Ng and Australian Securities and Investments Commission
[2006] AATA 244
•15 March 2006
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2006] AATA 244
ADMINISTRATIVE APPEALS TRIBUNAL )
) No N2005/932
GENERAL ADMINISTRATIVE DIVISION ) Re EDDIE FONG CHUNG NG Applicant
And
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Respondent
DECISION
Tribunal Senior Member Allen Date15 March 2006
PlaceSydney
Decision The decision under review is affirmed.
(Sgd) M.D. ALLEN
..................................................
Senior Member
CATCHWORDS
Corporations Law – Applicant disqualified from managing corporations for a period of 2 years – two of Applicant’s companies were wound up and both were unable to pay their debts – applicant as director had failed to keep proper books of account and provide to liquidators any records of the company – lack of due diligence shown by the Applicant – decision under review affirmed.
Corporations Act 2001 s206F
Rich v Australian Securities and Investments Commission (2004) 220 CLR 129
Kamha v Australian Prudential and Regulation Authority [2005] FCAFC 248
Healey vAustralian Securities and Investments Commission [2000] AATA 9
Australian Securities and Investments Commission v Starnex Securities Pty Ltd (2003) 133 FCR 238
REASONS FOR DECISION
15 March 2006 Mr M D Allen, Senior Member 1. By application made the 25th day of July 2005 the Applicant sought review of the decision by the Respondent made the 29th day of June 2005 disqualifying him from managing corporations without the leave of the Respondent for a period of 2 years.
2. Section 206F of the Corporations Act 2001 states:
“(1) ASIC may disqualify a person from managing corporations for up to 5 years if:
(a)within 7 years immediately before ASIC gives a notice under paragraph (b)(i):
(i)the person has been an officer of 2 or more corporations; and
(ii)while the person was an officer, or within 12 months after the person ceased to be an officer of those corporations, each of the corporations was wound up and a liquidator lodged a report under subsection 533(1) about the corporation’s inability to pay its debts; and
(b)ASIC has given the person:
(i)a notice in the prescribed form requiring them to demonstrate why they should not be disqualified; and
(ii)an opportunity to be heard on the question; and
(c)ASIC is satisfied that the disqualification is justified.
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.
…..”
3. Referring to the analagous section namely s 206E of the Corporations Act, McHugh J in Rich v Australian Securities and Investments Commission (2004) 220 CLR 129 at 152-154, adopted the fifteen propositions formulated by Santow J of the New South Wales Supreme Court. Of those propositions the following are relevant here, namely:
“(1)Disqualification orders are designed to protect the public from the harmful use of the corporate structure or from use that is contrary to proper commercial standards.
(2)The banning order is designed to protect the public by seeking to safeguard the public interest in the transparency and accountability of companies and in the suitability of directors to hold office.
(3)Protection of the public also envisages protection of individuals who deal with companies, including consumers, creditors, shareholders and investors.
(4)The banning order is protective against present and future misuse of the corporate structure.
(5)The order has a motive of personal deterrence, though it is not punitive.
(6)General deterrence is an object of the legislation.
(7)In assessing the fitness of an individual to manage a company, it is necessary that the individual have an understanding of the proper role of the company director and the duty of due diligence that is owed to the company.
(8)Longer periods of disqualification are reserved for cases where contraventions have been of a serious nature such as those involving dishonesty.
(9)In assessing an appropriate length of prohibition, consideration is given to the degree of seriousness of the contraventions, the propensity of the defendant to engage in similar conduct in the future and the likely harm that may be caused to the public.
(10)It is necessary to balance the personal hardship to the defendant against the public interest and the need for protection of the public from any repeat of the defendant’s conduct.
(11)A mitigating factor in considering a period of disqualification is the likelihood of the defendant reforming.
(12)The eight criteria to govern the exercise of the court’s powers of disqualification set out in Commissioner for Corporate Affairs (WA) v Ekamper (1987) 12 ACLR 519 have been influential. It was held that in making such an order it is necessary to assess:
(a)the character of the defendant;
(b)the nature of the breaches;
(c)the structure of the company of companies and the nature of its or their business;
(d)the interests of shareholders, creditors and employees;
(e)the risks to others from the continuation of the defendant as a director;
(f)the honesty and competence of the defendant;
(g)hardship to the defendant and to his or her personal and commercial interests; and
(h)the defendant’s appreciation that future breaches could result in future proceedings.
(13)….
(14)…
(15)The factors leading to the shortest disqualifications,(that is, disqualifications for up to three years) were:
(a)although the defendant had personally gained from the conduct, he or she had endeavoured to repay or partially repay the amounts misappropriated;
(b)the defendant had no immediate or discernable future intention to hold a position as manager of a company;
(c)the defendant had expressed remorse and contrition, acted on a advice of professionals and had not contested the proceedings against him or her.”
