Re Andrews v Australian Securities and Investments Commission
[2006] AATA 25
•16 January 2006
Administrative
Appeals
Tribunal
DECISION AND REASONS FOR DECISION [2006] AATA 25
ADMINISTRATIVE APPEALS TRIBUNAL )
) No Q2004/848
GENERAL ADMINISTRATIVE DIVISION ) Re KIMBALL ANDREWS Applicant
And
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Respondent
DECISION
Tribunal Senior Member B J McCabe Date16 January 2006
PlaceBrisbane
Decision The decision under review is set aside. The applicant should not be disqualified from being involved in the management of a company pursuant to s 206F of the Act.
..................[Sgd]........................
SENIOR MEMBER
CATCHWORDS
CORPORATIONS – Official management – directors – disqualification from managing a corporation – restructuring of companies in the freight and transport business – related companies – applicant an officer of 2 or more corporations that were wound up with liquidators reports being lodged with ASIC about the company being unable to pay its debts – consideration of applicants conduct in relation to the management, business and property of relevant corporations – public interest not served by disqualifying the applicant from being involved in the management of a company.
Corporations Act 2001 (Cth) s 206F, s533
Australian Securities and Investments Commission v Adler v Adler (2002) 42 ACSR 80; (2002) 20 ACLC 1146; [2002] NSWSC 483
Jeffree v National Companies and Securities Commission [1990] WAR 183; (1989) 15 ACLR 217; (1989) 7 ACLC 556
Feher and Australian Securities Commission (1997) 15 ACLC 1774
Sheslow and Australian Securities Commission (1994) 34 ALD 539; (1994) 20 AAR 161; (1994) 12 ACLC 740
Re Lo-Line Electric Motors Ltd [1988] 1 Ch 477
Cullen v Corporate Affairs Commission (NSW) (1988) 14 ACLR 789; (1988) 7 ACLC 121
Sycotex Pty Ltd v Baseler (1994) 122 ALR 531; (1994) 13 ACSR 766; (1994) 12 ACLC 494
Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722; (1986) 10 ACLR 395; (1986) 4 ACLC 215
REASONS FOR DECISION
16 January 2006 Senior Member B J McCabe
introduction
1. The Australian Securities and Investments Commission (ASIC) decided on 15 October 2004 to disqualify the applicant, Mr Kimball Andrews, from managing a corporation for 18 months. The decision was made pursuant to s 206F of the Corporations Act 2001 (the Act). Mr Andrews has asked the Tribunal to review the decision pursuant to s 1317B of the Act.
2. The decision under review has not been stayed. The bulk of the disqualification period has already passed. Even so, Mr Andrews says he wants to clear his name. He says he has done nothing wrong that would merit a disqualification.
the material before the tribunal
3. The Tribunal was provided with the documents required under s 37 of the Administrative Appeals Tribunal Act 1975. A number of statements and other documents were also tendered in evidence.
4. The applicant objected to the tender of a letter from the liquidator of Donfort Pty Ltd. The applicant was also a director of that company when winding up proceedings were commenced. The liquidator prepared a report under s 533 of the Act in relation to the affairs of the company. That document forms part of exhibit R1. The respondent wrote to the liquidator requesting a supplementary report. Mr Hackett for the applicant said he was only made aware of the document as it was tendered. He objected to the tender of the document on that basis. Ms Brennan for the respondent said the document had only recently become available. I decided to admit the document into evidence but I indicated to the parties that I would decide what (if any) weight it should be accorded after hearing the submissions of the parties.
the factual background
5. Mr Andrews is 48 years of age. His business career began in 1974 when he took over management of his family’s cane farm. He grew watermelons and pumpkins throughout the 1980s and started exporting fresh produce to south-east Asian countries in 1983. He has held a number of senior positions in Brismark, a trade organisation representing wholesalers of fresh produce in Queensland. He was involved in particular with the negotiations leading to the privatisation of a wholesale market complex in Brisbane. He has also been a senior officer of the Australian Chamber of Fruit and Vegetable Industries and the Horticultural Industry Development Council.
6. Mr Andrews was appointed a director of Market Produce Movers Pty Ltd (MPM) on 20 December 1994. MPM conducted a freight transport business from the Brisbane markets. Prior to 1998, interests associated with Mr Andrews held 51% of the shares in MPM. Mr John Gardener was the other shareholder. In 1998, the company experienced losses. The board decided further capital was required if the business was to remain viable.
