutory authorities and administrators.”
27. It has been held in a case under the predecessor of s 206F that legal notions of onus of proof are not applicable to the proceedings before the delegate, but a director who has been served with a show cause notice has a practical onus to adduce further material that has not already been considered by the Commission: Kardas v Australian Securities Commission (1998) 53 ALD 303 at 308.
28. The requirements of s 206F(1)(a) and (b), described in Murdaca (supra) as the “trigger mechanism” and the “procedural fairness” stages, have been satisfied in this matter. The issue that arises in the present matter relates to the so-called third stage, namely a merits review of the decision as to whether the disqualification of the applicant is justified. This entails considering the criteria referred to in s 206F(2) of the Act, being the matters to which we referred in paragraph 5 above. We shall consider these criteria in turn.
Section 206F(2)(a) : are any of the Elan Group of companies related to one another?
29. Under s 206F(2)(a), we must have regard to whether any of the EG 12 companies in respect of which s 533(1) reports were lodged were related to one another.
30. The relevance of this consideration was referred to by Deputy President McDonald in Re Feher and Australian Securities Commission (1997) 15 ACLC 1774 at [23], where he referred to the explanatory memorandum in relation to a similar provision when it was first introduced into the Act. This stated that the relevant provision, which required the decision-maker to have regard to the relationship between two companies when considering whether or not it was appropriate to issue a show cause notice, would be relevant in the case of a failure of a group of companies which is in substance a single entity.
31. Section 50 of the Act provides for when bodies corporate are related to each other. It provides as follows:
“50. Where a body corporate is:
(a) a holding company of another body corporate; or
(b) a subsidiary of another body corporate; or
(c) a subsidiary of a holding company of another body corporate;
the first-mentioned body and the other body are related to each other.”
32. Counsel for the applicant, Mr Robert Sallis, pointed out that s 206F(2)(a) does not use the defined expression “related body corporate” appearing in s 9 of the Act, being the dictionary section, nor is it expressed to refer to corporations that were related to one another “within the meaning of s 50 of the Act”. He also referred to the definition in s 9 of “related entity” which is a more expansive term, and is defined to include a situation where two bodies corporate have a common director.
33. We consider that s 206F(2)(a) should be interpreted in accordance with s 50, and do not accept Mr Sallis’s contrary submission. In our opinion, the words of s 50 are clear, and should be applied in order to determine whether corporations referred to in s 206F(2)(a) are related to each other. Our opinion is consistent with the definition in s 9 of “related entity” itself; the relevant paragraph of the definition is paragraph (g), which refers to “a body corporate that is related to the first-mentioned body”, but like s 206F(2)(a), it does not import a reference to s 50, and it does not incorporate the defined expression “related body corporate”.
34. The ownership structure of most of the Australian companies in the Elan Group appears in exhibit R5. From this, it appears that of the twelve companies that were the subject of show cause notices, the following companies are related to each other within the meaning of s 206F(2)(a), as interpreted by reference to s 50:
(a) ETC and its wholly owned 100% subsidiary, Brownlie Pistachio Nuts Pty Ltd;
(b)Pegara Pty Ltd and its wholly owned 100% subsidiary, Perpetual Plantations of Australia Pty Ltd; and
(c)Wellness Inside Limited, Life Productions Pty Ltd and ETC, each company being 100% subsidiaries of P.O.PA. Pty Ltd.
35. However, other companies in the EG 12 are not related to each other, and so on a strict application of s 206F(2)(a), the failure of the EG 12 cannot be treated as the failure of a single entity.
36. In Re Sheslow and Australian Securities Commission (1994) 34 ALD 539 at [39], a Deputy President of this tribunal considered a provision in the Corporations Law that corresponded with s 206F(2)(a) of the Act, and adopted the broader view that the three companies in question in that case “should be considered as a group by virtue of their connections in shareholding, directors and activities”. However, the Deputy President did not refer to s 50 of the Corporations Law (which is in the same terms as s 50 of the Act) in order to determine whether the companies were related to each other, and we do not agree, with respect, with his conclusion in that case that s 600(4) (the predecessor of s 206F(2)(a)) applied to the group of three companies in question.
37. In the alternative, it was contended on behalf of the applicant that there was nevertheless a close relationship between the companies in the EG 12, because the applicant was a director of each of the companies, ETC provided to the group the management and other services to which we have referred above, the group had the same general manager, namely the witness Timothy John Scala, it used the same professional advisers, and had been offered as a group to PEP and later to ANZ Private Equity.
38. Under s 206F(2)(b)(iii), we may have regard to any other matters that we consider appropriate. We do not think that the presence of s 206F(2)(a) (which makes it mandatory for ASIC to have regard to whether the relevant corporations were related to one another) would mean that we are precluded by the expressio unius rule of statutory interpretation from taking into account the closeness of the relationship between the companies in the EG 12 under the broad provisions of s 206F(2)(b)(iii).
39. We accept that there was a close relationship between the companies in the EG 12 for the reasons referred to by Mr Sallis, and also because it appears that the applicant had a considerable influence over the activities and policies of other companies in the EG 12 whose boards included other directors in addition to the applicant. However, different shareholders were involved in the case of a number of the companies. The activities of a number of the companies were quite disparate, and ranged from such things as running a pistachio plantation and marketing pistachio nuts, marketing employee benefits opportunities, manufacturing and recording CDs, marketing and distributing Christian music, operating a mill to make grape seed oil, drying and selling grape marc, and research and development in relation to appetite suppression. These activities are likely to have entailed quite different trading and management issues. Further, whilst Mr Scala was the general manager of the EG 12, he had little to do with two of the companies, namely Ransom Records Pty Ltd and Life Productions Pty Ltd. In all of the circumstances, we do not think it appropriate to regard the companies in the EG 12 as constituting a single entity for the purpose of applying s 206F(2)(b)(iii) of the Act.
Section 206F(2)(b)(i) : the applicant’s conduct in relation to the management, business or property of any of the relevant corporations
40. Mr Sallis contended on behalf of the applicant that there was no evidence that he had been guilty of dishonesty or incompetence, in the sense of negligence or lack of commercial morality, in his management of the Elan Group or the EG 12. He further contended that the collapse of the EG 12 was the direct result of the unexpected failure of ANZ Private Equity to effect settlement pursuant to the ANZ transaction. He submitted that the Elan Group did not have any real opportunity to find a new equity partner because the Hellier Group lender took action, within a short time of the collapse of the ANZ transaction, on the breach by Coonawarra Gold Facilities Pty Ltd of the bridging loan.
41. As against this, counsel for ASIC, Mr Nigel Wilson, referred to the financial position of the Elan Group as it was without the proposed injection of funds from the ANZ transaction. In support of this submission, he referred to certain exhibits, namely exhibits R3, R6 and R8, which were prepared by the respondent to summarise the consolidated trading and asset position of the EG 12 without the funding that would be available from the ANZ transaction. We understand ASIC’s contention to be that the EG 12 were in difficult financial circumstances, and that this should be attributed to the applicant’s conduct in the management of the EG 12 (as well as the Elan Group). Mr Wilson also referred to the significant deficiency on the liquidation of the EG 12, and to the total of the losses incurred by the unsecured creditors of the EG 12. He further referred to certain specific statutory liabilities which certain of the EG 12 companies had not met, and he relied upon this failure as evidence of misconduct by the applicant in relation to the management of the EG 12.
42. A number of issues relevant to s 206(2)(b)(i) are raised by these competing submissions and by the evidence before us. We will consider these in turn.
(a) What was the financial position of the EG 12 prior to its failure?
43. The applicant did not accept the accuracy of exhibits R6 (the consolidated balance sheet of the Elan Group), R3 or R8. Exhibit R8 is a consolidated profit and loss account that corrected some information in exhibit R3, which may therefore be regarded as having been superseded.
44. Exhibit R6 purported to show the total assets and liabilities and net position of the EG 12, both including and excluding inter-company loans, and also the same information in relation to five other companies, including overseas companies, that were, at least under the initial proposal, to be part of the ANZ transaction. This exhibit was based on the accounting information before the tribunal, but it used various balance dates. The applicant then sought advice from a forensic accountant, the witness David Ian Crase, who provided a report as to the correctness of exhibit R6. This report was disputed in a number of respects by ASIC’s forensic accountant, the witness Sam Davies. We then made an order for the two accountants to give concurrent evidence.
45. Prior to their doing so, at our direction, Messrs Crase and Davies prepared a joint report. This recorded that they had agreed that a number of adjustments needed to be made to exhibit R6, being the consolidated balance sheet. They did not advise on the value of the EG 12 as a going concern. Their final agreed position as to the consolidated net assets and liabilities of the Elan Group, on the basis that inter-company loans were included, was as follows (exhibit AR1, page 5).
