Lee and Australian Securities and Investments Commission - [2020] AATA 2661

Lee and Australian Securities and Investments Commission [2020] AATA 2661 (7 August 2020)
Division:TAXATION AND COMMERCIAL DIVISION
File Number(s): 2019/7848
Re:Kenneth Wen Hsi Lee
APPLICANT

AndAustralian Securities and Investments Commission
RESPONDENT

DECISION
Tribunal:Deputy President Bernard J McCabe
Member P Ranson
Date:07 August 2020
Place:Sydney

The decision under review is set aside. In substitution, the Tribunal decides Mr Lee should not be disqualified from being involved in the management of corporations pursuant to
s 206F of the Corporations Act 2001.
....................................[sgd]....................................
Deputy President Bernard J McCabe
CATCHWORDS
CORPORATIONS – DISQUALIFICATION FROM MANAGING CORPORATIONS – discretion to disqualify enlivened – whether the applicant should be disqualified – whether the applicant should be refused permission to manage a particular company – failure of two companies – companies related – where the failure arose from the same circumstances – applicant’s behaviour deserving of censure – disqualification not appropriate on balance – decision set aside
LEGISLATION
Corporations Act 2001 ss 206F, 206GAB, 533
Environmental Planning and Assessment Act 1979 (NSW) s 96
CASES
Daniels v Anderson (1995) 37 NSWLR 438
Francis v United Jersey Bank (1981) 432 A 2d 814
In the name of Sydney Project Group Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) and SET Services Pty Ltd (Administrators Appointed) [2017] NSWSC 881
REASONS FOR DECISION
Deputy President Bernard J McCabe
Member P Ranson
07 August 2020