7. The shareholders reached agreement on a restructuring of the company. Kenwick Capital Pty Ltd acquired all of the operating plant and equipment of MPM. MPM retained the customer list together with any goodwill attached to the name of MPM. It also remained liable for debts contracted in its name. MPM continued to operate; it rented plant and equipment from Kenwick, which was subsequently renamed Freight 1 Australia Ltd (F1). The applicant was a director of F1.
8. The directors of F1 resolved in 1999 to float the company on the stock exchange. As part of the preparations for that event, F1 contracted with MPM to acquire MPM’s client list for $500,000. The agreement for sale was dated 21 July 2000 although it was said to take effect as of 1 April 2000. It provided for the payment of a $1 deposit with the balance of the purchase price being paid by way of an allocation of shares in F1. The contract was lodged for stamping but stamp duty was never paid.
9. Mr Andrews says he did not participate in the voting with respect to the sale. In the position paper found at annexure B to his statement, the applicant says the purchase was on terms favourable to MPM – assuming that the listing of F1 proceeded.
10. F1 converted to an unlisted public company and engaged professional advisers in anticipation of the capital raising. The plans to list F1 on the stock exchange foundered some time during the course of 2000. The applicant attributes the failure of the plan to a variety of factors, including the collapse of the stock market and the loss of key staff and customers.
11. Mr Andrews says the failure of the float plan meant a decline in the value of the shares in F1 that had been allocated to MPM in consideration of the sale of its assets. The applicant entered into an agreement to purchase the shares in F1 from MPM for a consideration of $50,000 in June 2000. No money ever changed hands in respect of the sale: an amount of $50,000 was deducted from a loan account recording monies owed to the applicant.
12. MPM ceased trading on 30 March 2000. Its finances were in a parlous state. Some of its debtors had become insolvent, while creditors were pressing for payment. Shell was making demands in respect of a debt in the amount of $151,811.14. Shell held a fixed and floating charge over the assets of the company. On 12 March 2001, Shell appointed receivers to MPM. The receivers retired on 27 April 2001 after Donfort Pty Ltd settled the debt.
13. The applicant said in his position paper that he settled some of MPM’s debts out of his own resources. The board (ie, Mr Andrews, who was by then the only director of the company) resolved to put MPM into the hands of administrators on 22 February 2001 following the commencement of legal proceedings by GE Capital Returnable Pallet Systems Pty Ltd. Maree Henry was appointed official liquidator of MPM on 12 March 2001 on the application of a creditor. Reports pursuant to s 533 of the Act were issued on 17 March and 7 April 2003.
14. A deposit of $141,517.95 was made to MPM’s bank account on 20 December 2000. $126,000 of that amount was paid out to F1 and two other companies associated with the applicant, Donfort Pty Ltd and Ressek Pty Ltd. The liquidator demanded repayment of the money but the recipients claimed the payments were the proceeds of the sale of assets held on trust by the company in its capacity as trustee of the MPM unit trust. The recipients claimed they had loaned money to the trust and declined to repay it to the liquidator.
15. The Australian Tax Office lodged formal proofs of debt in respect of unpaid tax dating back to 1998. The first proof of debt lodged on 3 April 2001 claimed $225,907.28 was owed; the second proof of debt lodged on 31 March 2003 claims $232,933.08. The Commissioner says thoe debts arose because the company did not meet its obligations to remit PAYG withholding amounts, incurred shortfalls in the superannuation guarantee surcharge and was required to make additional payments in respect of the 1998, 1999 and 2000 years of income.
16. The Commissioner sued the applicant personally in respect of some of MPM’s debts to the Australian Taxation Office (the ATO). An officer of the ATO prepared an affidavit detailing the indebtedness for use in those proceedings: exhibit R1, p116ff. The applicant settled the proceedings. The deed of settlement is reproduced at exhibit R1, p124ff. The applicant asserted in his testimony at the private hearing before ASIC investigators that he paid the ATO in full: exhibit A1 at pp159-160. It appears the applicant has indeed settled the proceedings brought in the District Court in respect of unpaid tax instalment deductions and penalties in the amount of $52,597.39: see annexure D to exhibit A4. The settlement does not appear to cover all of the debts owed by MPM. I note the final proof of debt was filed by the ATO nearly a year after the settlement of the District Court proceedings. It appears MPM is still indebted to the ATO.