EG 12 $(1,571,792) The five additional companies
$1,038,464
Net position of the Elan Group
$(533,327)
46. The accountants disagreed with respect to three items included in the combined balance sheets. These items were as follows:
(a)Mr Crase considered, and Mr Davies disputed, that there should be a revaluation of land owned by one of the EG 12, namely Perpetual Plantations of Australia Pty Ltd (which would result in an increase of $2 million in the value of the EG 12);
(b)Mr Crase considered, and Mr Davies disputed, that one half of certain expenses of another EG 12 company, Easy Life Management Pty Ltd, should be considered developmental in nature and therefore capitalised (which would result in an increase in the value of the EG 12 of $484,614); and
(c)Mr Davies considered, and Mr Crase disputed, that an adjustment should be made because no balance sheet was provided for three of the EG 12 companies (which would result in a decrease in the value of the EG 12, as discussed below).
47. The consolidated corrected and adjusted balance sheet of the EG 12 prepared by the accountants included an adjusted net asset of $826,827 for Perpetual Plantations of Australia Pty Ltd (see exhibit AR1, page 5). The balance sheet of that company (exhibit R1, T61, page 1239) included the following non current asset:
“Freehold land at Valn – June-03 $1,876,368.00.”
48. We have concluded that it is appropriate to increase the value of the land owned by Perpetual Plantations as at 30 June 2005 by $2 million, in accordance with Mr Crase’s opinion.
49. In reaching this conclusion, we have taken into account first that the land was subsequently sold (not by the company in a normal sales environment, but by its liquidator) for $3.2 million. Second, the land was valued at $3.72 million in an earlier valuation dated 13 March 2003 (exhibit A18) (and the valuer identified the risks to which Mr Davies referred, but expressly recognised that they should be reflected in his valuation). Third, in Heads of Agreement dated 30 January 2004 between a Hellier Group lender (Robier Holdings Pty Limited), Perpetual Plantations and Coonawarra Gold Pty Ltd as borrowers, the parties acknowledged that the property had a value of $4.3 million (exhibit R1, T93, page 1415).
50. There was also further evidence of the valuation of the land to which we attach less weight. This included the applicant’s evidence that he and his wife had incurred expenses to improve the land after they acquired their interest in it some years earlier; a Report as to Affairs (Form 507) signed by the applicant in December 2005, in which he stated that the valuation of the land was $3.75 million, and that it had an estimated realisable value of $3.5 million; his evidence that the Hellier Group had had the land valued at an amount that supported the figure in the Heads of Agreement of $4.3 million; and evidence that the company itself had obtained a revaluation from the same valuer who had prepared the 2003 valuation at a figure of $4 million. Neither of these further valuations was tendered, and the latter valuation cannot apparently be found. Counsel for the applicant also referred to the amount of stamp duty paid on a mortgage over the land (exhibit A19) which indicated that the document had been stamped as security for $4.85 million in March 2004. However, the mortgage was collateral to another mortgage, and without information as to the value of the prime security, the stamping of the mortgage does not assist to establish the value of the land.
51. In evaluating the evidence of value, we have been mindful that none of the bases for the suggested increase in value is conclusive, and we have taken into account the submissions of counsel for ASIC, as well as the reservations which Mr Davies had as to the matters relied upon by the applicant. But as Mr Sallis submitted, all of the evidence in combination supports the view that the figure included in the balance sheet should be substantially increased, and we think that Mr Crase’s adjustment of $2 million is reasonable.
52. The second difference between the accountants related to Easy Life Management Pty Ltd. This company was engaged in research as to the effects of lauric acid on appetite suppression. Mr Davies referred to relevant accounting standards in support of his opinion that no part of the costs incurred in relation to the intellectual property of that company should be capitalised. He also referred to agreements that had been entered into by that company in relation to its research and proposals to commercialise its intellectual property. He considered, by reference to those agreements and to two accounting standards which he identified, that the company’s activities should properly be categorised as research activities, and not development activities, and the relevant expenses should not therefore be treated as one-off expenses. We prefer his analysis of the accounting treatment of the losses incurred by this company to the view of Mr Crase.
53. At the same time, in considering whether these expenses provide evidence of some misconduct or lack of proper management on the part of the applicant, we take into account that the company was engaged in an endeavour to acquire and commercialise new intellectual property. It had raised and expended what appears to have been venture capital for this purpose in the form of a loan from the Hellier Group of approximately $1.1 million, according to the balance sheet of the company (exhibit R1, T105, page 2146). The applicant gave evidence that this loan was unsecured, and that the lender had an option to convert the loan to equity. No doubt this option would have been exercised if it had appeared that the prospects of successfully commercialising the company’s intellectual property were sufficiently attractive. We also note that the company was one of the four EG 12 companies in which ANZ Private Equity was to invest.
54. As to the third difference between the accountants, Mr Davies pointed out, in support of his concern that balance sheets for three of the EG 12 companies were not available, that whilst the assets of ETC included inter-company loans from two companies, the corresponding liability for these two loans was not included. He also pointed out that the liquidators had estimated an excess of liabilities over assets in the case of each company. However, Mr Crase thought that the liquidators might have allowed for the liability of the two companies concerned under the collateral guarantees they had given in favour of the Hellier Group. That certainly appears to be the case with Ransom Records Pty Ltd, which was reported as having an estimated deficiency of $10 million. The applicant gave evidence that the other company, Pegara Pty Ltd, had repaid a loan for the amount of the deficiency estimated by the liquidator, namely $0.5 million, and this evidence was not disputed by ASIC. On the state of the evidence before us we think that the preferable approach is to consider the position on the basis that all inter-company loans are included, and to assume (as have the experts in their jointly agreed figures) that the three companies concerned have a neutral net asset position.
55. The accountants agreed that it was not appropriate to exclude inter-company loans from the consolidated balance sheet, because in a number of cases the shareholders of the EG 12 companies were different. We accept that this is correct.
56. As to the profit and loss position and exhibits R3 and R8, the accountants for the parties agreed that a number of adjustments should be made to exhibit R8 to correct arithmetical errors and to include the trading results of each company to a common year end, namely 30 June 2005. On this basis, they agreed that there was a net trading loss for that year of approximately $1.45 million.
57. They did not agree on two further adjustments proposed by Mr Crase. He considered that:
(a)the trading loss should be reduced by $20,000 - $77,000 in round figures because certain costs incurred by Wellness Inside Pty Ltd should be treated as one-off costs incurred in preparation for the PEP transaction; and
(b)the trading loss of Easy Life Management Pty Ltd should be reduced by $484,000 (that is, one half of research and development costs, being the same amount as he had proposed should be capitalised in the consolidated balance sheet of that company). He described the company as a “start-up company, with no sales revenue”.
58. There is evidence before us, from the applicant and Mr Scala, that Wellness Inside Limited was the vehicle that was to be used for the PEP transaction, and that it had incurred legal and consultants’ costs in connection with that proposed transaction. There is insufficient evidence before us to enable us to determine the amount or precise nature of the costs that were so incurred. We note, however, that the company had no purpose other than to be the vehicle for the PEP transaction, and that the total operating loss that it incurred was approximately $77,000. We accept Mr Crase’s opinion that some reduction for one-off costs should be made with respect to this company’s activities, and that his estimate of the range of this adjustment is reasonable. It is not necessary, in view of the conclusion that we have reached as to the relevance of exhibit R8, for us to attempt to quantify the adjustment within the broad range that he suggested.
59. Of course, even if both adjustments suggested by Mr Crase are made, significant trading losses were incurred by the EG 12, and there were very significant losses to unsecured creditors following the collapse of the EG 12. However, the EG 12 was part of the Elan Group, and it is apparent that the overseas companies together were in a stronger financial position than the EG 12. In his evidence, the applicant said that the group employed about 350 people, had a turnover in excess of $40 million per year, was trading profitably to 30 June 2005, and had an EBITDA of about $1.6 million (transcript 22.02.10, page 67, line 43). In addition, our above finding as to the value of the Perpetual Plantations property would result in a further adjustment to the corrected consolidated balance sheet and produce a surplus of approximately $1.5 million of assets over liabilities, and a surplus of assets of approximately $0.5 million for the EG 12.
60. There are other matters that are relevant to the financial position of the Elan Group prior to its failure. The EG 12 had not received the benefit of the new equipment that was still being constructed for Coonawarra Gold Facilities Pty Ltd at the time when the Hellier Group appointed receivers and managers; that company was at the point of establishing a new business enterprise, but it had not commenced. In addition, Easy Life Management had not received any return from its investment in research. Further, the applicant estimated that the Elan Group had incurred legal, accounting and consultants’ fees in the order of $600,000, which included the expenses of due diligence investigations and preparation of relevant documentation, in connection with the proposed transactions with PEP and the ANZ. He also said that the Elan Group incurred significant audit fees, both for the Australian companies and the overseas companies, that would not have been required if the PEP and ANZ transactions had not been proposed. In addition, the applicant referred to the loss of management time arising from the due diligence process, his own inability to drive the Elan Group’s sales due to his involvement, and the impact of these matters on the Elan Group during this period. Mr Scala gave evidence that Coonawarra Gold Pty Ltd had been purchased in early to mid-2004, that its facilities were then in a poor condition, that about eight to nine months were spent putting the facilities into proper condition and testing them, and that the company only traded for three or four months of the 2005 financial year.
