Raphael Gabay and and Australian Securities and Investments Commission
[2014] AATA 425
[2014] AATA 425
Division GENERAL ADMINISTRATIVE DIVISION File Number
2013/6142
Re
Raphael Gabay
APPLICANT
And
Australian Securities and Investments Commission
RESPONDENT
File Number
2013/6669
Re
Mark O'Neil
APPLICANT
And
Australian Securities and Investments Commission
RESPONDENT
DECISION
Tribunal The Hon. Brian Tamberlin, QC, Deputy President
Date 27 June 2014 Place Sydney 1. The Orders made by the Tribunal on 25 February 2014 on the stay application of Mr Gabay are set aside.
2. In relation to Mr O’Neil, the decision under review is affirmed. Mr O’Neil is disqualified under s 206F of the Act for a period of 12 months. That period of disqualification will commence at the date of the reviewable decision, 29 October 2013.
3. In relation to Mr Gabay, the decision under review is varied. The period of disqualification under s 206F of the Act is extended to 18 months, commencing on 29 October 2013. This 18 month period excludes the time during when the disqualification was stayed as a result of the order made on 25 February 2014.
............................[sgd]............................................
The Hon. Brian Tamberlin, QC, Deputy President
CATCHWORDS
CORPORATIONS - Disqualification as director of corporations - Whether disqualification is justified as the consequence of the person’s conduct - Related body corporate - Reasonable suspicion of insolvency - Trading while insolvent - Escrow agreements - Whether proper consideration provided - Assignment of intellectual property rights - Whether required consent obtained - Whether adequate records kept - Delegation of duties - Whether duties discharged with care and diligence - Decision under review affirmed – Decision under review varied
LEGISLATION
Corporations Act 2001 (Cth), ss 46, 47, 48, 50, 206F, 286, 533, 1317B
CASES
Guss and Australian Securities and Investments Commission [2006] AATA 401
REASONS FOR DECISION
The Hon. Brian Tamberlin, QC, Deputy President
27 June 2014
On 29 October 2013, the Australian Securities and Investments Commission (ASIC) disqualified Mr Gabay and Mr O’Neil (the Applicants) under s 206F of the Corporations Act 2001 (Cth) (the Act) from managing corporations for a one year period. The Applicants seek review of these decisions under s 1317B of the Act.
I am satisfied that the disqualifications are justified and that the decisions under review should be affirmed.
ISSUE
The issue for determination is whether the Tribunal is satisfied that the disqualification is justified or, if it is not so satisfied, what the correct and preferable decision should be in the circumstances. This calls for a consideration of the conduct of the applicants during the period of 2006 to early 2010.
BACKGROUND
The disqualifications turn on the conduct of the Applicants in their capacity as either directors or secretaries of companies within the Beacon Group of Companies, and the dealings engaged in by those companies with respect to the creation, sale, marketing, distribution and servicing of IT software programs. The principal program for consideration is called BIDS.
BIDS SOFTWARE
BIDS is a business software program developed in 2004 and launched commercially in 2005. It is a web-based program which enables users to create applications providing consistent and rigorous processes for data entry adjustment, as well as the validation and approval of financial and business process data via logical workflows to ensure present forecasts are prepared in a timely, relevant and transparent manner. It is an integrated application which addresses issues of visibility, integrity and completeness faced by both corporate and government clients. These processes were previously loosely and manually linked, but were generally independent.
In September 2006, Deloitte estimated the software program as having a fair market value of $10.5 million AUD. This was based on information provided by management as well as projections as to revenue and expenditure for the period 2007 to 2010. Deloitte expressly disclaimed having any discussions around the reasonableness of the assumptions or the achievability of the projections over that period, and they made no comment on the reasonableness of the assumptions underpinning the projections.