17. F1 also ran into trouble. Mr Andrews said in his position paper that the appointment of external administrators to MPM created difficulties for F1 “because the two companies were inextricably connected and linked by association.” He added that publicity surrounding the failure of the float plans added to the pressure on F1.
18. The applicant said he remained hopeful at the time that a float was still possible. He said he busied himself with raising capital and undertaking other activities in anticipation of a float. A general manager was appointed to run the operations of Donfort and F1.
19. F1’s position worsened. The board resolved to appoint administrators on 3 June 2001. Raymond Richards and Grant Sparks were appointed as liquidators on 27 August 2001 at a meeting of creditors. A report pursuant to s 533 of the Act was filed on 27 September 2001. The applicant disclosed in his report as to affairs (RATA) that the liabilities of the company (including a debt owed to the Commissioner of Taxation in the amount of $56,696.35 in respect of unpaid tax) exceeded the book value of its assets. The Commissioner filed a formal proof of debt in the amount of $68,513.54 on 27 August 2001 alleging deficits in respect of PAYE deductions and BAS amounts as at 30 July 2001.
the legislative framework
20. The power to disqualify a person from acting as a director is contained in s 206F of the Act. Section 206F(1) provides the power to disqualify may only be exercised 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.
21. In this case, a Notice (dated 22 June 2004) was given to the applicant in the prescribed form, and he has had an opportunity to explain why he says he should not be disqualified. The applicant had been an officer of at least two corporations (MPM and F1) that were wound up while he was a member of the board. Liquidators’ reports were filed pursuant to s 533 of the Act in both cases. The applicant was also an officer of a number of other companies, including Donfort Pty Ltd. That company was not mentioned in the Notice but it has subsequently been wound up while the applicant was (or had recently been) an officer. A liquidator’s report has been filed under s 533 in relation to that company.
22. Section 206F sets out a series of matters to which ASIC must have regard in the course of deciding whether disqualification is justified under s 206F(1). The sub-section says:
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.
23. The requirement in s 206F(2)(a) that ASIC consider whether any of the corporations in question are related arises because many enterprises are carried on by more than one company as part of a group. The legislation assumes it would not necessarily be fair to disqualify a director of two related companies involved in the conduct of a single failed enterprise. ASIC’s power under s 206F is really intended to protect the public from directors with a track-record of failure: see, for example, ASIC v Adler (2002) 42 ACSR 80. (Adler and other cases on disqualification like Jeffree v National Companies and Securities Commission (1989) 7 ACLC 556 deal with the power of the Court to disqualify officers under s 206E and its predecessors, but there is no reason to assume s 206F has a different objective.) The provision was apparently enacted on the assumption that involvement in one failure might simply be unfortunate, but involvement in two or more separate failures could suggest carelessness or other breach of duty.
24. The Tribunal considered the relationship between companies in Feher and Australian Securities Commission (1997) 15 ACLC 1774. In Feher, a company was established to conduct a business. It was undercapitalised and was experiencing declining profitability. A restructuring of the business ensued and it was split at the behest of a major supplier. The wholesale aspects of the business were thereafter carried on by one company while the retail activities were carried on by a second company that was a wholly-owned subsidiary of the first company. The directors apparently thought the separation might make it easier to sell the viable part of the company, or to at least attract a joint venture partner. Both companies were undercapitalised and they subsequently failed. They had common directors and creditors and their financial futures were interdependent. The Tribunal concluded the relationship between the two companies in the group was so close that they ought to be considered as one entity.
25. The decision in Feher followed the Tribunal’s earlier decision in Sheslow and Australian Securities Commission (1994) 12 ACLC 740. In Sheslow, the Tribunal considered whether three related companies should be treated as a single entity for the purposes of the disqualification provision in the companies’ legislation. Deputy President McMahon said (at 748) it was appropriate to ask whether the “companies should be considered as a group by virtue of their connections in shareholding, directors and activities.” Having done so, the Tribunal decided “[t]he failure of the 3 companies is not to be regarded as 3 discrete failures, but as the failure of one overall operation.”
