Re Cash Converters International Ltd;
[2006] WASC 203
RE CASH CONVERTERS INTERNATIONAL LTD; EX PARTE COOKE [2006] WASC 203
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2006] WASC 203 | |
| Case No: | COR:121/2006 | 29 AUGUST 2006 | |
| Coram: | MASTER NEWNES | 20/09/06 | |
| 13 | Judgment Part: | 1 of 1 | |
| Result: | Application dismissed | ||
| B | |||
| PDF Version |
| Parties: | MICHAEL IAN COOKE AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION |
Catchwords: | Corporations Director Bankruptcy Application for leave to manage a corporation Relevant considerations Corporations Act 2001 s 206G Turns on own facts |
Legislation: | Corporations Act 2001(Cth), s 206A, s 206G, s 206G(1) |
Case References: | Adams v Australian Securities & Investments Commission (2003) 46 ACSR 68 Australian Securities and Investments Commission v Infomercial Management Group Pty Ltd [2002] VSC 262 Murray v Australian Securities Commission (1993) 12 ACLC 11 Re Australian Limousin Breeders Society Ltd (1989) 7 ACLC 426 Re Etick Ltd; Ex parte Mansell [2006] WASC 111 Re Ansett (1990) 3 ACSR 357 Re Application of Chapman (2006) 56 ACSR 706 Re Shneider (1996) 15 ACLC 90 Re Zim Metal Products Pty Ltd (1977) 2 ACLR 553 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CHAMBERS
MICHAEL IAN COOKE
Plaintiff
Catchwords:
Corporations - Director - Bankruptcy - Application for leave to manage a corporation - Relevant considerations - Corporations Act 2001 s 206G - Turns on own facts
Legislation:
Corporations Act 2001(Cth), s 206A, s 206G, s 206G(1)
Result:
Application dismissed
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Category: B
Representation:
Counsel:
Plaintiff : Mr N W McKerracher QC
Intervener : Mr J McGrath
Solicitors:
Plaintiff : Q Legal
Intervener : Australian Securities and Investments Commission
Case(s) referred to in judgment(s):
Adams v Australian Securities & Investments Commission (2003) 46 ACSR 68
Australian Securities and Investments Commission v Infomercial Management Group Pty Ltd [2002] VSC 262
Murray v Australian Securities Commission (1993) 12 ACLC 11
Re Australian Limousin Breeders Society Ltd (1989) 7 ACLC 426
Re Etick Ltd; Ex parte Mansell [2006] WASC 111
Case(s) also cited:
Re Ansett (1990) 3 ACSR 357
Re Application of Chapman (2006) 56 ACSR 706
Re Shneider (1996) 15 ACLC 90
Re Zim Metal Products Pty Ltd (1977) 2 ACLR 553
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1 MASTER NEWNES: This is an application by the plaintiff for leave, pursuant to s 206G(1) of the Corporations Act 2001 (Cth) (the "Act"), to act as a director and to take part in the management of Cash Converters International Ltd ("Cash Converters") and certain of its subsidiaries. The need for the application arises because, on 24 May 2006, the plaintiff became bankrupt on his own petition. The plaintiff was a director of Cash Converters from 26 April 1995 until 24 May 2006, when he resigned immediately before lodging the petition in bankruptcy.
2 The application is opposed by the Australian Securities and Investments Commission ("ASIC"), which contends, in essence, that the plaintiff has not established grounds that would warrant leave being granted.
The plaintiff's bankruptcy
3 The circumstances of the plaintiff's bankruptcy have been set out in his affidavit in support of the application. They were not put in issue by ASIC. The plaintiff became bankrupt following the issue of taxation assessments by the Australian Taxation Office ("ATO") in respect of certain deductions claimed by the plaintiff for the income tax years from 30 June 1994. A large portion of the debt to the ATO arises from some apparently not insubstantial investments in what the plaintiff's counsel described as mass-marketed tax schemes, called "infomercials", during the years 1996 to 1998, and a dispute in relation to the treatment of the resulting income and losses. The balance of the debt relates to the treatment of pre-paid fees to a service entity, which were disallowed in full with penalties, and a claim for a loss on the disposal of a security, which was also disallowed with penalties.