Section 206F of the Corporations Act 2001 (the Act) contains a power to disqualify a director from being involved in the management of corporations if the person was a director of two or more companies that were wound up in insolvency. The power is intended to deal with individuals who have a track record of being involved in the management of corporations that fail. If the requirements of the section are met and the discretion is enlivened, the Australian Securities and Investments Commission (ASIC) may disqualify an individual for up to five years.
ASIC’s eye was drawn to the affairs of Mr Kenneth Lee, a director of two companies that were wound up in 2017. The liquidators of the two companies filed reports under s 533 of the Act referring to the companies’ inability to pay their debts. ASIC was satisfied the discretion to disqualify found in s 206F was enlivened after conducting a hearing. On 15 October 2019 an ASIC delegate made a reviewable decision to disqualify Mr Lee from being involved in the management of a corporation for two years. The delegate also decided Mr Lee should not be given leave to manage one or more specific corporations pursuant to s 206GAB. Mr Lee has approached the Tribunal to review those decisions.
Mr Lee accepts the discretion to cancel was enlivened. He argues he should not be disqualified. If he is to be disqualified, he argues it should be for a shorter period. He also says he should be given leave to manage an identified company.
We are critical of some aspects of Mr Lee’s conduct as a director but, in all the circumstances, we are not satisfied he should be disqualified under s 206F. We explain our reasons for that conclusion below.
WHAT HAPPENED?
Mr Lee has qualifications in commerce and accounting. He has a lengthy background in the financial services industry. He worked for a range of financial institutions in Australia and overseas. Much of his experience was in asset management but he also had exposure to private equity ventures. As he explained in his oral evidence, he often engaged with the management of companies that were being acquired by private equity ventures with a view to turning them around and readying them for resale. It follows he has some experience in corporate affairs. Over the last decade, he has tended to his more creative side. He is an artist. He has been attempting to develop a business that sells commercial art over the internet. That business is conducted through a family company. His father is currently a director of that company while Mr Lee is indisposed.
After he returned to Australia from overseas, Mr Lee was approached by contacts who were conducting a law firm in Sydney. The firm, Madison Marcus, had several commercial clients. They agreed there was an opportunity for the firm to branch out into consulting work to business clients. Mr Lee became a director of the consulting company in due course.
In the course of his consulting work, Mr Lee was introduced to companies involved in a property development in Sydney. The companies proposed developing a project constructed on land owned by companies controlled by a prominent Sydney businessman, Mr Salim Mehajer. Mr Mehajer is a controversial character – too controversial, it seems, for his project partners. Mr Lee says he was suggested as a ‘clean-skin’ that could take over as the director of Mr Mehajer’s land owning companies.
The two companies, SET Services Pty Ltd (ACN 151 314 439) (In Liquidation) and Sydney Project Group Pty Ltd (ACN 155 827 295) (In Liquidation) (the landowning companies), were proprietary companies. They owned the land to be used in the development venture but they did not otherwise trade or have any other assets or obligations. Mr Mehajer was the sole shareholder of each company. He did not relinquish the shareholding when the proposal to appoint Mr Lee was agreed. It turns out Mr Mehajer had no intention of giving up control over the companies, notwithstanding Mr Lee’s arrival on the scene. We will say more about that below.
Mr Lee was appointed a director of the companies on 26 April 2016. Mr Mehajer made the appointment after agreeing to engage Madison Marcus Advisory Pty Ltd (MMA), the consulting company, to provide Mr Lee’s services. Mr Mehajer agreed to pay a retainer fee to MMA in return for Mr Lee’s services. The letter of engagement was reproduced in exhibit 1 at T30.7, p 1478.
On 29 April 2016, Mr Lee was shown copies of documents negotiated between Mr Mehajer (on behalf of the landowning companies) and the other entities involved in the venture. The documents had not been executed at that point. They are lengthy. They explain the way in which the development was to be carried out. The agreement provided for a project management company to take the lead in the development. While the development proceeded, the landowning companies had no active role to play although a representative of the companies would have the right to participate in the venture’s ‘project control group’. It was envisaged the representative would attend at the work site and scrutinise expenditures in the course of the venture.
The agreements included two features which are of particular relevance to the story. One of them was found in clause 6 of Development Management Deed: exhibit 1, T30.5 pp 1425-1426. Clause 6 referred to the possibility of an application being brought under s 96 of the Environmental Planning and Assessment Act 1979 (NSW) (the EPA Act) to amend the development approval that had already been obtained. If the application for amendment were successful, the developer would be permitted to construct extra lots. That clause was ultimately intended to benefit Mr Mehajer. Mr Lee said in his oral evidence that he understood he and the landowning companies had no choice but to facilitate the application if Mr Mehajer insisted.
The second feature was a set of guarantees. The landowning companies guaranteed the performance of certain obligations by the project manager. Mr Lee said that was unlikely to be a problem if the development proceeded according to plan.
Mr Lee recalled he met with a lawyer from Madison Marcus in the presence of Mr Mehajer to discuss the documents. The documents were subsequently executed by the parties. Mr Lee signed on behalf of the company. The development proceeded.
