Leslie John May and Australian Securities and Investments Commission
[2013] AATA 180
[2013] AATA 180
Division GENERAL ADMINISTRATIVE DIVISION File Number(s)
2012/2555
Re
Leslie John May
APPLICANT
And
Australian Securities and Investments Commission
RESPONDENT
DECISION
Tribunal Deputy President P E Hack SC
Date 28 March 2013 Place Brisbane The Tribunal sets aside the decision under review and substitutes a decision that the applicant not be disqualified from managing corporations.
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Deputy President P E Hack SC
CATCHWORDS
CORPORATIONS – Officers and employees – Officer of two or more corporations that have been wound up – Disqualification from managing corporations – Whether satisfied disqualification justified – Public interest considerations – Relevance of breach of directors’ statutory duties – Relevance of competence to hold office of director – Two companies regarded as single entity – Failure to comply with taxation obligations – Failure to meet responsibilities as director caused loss of revenue – Discretion to disqualify enlivened – Neither applicant’s incompetence nor public interest considerations warrant period of disqualification – Decision set aside
LEGISLATION
Corporations Act 2001 (Cth), s 206FCASES
Murdaca v Australian Securities and Investments Commission [2009] FCAFA 92; (2009) 178 FCR 119REASONS FOR DECISION
Deputy President PE Hack SC
Section 206F of the Corporations Act 2001 (Cth) confers on the respondent, the Australian Securities and Investments Commission (ASIC), a power to disqualify a person from managing a corporation where that person has been an officer of two or more corporations that have gone into liquidation in the particular circumstances set out in the section. The applicant, Mr Leslie May, was a director of two such companies. On 21 May 2012 a delegate of ASIC decided to disqualify Mr May from managing corporations for a period of two years. That decision took effect from 1 June 2012 when a copy of it was served on Mr May[1].
[1] See s 206F(4), Corporations Act.
Mr May seeks a review of ASIC's decision.
So far as is presently material, s 206F of the Corporations Act is in these terms,
(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.
(1A) …
(2)In determining whether disqualification is justified, ASIC:
(a)must have regard to whether any of the corporations mentioned in subsection (1) were related to one another; and
(b)may have regard to:
(i)the person’s conduct in relation to the management, business or property of any corporation; and
(ii)whether the disqualification would be in the public interest; and
(iii)any other matters that ASIC considers appropriate.
In Murdaca v Australian Securities and Investments Commission[2] the Full Court described the operation of s 206F of the Corporations Act in this way,
[2] [2009] FCAFC 92; (2009) 178 FCR 119 at [101].
Our reasons for these conclusions may be shortly stated as follows:
(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 (Rich v Australian Securities and Investments Commission (2004) 220 CLR 129 at [47]-[50] and the maintenance of professional management standards in the public interest (Visnic v Australian Securities and Investments Commission (2007) 231 CLR 381 at [11] and [26]).
(c)Section 206F does not give reports prepared by liquidators pursuant to s 533 of the Act any particular status or weight. ASIC may approach the exercise of its power of disqualification under s 206F(1)(c) in any way it thinks fit, subject to complying with s 206F(1) and (2) and subject to respecting and applying the principles referred to in subparagraph (b) above.
(d)Subsection (2) of s 206F informs the exercise of the power given to ASIC by subs (1)(c). Subparagraph (a) of subs (2) lays down a mandatory requirement to which regard must be had and subpara (b) sets out matters to which regard may be had. ASIC is not obliged to have regard to the s 533 report or reports which triggered the disqualification process when considering whether disqualification is justified. No doubt it may do so in an appropriate case but it is not obliged to do so. Rather, it is authorised and empowered to make a decision on the merits as to whether disqualification is justified. It would make no sense at all if it were also required to involve itself in a merits-based decision in relation to the correctness of the relevant s 533 report or reports at stage 1 of the process.
In the event that reliance is placed upon the s 533 report or reports at stage 3 of the process, ASIC will be called upon to assess the worth of that report or those reports at that stage in order to decide whether disqualification is justified.