4. That general deterrence is a factor in disqualification from acting in an office was also acknowledged by the Full Court of the Federal Court, albeit in relation to the Insurance Act 1973, in Kamha v Australian Prudential Regulation Authority [2005] FCAFC 248.
5. It is not disputed that the Applicant was a director of Kam Fook Sharks Fin Seafood Restaurant Pty Ltd (“KF Restaurant”) from 31 March 2005. That company was wound up pursuant to an order made on 11 June 2004.
6. The business of that company was the conduct of a Yum Cha and Chinese Seafood Restaurant in the Haymarket area of Sydney. The Restaurant could seat up to 550 people.
7. During 1997 the Applicant became a director of a company, Market City Tavern (Haymarket) Pty Ltd (“MC Tavern”). That company was wound up pursuant to a creditor’s petition by order dated 2 July 2002.
8. MC Tavern was in premises adjoining KF Restaurant and prior to the company being wound up the business had been sold.
9. On 22 October 1997 the Applicant became a director of Kam Fook (Hurstville) Pty Ltd (“KF Hurstville”) which was a Chinese restaurant at Hurstville. The Applicant was a founding director of this business. The business was wound up pursuant to an order made on 1 May 2003.
10. In addition to the above, from 17 July 2001 and continuing at the date of the Respondent’s decision, the Applicant was a director of Kam Fook (Chatswood) Pty Ltd (“KF Chatswood”). On 25 October 2002 KF Chatswood was placed into voluntary administration. As this company was not wound up, its failure was not a ground for action pursuant to s 206F Corporations Act. I do however take into account that another company with which the Applicant was associated failed.
11. When KF Hurstville and KF Restaurant were put into liquidation there was a deficiency of assets over liabilities. In the case of KF Hurstville the deficit sum was $661,672.00 and for KF Restaurant $380,912.00. KF Chatswood also had a deficit being in the sum of $3,918,374.00.
12. Likewise, statutory debts were not paid as and when they fell due, including:
(a)A total of $1,383,787.16 BAS in the case of KF Hurstville, MC Tavern and KF Chatswood;
(b)$255,658.00 superannuation guarantee charge in the case of KF Restaurant;
(c)$119,566.64 income tax for the year ended 30 June 2000 in the case of MC Tavern; and
(d)$95,421.00 deferred company instalment in the case of MC Tavern.
13. On 10 July 2003 the Applicant was convicted at Brisbane Magistrates Court of contravening s 475(1) of the Corporations Act by failing to submit to the liquidators of MC Tavern a report as to the affairs of that company.
14. On 10 July 2003 the Applicant was convicted at Brisbane Magistrates Court of contravening s 530A(2)(b) of the Corporations Act by failing to give information to the liquidators of MC Tavern as required.
15. There is no dispute between the parties that the Respondent gave the required notice pursuant to paragraph 206F(1)(b) Corporations Act and that the Applicant availed himself of his opportunity to be heard. The required notice was given on 14 March 2005, therefore the Applicant was, within the 7 years immediately before the giving of the notice, an officer of the said corporations.
16. The Applicant was an officer of 2 corporations, namely KF Restaurant and KF Hurstville at the time they were wound up and the said corporations were unable to pay their debts upon winding up.
17. In the case of MC Tavern the estimated dividend to unsecured creditors was, as at the date of the Respondent’s decision, unknown as the company had failed to keep proper books of accounts and the directors had failed to provide to the liquidators any records of the company. As stated above the Applicant was convicted and fined for failing to submit to the liquidators of MC Tavern a report as to the affairs of that company or to give any information to them.
18. The Applicant by his counsel conceded that the 3 companies namely KF Restaurant, KF Hurstville and MC Tavern were not “related” companies.
19. If I understand the Applicant’s evidence correctly, he says in relation to KF Restaurant that it was trading successfully until some employees engaged in what is known as “credit card skimming” and as a result, the Commonwealth Bank and American Express withdrew from the Restaurant credit card facilities. This event had a negative effect upon the businesses’ ability to trade.
20. Further, the Applicant claimed that at the relevant time he was not in control of the company and although he wished to take steps, which he believes would have led to it trading successfully, he was outvoted by the other directors.
21. As a result of the withdrawal of credit card facilities from KF Restaurant, they were also withdrawn from KF Hurstville and MC Tavern.
22. I must stress that there is no allegations whatsoever that the Applicant had any connection with the credit card skimming activities. The fact is that certain employees at KF Restaurant engaged in criminal activities on their own behalf.