In the period that followed, Mr Lee had other clients as part of MMA, and he continued to attend to the development of his own business. He did not devote all of his time to his role as a director of SPG and SET. But it is not as if there was much for him to do as a director of SPG and SET in any event. While he said he regularly attended the site of the development venture and participated actively in the project control group, the companies were not otherwise trading. They did not have premises as such. Mr Mehajer had an office and staff who worked for him, and Mr Lee understood those staff were available to perform any administrative functions he required. Mr Lee did not know who the staff were or precisely what they did. It seems they were not employed by the landowning companies.
While the companies were not trading, they still had affairs that required the attention of their director. They were obliged to lodge business activity statements (BAS) and income tax returns. They had books and accounts. They also had legal issues arising out the property development.
Mr Lee explained the financial and reporting responsibilities of the companies were dealt with by Mr George Boutros (Mr Boutros), an accountant. Mr Boutros was actually Mr Mehajer’s accountant. Mr Lee spoke with Mr Boutros on several occasions to ask about the company’s financial affairs. Mr Lee said he was fobbed off. Mr Lee also asked Mr Mehajer about the financial affairs. Mr Lee said Mr Mehajer airily promised to provide the information, but it was never forthcoming. Mr Lee said the stonewalling about the financial affairs went on for months. He said in his statement that he approached Mr Mehajer’s lawyers for information at one stage: exhibit 2 at [15]. It is not clear he ever accessed the required information. He said during cross-examination he did not know who was filing the BAS at the end of each quarter, or the income tax returns. (It turns out some of the BAS were not filed. We also note the income tax return for the 2017 year of income was not filed when the company went into administration.) He assumed Mr Boutros was attending to those matters. It was apparent from his evidence that Mr Lee was not aware Mr Mehajer remained the public officer of the company for tax purposes.
The stonewalling about the companies’ financial affairs was obviously a problem – and a red flag. It is axiomatic a director must be across the financial affairs of the company. That does not mean he must undertake the accounting and tend to the books himself, of course. At a minimum, he must make proper enquiries that enable him to be satisfied the company remains solvent. The law reports – and the financial press – are full of stories about what happens to directors who fail to properly inform themselves about the affairs of companies which go broke on their watch. Some of them are subject to orders under s 206F.
Mr Lee should have insisted on the production of the financial information he required to discharge his duties as a director. If the information was not provided in a timely way or in an accessible form, he was under an obligation to act. The most obvious course in the circumstances was for him to resign. But he did not do that. He explained in his oral evidence he thought the most important thing was to ensure the development venture proceeded according to the plans. If that occurred, the company would undoubtedly benefit. It appears he was not concerned about the failure of Mr Boutros and Mr Mehajer to provide the information he requested because he assumed the company’s financial affairs were relatively straight-forward. The company was not trading, and it was not incurring debts. It did not have creditors (apart from the obligations that might arise under the terms of the guarantees, of course). What could possibly go wrong?
What went wrong was Mr Mehajer. Specifically, Mr Mehajer insisted on making the application for the amendment of the development approval under s 96 of the EPA Act. The application was lodged in July 2016. The delays associated with processing the application (including an amended application) meant the strata plan could not be finalised. That slowed down the entire venture.
Mr Lee said in his statement, and during cross-examination, that he repeatedly expressed the view the s 96 application was a bad idea. He said the application did not benefit the landowning companies or other participants in the venture. Indeed, the delays associated with the application created a risk the guarantees might be enforced against the companies if the development could not be completed in accordance with the timetable agreed with the financiers of the whole venture. Importantly, though, Mr Lee insisted he understood he had no choice in the matter. He said he understood the companies were powerless to resist Mr Mehajer’s demand that the application proceed. He said that obligation arose out of a reading of clause 6 of the Development Management Deed the companies had signed.
Clause 6.1 of the Development Management Deed obliges the parties to the agreement – including the landowning companies - to “cooperate in good faith to agree the form of the Section 96 Application to create a developer lot on the top floor of the Development”. Clause 6.2 provided the project management company would then lodge the application in its agreed form. The balance of the clause provided the parties to the agreement would not object to the application or take any action in relation to it once the application was lodged.
Mr Cheshire SC, who appeared on behalf of Mr Lee, suggested this was akin to a subrogation agreement in an insurance contract in which the insured consents to having litigation conducted in his or her name. When pressed as to whether the terms of the deed had precisely that effect, Mr Cheshire pointed out Mr Lee certainly had that understanding. Mr Cheshire argued it was a reasonable interpretation in the circumstances. He said we should accept Mr Lee genuinely and reasonably believed he had no opportunity to thwart the proceedings that were being encouraged by Mr Mehajer even though Mr Lee had serious misgivings. Those misgivings only increased when the application was rejected and an appeal was commenced in the Land and Environment Court, which led to further delay.