THE BEACON GROUP OF COMPANIES
Beacon Pty Ltd (BITA)
From June 1999 Mr Gabay was a director of Beacon Pty Ltd (BITA), becoming the executive chairman in November 2004, and the sole director on 31 October 2008. From 28 July 2008 Mr O’Neil was the secretary of BITA. On 25 January 2010 BITA was wound up, and on 26 May 2010 the liquidator lodged a report under s 533 of the Act concerning BITA’s inability to pay its debts. Upon liquidation, BITA owed over $945,000 to unsecured creditors including the Australian Taxation Office (ATO) and the Department of Education, including debts owed to Mr Gabay and related parties. The return to creditors was zero.
Beacon Software Innovations Pty Ltd (BSI)
From 31 May 2004 Mr Gabay was a director and secretary of Beacon Software Innovations Pty Ltd (BSI), becoming the executive chairman on 25 June 2004. This was the company which owned the BIDS software. On 28 July 2008 Mr O’Neil was the secretary of BSI. On 25 January 2010 BSI was wound up, and on 26 May 2010 the liquidator, Mr Holzman, lodged a report under s 533 about BSI’s inability to pay its debts. On liquidation, BSI owed over $5 million to unsecured creditors, including the ATO and the Department of Employment. AusIndustry lodged a proof of a contingent debt for over $4.26 million plus interest. The return estimated to unsecured creditors was zero.
Beacon IT Solutions Pty Ltd (BITS)
Mr Gabay became a director of Beacon IT Solutions Pty Ltd (BITS) on 7 June 1999. Mr O’Neil became a director of BITS on 12 October 2007, and from 28 July 2008 onwards he was also the company’s secretary. On 25 January 2010 BITS was wound up for an inability to pay its debts. On liquidation, BITS owed over $600,000 to unsecured creditors. The return estimated to creditors was zero.
Beacon IT Group Pty Ltd (BITG)
As from 29 May 2006, Mr Gabay was also the director and executive chairman of Beacon IT Group Pty Ltd (BITG), which was the holding company of BITA and BSI from the date of its incorporation in May 2006. Mr O’Neil was also the secretary of BITG, and later in October 2008 he became an executive director. On 30 July 2010 BITG was wound up. On 10 February 2011 the liquidator made a Supplementary Report under s 533 concerning BITG’s inability to pay its debts. The detailed financial circumstances are recorded in that report. On liquidation, BITG company owed over $2 million to unsecured creditors excluding related parties. The return was again estimated at zero.
The four companies: BITA, BSI, BITS and BITG will be referred to in these reasons as the Beacon companies.
It is common ground that the Beacon companies were insolvent by 7 December 2010. The question is whether, as ASIC contends, the companies were in fact insolvent, or could reasonably have been suspected of being insolvent prior to that date and, if so, at what time. ASIC contends that from at least June 2009 the directors were aware or ought to have been aware that one or more of the companies was insolvent and yet they continued to trade. The liquidator formed the view that the companies were insolvent by January 2009.
LEGAL PRINCIPLES
The nature of the jurisdiction conferred on ASIC is protective and not punitive in character. It is inevitable that a period of disqualification may present some hardship and difficulty but if this is required, as in the present case, to protect the public interest then hardship is no defence to non-compliance with the statutory standards.
The Act directs attention to whether disqualification is justified as the consequence of the person’s conduct in relation to the management, business or property of a corporation; whether the disqualification is in the public interest, and to any other matters considered appropriate.
It is not necessary under s 206F to make a positive finding that there has been a contravention of the Act, although that of course will be relevant: see Guss and Australian Securities and Investments Commission [2006] AATA 401 at [45]-[49] inclusive.
RELATED CORPORATIONS
To determine whether disqualification is justified, s 206F(1) of the Act mandates that regard be directed to whether any of the two or more corporations are related to each other.
The relevance of this requirement is that if corporations are related the reasonableness of conduct may be found to arise from one or more common transactions, and the seriousness of the conduct may be less because there is no continuous pattern between different ventures. For example if the conduct of several companies in a corporate group arose out of one set of circumstances or events, then it could be suggested that it did not disclose a pattern of non-compliance as may be the case where there is a pattern of multiple non-compliance in relation to distinct operations. The relationship goes to the gravity of the conduct and the extent of the need to protect the public.