61. It is also significant that following the due diligence, which had been conducted by reputable legal and accounting firms, PEP and the ANZ had effectively placed a significant value on certain of the Elan Group companies. That is because PEP had been willing to inject $20 million to $25 million into the companies concerned in the PEP proposal in return for a 50% interest, and ANZ Private Equity had been prepared to inject $7.4 million in return for a 25% interest in other group companies that were involved in the ANZ transaction (see the companies listed at page 12 of exhibit A16, with the exception of Aloe Wellness Australia Pty Ltd, which was later excluded from the ANZ proposal).
62. Late in the hearing the applicant produced a printed copy of power point slides used at a presentation made to senior executives from ANZ and ANZ Private Equity on 22 September 2005 (exhibit A16). The slides included a cash flow review. This demonstrated that after the Elan Group had received loans from the ANZ Bank and the injection of share capital from ANZ Private Equity, and after repayment of the Hellier loans, cash flow for the companies involved in the ANZ transaction was positive from operations in all but two of the first 13 weeks, and would amount to a cumulative positive result of $800,000 during that period. The cash flow slides were also referred to Messrs Crase and Davies for comment, and they prepared a joint report as to their correctness (exhibit AR2). It is apparent from their joint report that they shared a number of reservations as to the accuracy of the cash flow forecast, and that their ability to assess the correctness of the forecast was limited. Their difficulties included a lack of information as to the assumptions underpinning the financial information, and the absence of source documents. As against this, Mr Scala, who was one of the two presenters, explained that the presentation did not purport to encompass the source documents, and relevant information was covered by the due diligence process that had previously been undertaken on behalf of PEP and ANZ. We think that a number of the accountants’ concerns are not relevant, having regard to other evidence before us of which they were unaware. On balance, we do not attach significant weight to the cash flows referred to in the presentation, but the presentation does support the apparent assessment by the ANZ, and earlier by PEP, of the positive future prospects and value of the companies concerned.
63. We note that ASIC did not contend that the Elan Group was insolvent prior to the failure of the ANZ transaction. We have carefully analysed the financial position of the Elan Group as it was in the period prior to the proposed settlement with the ANZ. We are not satisfied that its financial position at that time, or the financial position of the EG 12, provides evidence of misconduct or incompetence on the part of the applicant, or that it justifies disqualifying him from managing corporations.
(b) Effect of the failure of the ANZ transaction
64. The applicant contended that the failure of the ANZ transaction was both sudden and unexpected, and caused the collapse of the Elan Group, including the EG 12, and the substantial deficiency on their liquidation.
65. The application of the funds actually available to the Elan Group from the sale of the Perpetual Plantations property and the refinancing of a loan owing to Mulpara Pty Ltd, and the funds that would have been provided pursuant to the ANZ transaction (if it had proceeded) appears in exhibit A4. This shows the receipt of $7.4 million from ANZ Private Equity, $14.269 million from ANZ Bank, $2.8 million from the sale of the Perpetual Plantations’ land (that being the net amount received out of the gross sale price of $3.2 million), and $3.2 million from the refinancing of the Mulpara loan. The exhibit also shows the amount of the secured loans of the various companies referred to, and also the repayment of the loans owing to the Hellier Group. As also appears from exhibit A4, two secured loans were to remain in place, namely a loan to Coconut Oil Production Medang Limited from the Bank of South Pacific (which was to be reduced from $4.215 million to $2 million), and a loan from Westpac of $2.5 million to Coconut Oil Production Holdings Limited (previously Coconut Oil Production Vanuatu Limited).
66. There were also two other loans that were not going to be repaid from settlement of the ANZ transaction. One was a loan of $3.2 million owing to Mulpara Pty Ltd on the security of a building at 41 Currie Street, Adelaide. This was refinanced independently. The second excluded loan was for $4 million owing by ETC to Bridgecorp Finance; this was later fully repaid by selling other assets. This second excluded loan is shown in exhibit A6, which supplements exhibit A4 by including reference to that loan.
67. In its final submission, ASIC referred to an extract from a due diligence report prepared by PricewaterhouseCoopers which contained a table of figures illustrating the application of the funds to come from ANZ Private Equity (exhibit R1, T57, page 1183). This extract referred to a debt of $3.5 million owing by Wellness Inside Ltd on the basis that it would be “outside the Pacific Wellness Group”. We permitted the applicant to be recalled to explain this reference, and an apparent contradiction in his earlier evidence as to this aspect. It is clear from his further evidence that the report is correct in saying that Wellness Inside Ltd (which was the vehicle established for the purpose of the PEP transaction) would be outside the Pacific Wellness group, but is incorrect in assuming that the loan from the Hellier Group lender to Wellness Inside Ltd would not be repaid out of the funds to be provided pursuant to the ANZ transaction. The applicant explained that the indebtedness of Wellness Inside Ltd to the Hellier Group was to be discharged by receiving repayment of other inter-company loans owing to it, which were in turn to be repaid by ETC from funds received by it at settlement of the ANZ transaction. The flow of the funds to be received at settlement is shown in exhibit A23. We are satisfied that the Hellier loans to the Elan Group would have been fully discharged out of the funds received pursuant to the ANZ transaction, as shown in exhibits A4 and A6.
68. It follows from the information in exhibits A4 and A6 and the applicant’s evidence that after settlement of the ANZ transaction the Elan Group would have had surplus assets of approximately $4.4 million. This figure assumes that costs and creditors would amount to only $2.5 million. The applicant referred to this in his evidence as an estimate. It is an amount substantially less than the total amount of unsecured creditors referred to in the delegate’s decision when he referred to the deficiency on liquidation of the EG 12, but is consistent with the applicant’s evidence to the delegate, as appears from the schedule showing estimated creditors submitted to the delegate by the applicant (see exhibit R1, T96, page 1638 and the transcript before the delegate at page 1959, line 27 and following). The applicant’s above estimate of $2.5 million was not questioned by ASIC, and we also note that the applicant gave uncontested evidence that certain further loans from other creditors were to be capitalised following the restructuring of the Elan Group pursuant to the ANZ transaction. This appears from the same extract from the due diligence report of PricewaterhouseCoopers (exhibit R1, T57, page 1183). The capitalisation of these loans would have increased the group’s surplus funds by some $4.93 million (transcript 23.02.10, page 175, lines 8 - 28). Taking into account all of the evidence before us, we accept the applicant’s assessment that the Elan Group would have had adequate working capital following settlement of the ANZ transaction.
69. There is also ample evidence before us to support the applicant’s statement that he was expecting settlement to occur on the ANZ transaction. Due diligence had been completed. Extensive documents had been prepared, and all of the loan documents had been executed prior to settlement. The ANZ and ANZ Private Equity had incurred substantial legal, accounting and corporate advisory costs, estimated by the applicant to be in excess of $500,000 (exhibit A3, paragraph 109c). The applicant and Mr Scala gave evidence that senior executives representing the ANZ Bank and ANZ Private Equity were satisfied with the matters covered by the presentation on 22 September 2005, to which we have referred above. A date in mid-October 2005 was fixed for settlement, which was to occur at the ANZ’s Adelaide Office.
70. However, on the evening before settlement, a representative of ANZ Private Equity, without any prior warning, advised Mr Scala that ANZ Private Equity did not propose to settle, and was withdrawing from the transaction. The proposal for the investment by ANZ Private Equity is contained in an Investment Term Sheet dated 1 August 2005 (exhibit R1, T56, page 1132). The document is expressed not to be binding or to give rise to any legal obligation (clause 15), and is subject to various conditions precedent (clause 14). Nevertheless, the document sets out detailed terms of the proposed investment, the parties proceeded to prepare all requisite documentation, and there is no evidence that the conditions precedent had not been fulfilled prior to the date fixed for settlement. As mentioned above, the applicant has never been given a reason for the withdrawal of ANZ Private Equity, notwithstanding endeavours to ascertain the reason. Notwithstanding the withdrawal of ANZ Private Equity, all of the other parties attended the next day at the time and place arranged for settlement. This included Mr Hellier and his Sydney solicitor, and a Mr Turner from New Zealand, representing his company, MRP Services Limited. As the applicant discovered just prior to settlement, that company was a major customer of the ANZ Bank in New Zealand, and was going to contribute $2 million to the $7.4 million that had been expected to come from ANZ Private Equity.
71. The applicant said that Mr Turner’s company remained willing to enter into further negotiations notwithstanding ANZ Private Equity’s withdrawal. In addition, the ANZ Bank remained willing to make the loans previously agreed if the Elan Group could find alternative equity capital. The applicant endeavoured to do so, and also to find buyers for group assets. However, the failure of the ANZ transaction to settle resulted in a breach of a capital raising condition in the bridging loan that had been raised by Coonawarra Gold Facilities Pty Ltd, and quite soon after the date of settlement, on 11 November 2005, the Hellier Group lender appointed receivers and managers over most of the companies in the Elan Group. The applicant then took steps on 17 November 2005, on legal advice, to place various companies in the Elan Group into voluntary administration.