4 The plaintiff says that his claim for a deduction for the loss on the security was supported by a decision of the Administrative Appeals Tribunal directly on point, but that the ATO indicated it intended to re-litigate the issue using the plaintiff's claim as the vehicle for doing so.
5 The plaintiff says that the dispute in relation to the treatment of income and losses from the "infomercials" was never determined on the merits as a fraud underlying the schemes had the effect that the schemes failed commercially and the taxation law aspects could not be tested. The plaintiff has referred, in connection with these schemes, to a decision of the Supreme Court of Victoria in Australian Securities and Investments Commission v Infomercial Management Group Pty Ltd [2002] VSC 262 in which Byrne J said that "the scheme in each case was a fraud on the investors, if not on the Australian Tax Office." I should mention that
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- Byrne J made that comment in the context of a finding that in fact very little of the amount contributed by investors was actually used by the promoters for the production or marketing of the "infomercials", but instead was directed elsewhere.
6 The plaintiff says that, during 2005 and 2006, he assisted the Federal Police by providing a witness statement for the prosecution in criminal proceedings against the managers of the schemes.
7 The total amount claimed by the ATO is $5,615,246.65, consisting of $2,014,860.21 relating to amended tax assessments and an amount of $3,600,386.44 by way of interest and penalties. As I have mentioned, a large portion of the debt of $2,014,860.21 was incurred in the three year period, 1996 to 1998.
8 The plaintiff says that he believes, on the basis of the advice he has received and his own knowledge of taxation law, that the assessments could be successfully challenged if he had sufficient funds available to do so, which he does not. He also says that, as the assessments in connection with the "infomercials" were of an amount far beyond his capacity to pay, there was no point in pursuing any issue in relation to the other taxation assessments.
9 Apart from the ATO, the only unpaid creditor of the plaintiff is Riverwood Park Pty Ltd ("Riverwood"), as trustee for the Cumins Family Trust. In 1997 the plaintiff's family company borrowed funds from National Australia Bank ("NAB") to purchase shares in Cash Converters. The loan was guaranteed by Oakrange Holdings Pty Ltd ("Oakrange") and Riverwood. Both companies are associated with Mr Brian Cumins, the founder of Cash Converters. In 2000, Oakrange and Riverwood repaid the NAB loan and, in May 2005, Oakrange assigned the resulting debt owed to it by the plaintiff to Riverwood. As a result of the plaintiff's bankruptcy, the debt to Riverwood crystallised and he currently owes an amount of $3,801,758 to Riverwood.
The circumstances of the plaintiff following bankruptcy
10 Following his bankruptcy, the plaintiff asked the Legal Practice Board to issue a new practice certificate to enable him to continue practising as a solicitor. The Board confirmed that the practice certificate would be issued subject to the requirements that the plaintiff provide financial statements to the Board every six months and that he does not maintain a trust account on behalf of clients. The plaintiff is thus able to continue his legal practice and to continue to act as a legal adviser to Cash
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- Converters. He has, however, ceased to participate in the management of Cash Converters and its subsidiaries.
The nature and structure of the business of Cash Converters
11 Cash Converters is an Australian company listed on the Australian Stock Exchange and the London Stock Exchange. It was listed on the London Stock Exchange on 30 August 1996 and on the Australian Stock Exchange on 7 February 1997.
12 The principal activity of Cash Converters is the international franchise of retail stores. It has over 100 stores in the United Kingdom, 120 stores in Australia and chains of stores in many other countries. It is currently represented in 21 countries worldwide and has a network of some 500 franchise stores. The retail stores provide a range of personal financial products and trade in second-hand goods. Cash Converters also operates a subsidiary finance company and an internet auction site. According to the evidence, since its public listings Cash Converters has experienced very considerable growth.
13 The plaintiff and the managing director, Mr Peter Cumins ("Mr Cumins"), were appointed directors of Cash Converters in April 1995 and were the executive directors of the company prior to the plaintiff's resignation. The board otherwise consists of directors with backgrounds in accounting and corporate and investment banking.