Section 50 of the Act defines “related body corporate” as being a holding company or subsidiary of another holding corporation or a subsidiary of a holding corporation of another body corporate. The definition is not exhaustive. The expression “subsidiary” is defined in s 46 by reference to the ability to “control” which in turn refers to ss 47 and 48. I consider in this case that by reason of related shareholdings and directorships, the Group of Beacon Companies comprising BITA, BSI, BITIS and BITG are “related” for the purposes of the definition.
In relation to BITUS, JQ Consulting and Xylogy Pty Ltd, while I consider there is some association between these companies suggestive of control, the evidence does not enable a finding to be made that these corporations can be said to be related to each other or to the Beacon companies.
ISSUES FOR CONSIDERATION
REASONABLE SUSPICION OF INSOLVENCY
I am satisfied that since at least June 2009 the Beacon companies were insolvent and that by that time, or shortly thereafter, there were reasonable grounds for the Applicants to suspect that the companies were insolvent yet they failed to prevent further trading.
There are strong indicators in the material from which an inference of the Beacon companies’ insolvency can be made. For example, although there were some profits in the Group between 2006 to June 2009, these were relatively small. During the same period there were large losses suffered by the group, with losses of over $2.8 million recorded in 2006. I am satisfied that Mr Gabay was aware of the extent of these losses. Further, in 2007 it had been necessary for BITA and BSI to make deferred payment arrangements with the Australian Taxation Office (ATO), culminating in BIS receiving a notice of intended legal action from the ATO in January 2009. I also note that the salary of Mr Gabay was not paid for the 2009 financial year.
Moreover, a very substantial proportion of BITA’s creditors and BITA’s trade creditors and BSI’s trade creditors were not paid within 90 days in this period.
In addition, BITA and BSI did not pay superannuation from June 2009. Income tax returns were not lodged for the 2008 and 2009 financial years.
This inability to pay an important debt is consistent with his awareness of the parlous state of all the companies’ finances at that time.
In addition, there is the letter from Mr Gabay of 30 April 2009 to BSI, stating that the companies had repeatedly failed to make loan repayments to him and that he was “very concerned” that his loan was at risk. He insisted on “immediate additional security” and referred to an escrow or other similar arrangement for him so that it would be released on any further breach of the loan – something which he no doubt anticipated. This letter indicates a keen appreciation of the likely inability of the companies to meet the debts owed to them. I also note the remarks of the liquidator in his report of 8 July 2011, who noted that the request by Mr Gabay was inconsistent with the assertion of a party who believed that he was the holder of a valid charge over all the assets of BSI at that date. In my view there is substance in the conclusion of the liquidator that this letter may have been backdated.
Importantly, BITG was not able to and did not pay about $350,000 accruing due to its convertible note holders between August 2009 and August 2010. This amount was due under convertible note issue in the amount of $2 million to be paid in stages after August 2009. These convertible notes were not converted into shares. There were negotiations carried out on working note holders between August 2009 and the date when the companies went into administration by triggering their requirement to pay the outstanding funds. I do not accept that the Beacon companies were entitled to proceed on the basis that the notes would be converted to shares and consequently the debt would not be called in.
BITA and BSI could not, and did not, pay the $430,000 due to be repaid to them by Mr Gabay on 8 June 2009. Nor were they able to meet the first instalment of the $2 million accruing to the convertible noteholders which was due for repayment. They were therefore compelled to engage in negotiations to make other firm arrangements by way of the “Umbrella Draft Agreement” for payment which proved to be unsuccessful. Inconclusive negotiations continued until 9 December 2009 when Mr Holzman was appointed as the external administrator. No doubt the need to make provision for this large repayment was present in the minds of Mr Gabay and Mr O’Neil by June 2009. It is no answer to contend, as the Applicants have suggested, that the notes could have been converted to shares, and that the debt would not be called in by the noteholders. There is no suggestion in the evidence that this was in any way a real possibility.
By May 2009, the Applicants knew that there had been a profit before tax estimated at $900,000 but that the companies had in fact incurred a loss of over $800,000 up to that time, and that a loss in excess of $1 million was forecast for the 2009 financial year.