72. The applicant gave evidence that he and his wife lost everything they had as a result of the liquidation of the EG 12. They sold personal assets, including their house, to pay bank guarantees. After the collapse of the Elan Group, the applicant worked as a consultant to various companies, including Mr Turner’s company, MRP Services Limited. He said that that company subsequently bought one of the Elan Group’s mills in Papua New Guinea by discharging a Hellier mortgage of $1 million, and over the next four years made an EBIT of about $13 million from this investment.
73. The applicant said that if ANZ Private Equity had given him any cause to believe that the ANZ transaction would not proceed, he would have arranged for alternative funds and/or to have sold down assets to retire the Hellier debt (and we understood him to be referring to the bridging loan from the Hellier Group lender to Coonawarra Gold Facilities Pty Ltd, since the other loans were for terms of four to five years). Mr Scala and the Elan Group’s solicitor, Mr Arthur, confirmed the applicant’s evidence as to the steps taken in preparation for the ANZ settlement and that the withdrawal of ANZ Private Equity was completely unexpected. There is no evidence that ASIC took any steps, either for the purpose of the hearing before the delegate or the hearing in this tribunal, to investigate the reason for ANZ Private Equity withdrawing, notwithstanding the potential significance of this issue. The applicant described the failure of ANZ Private Equity to settle as “an unforeseen and catastrophic event that triggered the crash of the Elan Group of companies” (exhibit A3, paragraphs 110 – 197). On the evidence before us, we think that this is a correct description of what occurred, and that the collapse of the Elan Group, including the EG 12, does not of itself, due to the circumstances in which it occurred, justify disqualifying the applicant under s 206F of the Act.
(c) Applicant’s understanding of inter-company and shareholder loans
74. In his reasons for decision, the delegate said that it was “of major concern” that the applicant had in effect treated inter-company loans and loans from people associated with companies as being the same as equity. He concluded that it was important that the public be “protected from directors who hold such views, particularly where the consequences of such views, as here, has contributed to a number of corporate and individuals receiving no return on their loans to companies of which (the applicant) is a director” (exhibit R1, T5a, paragraphs 214 – 216). In support of his conclusion, the delegate quoted from a passage of the transcript of the evidence before him, and emphasised portion of a response from the applicant, in which the applicant had said: “… as you know, most times intercompany loans are deemed to be the same as capital.” (exhibit R1, T5a, paragraph 214).
75. ASIC contended that the delegate’s finding as to this matter should be upheld. In support of this contention, ASIC led expert evidence from Mr Davies as to the treatment of inter-company loans and loans from related parties, and the formal steps and documentation that were required in order to convert loans to equity.
76. As against this, counsel for the applicant submitted that the delegate’s decision was incorrect in this respect. Mr Sallis pointed out that the particular passage from the transcript of the hearing before the delegate, to which the delegate referred in his decision, related to a particular inter-company loan from ETC to Life Productions Pty Ltd, which companies were both wholly owned subsidiaries of P.O.P.A. Pty Ltd. Counsel further pointed out that the question was asked in the context of whether the debtor, Life Productions Pty Ltd, was insolvent by reason of this loan.
77. The applicant gave evidence in the proceedings before us to the effect that it was common practice in Australia for the founders of private companies to provide working capital to their companies by means of shareholder loans, and he referred to the tax and other advantages of that practice. He said further that he was the sole director of P.O.P.A. Pty Ltd, and did not intend to call up the loan, and the inter-company loan would be extinguished if the accounts of the two companies were consolidated.
78. The applicant’s evidence was supported by the witness Mr Scala (who could speak from his long experience as a banker), and by the evidence of Mr Crase. In support of his opinion Mr Crase produced a summary of some reasons why accountants may opt not to recommend the conversion of a loan into equity (see exhibit A14).
79. There is force in Mr Sallis’s submission that the passage of evidence referred to in the delegate’s decision must be read in its context, and that the delegate did not ask the applicant more generally as to his understanding of the treatment of loan accounts. However this may be, as mentioned above, our function is to determine the issues before us by reference to the evidence that is now before the tribunal. Further, we must consider the applicant’s understanding of this issue at the time when we make our decision, and not at the time of the hearing before the delegate: Shi (supra). The applicant gave clear evidence before us in which he explained why he made the comments in question in his earlier evidence to the delegate. He also explained his understanding of the difference between loan accounts and equity, and the way in which loan accounts should be treated and accounted for. We are satisfied that he has a proper understanding of the position, and that he should not be disqualified from managing corporations by reason of any lack of understanding as to this matter.
80. We have not overlooked the discrepancy between the accounts of ETC and Easy Life Productions Pty Ltd, in that the loan account in the latter company is described as a non-current liability, whereas the loan is described as a current asset in the accounts of ETC. Whilst this is not correct, it is not of such significance as to alter our conclusion that the applicant should not be banned from managing corporations by reason of any lack of understanding of the EG 12’s accounts.
(d) Failure to pay debts owing to the ATO and other statutory obligations
81. In his final submissions, Mr Wilson referred to and relied upon the delegate’s findings to the effect that debts were owing to the ATO, and that other statutory liabilities had not been paid. Counsel contended in effect that such findings constituted a breach of the applicant’s duties under s 180 of the Act. He further referred to the importance of the need to meet taxation and other statutory obligations, and adopted the delegate’s conclusion, by reference to Piastri v Australian Securities Commission (unreported, Administrative Appeals Tribunal, Deputy President McDonald and Members JTC Brassil and CG Woodard, 20 December 1996) and Re Boyle and Australian Securities Commission [2009] AATA 122, that such failures of directors’ duties were significant and important failures on the part of the applicant, and of themselves warranted disqualification for a considerable period (exhibit R1, T5a, paragraph 210).
82. Section 180 provides in effect that a director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director or officer of a corporation in the corporation’s circumstances, and occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
83. In his decision the delegate referred to the following taxation and other statutory liabilities (exhibit R1, T5a, paragraph 207).
(a)Coonawarra Gold Facilities Pty Ltd – The delegate referred to this company having a debt of $41,624 to the ATO between 3 August and 17 November 2005. The applicant admitted in cross-examination that a debt of $51,880.37 was owed to the ATO, but in his witness statement he explained that the debt to the ATO related to a running balance account in respect of BAS amounts, and was a current liability when the Hellier debts were called up, and the non-payment of the debt was due to circumstances beyond his control (exhibit A3, paragraph 139a.i). He also admitted that a further $45,077.49 was owed to the former Department of Employment and Workplace Relations (DEWR) for advances made to employees pursuant to the General Employee Entitlements and Redundancy Scheme (GEERS). GEERS is a payment scheme administered by DEWR to assist employees who have lost their employment as a result of the insolvency of their employer and are owed certain employment entitlements, and DEWR has the right to recover payments made from the insolvent employer if funds become available. The applicant said that this debt had since been paid in full (transcript 24.02.10, page 205, lines 16 – 24). We note that the delegate accepted that Coonawarra Gold Facilities was constructing or developing its drying grape marc plant, and the ANZ transaction would have enabled the company to pay its secured and unsecured creditors (exhibit R1, T5b, paragraph 161). We agree with this assessment.
(b)Life Productions Pty Ltd - The applicant conceded that an amount of $40,618.58 was owed to the ATO by Life Productions Pty Ltd. He said that this debt included an unpaid superannuation guarantee charge of $9,952.04, plus interest of $630.21 dating back to 2002. He did not know why this amount had not been paid, and said it appeared to have been an oversight in the context of a group of companies with an annual turnover of $40 million. He said that all other superannuation guarantee amounts were paid in the ordinary course of business, that he never gave any instruction not to pay the amount, and that the non-payment had never been brought to his attention by those responsible for the company’s accounts. He further said that the balance of the debt, namely $30,036.33, was a running account balance in respect of BAS amounts and was a current liability at the time when the Hellier debts were called up, and again that the non-payment of that debt was due to the failure of the ANZ transaction, a matter beyond his control (exhibit A3, paragraphs 120 – 129).
(c)Brownlie Pistachio Nuts Pty Ltd – In this case there was a debt to the ATO of $35,454 by way of a running balance account, again in respect of BAS amounts. The applicant gave evidence that, once again, this was a current liability at the time the Hellier debts were called up, and the non-payment was due to circumstances beyond his control (exhibit A3, paragraph 132). In any event, the applicant gave evidence that at the time of liquidation of this company, it had stock on hand that was more than sufficient to pay all of the company’s indebtedness (transcript 24.02.10, page 266, lines 1 – 35).