26. F1 was the holding company of MPM during 1998 and 1999. It follows the two companies were related within the meaning of s 50 of the Act during this period. The applicant purchased F1’s shares in MPM in April 2000. MPM continued to hold over 3,333,333 shares in F1. While the two companies may thereafter have been associated entities within the meaning of s 50AAA or related entities within the meaning of s 9 or related parties within the meaning of s 228, I do not accept they continued to be related within the meaning of s 50. The fact the two companies were related for a time must still be taken into account, but the change in the relationship between the entities might tell the decision-maker something about how closely connected they were in practice. In this case, I think the change in the relationship reflects a larger commercial reality: MPM was gradually retired as part of the reorganisation of the business in favour of F1, which was to be the float vehicle. This reality was summed up in the evidence given to the administrative hearing (document T5 at p 176) where the following exchanged took place:
Q: Just to clarify, we have two transport companies?
A: Yes.
Q: Market Produce Movers and Freight One?
A: Correct.
Q: And they both conducted transport businesses independently?
A: But not at the same time.
27. ASIC pointed out in its written submissions that there were no significant intercompany loans between MPM and F1. It also noted the two companies had separate employees, separate assets (the assets of MPM being transferred to F1 in 1998) and separate liabilities (ASIC notes F1 never formally assumed responsibility of MPM’s debts). Mr Andrews says (at paragraph 37 of his statement) that employees of MPM became employees of F1, and creditors and debtors of MPM became creditors and debtors of F1 as a result of the transaction.
28. The evidence does not consistently support the applicant’s claims in this regard. Clause 10 of the agreement for sale (exhibit R8) provides that MPM would terminate all of its employees and F1 would re-employ them. While the applicant might find some comfort in that provision, clause 4.1 says MPM remains responsible for meeting its own debts, and clause 4.2 says book debts owing to MPM did not form part of the sale. The following exchange between the delegate and the applicant also appears (at T5 pp168-169) in his record of interview:
Q: Just a point of clarification. Was it also your view that because Market Produce Movers was a wholly-owned subsidiary that Freight One was responsible for payments of its creditors as well?
A: No, not really. I did see them as separate entities. Well, they were. But…
29. Later in the record of interview (at T5 p170), the applicant and the delegate had the following exchange:
Q: Did Market Produce Movers trade with Freight One?
A: In as much as it used its plant and equipment, yes; otherwise, no.
30. After considering the connections between MPM and F1, I am not satisfied that the fates of the companies were so intertwined that I should treat their failure as a single event. The companies were used for similar purposes at different times. They admittedly faced the same challenges (undercapitalisation, in particular) but they were not interdependent.
31. The respondent has also suggested the fate of Donfort ought to be taken into consideration. The applicant was a shareholder and director of that company at all material times. It follows it was a related company. It has also been placed in external administration.
32. The evidence surrounding the circumstances of Donfort’s failure is more limited. It does appear however from the applicant’s evidence that Donfort’s failure was inextricably linked to the failure of F1 and MPM. It had been providing financial support to both companies and their failure impacted on the finances and viability of Donfort. Donfort’s failure ought to be seen in that light: it should not be regarded as the failure of a third business for which the applicant is responsible. It follows that the report of the liquidator of Donfort is of limited assistance to me in these proceedings.
33. I will now consider the matters raised in s 206F(2)(b). Recall that the sub-section says ASIC 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.
34. The respondent’s concerns about the applicant’s performance in managing the companies were originally identified in the delegate’s decision at document T3, p53. Mr Hackett responded to those matters in his submissions on behalf of the applicant. The respondent refined the list of concerns for the purpose of the hearing. In paragraph 13 of its submissions, ASIC asserted:
·The applicant permitted the transfer of assets of MPM to F1 for no or very little consideration in disregard of the interests of the creditors of MPM;
·As a result of the restructuring, the applicant acquired the shares in MPM at less than their market value;
·The applicant failed to ensure that both companies complied with their tax liabilities;
·The applicant failed to provide the liquidator of MPM with information with respect to the Market produce Unit Trust as required by s 503A(2) of the Act;
·The applicant permitted both companies to trade with poor cash flow and without adequate capital, and paid expenses of related companies from the accounts of F1. The liquidators unsuccessfully sought to recover some of those payments as unlawful preferences.
35. The respondent also sought to introduce concerns about the role of another company controlled by the applicant, Donfort Pty Ltd. In 2001, Shell appointed receivers and managers to MPM under the terms of a registered charge. Donfort paid out Shell but asserted Shell’s rights as secured creditor over the debtor’s ledger of MPM. Since that time, Donfort has also been placed in external administration.