14 Cash Converters has a number of subsidiary companies. The subsidiary companies to which the plaintiff seeks to be appointed as a director are Cash Converters Pty Ltd, which is the trading entity in respect of Cash Converters' Australian operations; Cash Converters Finance Corporation Ltd ("CCFCL") which operates as a specialised finance company for loans to Cash Converters franchisees; MON-E Pty Ltd ("MON-E") which provides a software programme and office support to franchisees for the provision of cash advances to their customers; and the Safrock Group of Companies which specialise in the provision of secured and unsecured personal loans ranging from $1000 to $10,000 to customers of franchisees. Cash Converters has recently agreed to acquire MON-E and the Safrock Group as subsidiaries and Mr Cumins says it is crucial that the plaintiff is a director of each company.
15 Cash Converters intends that the board of directors on each of the subsidiaries should be the same as the board of Cash Converters in order to facilitate the management and operation of each of those companies and their businesses.
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The plaintiff's involvement in Cash Converters
16 The plaintiff has been admitted as a legal practitioner in Western Australia since 1983 and currently practices on his own account. For several years his legal practice has had only two clients, a suburban accounting firm and Cash Converters. He has acted as Cash Converters' legal counsel since 1992.
17 As I have mentioned, the plaintiff was a director of Cash Converters from 26 April 1995 to 24 May 2006. He and Mr Cumins were the executive directors of the company. Mr Cumins says he worked closely with the plaintiff for that 11-year period, during which Cash Converters changed from a private company to an international organisation with dual stock exchange listings. Mr Cumins says they have worked as a team in relation to important executive decisions and all of Cash Converters' policy and strategic initiatives. He says he has relied upon the plaintiff to assist him in formulating policy and has discussed decisions with him before they were presented to the full board of the company. The plaintiff has also been actively involved in meeting with franchisees and dealing with issues of a non-legal nature raised by the franchise chain. Mr Cumins says that he and the plaintiff have shared responsibility for investor relations, and in dealing with brokers and shareholders.
18 According to Mr Cumins, the plaintiff has extensive experience in making the day-to-day commercial decisions required to keep the large international chain of franchisees and licensees functioning harmoniously. The decisions in which he has been involved include whether or not Cash Converters should grant licences in different countries and, if so, on what terms; how the company should structure payment terms for different regions, and whether new products or business applications can usefully be added to the franchise concept.
19 Mr Cumins says that as a director the plaintiff was instrumental in the listing of Cash Converters on the London and Australian Stock Exchanges, in establishing the company's international chain of franchisees, in the day-to-day management of the company and in the promotion of its business and growth. The plaintiff established and maintained the franchise arrangements, drafted the franchise agreements, liaised with the franchisees and developed the company's business relationship with each of them.
20 In his affidavit, Mr Cumins says he spends a considerable part of his time living and working in the United Kingdom where Cash Converters has a large chain of franchise stores. The plaintiff has been the only
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- executive director in Australia during his absence and Mr Cumins has relied upon the plaintiff to assume part of his (Mr Cumins') responsibilities for the company's operations in Australia. Mr Cumins says that each of the non-executive directors of Cash Converters resides in Australia and in the event that the plaintiff's application is successful, the plaintiff would not be the only director ordinarily resident in Australia.
21 According to Mr Cumins, the plaintiff's knowledge and expertise in relation to the subsidiaries is essential to Cash Converters. Mr Cumins says that the plaintiff established CCFCL and the specialised finance concept, and has been the executive director responsible for this company since 1995. He has overseen all of CCFCL's operations and the implementation of its lending policy. In Mr Cumins' opinion, the plaintiff's performance as an executive director of CCFCL has been essential to the company's success. In addition, the plaintiff set up and maintained the licence arrangements with MON-E, drafted the licence agreements, and liaised with and developed the company's business relationship with MON-E. He has a close knowledge of MON-E's business and its operations. The business of the Safrock Group is of the same nature as MON-E.