(d)Elan Trading Corporation Pty Ltd – In this case, according to the delegate’s decision, the liquidator reported a total of $176,516 owing to the ATO and $439,136 owing to Revenue SA. The applicant stated that no other material was provided in support of the reported debt to the ATO, and that there were no proofs of debt showing the period of the alleged failure to pay this liability to the ATO (exhibit A3, paragraph 139b.i). As to the asserted debt to Revenue SA, he said that this was disputed, was the subject of an objection (apparently on the grounds that an accountant had transferred shares in Mulpara Pty Ltd in error, and the transaction was reversed within 24 to 48 hours of the error being realised), and he had received legal advice that if the objection had been disallowed, the company should appeal to the Supreme Court of South Australia. He said further that the objection had not been decided at the date of the winding up of the company (exhibit A3, paragraph 193b.ii).
(e)Easy Life Management Pty Ltd – According to the supplementary report of the liquidator pursuant to s 533(2) of the Act, this company owed $696 to the ATO, and $3,656 to DEWR. In cross-examination, the applicant admitted these two amounts but said that the ATO debt was a running balance, and the debt to DEWR had arisen from the payment of the GEERS assistance, and was later repaid (transcript 24.02.10, pages 205 – 207).
84. The applicant said further that he had never given any instructions to delay payment of any debts to the ATO, and neither Life Productions nor any other company in the EG 12 had a history of delaying payment to the ATO (exhibit A3, paragraph 126). This assertion in the applicant’s witness statement must be read in conjunction with his cross-examination, where he was directed to a statement in the PricewaterhouseCooper’s due diligence report to the effect that due to cash flow constraints ETC had withheld payments for superannuation and WorkCover contributions for a number of years (exhibit R1, T 56, page 1178). There was the following exchange in cross-examination:
“That was the case, wasn’t it?---Correct.
That was the case being a practice within the Elan Group, wasn’t it?---Absolutely not. This was due to cash flow constraints they’re talking about – there were some outstanding matters but the only one that was outstanding at the time of the liquidation as I understand it were the ones that you’ve raised.” (transcript 23.02.10, page 198, lines 7 – 12)
85. We also bear in mind the evidence of Mr Scala, where the same extract from the PricewaterhouseCooper’s report was put to him, and he said that this was his understanding of the case across the Elan Group (transcript 25.02.10, page 377, lines 23 – 26). However, Mr Scala was not asked any further questions as to the currency or otherwise of the relevant debts.
86. We accept the importance of the responsibility that directors have to ensure that statutory obligations are met. However, we consider that Boyle (supra) can be distinguished because there was found to be an improper and wilful withholding of tax instalments, and in Piastri (supra) it was found that the director should have been alerted to the default in paying significant arrears of group tax because he had been made aware of the default in discharging group tax by another company of which he was a director. In the present case the non-payment of current debts occurred following an event outside the applicant’s control that produced insolvency. In addition, on the evidence before us we are not satisfied that there were substantial unpaid taxation liabilities other than current running balances that we accept would have been paid following settlement of the ANZ transaction. We further accept that the applicant was unaware of the comparatively small long outstanding amount of unpaid superannuation charge owing to the ATO by Life Productions Pty Ltd. The applicant’s evidence that the DEWR debts have been repaid and that the debt to Revenue SA was disputed was not contested. In all of the circumstances, we are not satisfied that the unpaid taxation and other statutory liabilities justify disqualifying the applicant under s 206F.
(e) Total amounts outstanding to unsecured creditors
87. ASIC submits that the total amount outstanding to the unsecured creditors of the EG 12 was very significant, but there is a very wide disparity between the figure asserted by ASIC and the figure derived from our findings as to the correct analysis of the evidence before us. ASIC calculated the amount at between $13.475 million and $14.185 million, according to the table in paragraph 4 of ASIC’s submissions of 22 October 2010 (exhibit R17). As explained below, this amount was derived from proofs of debt referred to in a letter dated 30 July 2010 from the witness Timothy James Clifton, who was appointed the liquidator of eleven companies out of the EG 12 (see Attachment 2 to exhibit R12). We note that ASIC does not assert that the twelfth company, Pegara Pty Ltd, which was a holding company, had any unsecured creditors at the time of its liquidation. The delegate referred to a different figure, namely a total of approximately $9,115,135, when he referred to the total of unsecured creditors (exhibit R1, T5b, page 59a, paragraph 206). Clearly if either figure was correct, the total amount was very significant, and might of itself lead to an inference that the applicant had been incompetent in his management of the EG 12. As appears from paragraph 96 below, we find that the total debts to unsecured creditors were between $2.668 and $3.367 million.
88. The amount owing to the creditors (both secured and unsecured) of the eight companies from the EG12 that remain in liquidation is also relevant to a proposal to which the applicant has agreed, whereby further voluntary payments will potentially be made to the unsecured creditors of six of those eight companies, and also to the creditors of P.O.P.A. Pty Ltd. We will refer to this proposal below.
89. The applicant gave evidence that he disputed a number of the proofs of debt lodged in the liquidation of the EG12. Mr Clifton and the auditor of Perpetual Plantations Pty Ltd, Allen Elliott Bolaffi, also gave evidence as to this issue.
90. ASIC relied on paragraph 135(c) of the applicant’s witness statement as constituting an admission as to the above finding by the delegate as to the quantum of unsecured creditors. However, any such admission would clearly be contrary to the applicant’s submission to the delegate, as evidenced by the Schedule of Creditors submitted by the applicant, which totalled $2,139,124 (see exhibit R1, T96, page 1638). It was also inconsistent with the applicant’s evidence before us as to his estimate of the unsecured creditors of the EG12 as at the date of liquidation, namely $2,173,153.21 (exhibit A36, paragraph 1(a)). We accept his explanation that he did not intend paragraph 135(c) of his witness statement to constitute an admission of the quantum of the debts found by the delegate (which could only have been deduced by referring to the footnote, which in turn referred to the relevant paragraph of the delegate’s finding), and that he only intended to admit the proposition in the text of paragraph 135(c), namely that “Group companies had significant creditors at the time of winding up”. That admission was then of course qualified by the statement that immediately follows, namely “that had the ANZ transaction settled, all unsecured creditors would have been paid in the ordinary course of trading.”
91. Mr Clifton gave evidence that the spread-sheets enclosed with his letter of 30 July 2010 listed creditors who had lodged proofs of debt in the liquidation of the eleven companies with which he was involved, and also listed claims made later by creditors when ten of those companies were placed in administration in order to consider proposals by the applicant for those ten companies to enter into deeds of company arrangement (DOCAs). He noted that some creditors claimed increased amounts in the administration of some of the ten companies, compared with the amounts claimed in the liquidation of the same companies, and that in some cases, the same claims appeared to have been duplicated (that is, they were made against more than one company). Mr Clifton also said that initially, he made a prima facie examination of the claims lodged in order to determine whether claimants should have voting rights at creditors’ meetings, and that because at that time there were no funds to distribute, he did not attempt to determine whether the claims could otherwise be justified. Subsequently, four companies, namely Coonawarra Gold Facilities Pty Ltd, Pacific Wellness Pty Ltd, Welfare Strategies Pty Ltd and Wellness Inside Ltd, entered into DOCAs. In the case of those companies, Mr Clifton did consider whether the claims should be accepted for the purpose of making distributions to their creditors, and his spreadsheets reflect the decision in relation to the creditors’ claims.
92. However, it is necessary for us to make an assessment of the claims made by the creditors of the EG 12 in order to address the issues to which we have referred in paragraphs 87 and 88 above. For this purpose we are not bound by the determinations made by Mr Clifton in administering the DOCAs. We have of course taken into account his decision in relation to those claims that have been called into question by the applicant, and we are mindful that the evidence before us is unsatisfactory, in that we have not received evidence from the creditors in question supporting their claims. Nevertheless, we have received certain information that Mr Clifton was unaware of in relation to a number of the creditors’ claims, and in addition, it is clear from his evidence that he did not make a considered evaluation of the claims from the creditors of the seven EG companies that did not enter into DOCAs, and did not need to do so.
93. We also make the general comment that in our view, for present purposes, it was inappropriate for ASIC to have included (as it appears to have done) the amounts of proofs of debt based on the full amount of secured debts in respect of which guarantees were given by any of the EG 12, without deducting the value of the securities concerned. That is because it was reasonable to expect that secured creditors would first enforce their securities, and depending on the amount recovered, might not have needed to enforce the guarantees. If they did so, their claims would be limited to the shortfall (if any) between the secured debts and the amounts recovered from realising the securities. Even then, the guarantors’ liability would be further reduced by equitable rights of contribution against any co-sureties. And if the secured creditors chose not to enforce their securities but to claim under the guarantees, the guarantors would have rights of subrogation, and would themselves be entitled to enforce the securities, and to receive the value realised from doing so.