36. I will deal with the question of tax debts first. The respondent produced proofs of debt from the ATO that were filed after the applicant settled the action brought against him by the Commissioner. The applicant says he was unaware of those debts or the fact that a proof of debt had been filed. He has not been contacted by the ATO or the liquidators of the companies in relation to the debts. He says he only learned of the claim of further debts during the course of these proceedings. He says he has no way of challenging the veracity of the ATO’s claims.
37. I accept the applicant was unaware of the further proofs of debt, but the evidence provided by the respondent leaves little doubt that the applicant did not ensure the companies he managed attended to their taxation obligations. As a result, money was owed – and may still be owed - to the Commissioner in respect of PAYE deductions, BAS amounts and superannuation guarantee charges. That is a serious matter: as Browne-Wilkinson VC observed in Re Lo-Line Electric Motors Ltd [1988] 1 Ch 477 (at 488):
Although the Crown debts are not strictly trust moneys, the failure to pay them over does not only prejudice the Crown, as creditor, but in the case of PAYE and national insurance may also have a prejudicial effect on the company’s employees. The use of moneys obtained by compulsory deductions from wages for the financing of the company’s business is to use moneys which morally, if not legally, belong either to the employees or to the Crown without the consent of either. I consider the use of moneys which should have been paid to the Crown to finance continuation of an insolvent company’s business more culpable than the failure to pay commercial debts.
38. This view has been echoed by Australian courts. In Cullen v Corporate Affairs Commission (NSW) (1988) 14 ACLR 789, Young J held (at 796) that outstanding group tax was:
…for all intents and purposes, trust moneys which do not belong to the company. If the company directors use these money’s for trading purposes, it shows a complete lack of appreciation of the seriousness of this situation and a serious lack of commercial morality.
39. His Honour went on to observe (at 796):
In England the non-payment of such moneys has been highlighted perhaps above all other factors as showing that a director is not fit to continue his profession.
40. Some of the other matters alleged against the applicant raise more complicated questions. The respondent says the applicant traded with poor cash-flow. Mr Hackett emphasised that his client was not accused of trading while insolvent. Insolvent trading would clearly amount to a contravention of the Act. But he submitted there was no duty at law to avoid trading with poor cash flow in circumstances stopping short of insolvency, nor was there a duty to avoid trading without adequate capitalisation.
41. Ms Brennan noted Gummow J observed in Sycotex Pty Ltd v Baseler (1994) 122 ALR 531 (at 550) that a “duty of imperfect obligation” was owed to creditors when the company was insolvent or nearing insolvency. The duty is imperfect in the sense that it does not confer any substantive rights on creditors - but it does restrict the ability of shareholders to ratify directors’ breaches of duty: see also Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 at 732 per Street CJ. There is a practical difficulty in determining when a company is near insolvency. Gummow J noted in Sycotex that one needs to consider each case on its facts, and look in particular to the trading conditions in the relevant industry at the relevant time: at 540. His Honour noted it was common in some industries for creditors to wait longer periods before they were paid. Street CJ in Kinsela also cautioned against attempting to formulate or apply a test of relative financial stability: at 732.
42. The applicant in this case gave evidence in his statement to the delegate that companies in the transport industry were notoriously slow in paying their debts. That information is relevant.
43. There is a wealth of material in the files before me describing the state of the companies’ finances. ASIC points out F1 consistently made losses. That is not unusual in a new business, of course. MPM declined in profitability over time, but especially after it was restructured and then ceased trading. But as Mr Hackett noted in the course of his submissions, the companies did not trade while insolvent. Both companies needed more capital, but the applicant points out he was taking steps to address that problem by restructuring the business with a view to a public float of F1. Professional advisers were engaged at considerable expense to that end. It appears the applicant had good reason to be confident about the future of the enterprise following a public offer.
44. Many businesses experience cash-flow problems, and many more are undercapitalised. New businesses in particular may face testing times after their launch. A number of those businesses muddle through; some of them emerge stronger and go on to trade prosperously. Some will fail, despite the best efforts of their promoters. That is the way of things in a free enterprise system. As Street CJ pointed out in Kinsela, intervention will only be justified in cases of straightforward wrong-doing (eg, where the company is plainly insolvent: at 733).