23. In their report to the Respondent the liquidators of KF Restaurant state that the cause of the company’s failure was poor financial control and lack of records together with poor strategic management of the business.
24. The liquidators of KF Hurstville gave as reasons for the failure of that business, disputes among the directors and trading losses.
25. So far as MC Tavern was concerned the Applicant stated that it had been trading successfully until the manager, a Mr Stiffe, was murdered during a robbery of the Tavern. Following the death of Mr Stiffe, that company’s financial controller, a Ms Anita Fung, resigned her position.
26. Although a replacement manager was found for MC Tavern the loss of the knowledge of the business affairs of the Tavern which had accumulated to Mr Stiffe and Ms Fung, led to creditors’ claims being delayed for payment while checks were made to avoid fraudulent claims.
27. Unfortunately the claim by one creditor was overlooked and that creditor issued a s 459E Notice, which Notice was served at the company’s registered office, which was at the office of its external accountant, a Mr Yu.
28. Mr Yu had not been particularly attentive to the affairs of the company. Indeed the Applicant states he has attempted to have him replaced as the accountant to MC Tavern and KF Restaurant but had been outvoted by other directors. Suffice it to say that Mr Yu did not attend to the statutory demand with the result that the company was placed into liquidation.
29. It would also appear that following these events there arose disputes between the Applicant and Mr Yu and Mr Yu did not make available to the Applicant the books and records of MC Tavern which were in his custody.
30. Much of the Applicant’s evidence regarding these events was difficult to follow. Prior to the statutory demand upon the company the business had been sold. In cross examination the Applicant stated that he had arranged for payment to those creditors of the company who had made contact with him. He stated in cross examination “creditors who did not contact me, I did not seek to pay”.
31. So far as the conviction for failure as a director to submit to the liquidator of MC Tavern a report as to that corporation’s affairs and to give to the liquidator information as required, the Applicant stated that he had not been aware of the requirement due to his failure to open his mail. Indeed he made the quite remarkable statement that at that time, he had not opened a letter for years. The duty had been previously undertaken by his wife who by then had left him, and after that time there were “letters everywhere”.
32. Exhibit R2 contains an affidavit sworn 23 January 2002 by one Qi Xiang Xu in an action by Mr Xu against the Applicant. In that affidavit Mr Xu states at paragraph 8 that the Applicant was the “Executive Director” of the Kam Fook Group, which comprised a number of related companies.
33. What is also clear from Mr Xu’s affidavit and the Applicant’s own evidence to the Respondent’s examiner at transcript page 35 of that examination, is that KF Restaurant and KF Hurstville were used as vehicles for migrants from China to claim a business skills visa and to avoid cancellation of that visa pursuant to s 134 of the Migration Act 1958 by asserting inter alia that they had obtained a substantial ownership interest in an eligible Australian business and were actively participating at a senior level in the day-to-day management of that business. I do not accept that those “investors” did in fact involve themselves in the day-to-day activities of the company.
34. At paragraph 23 of his affidavit Mr Xu states:
“having invested $350 000.00 in the companies, I was made a director of the companies. However, I had no involvement in the business of the companies. For 2 years after I was appointed as a director of the companies, I would periodically say to Eddie words to the effect of ‘I would like to work in the Kam Fook Group Company’. Eddie would not agree.”
35. Also in Exhibit R2 is an affidavit by Limei Ma, the wife of Mr Xu. She corroborates his evidence that the Applicant suggested that investment be made in KF Restaurants and MC Tavern in order to meet the requirements for a business skills visa.
36. I am satisfied that the other directors in the various Kam Fook companies were in a similar position to Mr Xu and that the Applicant was in fact the “Executive Director” of the Kam Fook group of companies. I reject his assertions that he wished to put in place strategies that would have led to the companies trading their way out of financial difficulties but was out voted by other directors.
37. No evidence in the form of minutes of directors meetings or of resolutions of the boards of the companies was put before me to corroborate the Applicant’s evidence of being out voted by other directors.
38. So far as the failure of the restaurants is blamed upon the withdrawal of credit facilities, I also reject this explanation. Credit facilities were withdrawn from KF Restaurant, MC Tavern and KF Hurstville in the period between July and September 1999. Administrators were appointed to KF Restaurant on 17 May 2004 and KF Hurstville on 31 March 2003. That is to say there was a considerable period of trading by both restaurants before administrators were appointed and failure of the businesses can only be regarded as failures of management. The lack of credit card facilities was known and strategies should have been put in place to cope with this.