22 Mr Cumins says that the company's franchise business has peculiar problems and issues which are not faced by normal retail chains. He considers it will be impossible to find anyone in Australia with comparable skills and experience to replace the plaintiff and it will be necessary to recruit a director from overseas. As the overseas markets are very different, it is likely to take considerable time and training to replace the plaintiff.
23 According to Mr Cumins, the company has extensive corporate government policies to ensure that there would be no risk to the public in the plaintiff being a director of Cash Converters and the subsidiaries.
24 An affidavit of the chairman of Cash Converters, Reginald Webb ("Mr Webb"), has been filed in support of the application. Mr Webb is a chartered accountant and a former partner of PricewaterhouseCoopers. He has been a director of the company since 22 October 1997 and was appointed chairman in January 2005. The other members of the current board of Cash Converters are Mr Cumins, John Yeudall and Andrew Moffat.
25 Mr Webb says that the plaintiff has explained to the board the circumstances regarding his bankruptcy and the board supports this
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- application. Mr Webb considers that the plaintiff's bankruptcy would not have a negative impact on his ability to act and his performance as a director of the company. But if the current application is unsuccessful, it will not be easy and could take a considerable period of time to find an alternative director of a sufficient degree of competence, particularly legal competence, in international franchising activities. Mr Webb says that the plaintiff's legal expertise and intimate knowledge of Cash Converters have been an essential element of the success of the company.
26 Mr Webb believes there would be no risk to others as a result of the plaintiff's reappointment to the board given the qualifications and expertise of the existing directors. But there would be hardship to Cash Converters and its shareholders if it were necessary to seek a replacement for the plaintiff or if Cash Converters was unable to find a suitable replacement.
The relevant principles
27 The principles to be applied on an application of this nature were not in dispute. They are conveniently collected in the judgment of Lindgren J in Adams v Australian Securities & Investments Commission (2003) 46 ACSR 68 where his Honour said (at 71):
"The following principles relevant to an application of the present kind have been consistently recognised and applied in the authorities:
1. The applicant bears the onus of establishing that the Court should make an exception to the legislative policy underlying the prohibition: [authorities omitted].
2. That legislative policy is one of protecting the public, not one of punishing the offender: [authorities omitted].
3. Another objective is to deter others from engaging in conduct of the particular kind in question: [authorities omitted].
4. A further objective is the more general one of deterring others from abusing the corporate structure to the disadvantage of investors, shareholders and others dealing with a company: [authorities omitted].
5. The prohibition itself contemplates that there will be hardship to the offender. Therefore hardship to the
- offender alone is not a persuasive ground for the granting of leave: [authorities omitted].
- 6. 'The court in exercising its discretion will have regard to the nature of the offence of which the applicant has been convicted, the nature of his involvement, and the general character of the applicant, including his conduct in the intervening period since he was removed from the board and from management. Where, as here, the applicant seeks leave to become a director and to take part in the management of particular companies the court will consider the structure of those companies, the nature of their businesses and the interests of their shareholders, creditors and employees. One matter to be considered will be the assessment of any risks to those persons or to the public which may appear to be involved in the applicant's assuming positions on the board or in management', per Bowen CJ in Eq in Re Magna Alloys at 205, followed in Zim at 555 - 556.
This passage does not purport to be an exhaustive statement of the matters appropriate to be taken into account by the Court as relevant to the exercise of its discretion under the section. Clearly, there can be no such exhaustive statement."
28 It is clear that the plaintiff bears the onus of establishing that the Court should make an exception to the legislative policy underlying the prohibition. The legislative policy is one of protecting the public and it is that consideration which is paramount. The plaintiff must show that protection of the public will not be compromised by the grant of leave sought. Whether to grant leave is a matter for the discretion of the Court and the discretion is at large, although it must be exercised in accordance with the scope and purpose of the Act and with the apparent legislative intent: Murray v Australian Securities Commission (1993) 12 ACLC 11 at 13.
The plaintiff's submissions
29 It was submitted on behalf of the plaintiff that it was an important consideration that the bankruptcy of the plaintiff had not arisen as a result of the failure of a business, or in connection with the performance of his duties as a director of Cash Converters or the affairs of any other company. It had arisen largely as the result of private investments in mass-marketed tax driven investment schemes.