Although the BIDS software had been valued by Deloitte, as at 2006, to be worth an amount of $10.5 million, no effort was ever made by the Applicants to reconsider, revalue or reappraise the value of the software. The explanations for this omission by Mr O’Neil were not satisfactory. This is important when considering the ability of the companies to raise funds to pay debts. The software was eventually sold to a company controlled by Mr Gabay in February 2010 for an amount of $347,000, which was an enormous depreciation over a period of four years. The insolvency of the Beacon companies is also indicated by the fact that there was a loss of over $1 million incurred between 1 July and 31 October 2009. It is also significant that many trade creditors were not paid on time during this period; a time when Mr Gabay was director of all companies in the group, and Mr O’Neil was a director of BITS and BITG, and the secretary of BSI and BITS.
The weight of the evidence strongly favours the conclusion that by June 2009 the companies were insolvent, in that they were not able to and did not pay their debts as and when they fell due.
Considering the above matters in combination, I agree with the conclusion of the liquidator in paragraph 5 of his Supplementary Report of 8 July 2011, that there were strong indications that the company had been trading whilst insolvent since at least mid-2009. He considered there was insolvency from January 2009. I note his comments on solvency in that section of his report and the figures set out in his report relating to the financial records.
TRADING WHILE INSOLVENT
There were reasonable grounds as from at least June 2009 for the Applicants to suspect that the companies in the Beacon group were insolvent or would become insolvent by the end of 2009, and that they did not prevent the companies from continuing to trade until after June 2009. I find that both directors ought to have been aware of such insolvency.
After January 2009 there were a substantial number of important events, actions and transactions, some of which were hastily and ineffectively proposed or implemented, were designed to protect the financial position and interests of Mr Gabay at the expense of the assets and creditors of BSI in particular. A number of arrangements were made to obtain security, or what was considered to be additional security for Mr Gabay.
Particular examples of these actions and transactions showing an awareness and concern about the ability of the company to pay its debts when they become due and payable include the following. The letter of 30 April from Mr Gabay, requiring further security. The May 2009 Escrow Agreement between Mr Gabay and BSI. The entry into the Intellectual Property Deed on 6 May 2009 by BSI and Mr Gabay, whereby BSI assigned its rights and interests in the intellectual property of BIDS for little or insufficient consideration. The agreement that the BIDS software was to be kept in escrow and released on any default event, such as a failure to make a required payment or an external administration. In my view, as at November 2009, Mr Gabay clearly contemplated that he would acquire the BIDS software pursuant to the BSI Escrow Agreement.
ESCROW DEEDS AND DEED OF ASSIGNMENT
During 2009 there was an Assignment Agreement in early May and three Escrow agreements in late November to early December entered into by BSI in respect of the BIDS software, in favour of Mr Gabay personally in two cases and with entities with which he had an association.
On 8 May 2009, after he had written his letter of 30 April 2009 expressing his desire for some security as a result of concerns for the repayment of his loan, Mr Gabay and Mr O’Neil executed an Assignment Deed Agreement with BSI in favour of Mr Gabay in respect of the BIDS software, whereby he became entitled in the event of any breach by the Assignor, BSI, to a perpetual irrevocable royalty-free licence to the BIDS software world-wide.
The consideration moving to BSI for this dealing with the software is not clear. The arrangement clearly had the effect of improving Mr Gabay’s security, by conferring the contingent right to obtain ownership in circumstances which indicated that a danger of default was anticipated by Mr Gabay.
In November, after Mr Holzman advised on 27 November 2009 that the 2006 charge in favour of Mr Gabay would be unenforceable in the event of liquidation, BSI almost immediately entered into three Escrow agreements in respect of the BIDS software: one of which, with Orana, was said to have been by mistake. The mistake with respect to this Escrow is indicative of the haste with which attempts were made to deal with the software to keep it away from administration. Clearly no real attention was given to whether this Escrow agreement was appropriate and in the best interests of BSI.