94. Whilst neither party has an onus of proof in the proceedings before us, it is necessary for a party who is seeking a favourable determination from the tribunal on a particular issue to adduce evidence in support of its position. We refer in this regard to McDonald v Director-General of Social Security (1984) 1 FCR 354 at 358, and to the discussion in Re Kowalski and Repatriation Commission (2008) 107 ALD 447 at [31]. In the present matter, ASIC has relied primarily on evidence of the total amounts of the proofs of debt lodged in the liquidation of each company. Mr Sallis criticised this approach, and submitted that, strictly speaking, a proof of debt constitutes a claim by a creditor, which the liquidator might accept in full or in part, or might reject. We think there is force in this criticism; once it was clear that the applicant did not admit the total of the creditors’ claims, it was not sufficient in our view, if ASIC sought to rely upon the total of unsecured debts to support a banning order under s 206F, for ASIC simply to rely upon the amount referred to in proofs of debt lodged in the liquidation of the EG 12. We referred above to the Full Court’s comments in Murdaca (supra) to the effect that s 206F does not give reports prepared by liquidators pursuant to s 533 any particular status or weight. We think that similarly, ASIC cannot rely on the amounts referred to in proofs of debt as proof that those amounts constituted liabilities as at the date of liquidation, particularly in circumstances where in the case of those companies in the EG 12 that did not enter into DOCAs, there is evidence in s 206F proceedings (as was the case in the present matter) not only that certain of those amounts were disputed, but also that the liquidator had not evaluated those claims in order to determine the amount to be distributed to each creditor.
95. In such circumstances it is also inappropriate, in our view, for ASIC to calculate the amount of unsecured creditors by in effect taking a snapshot of the position at the date of liquidation, if ultimately there were reasonable prospects that liability for particular debts at that date would be rejected, or the amount of the liability varied, in consequence of subsequent investigation, or legal, equitable or statutory remedies available to the liquidator. We have referred above to one situation where such an approach would not be appropriate, namely where a proof of debt is based upon a guarantee of a secured debt. Another example, which also arises in the present matter, is the liability of one of the EG 12, namely Welfare Strategies Pty Ltd, for a tax assessment for $513,505.93 issued prior to the date of liquidation; whilst this gave rise to a liability for this amount at the date of liquidation, it appears clear from the evidence before us that this assessment would have been withdrawn if an objection had been lodged. That is because according to the applicant’s evidence, the assessment was issued following the determination of a test case in tax scheme proceedings, and the Commissioner then disallowed deductions which had been claimed by a number of taxpayers who had participated in the scheme. However, Welfare Strategies had not claimed a deduction for the expense in question, and so the assessment should not have been issued in its case.
138. Further, there is authority for the proposition that it does not necessarily follow that a person may only be disqualified under s 206F when it has been established that the director has been guilty of a breach of standards of commercial morality or of gross incompetence. In a case where that issue arose under the predecessor of s 206F, s 600(3) of the Act, Goldberg J said that it would be open to the Commission to prohibit a person from managing a corporation simply because he or she had been a director of two or more companies which had been unable to pay their unsecured creditors more than 50 cents in the dollar: Laycock v Forbes (1997) 150 ALR 186 at 193. In Kardas (supra) Heerey J agreed with this proposition: (1998) 53 ALD 303 at 312. In our view, such a pattern of failure (if it occurs within the statutory period) enlivens the power to disqualify, and it is not necessary to establish specific breaches of duty or contraventions of the Act (which can of course also give rise to the lodgement of a s 533(1) report): see Quinlivan (supra) at [70], approved in Scott v Australian Securities and Investments Commission (2010) 78 ACSR 399. We agree, with respect, with the following comment in Quinlivan, where The Hon. Dr BH Macpherson, CBE, Deputy President, and Senior Member BJ McCabe said, at [70]:
“While evidence of contraventions will obviously be relevant to a decision to disqualify, the section has a different focus. The operation of the section is triggered by evidence of a pattern of failure.”
139. We conclude that the size of the losses suffered by the unsecured creditors of the EG 12 is, in itself, a relevant consideration under s 206F(b)(iii). It is the first of the matters referred to by McHugh J in Rich (supra) (see paragraph 26 above). We take into account that Rich and also Re HIH Insurance Ltd (supra) were not cases that arose under s 206F, but they arose under the group of sections in the Act that deal with the banning of directors. Further, the extent of the loss suffered by unsecured creditors seems to us to be even more relevant to cases that arise under s 206F, where one of the circumstances which will result in the power to disqualify is the lodging of a s 533(1) return to the effect that unsecured creditors will receive less than 50 cents in the dollar following the liquidation of two or more companies within the prescribed period.
140. However, whilst we are satisfied that s 206F confers power to disqualify in the absence of misconduct or incompetence, it remains necessary to determine whether that power should be exercised in the circumstances of this case. We have referred above to the significant financial detriment to the Elan Group arising from the legal, accounting and audit expenses incurred in connection with the PEP and ANZ transactions, and the consequences of the unexpected withdrawal of ANZ Private Equity from the ANZ transaction. We also referred above to the fact that the Hellier Group appointed receivers and managers to the EG 12 at a time before Easy Life Management Pty Ltd had received any return on its investment in research, and before the new plant and equipment for Coonawarra Gold Facilities Pty Ltd had been completed, so that it too had not received any return for its substantial investment in its new business enterprise. Further, as also mentioned above, significant management time had been lost due to due diligence activities related to the PEP and ANZ transactions, and Coonawarra Gold had only traded for three or four months in the 2005 financial year. In all of the circumstances, we are not satisfied that the losses sustained by the unsecured creditors, or the size of those losses, justifies disqualification.
141. In addition, as explained in paragraph 131 above, the applicant and his wife have already provided significant funds which have been of some benefit to creditors, and the offer by Shulamite Pty Ltd will potentially result in the unsecured creditors of the Offer Companies receiving an average of between 29.7 and 40.2 cents in the dollar if the Non Escrow Shares are sold for the offer price of 20 cents per share referred to in the prospectus. There is also the potential for the unsecured creditors to receive more than this, if the Non Escrow Shares are sold for more than 20 cents per share. The applicant had no legal obligation to provide4 any undertaking to contribute further funds to the companies in the EG 12 that remain in liquidation. The facts that he has arranged to provide the Shulamite undertaking, and that it potentially involves a not insignificant payment that will produce some return to creditors, are matters which we take into account in the applicant’s favour (notwithstanding that the undertaking is necessarily provisional on certain conditions being fulfilled).
Should the failure of the EG 12 be regarded as the failure of a single entity?
142. We concluded above that not all of the EG 12 were related to one another within the meaning of s 206F(2)(a) of the Act, and so the failure of the EG 12 could not be treated as in substance the failure of a single entity.
143. Nevertheless, we find from the evidence before us that the failure of the EG 12 was the result of one event, namely ANZ Private Equity’s abrupt and unexpected withdrawal from the ANZ transaction, which in turn led to the Hellier Group lender calling up the bridging loan, and enforcing the cross-guarantees given by group companies. This is not a case where there was a pattern of failures, but to use the language of Deputy President Olney in Re Guss and Australian Securities and Investments Commission (2006) 90 ALD 349 at [49], it is “a case of a group of companies having been brought down by a single catastrophic event”.
Conclusion and Decision
144. For all of the above reasons, we are not satisfied from the evidence before us that the disqualification of the applicant under s 206F is justified.
145. The tribunal sets aside the decision under review, and in place of that decision, decides that the discretion under s 206F of the Corporations Act 2001 (Cth) not be exercised.
SCHEDULE OF FINDINGS RE UNSECURED CREDITORS OF EG 12
AS AT DATE OF LIQUIDATION(1) We referred in paragraph 96 above to our findings as to the amounts owing to the creditors of the EG 12 as at the date of their liquidation. We now explain the basis for those findings, by reference to each company.
(2) Pacific Wellness Pty Ltd – The respondent submitted, on the basis of the information provided by Mr Clifton, that the unsecured creditors amounted to $390,206.23. The applicant’s position is as follows.
·The sum of $200,000 included in the respondent’s figure related to Mellor Olsson’s services in connection with the ANZ transaction, and was a success fee that was not payable because that transaction did not proceed.
·The debt claimed by UHY Hains Norton, of $114,602.18, was subsequently paid in full, partly in money and partly by the transfer of shares in My ATM by the applicant and his wife.
·Pacific Wellness Pty Ltd was subsequently taken out of liquidation pursuant to a DOCA, and amounts totalling $20,103.40 were distributed to creditors pursuant to the DOCA.
Mr Clifton, the liquidator, acknowledged that whilst Mellor Olsson had work in progress to the extent of $200,000, they had not rendered an invoice for this amount as at the date of liquidation, and that when he administered the DOCA he was not in a position to dispute the applicant’s evidence before us that that amount was not due to Mellor Olsson. However, Mr Arthur from Mellor Olsson did not say in his evidence that the amount claimed by his firm was a success fee. Even though this matter had not been raised at the stage of the hearing when Mr Arthur gave evidence, no application was made to recall him. The lodgement of the proof of debt and the acceptance of a dividend from the administrator of the DOCA is inconsistent with the amount being a success fee. As to the proof of debt by UHY Hains Norton, the applicant conceded that this amount was owing as at the date of liquidation. We consider that the amount owed to creditors at liquidation should not be reduced by the claims made by Mellor Olsson or UHY Hains Norton.