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30 The plaintiff is a person of good character. Since he commenced practice in 1983, there have been no complaints to the Legal Practice Board regarding the plaintiff's conduct and no disciplinary proceedings have been commenced against him by the Board. Nor have any complaints been made to any authority in connection with his conduct as a director of Cash Converters or any other company. He has no criminal convictions. The plaintiff acted responsibly by resigning as a director of Cash Converters prior to his bankruptcy and by advising the Legal Practice Board of his changed circumstances and requesting the issue of a new practice certificate.
31 The Cash Converters franchise system is unique in its structure and implementation. The plaintiff was personally involved in its development and, prior to his resignation, its continuing day-to-day franchising activities, commercial decisions and growth strategy. The interests of the company's shareholders, creditors and employees will be better served if he were permitted to continue to act as a director, given his intimate knowledge of the business. The members of the board of Cash Converters wish the plaintiff to be reappointed. It will be difficult, if not impossible, to replace the plaintiff with someone of comparable skills and experience.
ASIC's submissions
32 ASIC opposed the application. It was submitted that the plaintiff, as a bankrupt, was seeking to be a director of a corporation with significant trading operations both within Australia and overseas. Those operations included a specialised finance company of which the plaintiff was to be a director. Counsel for ASIC argued that there was insufficient evidence to establish that Cash Converters and its subsidiaries could not continue to operate successfully without the plaintiff acting as a director or being involved in management. Although Mr Cumins suggests it would be impossible to replace the plaintiff, Mr Webb does not. Mr Webb says it is likely to take some time to do so. There was no evidence that the loss of the management services of the plaintiff would have a significant effect on the company's economic fortunes. While it may cause some difficulty, it is not suggested that there would be any loss of employment or profitability.
Should leave be granted?
33 The legislative policy of s 206A of the Act is to exclude, among others, a person who is bankrupt from acting as a director of a company. The provision is not punitive; it is designed to protect the public. Plainly, the policy that ordinarily a person who is bankrupt should not act as a
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- director of a company should be given effect unless a sufficient case is made out to justify the Court granting an exception.
34 I accept that the plaintiff has an unblemished record in his conduct as a solicitor and in relation to his activities as a director of Cash Converters. The only blot on his commercial record is the present bankruptcy. That blot did not arise out of any conduct in connection with his involvement in the management of Cash Converters or any other company, but out of his personal financial affairs. The plaintiff acted properly in resigning as a director before presenting his petition in bankruptcy and in promptly notifying the Legal Practice Board of his circumstances. His practice certificate has been renewed, subject to the usual financial constraints which would apply in such a situation. Cash Converters will therefore continue to have access to the plaintiff's services as a legal adviser.
35 Although Senior Counsel for the plaintiff emphasised the circumstances of the plaintiff's debt to the ATO arising from the "infomercials" in the period 1996 to 1998, it must not be overlooked that that was not the only source of his indebtedness. There were, in addition, the debts arising from the disallowance of deductions claimed for pre-paid fees to a service entity and a claim for a loss on the disposal of a security. In each case, penalties were imposed. The plaintiff says he believes that the assessments could have been successfully challenged. But the fact is that they were not challenged and the assessments must therefore be treated as valid assessments.
36 It must also not be overlooked that, in addition to the debt to the ATO, the plaintiff has a further debt of $3,801,758 to Riverwood. The total amount owing by the plaintiff to his creditors is therefore some $9,500,000.
37 It hardly needs saying that that is a very substantial sum, a significant part of the debt having been incurred as a result of what, in Australian Securities and Investments Commission v Infomercial Management Group Pty Ltd (supra), were described as speculative investments in schemes from which, apart from earning a profit, investors expected to derive a tax deduction equal to about 4.5 times their investment contribution.