On 27 November 2009 Mr O’Neil, on behalf of Beacon Software, entered into the Escrow Deed in respect of BIDS with Orana Venture Capital Pty Limited, a company owned by the wife of Mr O’Neil.
On 30 November 2009 a further Escrow Deed was entered into by BSI with BITUS, a US corporation set up by Mr Gabay and managed by a previous associate of Mr Gabay, Mr Brian Rogers, who is now employed by one of Mr Gabay’s current companies, Performa. This Deed was signed by Mr O’Neil for BSI, and provided for the release of BIDS to BITUS upon the occurrence of a default event. As at 30 November 2009, it was likely that such an event would occur.
One consequence of these escrow agreements appears to have been to diminish the marketability of the BIDS software, and to contribute to its extraordinary loss in its fair market value. Importantly, BIDS was sold to Mr Gabay’s company Belog Pty Ltd for a price of $374,000, significantly less than the $10.5 million value attributed to it by Deloitte three years prior.
In December 2009, a further Escrow Deed was entered into between BSI and Mr Gabay personally. This Deed was executed by Mr O’Neil as director of BSI, and was signed by Mr Gabay. The consideration for this is not clear.
The late November and early December Escrow Deeds were unusual in that they were executed within two weeks of the voluntary administration and they were not made for the benefit of, or to the protect the interests of, an end-user which is normally the case. Again, there appears to be no real consideration given for these agreements moving to BSI.
In my view, the Escrow Deeds and the Assignment Deed were designed for and had the effect of providing financial advantage to Mr Gabay at the expense of the BSI creditors.
It is likely in my view that, particularly having regard to the timing of the Deed and the extent of the indebtedness of the companies that they were entered into with the expectation they would secure the substantial past debts already owed to Mr Gabay in the event of external administration which occurred on 9 December 2009.
LACK OF CONSENT BY AUSINDUSTRY
On the evidence before me the position was that by 2006, BSI received government grants totalling in excess of $4.2 million from AusIndustry, as set out in the letter from AusIndustry to the voluntary administrator on 21 January 2010. It was a term of the grants signed by Mr. Gabay in 2006 that BSI must receive the prior written consent of AusIndustry “before dealing with the intellectual property”. No request for such consent has ever been made.
It is apparent from the evidence of the applicants and the documentation from AusIndustry that the May 2009 assignment and the November Escrow agreements should have been consented to in writing by AusIndustry before BSI entered into those agreements to prevent breach of the terms of the grant. Similarly, AusIndustry’s written consent should have been obtained by Mr. Gabay before he entered into the Deed of Fixed Charge with BSI on 26 May 2006.
BSI entered into the Assignment Agreement of 6 May 2009 without consent from AusIndustry. It entered into the escrow agreements in November 2009 without consent from AusIndustry. It also entered into the Deed of Fixed Charge in 2006 without any such consent.
Each of these transactions was a dealing with the intellectual property referred to in the Grant Agreement without any written prior consent from AusIndustry.
The consequence of these failures to obtain AusIndustry’s consent was that BSI was exposed to a contingent liability arising from AusIndustry terminating the Grant Agreement and seeking repayment of up to 100% of the $4.2 million grant, plus interest. A Proof of Debt was lodged by AusIndustry with the liquidator on 22 January 2010, claiming about $4.216 million together with interest. I note that at the Extraordinary General Meeting of the BTI group on 29 October 2009, at which the Applicants were present, there was detailed reference to the necessity to obtain the consent of AusIndustry before dealing with the BIDS software. Notwithstanding this awareness by both applicants two escrow agreements were executed in November/December 2009. These escrow transactions, and the earlier agreement with Mr Gabay, whereby BSI had its main asset, namely the BIDS software, reduced in value, show Mr. Gabay’s primary concern was to protect his own interests at the expense of BSI, of which he was a Director.
LACK OF ATTENTION TO DEALINGS WITH THE BIDS SOFTWARE
I am not satisfied that any sufficient consideration was provided for the assignment of the software which benefited Mr O’Neil’s company or the escrows which were in favour of Mr Gabay and BITUS.