(3) Wellness Inside Ltd – The respondent submitted on the basis of the information provided by Mr Clifton, that the unsecured creditors amounted to $16,079.23, being an account from Norman Waterhouse Lawyers. The applicant said that the account was raised after the liquidation of Wellness Inside Ltd, and he did not know the basis or veracity of this amount. We note that Mr Clifton admitted this claim when making a distribution pursuant to the DOCA, and distributed $643.17 to Norman Waterhouse.
We accept that the balance owing at the date of liquidation was $16,079.23.
(4) Perpetual Plantations of Australia Pty Ltd – The respondent submitted on the basis of the information provided by Mr Clifton, that the unsecured creditors amounted to $1,019,871.82. As to this company, the applicant’s position is as follows.
·The proofs of debt included claims from growers amounting to $701,052.69. However, the witness Allen Elliot Bolaffi, a chartered accountant, gave evidence that he was the independent auditor of Perpetual Plantations of Australia Pty Ltd, and he prepared a balance sheet of the company as at 30 June 2005. This showed an asset of $500,218, being the liability of the growers to the company for the costs of harvesting pistachio nuts, and a liability of $512,484.08, being the amount realised from the sale of pistachio nuts, which was payable to the growers (see exhibit A27). Accordingly, in Mr Bolaffi’s view, only the difference between the proceeds of sale and the amount owing by the growers, namely $12,266.08, was due to the growers. Mr Bolaffi said that he sighted relevant agreements between growers and the company as to their respective obligations, and the figures referred to in the balance sheet that he prepared took those matters into account, and were arrived at in conjunction with a representative of the growers. He also said that pistachio nuts are not harvested until May or June each year, and so the amount claimed by the growers could not have related to the period after 30 June 2005 and before the date of the liquidation of the company in December 2005. He further explained that the costs of the harvest, for which the growers were liable, were included in the accounts on an accruals basis, and so would have been accounted for in the 30 June 2005 balance sheet. The applicant gave evidence confirming these matters.
ASIC provided a copy of certain agreements between PPA and certain growers, and said that these had been retained from Mr Bolaffi’s file, which (contrary to what Mr Bolaffi had said), was returned to him. The most recent of these copy agreements was dated 12 February 1996, and the term of all the agreements produced had expired. They indicate that, at least in the past, growers had to pay a licence fee to PPA for its services in maintaining the pistachio trees, and to that extent they are only marginally relevant, in that they are not inconsistent with the applicant’s evidence.
·An amount of $2,681.24 claimed by Mr Scala has since been repaid in full.
·A proof of debt for $2,200 was lodged by a Mr Hateley, and in the subsequent administration of Perpetual Plantations of Australia Pty Ltd he increased his claim to $13,475.93. The applicant at first disputed this increase, but later discovered that Mr Hateley is a grower, and accordingly says that the total claim by Mr Hateley should be rejected (except presumably for his proportion of the net balance referred to above of $12,266.08 due to the growers, who totalled about 300 in number).
·The applicant also thought that a proof of debt claimed by Watkinson Legal amounting to $130,246.56 was excessive, and he later compromised that claim for an amount of $35,000, of which $25,000 has already been paid. The applicant did not, however, fully explain the basis of the compromise or attempt to quantify the extent to which the claim of Watkinson Legal was excessive. In these circumstances, we do not think it appropriate to make any deduction in respect of this proof of debt in assessing the amount owing to that creditor.
Having regard to the evidence before us, we consider that it would be reasonable to reduce the total debts at the liquidation of Perpetual Plantations of Australia Pty Ltd to $303,885.21 (that is, by deducting the growers’ claims of $701,052.69 and the claim by Mr Hateley, and by including the net balance due to the growers of $12,266.08). After allowing for the payment by the applicant’s wife to Watkinson Legal of $25,000, the amount currently owing to the creditors of Perpetual Plantations of Australian Pty Ltd is $303,885.21.
(5) Welfare Strategies Pty Ltd - The respondent submitted on the basis of the information provided by Mr Clifton that the unsecured creditors amounted to the total of the claims he accepted in administering the DOCA, namely $543,050.88. As to this company, the applicant’s position is as follows.
·A proof of debt claimed by P.O.P.A. Pty Ltd of $8,000 was an inter-company loan and should be disregarded. However, P.O.P.A. is not included in the EG 12, and the shareholders of P.O.P.A. and Welfare Strategies are different, and in those circumstances, we do not agree with the applicant’s contention that the loan can be disregarded.
·A claim by Mellor Olsson of $10,000 has been compromised and is no longer claimed. However, the applicant did not give evidence that this debt was not properly due at the date of liquidation, or the basis of the compromise, and Mr Arthur was not recalled as to this debt.
·The ATO had lodged a proof of debt for $513,505.93 based on an assessment issued after the date of liquidation of the company. This followed a decision by the ATO to disallow claims for deductions for contributions to a welfare fund of which Welfare Strategies was a contributor. However, the company had not claimed a deduction for its contributions, and so was not liable for the ATO’s assessment. Mr Clifton said in his evidence that he took this matter no further than to check that an assessment had issued, and he appeared to be unaware that the company had not claimed a deduction for its contribution to the welfare fund. We think that it was inappropriate to include the amount of this assessment in these circumstances, and refer also to our comments in paragraph 95 above.
Having regard to the above evidence, we find that the liability of Welfare Strategies Pty Ltd as at the date of liquidation should be reduced to $39,544.95 (that is, after deducting the above sum of $513,505.93).
(6) Coonawarra Gold Pty Ltd, Ransom Records Pty Ltd, Life Productions Pty Ltd, Brownlie Pistachio Nuts Pty Ltd and Easy Life Pty Ltd – ASIC submitted, on the basis of the information provided by Mr Clifton, that the unsecured creditors amounted to the respective amounts referred to in each case in the second column of the table in paragraph 96 above. The parties subsequently agreed that those amounts were owing to unsecured creditors as at the date of liquidation, and currently, in each case. There was no evidence before us that is inconsistent with the parties’ agreement, and we have accordingly based our findings on the amounts agreed in each case.
(7) Coonawarra Gold Facilities Pty Ltd (CGF) – The respondent submitted on the basis of the information provided by Mr Clifton, that the unsecured creditors amounted to $743,270.10. The applicant’s position is as follows.
·A proof of debt by ETC of $89,260.74 is an inter-company loan, and should be disregarded. However, as was the case with the inter-company loan involving Welfare Strategies, the shareholders of CGF and ETC are different, and we do not agree that the loan should be disregarded.
·A proof of debt lodged by Circle Trust of $337,771.36 was based on the indebtedness of Ransom Records Pty Ltd to Circle Trust (and in the case of Ransom Records, Circle Trust had claimed $245,161.97), and the proof of debt lodged by Circle Trust against CGF was apparently based on a guarantee given by CGF of its indebtedness to Circle Trust. Mr Clifton said that he was aware that Circle Trust had lodged proofs of debt against more than one company, for substantially different amounts, but was unable to say whether the claim was properly claimable against Ransom Records only.
We do not think that this indebtedness should be counted twice for the purpose of establishing the total unsecured creditors of the EG 12, and find that the unsecured creditors of this company should be assessed at $405,498.74.
(8) Elan Trading Corporation Pty Ltd (ETC) – The respondent submitted on the basis of the information provided by Mr Clifton, that the unsecured creditors amounted to $10,010,511.76 (being the total shown in Mr Clifton’s spreadsheet less an acknowledged deduction for the duplicated claim by Watkinson Legal, and adjusted to correct an arithmetical error in making that deduction). The applicant’s position as to this company is as follows.
·A proof of debt for $2,243,000 was lodged by Mulpara Pty Ltd. As we understand it, Mulpara was the trustee of a unit trust which owned a building at 41 Currie Street, Adelaide. It refinanced the property and repaid, on behalf of ETC, a loan owing by ETC to a Hellier company. ETC then became indebted to Mulpara for the amount repaid to Hellier, being approximately $3.2 million, and Mulpara had security for this indebtedness. The applicant gave evidence that just before the liquidation of ETC, he and his wife agreed to transfer their 50% interest in the unit trust to interests associated with a Mr B Glaser, and this transaction also discharged the indebtedness of ETC to Mulpara. The applicant also said that following settlement of this transaction, Mr Glaser had agreed not to make any claim against ETC. The applicant referred in addition to certain proceedings in the Supreme Court of South Australia, and relied upon paragraph 1 of reasons for decision given by Judge Burley in those proceedings (exhibit A28, page 1). These reasons for decision recorded that the proceedings had been settled. ETC was not a party to the proceedings, but according to the applicant’s evidence, he, his wife and Mr Forshaw were guarantors of ETC’s debt to Mulpara, and the Supreme Court proceedings arose when Mulpara and another company sued them on the guarantee.