38 An important consideration on this application is the structure of the companies in which the plaintiff seeks to participate in management and the nature of their businesses. In that respect it is significant that Cash Converters is a public company listed on the Australian and London Stock
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- Exchanges. The 2005 Annual Report (in which the plaintiff is described as "Group Legal Director") shows operating revenue of $18,608,542 for the Cash Converters Group for the financial year ended 30 June 2005. Cash Converters operates a large-scale international franchise of retail stores, principally in Australia and the United Kingdom. Those retail stores, among other things, provide a range of personal financial products to customers. One of the subsidiaries in which the plaintiff would be involved in management is a specialised finance company and another would be involved in providing personal loans to customers of franchisees. It also appears from the papers that Cash Converters intends to raise capital of $15,000,000 by a share placement to provide the cash component of the acquisition cost of MON-E and the Safrock Group, and to provide additional working capital for Cash Converters.
39 It appears from the evidence that, prior to the plaintiff's resignation in May 2006, there were two executive directors of Cash Converters, the plaintiff and Mr Cumins. The other directors are non-executive directors. Mr Cumins, the managing director, spends a considerable part of his time living and working in the United Kingdom. It would therefore appear that, if the application were granted, the plaintiff would assume the position of being the only executive director of Cash Converters and its subsidiaries ordinarily resident in Australia and, as in the past, he would "shoulder part of [Mr Cumins'] Australian responsibilities when [Mr Cumins] is away." The non-executive directors, however, are ordinarily resident in Australia.
40 In the course of argument, Senior Counsel for the plaintiff referred to the decision of the Supreme Court of New South Wales in Re Australian Limousin Breeders Society Ltd (1989) 7 ACLC 426 where leave was granted to an applicant to act as a director of a public company where the applicant had been convicted of an offence of fraud arising out of a sales tax scheme. In that case, however, the company was one limited by guarantee and it was not a trading company, so that the public were unlikely to be exposed to any significant financial risk by the company's activities.
41 Counsel also referred to the decision of this Court in Re Etick Ltd; Ex parte Mansell [2006] WASC 111, where leave was granted to a plaintiff who had been convicted of an offence of dishonesty and had some years previously been twice bankrupt. An important factor in that case was that the plaintiff had been a major element in the success of the company and his knowledge and experience were of considerable value to the business. It would have been difficult and costly to replace him, if a
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- suitable replacement could be found at all. It was submitted that the present case was, if anything, a stronger case than that.
42 It is, of course, very difficult usefully to compare the facts of particular cases. However, in Ex parte Mansell (supra), putting aside for present purposes the particular circumstances of that plaintiff's offence and bankruptcies, the evidence was that the loss of the management services of the plaintiff was likely to result, at least in the short term, in substantial instability in the management of the company and may have a significant detrimental effect on the company's economic fortunes, as none of the directors, all of whom were newly appointed following a takeover, had the requisite knowledge and experience of the information technology business carried on by the company. Although experienced company directors, their backgrounds were in accounting and law. It was accepted that the consequences of the plaintiff's inability to participate in management may well adversely affect the position of a number of the company's current employees, particularly in its head office, and its shareholders. In that case, the plaintiff was given leave to participate in management, but not as a director of the company. It is, therefore, in my view some distance removed from this case.
Conclusion
43 I am not satisfied on the evidence that Cash Converters could not continue to operate successfully without the plaintiff acting as a director or being involved in management. I accept that it may not be easy to find a replacement but that will often be the case where a person has been a director of a company for a number of years. The difficulty of finding a suitable replacement is a factor to be considered, but it is only one factor to be weighed in the balance. It is the case, too, that Cash Converters will continue to be able to obtain legal advice from the plaintiff in his capacity as a lawyer.
44 While on the evidence the plaintiff's conduct since his bankruptcy is not open to criticism, his bankruptcy, resulting to a large extent from some not insubstantial investments in mass-marketed tax schemes, has left a very large sum of money owing to two creditors. In that context, the size and nature of the business of Cash Converters (including the relevant subsidiaries), to which I have referred, is of considerable significance.
45 Having regard to all of the circumstances, I am not persuaded that this is an appropriate case for leave to be granted to enable the plaintiff to act as a director and take part in the management of Cash Converters and its subsidiaries. I would therefore refuse the application.
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