Mr Lee should probably have obtained independent legal advice about the extent of the companies’ obligations to facilitate the application and appeal. Instead, he chose to accept the advice provided by Madison Marcus – which was acting in relation to the application – about prospects for success on the assumption the application would be pressed notwithstanding his concerns.
Ms Withana, who appeared for ASIC, pointed out the liquidators’ report into the affairs of the company concluded the delay associated with the litigation process was the precipitating event for the collapse of the development. On 4 May 2017, the companies received a notice of default under the Loan Facility Agreement. Demands from other creditors followed in short order. Mr Lee pointed out all the obligations had been agreed before he became a director. On 16 June 2017, Mr Lee accepted service on behalf of the landowning companies of statutory demands for in excess of $83 million from the other participants in the syndicate that invested in the venture.
Mr Lee and Mr Mehajer had an exchange over the next 24 hours. They traded text messages in which Mr Mehajer asked for authority to challenge the demands in court. Mr Lee said he was not happy with that course and decided to place the companies in voluntary administration on 17 June 2017. Mr Mehajer apparently tried to remove Mr Lee as a director and claimed the appointment was ineffective, but the administrators obtained declarations from the Supreme Court confirming they were validly appointed: see In the name of Sydney Project Group Pty Ltd (Administrators Appointed) (Receivers and Managers Appointed) and SET Services Pty Ltd (Administrators Appointed) [2017] NSWSC 881.
Once the companies were placed in external administration, Mr Lee provided such assistance to the administrators (and subsequently the liquidators) as he could. Mr Cheshire pointed out most of the secured creditors were paid. We were also told there was doubt over whether the unpaid creditors had good claims, but we are not in a position to make any finding on that point.
The liquidators lodged the reports with ASIC, ASIC conducted its own investigation into Mr Lee, and here we are.
THE POWER UNDER S 206F
The disqualification power was originally introduced to deal with directors who had a track record of running companies into the ground – or, worse still, might have been engaged in ‘phoenixing’. There is no dispute the discretion to disqualify is enlivened in this case because Mr Lee was a director of two companies that were the subject of reports under s 533 of the Corporations Act, and all of the procedural requirements were followed. The dispute is over whether the discretion to disqualify should be exercised, and – if it should be exercised – the length of the period of disqualification.
Mr Cheshire points out the decision-maker is not obliged to disqualify the applicant, even if there is evidence of unsatisfactory performance. There is such evidence in this case: Mr Lee was not sufficiently diligent in his pursuit of Mr Boutros and Mr Mehajer in obtaining access to relevant financial information. In that respect, at least, he failed to perform his duties as a director. We also think he should have obtained independent legal advice in relation to the companies’ obligations under clause 6 of the development management deed in relation to the s 96 application. For good measure, he probably should have obtained independent advice in relation to the documents he ultimately executed on 29 April 2016. It was also accepted Mr Lee was ultimately responsible for the companies’ failures to lodge the BAS. (Mr Mehajer as public officer of both companies was responsible for lodgement of the income tax returns.)
While that conduct may be worthy of censure, Mr Cheshire asserts Mr Lee had not committed a ‘hanging offence’. Mr Cheshire says the sanction of disqualification would not be a proportionate or appropriate response to Mr Lee’s shortcomings when all the circumstances are understood.
In considering whether disqualification is appropriate, we must have regard to whether the failed corporations were related: s 206F(2)(a). Section 206F(2)(b) says we may have regard to:
·the conduct of the individual in relation to any corporation;
·the public interest; and
·any other matters ASIC considers relevant.
Mr Cheshire emphasised SPG and SET were related companies, and that their failure effectively arose out of the same circumstances. That is important. Mr Lee was, in a sense, unlucky because of the corporate structure. The two companies played different roles towards similar ends. He was a director of both companies but their fates – and his, as it turns out – were intertwined. It is not as though Mr Lee made the same mistakes twice in different circumstances. It is, to some extent, an accident of organisational design (and a function of the technical operation of company law) that he was a director of two companies that were involved in or impacted by the one course of conduct.
It is one thing to say Mr Lee should have behaved better in his stewardship of these companies. But it is not as if he made the same mistakes twice. We are satisfied this consideration does not weigh in favour of the discretion to disqualify.
We accept Mr Lee otherwise has a clean record in the conduct of his business affairs. We were provided with several personal references from acquaintances that testified as to his character and qualities. We acknowledge he has a lengthy history in financial services. He continues to undertake consulting work, and he is developing his own business on the internet. Indeed, his good record and apparent expertise appeared to commend him to Mr Mehajer and the other venturers in the project in the first place. They needed somebody independent and unobjectionable given the controversy surrounding Mr Mehajer. It is a pity Mr Lee and the other venturers were not more alive to the risk of Mr Mehajer continuing to assert control from behind the scenes.