45. While the finances of MPM and F1 were not in good shape during the period in question, I do not think the applicant could be said to have acted irresponsibly by continuing to trade. He carried out the restructuring and pressed on in anticipation of a public float that would take the business to new heights. Whether or not his decision to do so was wise, I do not accept it warrants disqualification.
46. I turn now to the allegation that the applicant permitted the transfer of assets of MPM to F1 for no or very little consideration in disregard of the interests of the creditors of MPM.
47. The applicant told the delegate that all of MPM’s operating plant and equipment was sold to F1 in April 1998. Thereafter MPM rented plant and equipment from F1 in the course of its business until the company ceased trading. ASIC argues the books of MPM are not consistent with that evidence: the 1998 financial statements continue to show a total value of depreciated assets at $111,182. In paragraph 21(a)(1) of its submissions, the respondent asserts “it is impossible to conclude that following the 1998 transaction the only assets of MPM were the customer list and the goodwill.”
48. The applicant has explained in his more recent statement that the 1998 sale related only to transport equipment. (The balance of the equipment was sold to F1 in 2000.) The applicant said in his statement that the equipment was sold at full commercial value. Financiers who were owed money on individual pieces of equipment sold in 1998 were paid out, and cash surpluses on the sales were paid to MPM.
49. The applicant says the transaction was intended to “recapitalise the trading operation of [MPM] which had encountered some difficult times as a result of a series of unfortunate road accidents.” He said that trade creditors continued to be paid in the ordinary course, although the respondent points out creditors were issuing demands in respect of non-payment as early as February 2000.
50. I do not think the applicant’s explanation for what occurred is unreasonable in the circumstances. It may be that the decision to sell transport equipment in 1998 was ultimately unwise. But the company was already in some difficulty. The restructuring represented an attempt to focus on the core business. If trading conditions had improved, the business might have prospered. I do not think ASIC’s argument has been made out.
51. ASIC is also concerned that the applicant should end up acquiring a parcel of shares in MPM at below market value. That transaction must be seen in context. In 2000, F1 agreed to acquire the client list of MPM for $500,000. MPM was to receive a shareholding in F1 as consideration for the sale. Mr Andrews pointed out he did not participate in the vote to approve this transaction but insists MPM was getting a good deal. He explained that the float of F1 was still very much in prospect. If that float had been successful, he said MPM’s parcel of shares would have become much more valuable. He said the sale was a good deal for a company in MPM’s circumstances. When the float did not proceed, MPM’s shares in F1 were worth much less. He acquired them from MPM for $50,000. F1’s failure a short time later suggests the shares may have been worth even less. The applicant did not pay cash for the shares; MPM arranged for an entry to be made in a loan account in favour of the applicant.
52. It is doubtful whether creditors were left in a worse position as a result of this transaction. The asset the company had been promised in return for the sale of the client list was not as valuable as it had hoped because of the failure to proceed with the public float. Given the declining financial health of MPM in 2000, the possibility of a successful float might have been its last chance.
53. I also find it difficult to criticise the applicant in relation to the transaction that saw Donfort settle the debt due to Shell in 2001 after the company ceased trading. Shell had appointed receivers and managers to MPM in respect of the company’s unpaid fuel bill. Shell acted under the terms of a fixed and floating charge over the assets of the business. Donfort paid out Shell and took over the security. Donfort took control of the debtor’s ledger – something Shell would have done if it had not been paid out. The respondent says Donfort has not properly accounted for that property, but it is difficult to see how other creditors are in a worse position if Donfort paid Shell out and took over the same assets Shell would have sought to realise.
54. ASIC has also expressed a concern about the payment of $126,000 from the account of MPM to F1, Ressek and Donfort in late 2000. The applicant was a director of all of the companies. The liquidator of MPM sought to recover the payments but was told by the applicant (or his daughter) on behalf of Ressek and Donfort that a deposit appearing in MPM’s accounts on 29 December 2000 represented the proceeds of the sale of trust property held for the Market Produce Unit Trust. The payments to the related companies were said to be repayments of loans owed by the trust to those companies. ASIC says the applicant’s claims have never been properly justified. ASIC notes that MPM never operated a separate account for the trust if it was in fact acting as a trustee rather than the operator of a business when it sold property and paid out loans. The respondent says it has never been provided with documentation in relation to the sale of the trust property.