In evidence, Mr. Gabay attempted to distance himself from any awareness of or involvement in this arrangement by stating that it was arranged by his legal advisor Mr. Kadoury. I do not accept his evidence in relation to a transaction which was directed so closely to the significant financial interests of Mr. Gabay. Notwithstanding his testimony to the contrary, I consider that Mr Gabay had a significant interest and involvement in the BITUS company. As noted above, he knew Mr Rogers who was said to manage the affairs of BITUS, an individual who was both a former colleague of Mr Gabay’s, as well as a present employee of his own Performa business. Further, he had a greater familiarity with the JQ entities than he professed, considering that his prospective daughter-in-law was also a shareholder and Director of the JQ entities at all relevant times.
In relation to the BITUS escrow, Mr Gabay did not provide any clear or acceptable explanation as to the benefit which BSI was to derive from its entry into escrow agreements in respect of the BIDS software. He stated that the consideration for the arrangement with him was that he would refrain from recalling his loan or “anything else” as a forward commitment. He denied that he entered into the escrow agreement because he was concerned about the possibility of external administration. He conceded before me that the effect of the document was that he would be entitled to a copy of the software in escrow immediately following a breach of the loan agreement. He said he did not anticipate that happening almost immediately. Prior to this occasion he had never put software in escrow for anyone except end-users. He denied thinking when he signed the agreement that if the companies went into external administration he would get a copy of BIDS, although that was clearly one of the default events. He says it was a consequence but that he did not direct his attention to this consequence. This seems unusual having regard to the extent of the indebtedness.
Mr O’Neil was unable to provide any satisfactory explanation as to the consideration which was going to be provided by Orana for the escrow agreement in relation to the BIDS software, and he never considered the question of whether AusIndustry had given its consent as required by the Grant Agreements.
Mr. O'Neil signed the escrow agreement on behalf of BSI in favour of Mr Gabay, but does not remember ever reviewing the loan agreements or reviewing the terms of the charge which he understood accompanied the loan agreements. He does not remember speaking to Mr. Gabay about it, and he did not take any steps to have the entitlement to BIDS removed.
In an attempt to formalise the charges over the BIDS software, Mr O’Neil notified ASIC in September 2009 of the details of the Charge, annexing copies of the loan agreements with Mr. Gabay, BSI and BITA. The liquidator, Mr Holzman, advised on 27 November 2009 that this security would be void against any liquidation due to late lodgement.
Importantly when considering the conduct of both applicants it appears from the evidence that little or no attention was directed to the fact that the Grant Agreement with AusIndustry required that BSI must request and obtain the prior written consent of the Commonwealth before dealing with the intellectual property comprised in BIDS, including the transfer of property to another entity and/or any change in a company control event. If the company deals with any such intellectual property without prior consent of AusIndustry it may terminate the Grant Agreement and seek repayment of up to 100% of the grant if it considers that the objectives of the program have been or may be adversely affected. The grants in question to BIS in respect of BIDS amounted to in excess of $4.2 million.
In relation to those transactions in 2009 which affected control ownership or availability of the BIDS software neither of the applicants appear to have given any effect or indeed attach any significance to this requirement which carry the consequence that PSI might have had to pay in excess of $4.2 million to AusIndustry. This is a serious oversight. Rather, the focus of the attention of the applicant's was directed to hastily securing the position of Mr. Gabay by charge, assignment or the granting of Escrow rights to meet the concern of Mr. Gabay that he may not be paid out in the event that BSI or other members of the group should be liquidated or go into external administration. The position of AusIndustry is set out in its letter of 21 January 2010 to the Voluntary Administrator and liquidator, Mr Holzman Snr, and the Proof of Debt lodged by it on the 22 January 2010 claiming a contingent liability of $4,216,142 plus interest. This was clearly a major contingent liability to which BSI was exposed by the conduct of the applicants. Mr O’Neil testified that he was aware of the need for AusIndustry’s prior consent, but that he took no steps to obtain it.
In my opinion, neither Mr. Gabay nor Mr. O'Neil gave any real or sufficient consideration to whether any real benefit accrued to BSI as a result of the escrow and other security proposals made in 2009.
