Re Zarfati and Australian Securities and Investments Commission

[2008] AATA 989

Administrative Appeals Tribunal

INTERLOCUTORY DECISION AND REASONS FOR DECISION

[2008] AATA 989

ADMINISTRATIVE APPEALS TRIBUNAL      )   

)    No 2008/4041

GENERAL ADMINISTRATIVE DIVISION        )   

ReFrank ZARFATI

Applicant

AndAustralian Securities and Investments Commission

Respondent

INTERLOCUTORY STAY DECISION

TribunalProfessor GD Walker, Deputy President

Date6 November 2008

PlaceSydney

DecisionThe interlocutory decision is that:

(1)a partial stay is granted permitting the applicant to serve as a director and manager of Empire Printing (Australia) Pty Limited; and

(2)Liberty to apply is reserved.

....................[sgd]..........................

Professor GD Walker
  Deputy President

CATCHWORDS – Stay application – whether there are prospects of success – whether there will be prejudice to the parties - whether it is in the public interest – whether the application would be rendered nugatory – partial stay granted.

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RELEVANT ACT/S:

Corporations Act 2001 (Cth) (the Act): ss 206F

Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act): ss 41

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CITATIONS:

Australian Securities and Investments Commission v PTLZ [2008] FCAFC 164

Re XTWK and Australian Securities and Investments Commission (2007) 98 ALD 131

Australian Securities Commission v Roussi [1999] FCA 618

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OTHER REFERENCES:

Corporations Law (the Law): ss 229, 230

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REASONS FOR STAY DECISION

6 November 2008	Professor GD Walker, Deputy President
Basic facts

1. On 28 August 2008, the applicant applied for a review of a decision made by a delegate of the Australian Securities and Investments Commission (ASIC) on 31 July 2008, disqualifying the applicant from managing a corporation under s 206F(1) of the Corporations Act 2001 (Cth) (the Act) for a period of three years.

2.      In connection with that application for review, the applicant on 28 August sought an order staying the disqualification decision pending determination of the principal application for review.

3.      At the interlocutory hearing Mr James Pope of Pope and Spinks, Solicitors, appeared for the applicant while Dr Margaret Allars of counsel, appeared for the respondent instructed by Ms Alice Rees.

4.      In support of the stay application, the applicant on 13 October 2008 filed an affidavit by Mr Peter Baker (Exhibit A1), an accountant and registered tax agent of 30 years’ standing.  Mr Baker deposed that a company called the Elders Group Pty Ltd (Elders) (not related to the large corporation of similar name) had engaged him to attend the offices of Empire Printing (Australia) Pty Ltd (EPA) located at Addison Road, Marrickville, New South Wales, every two weeks for the next three to six months, and thereafter monthly.  His responsibility is to liaise with the in-house bookkeeper of EPA to ensure that proper provision is made for all tax and other statutory financial obligations of the business.  The engagement is permanent and will continue until all parties are confident that the business is running in a manner that does not risk any shortfall in complying with its statutory obligations.

5.      In the course of the stay hearing on 14 October 2008, an affidavit by the applicant sworn on the same date (Exhibit A2) was filed.  The applicant’s affidavit stated that he had never been convicted of any criminal offence and apart from his disqualification from acting as a director, had no stain on his reputation apart from the proceedings brought by the respondent.  He maintained that he had adequate reasons to explain his conduct in a manner involving no lack of diligence on his part.

6.      The applicant further deposed that all the corporations that were the subject of the complaints dealt with in the respondent’s decision of 31 July 2008 were partly or wholly controlled in relation to their financial affairs by financial managers located in Queensland.  The applicant was the manager of the business involved in the operation of the printing factory in Sydney.  He believed he had every reason to suppose that the administration of the companies in Queensland was adequate for all purposes, including in relation to taxation.

7.      Mr Zarfati is currently managing the printing factory at Addison Road, Marrickville, which is owned by Elders, a company owned by Mr Elio Morabito, who lives partly in Queensland and partly in New South Wales.  As problems occur when matters to be decided by a director arise when he is out of New South Wales, the applicant believed it would be preferable for the proper administration of the company if he were a director of it.

8.      Mr Baker’s services had been engaged to ensure that the printing business at Marrickville meets all of its statutory obligations.  The interests of shareholders, creditors and employees of Elders would thus not be impaired or threatened if the disqualification were stayed.  Elders has sufficient capital and experience in printing and public relations to ensure that it does not experience problems similar to those that arose in relation to the failed corporations.  Further, the applicant stated, there is no question as to his competence in relation to the management of a printing factory or as to his honesty and his competence to act as a director.