While we are critical of aspects of Mr Lee’s stewardship of SPG and SET, it must be acknowledged those shortcomings were not the moving cause of the insolvency and failure of the companies. The problem arose out of structural features of the development venture exacerbated by Mr Mehajer’s conduct. While there is an argument Mr Lee might have more carefully scrutinised the agreement already negotiated when he was appointed as a director, the board was largely set and the pieces were already in motion. He might have demanded better legal advice at several points, and he should have taken action to access information and deal more diligently with the companies’ taxation affairs. He was arguably too deferential to Mr Mehajer right up until the end. Perhaps he should have resigned much earlier, although that would not necessarily have prevented him being the subject of proceedings under s 206F. But his conduct did not lead to the failure. This was certainly not a case where Mr Lee actively mismanaged a business or heedlessly permitted it to continue trading and incurring obligations.
Mr Lee’s conduct in relation to the affairs of SPG and SET was certainly worthy of criticism and censure, but we are satisfied his conduct, in all the circumstances, does not weigh heavily in favour of disqualification.
We turn next to the public interest. General incorporation is a privilege that is widely available to businesses precisely because business is generally in the interests of the community. Businesses generate jobs and opportunities. They are expected to obey the law, pay taxes and contribute to economic growth. Corporate collapses can be immensely costly to individual creditors and other stakeholders, and they can wreak havoc in the wider economy. While business failures are an established feature of a free enterprise system, failures as a consequence of bad management are particularly regrettable – especially where they can be avoided if directors follow a few basic rules. It follows there is a public interest in ensuring the proper management of companies, albeit there is also an interest in encouraging (or at least not inhibiting) free enterprise.
Section 206F permits the regulator to weed out directors who have demonstrated they fall short on their basic obligations. It helps ASIC protect the public from actors who have already demonstrated they are bad, or at least unacceptably risky. The prospect of action under s 206F also provides a deterrent effect. There is the potential for specific deterrence: disqualification provides an opportunity to teach an errant director to be more careful in the future. Disqualifying a director also provides an example pour encourager les autres. It follows a decision in a particular case may serve the purpose of general deterrence.
It is important to remember the power in s 206F is not intended to punish, even if a disqualification incidentally has that effect. Mr Cheshire also pointed out in submissions that the potential for deterrence must not be given disproportionate weight. He reminded us, quite properly, that our objective is to reach the correct or preferable decision in all the circumstances. It would be a mistake to give one circumstance, or one factor, disproportionate weight and thereby distort the outcome.
It is possible a period of disqualification will drive home the message to Mr Lee about his conduct. As it happens, we have no reason to doubt he has already absorbed those lessons. He has experienced damage to his reputation as a result of what has already occurred. We expect that loss will be compounded by our observations about his conduct in these reasons. He acknowledged his shortcomings at the hearing and was candid about the mistakes he made. It is not clear that a period of disqualification will achieve significantly more.
There is more to be said for general deterrence. We have acknowledged Mr Lee’s shortcomings – especially his failure to acquaint himself with the financial affairs of the company - ultimately made little difference to the outcome. It was regrettable all the same. The system of regulation works more effectively if directors are constantly reminded of the importance of discharging their duties in this regard. It is a message that must be heard by those, like Mr Lee, who are effectively nominee directors. They need to appreciate that directors are not an ornament, as the New South Wales Court of Appeal explained in Daniels v Anderson (1995) 37 NSWLR 438 at 503, quoting Pollock J in Francis v United Jersey Bank (1981) 432 A 2d 814 at 821-823.
Mr Cheshire argued, in effect, a warning shot would be more appropriate than an execution. He said the censure contained in our public reasons will have an adequate deterrent effect on Mr Lee and on directors more generally. We think the case is more finely balanced than that. Directors need to understand they must take their obligations seriously – and they need to understand there are serious consequences if they do not.
This case provides an opportunity to administer a lesson to other directors. But we also accept the shortcomings were not especially obvious or egregious. In all the circumstances, we accept the public interest (promoted as it is through deterrence) tips in favour of disqualification, but not decisively so.
That leaves the other interests that might be relevant. Mr Lee’s interests are obviously relevant in this regard. Being disqualified as a director will likely have a significant impact on this work as a consultant. As it is, he cannot act as a director of the consulting company. He is also prevented from being a director of his family company which trades on the internet. He has coped with this challenge in his family business by having his father act as a director in his stead. It may yet be possible to conduct the business without using a company. It is harder to fix the damage to his professional reputation. These reasons will, in and of themselves, rake over those coals. A disqualification will likely be a hammer blow to his business and reputation.
While we accept many regulatory decisions (including, potentially, disqualification decisions like the one we consider here) may have implications for the role of ASIC, we are not satisfied that is the case here. We do not criticise ASIC over the conclusions it reached on the material before it, or the process it followed. Our decision is our own.
We are satisfied the other interests we have discussed weigh against disqualifying Mr Lee.
CONCLUSION
When we weigh all the considerations together, we are satisfied the correct or preferable decision is that Mr Lee should not be denied the opportunity to be a director. Mr Lee (and any other director or adviser reading these reasons) should appreciate our decision was reached after careful deliberation, and with some hesitation. Ultimately, though, we have concluded the decision under review must be set aside. We find in substitution that Mr Lee should not be disqualified from being involved in the management of corporations pursuant to s 206F of the Corporations Act. Given that conclusion, we do not see any need to address the additional question of whether leave should be granted under s 206GAB.

I certify that the preceding 47 (forty -seven) paragraphs are a true copy of the reasons for the decision herein of Deputy President Bernard J McCabe, Member Peter W Ranson

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Associate
Dated: 07 August 2020

Date(s) of hearing: 23 June 2020

Date final submissions received: 28 May 2020

Counsel for the Applicant: Mr A P Cheshire SC

Solicitors for the Applicant: Lander and Rogers

Counsel for the Respondent: Ms R Withana

Solicitors for the Respondent: Australian Securities and Investment Commission

Date(s) of hearing:	23 June 2020
Date final submissions received:	28 May 2020
Counsel for the Applicant:	Mr A P Cheshire SC
Solicitors for the Applicant:	Lander and Rogers
Counsel for the Respondent:	Ms R Withana
Solicitors for the Respondent:	Australian Securities and Investment Commission