(e)Section 206F is an alternative to Court action by ASIC. It is meant to be a quick and cheap alternative to Court action. However, it cannot be utilised just because ASIC feels that it would like to take action against a particular individual. Certain preconditions for action must be satisfied. But, in the end, the merits consideration by ASIC is intended to take place only once in the process--not at two stages. In a sense, the preconditions provided for in subparas (a) and (b) of s 206F(1) are jurisdictional requirements which must be satisfied before ASIC’s power to disqualify under s 206F is enlivened.
(f)…
Mr Lawson, the solicitor for Mr May, accepted that the stage 1 (the trigger mechanism) and stage 2 (the procedural fairness requirement) processes had been undertaken: what remains is the further review by the Tribunal in the stage 3 process.
Mr May’s disqualification arose out of his involvement in two companies, ACS Professional Pty Ltd (Professional) and ACS International Recruitment Pty Ltd (International). Professional was incorporated in January 2007; International was incorporated the following month. For all practical purposes Mr May became a director of Professional upon its incorporation; he became a director of International in September 2007. He remained a director of both companies until his disqualification took effect in June 2012.
The companies were incorporated to provide labour hire services in the mining, oil and gas industries; Professional to the domestic market and International to the international market. Mr May was the managing director of both companies. He became involved with them as a consequence of a long-standing relationship with Mr Raymond Crake who, together with Mr Frank Konstek, was a non-executive director of each of the companies. Mr May, Mr Crake and Mr Konstek (or entities associated with them) held, in equal shares, all the shares in the two companies.
Professional and International were wound up pursuant to a resolution of creditors at a meeting held on 30 August 2010 following the earlier appointment of an administrator to the two companies pursuant to Part 5.3A of the Corporations Act. Mr Gary Anderson, who had earlier been appointed administrator of each company, became the liquidator of them by operation of law on the passing of the creditors' resolution[3].
[3] Section 499(2A)(b), Corporations Act.
On 9 March 2011 Mr Anderson lodged with ASIC a report pursuant to s 533 of the Corporations Act in relation to the affairs of Professional. The report estimated the likely return to creditors in the range of 21-50 cents in the dollar. It listed the causes of the company's failure as trading losses and “Unrecoverable debt owing by a related company in liquidation”. In a subsequent report of 1 June 2011 Mr Anderson identified total liabilities of $1,752,419 including $1,315,294 owed to the Deputy Commissioner of Taxation and $117,396 owed to the Western Australian Commissioner of State Revenue. He estimated realisable assets of $695,453. Of that sum, $212,089 was owed to priority creditors leaving $483,364 available for distribution to unsecured creditors totalling $1,540,330.
Also on 9 March 2011, Mr Anderson lodged with ASIC a report pursuant to s 533 of the Corporations Act in relation to the affairs of International. That report estimated the dividend to unsecured creditors as being in the range 0-11 cents in the dollar. Subsequently on 20 May 2011 Mr Anderson lodged a further report which identified outstanding liabilities of that company totalling $2,027,243 including $1,055,006 owed to the Deputy Commissioner of Taxation and $7424 owed to the Western Australian Commissioner of State Revenue. Realisable assets were estimated at $505,939, of which $149,459 was owed to priority creditors, leaving $356,480 available for distribution to unsecured creditors amounting to $1,877,784.
A later report by Mr Anderson from September 2012 indicates that he took proceedings against the directors for insolvent trading and that those proceedings were settled on the basis that the directors collectively paid him the sum of $300,000 to settle his claims in respect of both Professional and International. It is not clear how much of that sum was contributed by Mr May.
As the extract from Murdaca makes clear, one of the purposes of the s 206F power is to protect those who deal with corporations from those who “through incompetence or dishonesty or a combination of the two” cause loss to others. It is not to punish albeit that it might, incidentally, have that effect. ASIC does not suggest that Mr May acted dishonestly; its case was that Mr May’s incompetence had caused loss, and, in particular, a very considerable loss to the revenue of the Commonwealth and of Western Australia. Mr Coveney, counsel for ASIC, took me to a line of cases starting with Cullen v Corporate Affairs Commission (NSW)[4] that stand for the proposition that what was then described as group tax (now PAYG) was, for all intents and purposes, trust monies which did not belong to the company and that the use of such money for trading purposes,
… shows a complete lack of appreciation of this situation and a serious lack of commercial morality.