55. ASIC argues it has not been able to properly investigate the disbursements because the applicant failed to provide the necessary information. If the applicant has failed to comply with legitimate requests for information, he may have contravened s 530A(2) of the Act.
56. It appears the applicant has not been particularly forthcoming with information – but nor is there much evidence that he was pressed to provide more extensive detail. Document T 38 is a letter written by the accountant to the applicant. The applicant apparently provided a copy of the letter to the liquidator. It is very brief and almost certainly an inadequate response to the liquidator’s request for information. It does indicate a preparedness to provide further information. I am reluctant to conclude the applicant has acted in breach of s 530A without better evidence of his failure to cooperate. I note the applicant has not been charged with a contravention of s 530A.
57. It remains necessary for me to consider what should be made of the payment of expenses of other companies out of the accounts of F1. It appears that F1 was paying Donfort in respect of fuel purchases. The applicant indicated in evidence that he arranged for BP fuel cards to be issued on Donfort’s account to F1 so the company could continue operating. ASIC pointed out in its submissions that F1 by that point had disposed of most of the vehicles it had acquired from MPM and was using subcontractors.
58. The applicant’s explanation of this arrangement seems reasonable enough. On his evidence, the arrangement enabled F1 to continue trading, presumably with a view to trading out of difficulty. It is not clear how the other creditors were prejudiced as a result. I do not think these matters should count against the applicant.
principles relevant to disqualification
59. I have concluded the applicant is open to criticism in respect of the failure of companies of which he was a director to meet their taxation obligations. As I indicated above, that failure is a very serious matter. It is therefore necessary for me to consider the principles relevant to disqualification.
60. The parties agree the relevant principles are summarised in the decision of Santow J in Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80. His Honour emphasised that disqualification orders are not intended to be punitive. They are intended instead to protect the public from directors who misuse the corporate form. They are also intended to deter other directors from engaging in misconduct that might harm the public. His Honour said that the length of disqualification would depend on the seriousness of the conduct, the likelihood the applicant would engage in similar conduct in the future and the likely harm to the public. But his Honour also said it was appropriate to weigh the personal hardship to the individual director if he or she were disqualified against the public interest in being protected from that conduct in future. The character of the defendant and his or her honesty and confidence are relevant, as will be evidence of a lack of contrition or a disregard of the law and the need for compliance with corporate regulation.
61. The applicant’s failure does not involve dishonesty. His failure to ensure the companies met their taxation obligations is problematic nonetheless for the reasons I outlined above. The failure was not the product of a single mistake or error in judgement. F1 and MPM both failed to meet their obligations to the Commissioner. (In fact all three companies did not deal appropriately with the Commissioner, if one includes Donfort – although I have already concluded that Donfort should not be regarded as a separate failure given its fate was apparently linked to the other two entities.) Some of the obligations were settled by the applicant subsequently, and he has given evidence that he was unaware of others. I did not form the impression he would take liberties with the Commissioner again were he to take up a management role in a company in the near future.
62. The applicant appears to be a person of good character who enjoys a good reputation in the business community. The failure of the companies has undoubtedly impacted on that reputation. He says he has no immediate plans to return to a management role in a company.
63. ASIC says the problems of MPM and F1 are largely attributable to the applicant’s failure to have regard to his duties. I disagree. Whether or not he acted wisely in managing the affairs of those companies, the evidence suggests the failure of the companies was ultimately attributable to commercial factors. The applicant had a plan for dealing with the difficulties – he proposed floating F1 – but that plan came to nothing for a range of reasons beyond his control.
64. In the circumstances, I do not think the public interest would be served by disqualifying the applicant from being involved in the management of a company. The failure to meet taxation obligations is unlikely to be repeated, and the Commissioner may yet have recourse against the applicant personally in respect of the companies’ obligations. The applicant is not otherwise a danger to the public.
conclusion
65. The decision under review is set aside. The applicant should not be disqualified from being involved in the management of a company pursuant to s 206F of the Act.
I certify that the 65 preceding paragraphs are a true copy of the reasons for the decision herein of Senior Member B J McCabe.
Signed: .....................................................................................
Associate: Sam J AppletonDate of Hearing 2 September 2005
Date of Decision 16 January 2006
The applicant was represented by Mr Hackett of counsel.
The respondent was represented by Ms Brennan of counsel.
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