39. The Applicant claimed that he had at all times a belief that credit card facilities would be restored. I doubt, given the protracted negotiations with the credit card providers, that this was a genuine belief but in any event the viability of the corporations should have been evaluated on the basis that credit card facilities would remain withdrawn.
40. The liquidator of KF Hurstville reported, pursuant to s 533(1)(a) Corporations Act, that it was considered there were contraventions of the provisions of the said Act and pursuant to s 533(1)(c) that the estimated dividend to unsecured creditors would be 0 - 10 cents.
41. As to KF Restaurant the liquidator reported that it was considered that there were contraventions of the provisions of the Corporations Act and that the estimated dividend to unsecured creditors would be 0 - 10 cents.
42. The liquidators of MC Tavern reported that it was considered that there were contraventions of provisions of the Corporations Act and pursuant to s 533(1)(b)(i) that a person may have misapplied or retained or become accountable for property of the company. The estimated dividend to unsecured creditors was unknown. The liquidators also made a report pursuant to s 476 Corporations Act that the directors failed to provide them with any records of the company in breach of their obligations under s 590 of the said Act.
43. A consideration of the whole of the circumstances surrounding the liquidation of KF Restaurant, KF Hurstville and MC Tavern reveals that the companies failed due to mismanagement and the Applicant was a director of the companies at all relevant times. As stated above, I am satisfied that he had an ongoing role in the management of the companies and was not, as he claimed, a mere figurehead. Prior to his involvement with the Kam Fook group of companies, the Applicant had been, both in Hong Kong and then in Western Australia, a director of companies that had on his evidence traded successfully. Upon liquidation of KF Restaurant, KF Hurstville and MC Tavern it was found that those companies had failed to keep proper books of account. As a director of those companies the Applicant had a duty to ensure that proper books of account were kept and it is no answer for him to say that other persons were engaged for that purpose. As a director his duty was to ensure that the persons employed correctly carried out the duties for which they were engaged.
44. This duty was particularly relevant in the Applicant’s case as I reject his evidence that he was a mere figurehead and outvoted at director’s meetings.
45. An important consideration is that statutory debts of the corporations were not paid as and when they fell due.
46. The Applicant’s counsel referred me to 2 cases where penalties had been imposed namely, Healey v Australian Securities and Investments Commission [2000] AATA 9 and ASIC v Starnex Securities Pty Ltd (2003) 133 FCR 238 and submitted that the Applicant’s culpability was less than the disqualifying conduct in those cases.
47. I do not believe that it is possible to establish some form of “tariff” in cases of disqualification under s 206F Corporations Act. Each case must depend upon its own particular circumstances and a penalty imposed having regard to the criteria set out in ss 206F(2) and the list of matters originally stated by Santow J and adopted by McHugh J in Rich v Australian Securities and Investments Commission (supra).
48. In Re Healey (supra), of 8 matters alleged, 6 were found to be proven by the Tribunal. In agreeing that the maximum penalty of 5 years should only be reserved for the worst cases Deputy President McMahon reduced the disqualification to 2 years finding that the failures on the part of the Applicant in that case amounted to a pattern of conduct.
49. Finkelstein J in ASIC v Starnex Securities Pty Ltd (supra) dealt with a director who had refused to cooperate with ASIC and whose companies had committed many offences. At paragraph 11 of his judgment, His Honour said of the director:
“Mr Camiolo failed to act responsibly as a director of the companies. He appears to have little or no knowledge of how a company should be managed. He certainly has little appreciation of the legal obligations imposed on a corporation in relation to its administration and record keeping”.
A disqualification of 2 years was imposed.
50. The present Applicant has knowledge of how a company should be managed in that other companies with which he has been involved have apparently been successful. In the present matters he failed to ensure that proper accounts were kept, failed to ensure statutory payments were made and failed to implement proper business strategies. In the case of MC Tavern he paid some creditors and not others and failed to attend to correspondence from the liquidator.
51. Given all the circumstances, in particular the lack of due diligence by the Applicant, his carelessness in not attending to correspondence, the losses incurred by the companies plus the element of personal and general deterrence, I consider a 2 year disqualification is appropriate even though the Applicant himself lost monies in the companies and has suffered a degree of unfavourable publicity within the Chinese community. I therefore affirm the decision under review.
I certify that the 51 preceding paragraphs are a true copy of the reasons for the decision herein of Mr M D Allen, Senior Member.
Signed: (E.Pope) .....................................................................................
Associate
Date of Hearing 13 February 2006
Date of Decision 15 March 2006
Counsel for the Applicant Mr J E Thomson
Solicitor for the Applicant Raymond Lee & Co Solicitors
Counsel for the Respondent Ms M Allars
Solicitor for the Respondent ASIC Legal Section
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