Given that the Commissioner of Taxation now has the capacity to make directors personally liable for the non-payment of PAYG deductions the question may arise in an appropriate case whether Cullen ought still be applied however in the circumstances of the present case that issue may be left for another day.
[4] (1988) 14 ACLR 789, 795-6.
ASIC contended that public interest considerations favoured the disqualification of Mr May because he breached his duty under s 180 of the Corporations Act in failing to ensure that the two companies complied with the taxation obligations and because he had demonstrated, so it was said, that he was not sufficiently competent to hold the office of director through his failures to monitor the financial state of the companies, to prevent the companies from acting to their financial detriment and to accept any responsibility for the company's failures.
These contentions need to be considered by reference to such evidence as there is that details the circumstances of the demise of the companies.
The liquidations commenced on 30 August 2010. I infer that the resolution to appoint an administrator was passed earlier that month or in the preceding month. Within the material are minutes of directors’ meetings (the companies held joint meetings) for 8 December 2009 and 6 April 2010.
The minutes of the December 2009 meeting record that as at September 2009,
The ATO was owed $175,456 [by International]
and that, in the case of Professional,
The ATO was owed $504,867.
The age of those debts does not emerge from the material. It is not clear, but I infer from the subsequent proofs of debt lodged by the Deputy Commissioner of Taxation, that the majority of the debts were PAYG deductions. The financial information presented appears to me, at least, to have been distinctly unpromising. Mr Crake and Mr Konstek are recorded as having expressed concern over the amount owed to the Australian Taxation Office. The minutes then record,
Mr May commented that turnover was about to increase that would improve cashflow. He summarised the cashflows provided by both companies. [Professional] was forecasted to make a profit of $441,837 to December 31, 2010 whilst [International] was forecasted to maker [sic] a profit of $985,114 for the full year to the same date.
Mr Crake asked the question of Mr McNamara if he believed that on the basis of his working knowledge of the businesses whether both companies would be able to meet their debts. Mr McNamara stated that he believed the businesses were viable.
The picture presented at the April 2010 meeting had not improved. The minutes of that meeting record the following,
The Financials of both Companies were provided at the meeting. Members took time to examine all the documents and noted with some concern that:
· [International]had lost $303,000 to Feb 2010. The [International] balance sheet showed in Feb 2010 a total equity of -$551,000. The ATO was owed over $500,000 including superannuation.
· [Professional] had lost over $34,000 to Feb 2010 and the balance sheet as of Feb 2010 showed a total equity of over -$22,000. The ATO was owed over $900,000 including Superannuation.
Mr Crake and Mr Konstek expressed concern over the amount owed to the ATO and noted it was a significant increase from the financials provided as of Oct 2009. Mr May summarised the cash flows provided by both companies. He reiterated that the December 2009 cash flows stand. [Professional] was forecasted to make a profit of $441,837 to December 31, 2010 whilst [International] was forecasted to maker [sic] a profit of $985,114 for the full year to the same date.
Mr Konstek and Mr Crake still expressed some concern over the progress the business was making and the operating costs including questioning the performance of staff.
Mr Crake directly asked Mr McNamara if he believed that both, or either of, the… companies were trading whilst insolvent. Mr McNamara stated that he believed this was not the case.
In late 2010 the Deputy Commissioner of Taxation lodged proofs of debt for Professional in the sum of $1,492,029 and for International in the sum of $1,055,006. The proofs do not provide any detail about the age of the debts. Mr May was questioned by ASIC’s delegate about the companies’ position with PAYG. He made reference to having “slipped behind” with tax from about October 2009[5] and being aware from January 2010 that the companies were “getting behind” in the payment of tax[6]. He suggested that the company's funds were used to repay loans to the other directors in preference to paying tax[7]. He made a reference as well to a lump sum payment of $450,000 made to the Deputy Commissioner in about May 2010[8].
[5] Exhibit 1, page 30.
[6] Exhibit 1, page 35.
[7] Exhibit 1, pages 36 and 41.
[8] Exhibit 1, page 62.