The applicant produced a letter and transfer of units, but as Mr Wilson pointed out, these did not constitute a release of ETC. Mr Wilson further submitted that if the applicant and his wife had guaranteed the entirety of ETC’s liability to Mulpara, then ETC would no longer be liable to Mulpara, but would be liable to the applicant, his wife and Mr Forshaw, under the principle of subrogation provided for in s 17(1) of the Mercantile Law Act (SA) 1936. However, there is no evidence that the guarantors lodged a proof of debt in the liquidation of ETC, and the guarantee is not before us. We accordingly do not know whether it was for the full amount of the debt to Mulpara, or whether it included terms which excluded the guarantors’ right of subrogation against ETC. During his evidence the applicant referred to the value of the building at 41 Currie Street, and said that the value of the security which ETC had provided to Mulpara exceeded its indebtedness to Mulpara. In any event, if (as the applicant says is the case) the indebtedness of ETC to Mulpara has been fully discharged, there would appear to be no basis for a claim by Mulpara against ETC. In the absence of evidence disputing these matters, we think that the claim by Mulpara should not be included in the unsecured creditors of ETC in our consideration as to whether the order for disqualifications is justified.
·Proofs of debt from growers associated with Perpetual Plantations of Australia amount to $134,848.07. The applicant did not identify which claims listed in the spreadsheet were from growers, but gave evidence that there is no basis on which the growers could make a claim against ETC, and that their only entitlement is against Perpetual Plantations of Australia. Mr Bolaffi, the auditor of Perpetual Plantations, did not suggest that the growers had any entitlement against ETC. We do not think that this claim should be included as a debt of ETC.
·The total amount of the proofs of debt includes a claim by Watkinson Legal against ETC of $130,246.56, being the same amount as was claimed against Perpetual Plantations of Australia Pty Ltd. The respondent has deducted this amount from the amount it asserts for ETC.
·A proof of debt for $3,133,638 was lodged by 13 Grenfell Street Pty Ltd. The applicant gave evidence that this company was the trustee of a property trust which owned the former ANZ Bank Building at 13 Grenfell Street, Adelaide, and that in October 2005, ETC agreed to surrender its interest in the property trust in return for an indemnity in respect of ETC’s liability under a secured indebtedness to Bridgecorp Finance Pty Ltd, and a release of ETC and the applicant from any liability. A partially executed copy of the release was tendered, and whilst this provided that ETC remained liable for certain amounts less the value of the cancelled units (see exhibit A35, clauses 13 and 17), the applicant gave evidence as to the increased value of the building, and that the present unit holders have not suffered any loss, and the value of their equity in the trust has increased significantly with the increase in the value of the building. In these circumstances, we are not satisfied that the amount of the proof of debt lodged by 13 Grenfell Street Pty Ltd should be included in the total of the amount owing to the unsecured creditors of ETC.
·A proof of debt was lodged by Revenue SA for $439,136.28. The applicant gave evidence that this was stamp duty assessed on a transfer shares in Mulpara Pty Ltd from his wife to ETC, that the transfer was due to an error by an accountant, and that the transaction was reversed within 24 to 48 hours, when the error was discovered. The assessment was disputed by the applicant’s lawyers. It appears that this transfer was evidenced by a return lodged with ASIC by the accountant concerned on behalf of Mulpara. We were subsequently told that Mulpara was a land rich company for the purposes of the Stamp Duties Act 1923 (SA), and that the share transfer in question from the applicant’s wife, in combination with earlier share transfers, led to the transfer of more than 50% of the shares in Mulpara, and so the Commissioner of Stamps issued an assessment of duty based on the value of the land owned by Mulpara. The applicant said further that the accountant lodged the form with ASIC to report the share transfer as part of an estate planning process, but that his wife had never executed any share transfer, and there was never any agreement for her to do so.
This evidence is somewhat at variance with the terms of the Notice of Objection lodged in 2004, which states that neither ETC nor Mulpara had been able to locate the books and records of Mulpara, that ETC “does not necessarily accept” that it acquired the shares in question, that ETC did not instruct its accountants to transfer the shares, and there was no need to do so (exhibit A34, pages 1 and 2). The Objection does not say that the transfer had been made by mistake, or that the transaction had been reversed when the error was realised.
The respondent pointed out that the Objection had been disallowed by the Treasurer, and contended accordingly that ETC was indebted for the amount of the stamp duty as at the date of liquidation (see exhibit R20). As mentioned in paragraph 95 above, we do not accept that it is appropriate for present purposes to take a “snapshot” of ETC’s liabilities as at the date of liquidation, if there were reasonable prospects that the company was not liable for the amount referred to in a particular proof of debt.
On the face of it, we find it surprising that an accountant would lodge a return with ASIC that did not reflect a properly authorised and documented share transfer. We received no evidence from the accountant concerned, and the company’s register of members was not tendered. On this state of the evidence, we are not satisfied that the proof of debt lodged by Revenue SA should be deducted, although if further information were available, it might be possible to pursue an appeal to the Supreme Court of South Australia against the disallowance of the objection.
·A proof of debt was lodged by Westpac Bank and Westpac Samoa for $3,520,000. This claim was the subject of an action in the Supreme Court of New South Wales against the applicant, his wife and Mr Forshaw. The applicant gave evidence that the claim is based on a guarantee given by ETC of loans made to the Vanuatu and Samoa companies in the Elan Group and that following mediation, the proceedings were settled for $850,000, and this amount has been paid in full. He also said that Westpac subsequently sold the assets over which the loans had been secured in Vanuatu and Samoa, and he understands that Westpac received sufficient funds to satisfy the amounts they are owed. It appears likely that the compromise with the applicant, his wife and Mr Forshaw would in any event release ETC, as a co-guarantor, from any further liability. We do not think that this amount should be included in the total of unsecured creditors of ETC.
·David Wong-Tung lodged a proof of debt for $260,000. He is also claiming the same amount against P.O.P.A. Pty Ltd. The claim is based on a share sale agreement. Contrary to earlier submissions made on behalf of the applicant, ETC is a party to the share sale agreement (see Annexure F to exhibit A26). Clause 11.5 of the agreement confers on Mr Wong-Tung, in somewhat garbled terms, an entitlement to “pursue all and any remedies, claims or actions which … [Mr Wong-Tung] has or may have against … [ETC]”, but does not provide for ETC to be a guarantor of the obligation to pay the purchase price for the shares that are the subject of the agreement.
However, the applicant tendered a copy of the statement of claim and defence in proceedings issued by Mr Wong-Tung against the applicant and his wife in the District Court of South Australia based on a guarantee that they gave for payment of the price payable to him under the share sale agreement. The statement of claim in those proceedings also refers to a subsequent deed of variation dated 15 November 2005, whereby ETC was to pay the sum of $260,000, which is described as “the amount of the unpaid balance of the purchase price to support the obligations of POPA to pay the balance of the purchase price” (exhibit A30, page 2, paragraph 5.5). A copy of the proposed amended defence was also tendered. This asserts that Mr Wong-Tung did not pay for the shares on their issue to him, and had no title to the shares.
In this matter there is clear evidence before us from the statement of claim in the District Court action of the basis of the proof of debt that has been lodged. It is also clear that the claim is disputed, but we are not in the position to reach any conclusion as to the likely outcome of the proceedings. It may well be that this claim duplicates Mr Wong-Tung’s primary claim against P.O.P.A. for the price of the shares, and that as the applicant asserts, the primary liability (if any) to Mr Wong-Tung would rest with P.O.P.A. However, P.O.P.A. is not part of the EG 12, and we are not satisfied that the amount of this proof of debt should necessarily be excluded from the total of the unsecured creditors of the EG 12.
We think it reasonable to assess the total liabilities of ETC as at the date of liquidation at $979,025.69, being the total amount of the proofs of debt less the amounts claimed by Mulpara, the growers, 13 Grenfell Street Pty Ltd, Westpac Bank and Westpac Samoa. If the disputed stamp duty assessment and the claim by Mr Wong-Tung are also excluded, the total liabilities of ETC would be further reduced to $279,889.41.
(9) Pegara Pty Ltd – The respondent does not assert that this company had any unsecured creditors as at the date of its liquidation.
I certify that the 145 preceding paragraphs are a true
copy of the reasons for the decision herein of Deputy President D G Jarvis and Senior Member R W Dunne,
and of the Schedule attached to those reasons for decision.............. [Signed] ............
L. Staker Associate
Date/s of Hearing 22, 23, 24, 25 and 26 February 2010
13 May 2010
3, 22, 23 and 24 June 2010
6, 7, 8 and 22 October 2010Date of receipt of final
exhibit 22 November 2010
Date of Decision 23 November 2010
Counsel for the Applicant Mr R Sallis
Solicitor for the Applicant Mellor Olsson
Counsel for the Respondent Mr N Wilson
Solicitor for the Respondent Australian Securities & Investments Commission
0
16
1