CONDUCT IN RELATION TO BUSINESS
In many important respects the manner in which the applicants conducted themselves in relation to the management business and property of the corporations, particularly that of BSI, indicated a serious lack in the degree of care and diligence which is required by s 180(1) of the Act.
The business conducted by the Beacon companies involved the highly complex and specialized licensing and maintenance of elaborate intellectual property, on both national and international levels. Such business called for careful management and scrutiny, yet, the companies were administered as if they were a single entity.
Many of the actions and transactions engaged in by the applicants in 2009 operated to advance the security position of Mr. Gabay, while at the same time having the consequence of reducing the marketability and value of BSI’s main asset, the BIDS software. As noted above, the BIDS software was sold in 2010 to a company controlled by Mr Gabay for a price 30 times less than it was valued under an appraisal conducted by Deloitte several years earlier without any downward adjustment in the years after 2006.
Mr. O'Neil worked for the Beacon companies in 1999–2000, and became the financial controller in 2005, thereby gaining full access to all books and records (financial and otherwise) in relation to the management of the companies. He was actively and closely involved in all relevant transactions, particularly those in 2009 relating to companies in the Beacon Group.
From July 2008 he was the Secretary and later a Director of the BITG and was concerned with finance and administration. In such a capacity he must have been aware of the financial position of the group, yet he did not take any steps to update the values attributed in the company records to the major asset of the group, namely the BIDS software originally estimated by Deloitte's to be worth $10.5 million. He made significant admitted errors in relation to the Orana escrow agreement. He was not clear as to which entity was in fact the United States distributor, that is to say whether it was Orana or BITUS. He did not appear to have an appreciation of the need to administer the companies as distinct entities, and allowed an important contract to be signed by an employee, Mr Seo, who apparently had no involvement or knowledge of the transaction on behalf of Orana. Mr. Neil was unable to satisfactorily explain the consideration moving to BSI in return for the Escrow agreements to BITUS and J Q.
KEEPING RECORDS – LACK OF CARE AND DILIGENCE
Cross-examination of both Applicants indicates that neither director has exercised their powers and discharged their duties with the degree of care and diligence required under the Act in relation to familiarising themselves with or keeping accurate records, financial or otherwise so as to record and explain the complex transactions of the companies.
It was contended that the provisions of contract documents do not come within the description of “financial records” which a company is obliged to keep under s 286 of the Act. I do not agree with this proposition because the keeping of details and recording of the terms of contracts sufficient to correctly record and explain transactions is necessary to enable preparation and verification of proper financial statements and the necessary notes to those statements. Without access to documents recording the rights of the parties to the transactions, it is not possible to accurately evaluate the effect of transactions as required by the Act. This is the case in relation to the escrow agreements, particularly in the circumstances of this case.
In this case it is clear on the evidence that books and record keeping of the companies fell short of the requirements of the Act. The keeping of complete and accurate records of a company’s affairs and ensuring that contracts are duly and properly completed and documented the correct entities are fundamental requirements to ensure proper management. The conduct of the Applicants in relation to several corporations over a long period of time indicates an incapacity to comply with these obligations. A complex business involving distinct entities in different countries should be recorded, executed and managed in an efficient and orderly manner. This did not happen in this case. The directors have failed to pay the required degree of close attention to the operations and interactions of the dual relations on which the business is based. The public, including creditors, investors, customers, employees, and contractors have a vested interest in the competent management and attention paid by those who manage corporations. The duties under the Act are designed to protect the interests of these parties.
The cross examination of the Applicants clearly indicates that there was a lack of care and attention in relation to the identity of contracting entities and the due execution of important documents in what must have been perceived as very important transactions. For example the United States distribution contracts left it unclear as to whether it was BITUS or JQ that was party to the distributor arrangement.
DELEGATION OF DUTIES
There was a tendency to delegate to such an extent that the directors did not discuss or involve themselves in the exercising even the supervisory or oversight roles appropriate to their position as director.