It is regrettable that no more detailed analysis has been undertaken of the way in which the debt to the Deputy Commissioner of Taxation accumulated. Where, as is the case here, ASIC relies principally upon the non-payment of revenue debts to warrant the exercise of the power of disqualification, it is important that there be a proper analysis of that debt. The amount of a PAYG debt says very little about the incompetence or otherwise of a director; that judgement is better made by reference to the period of time over which the debt accrued. Here, on the material put before me, as much as I can say is that the PAYG debt appears to have accrued over a period of up to about six months. And what emerges from the transcript of Mr May’s examination before the delegate is that, in common with many others, he did not ensure that PAYG tax deductions were promptly remitted to the Deputy Commissioner as they ought to have been. The vice in his conduct was twofold – he did not keep a sufficiently close eye on the financial position to ensure that the PAYG debts were being paid and, in circumstances once he had learnt that they were not, he did not insist to the other directors that they were paid ahead of the other director’s loans.
Section 180(1) of the Corporations Act, which is relied upon by ASIC, is in these terms:
(1)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:
(a)w ere a director or officer of a corporation in the corporation’s circumstances; and
(b)occupied the office held by, and had the same responsibilities within the corporation as, the director or officer.
I do not consider that this section has any particular application in the present case. Moreover, it is unnecessary to make the judgement required in the present case by reference to any particular characterisation of conduct. The power of disqualification may certainly be exercised without reference to whether the conduct in issue amounts to a breach of directors’ statutory duties. Moreover, whilst I think that Mr May demonstrated a level of incompetence, I would not characterise it in the way that ASIC’s submissions do. I accept that he inadequately monitored the financial position of the two companies but I do not accept, as ASIC contends, that he was incompetent because he failed to “prevent the companies from acting to their financial detriment”. If, by that, it is meant that he allowed the outstanding PAYG to build up over a number of months, then it adds nothing to the analysis of Mr May’s conduct. I do not otherwise comprehend what is intended to be conveyed by the submission.
ASIC submits that Mr May’s failure to “accept any responsibility for the failure of the companies” favours disqualification. I do not agree with that characterisation. Mr May, unsurprisingly, has sought to attribute the large PAYG debt to particular circumstances: problems with financial accounts, failures of the internal accountant and the demands for loan repayments by the other directors. These matters explain, but do not justify, the overall failure of Mr May to ensure that the PAYG debt was paid or otherwise provided for; I do not understand his case to be otherwise.
ASIC conceded, appropriately, that the two companies were related to one another and that the failure of the two companies ought be regarded as the failure of a single entity[9]. That is a matter I am obliged to have regard to and it is a matter, in my view, of considerable significance. Unlike the applicants in the cases relied on in ASIC’s submissions, Mr May presided over the collapse of what is conceded to be a single entity. The applicant in Re Boyle and Australian Securities and Investments Commission[10]was a director of three separate corporate ventures that failed between August 2004 and February 2006. In Re Culley and Australian Securities and Investments Commission[11] the applicants had been directors of five companies that carried on quite separate undertakings.
[9]Cf. Re Guss and Australian Securities and Investments Commission [2006] AATA 401; (2006) 90 ALD 349.
[10] [2009] AATA 122.
[11] [2008] AATA 588.
Mr May is a man of mature years. There is no suggestion that he has otherwise conducted the affairs of the companies incompetently or dishonestly. He failed in his responsibilities as a director over a period of some months, perhaps as long as six months, with the result that a single venture that he was managing failed with a significant loss to the revenue. But while the discretion to disqualify is enlivened, I do not regard the present case as one where any period of disqualification is warranted. Neither the extent of Mr May’s demonstrated incompetence nor the public interest in maintaining proper standards call for that conclusion.
I would then set aside the decision and substitute a decision that Mr May not be disqualified from managing corporations.
I certify that the preceding 24 (twenty-four) paragraphs are a true copy of the reasons for the decision herein of Deputy President P E Hack SC ........................................................................
Associate
Dated 28 March 2013
Date of hearing 29 January 2013
Solicitors for the applicant Porter Davis Lawyers
Counsel for the respondent Mr G Coveney
Solicitors for the respondent Australian Securities and Investments Commission
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