In the case of Mr Gabay, during the period of 2006–2008 when he was on leave from the company, he nevertheless remained in office as a Director and drew a very substantial salary. However, on his evidence, he did not closely engage or familiarize himself with the activities of the companies during that period. In October 2009, Mr. Gabay was confused as to the correct parties to the US Distribution Agreement which had been made, conceding he “wasn't on top of it”. In one instance Mr Gabay initially indicated that he did not understand the meaning of the expression "secured", but after further questioning he demonstrated a clear appreciation for the meaning of the term.
At the time when Mr Gabay returned from his studies in 2008, the companies were involved in very substantial debts and highly significant transactions, yet it was his evidence that he left it to others to formulate and implement the highly significant transactions entered into by the companies.
His evidence in many aspects was vague and nonresponsive, so as to advocate in his own interest where possible. His recollection of important matters concerning numerous important transactions was consistently defective in many instances. He did not read or analyse a number of significant contracts proposed or entered into by Beacon companies. He did not clearly articulate his reasons for actions being taken and was tentative as to whether certain issues had been discussed at meetings.
In the case of Mr O’Neil, he demonstrated a similar approach and he did not indicate a sufficient level of familiarity of the duties and functions attaching to his position as director and officer of the companies.
In all the circumstances I find that functions and duties had been delegated in circumstances where it was not a sufficient degree of control exercised.
In our view it is not a case where the directors were entitled to rely on information prepared by Mr Kadoury under s 189 of the Act so far as any reliance based on independent assessment of the information or advice in regard to the directors’ knowledge of the corporation, the complexity of the structure and operations of the corporation, and it was not reasonable for them to rely on it without further investigation in our view in this case. Section 189 does not provide an excuse or exculpation of the directions in the circumstances of this matter.
XYLOGY
ASIC has raised the association of Mr Gabay and Mr O’Neil in relation to Xylogy Research Pty Ltd. Between November 2003 and August 2008 Mr Gabay’s wife, Ms Aarons, was director and secretary of that company. Mr Gabay was engaged in May 2007 as a consultant. He nominated a Mr Stanley Pinkus to be secretary and director of that company but Mr Pinkus did not take part in the management of that company. The company had a principle place of business nominated as the residential address of Mr Gabay.
Between 2005 and 2008 Mr O’Neil was the accounts manager for Xylogy. His wife was paid by that company.
In 2006 and 2007 Xylogy claimed research and development tax offsets of about $600,000, which were later found to be based on fraudulent invoices. In 2006 Xylogy was a dormant company but this company was placed in voluntary liquidation in May 2009 owing over $1.8 million.
Although there was a significant relationship between Mr O’Neil and Mr Gabay in relation to this company, I am not satisfied on the evidence that they engaged in any fraud or fraudulent activity of that company. I do not give this matter any significant weight in reaching my decision.
DECISION
Having regard to the above matters I am satisfied that the conditions for the exercise of the power to disqualify are satisfied and, in particular, that the disqualification under s 206F of both applicants is justified on the basis imposed in the reviewable decision. I decide that:
4.The Orders made by the Tribunal on 25 February 2014 on the stay application of Mr Gabay are set aside.
5.In relation to Mr O’Neil, I affirm the decision under review that he be disqualified under s 206F of the Act for a period of 12 months. That period of disqualification will commence at the date of the reviewable decision, 29 October 2013.
6.In relation to Mr Gabay, the decision under review is varied. The period of disqualification under s 206F of the Act is extended to 18 months, commencing on 29 October 2013. This 18 month period excludes the time during when the disqualification was stayed as a result of the order made on 25 February 2014.
I certify that the preceding 80 (eighty) paragraphs are a true copy of the reasons for the decision herein of The Hon. Brian Tamberlin, QC, Deputy President ........................................................................
Associate
Dated 27 June 2014
Dates of hearing 9 and 10 April; 10 and 18 June 2014 Date final submissions received 20 June 2014 Counsel for the Applicant Mr J Smith Solicitors for the Applicant Minter Ellison Counsel for the Respondent Ms M Avenell Solicitors for the Respondent Australian Securities and Investments Commission
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