9.      His income is currently limited to that which he can command as a factory manager, and that is not sufficient for him to have confidence that he could support himself and his partner, as they are planning to start a family.  If he were able to act as director he would be able to command a higher salary.

10.     The respondent opposed the application for a stay on the ground that it did not meet the criteria that are to be satisfied before such a direction can be made.

Consideration

11. The tribunal's power to grant a stay is conferred by s 41(2) of the Administrative Appeals Tribunal Act 1975 (Cth) (the AAT Act) which provides as follows:

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41.     Operation and implementation of a decision that is subject to review

(1)…

(2)The Tribunal may, on request being made, as prescribed, by a party to a proceeding before the Tribunal (in this section referred to as the relevant proceeding), if the Tribunal is of the opinion that it is desirable to do so after taking into account the interests of any persons who may be affected by the review, make such order or orders staying or otherwise affecting the operation or implementation of the decision to which the relevant proceeding relates or a part of that decision as the Tribunal considers appropriate for the purpose of securing the effectiveness of the hearing and determination of the application for review.

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12.     In Australian Securities and Investments Commission v PTLZ [2008] FCAFC 164, the Full Court of the Federal Court emphasised that in applying s 41(2), it is important to focus on the terms of the provision rather than be unduly distracted by case law. The court in that case did not disturb the existing test, however, as laid down, inter alia, in Re XTWK and Australian Securities and Investments Commission (2007) 98 ALD 131 at 134 where the following matters relevant to the exercise of the discretion to grant a stay were set out:

(a)the prospects of success or the merits of the application for review;

(b)whether there will be prejudice to the parties or anyone else if a stay is not granted;

(c)whether it is in the public interest to grant a stay; and

(d)whether the review application, if successful, would be rendered nugatory or pointless if the stay is not granted.

13.     The applicant bears a practical onus of establishing on the evidence that those considerations point to the grant of a stay (XTWK at p134).

14.     The applicant invited the tribunal to apply the principles stated in Australian Securities Commission v Roussi [1999] FCA 618 at para 9. Although there is some overlap between the criteria listed by Einfeld J in that case and those applied in exercising the discretion in s 41(2), the case, as Dr Allars pointed out, related not to the question of a stay but to the length of the period of disqualification to be imposed pursuant to ss 229 and 230 of the Corporations Law (the Law).

15.     The respondent criticised the evidence adduced in support of the stay application on a number of grounds.  One was that one of the affidavits was served on the respondent only at the hearing itself, the other having been served the day before.  Mr Baker was not available for cross-examination.  The respondent had no opportunity to obtain instructions about Exhibit A2.  While an application for an adjournment to enable that to be done could have been made, that would have involved the respondent, and ultimately the taxpayer, in further expense, and perhaps for that reason the respondent elected to proceed with the stay hearing.

16.     The respondent also pointed out that there were gaps in the applicant’s evidence and that the affidavits suffered from a lack of detail on material matters, including for example the ACN of Elders.

17.     While those criticisms were justified, I think some latitude can be extended in connection with an interlocutory application when there is nothing overtly improbable or unduly contentious in the evidence relied on.

18.     As regards the interests of the applicant, the respondent submitted that the disqualification order does not prevent the applicant from being employed by a corporation engaged in printing and publishing.  The applicant claimed in the stay application that he is a director of a corporation that employs a number of people (apparently about 25) whose livelihoods would be affected, implying that his remaining in that role was essential to avoiding the corporation’s failure and the loss of employment.  If the applicant was complying with the disqualification order and a corporation carrying on the printing and publishing business formerly operated by Empire Printing, plainly there had been no disruption of business or loss of employment by reason of the applicant's ceasing to be a director.  If the applicant succeeded in the application for review he would not in the meantime have been deprived of the opportunity to earn his living.

19.     The applicant submits that he could command a higher salary as a director of EPA than he can as a factory manager, a circumstance that would have an impact on his family plans.  He did not indicate the level of his present earnings or estimate what his income might be if he were to become a director.  That argument cannot, therefore, receive substantial weight.

20.     On the other hand, the evidence and the delegate’s decision of 31 July 2008 make it clear that the applicant’s interests are closely involved with the printing business conducted at Marrickville by EPA, and before that by other corporate entities.  The applicant founded that business in 2001 and has operated it ever since, although he argues that the financial and administrative side of the business was conducted by others in Queensland as part of his efforts to obtain further capital and expand the business.

21.     It is in his interests that the business should be operated successfully.  According to his evidence, the company’s present owner, Elders, is owned by Mr Elio Morabito who lives part of the time in Queensland and for that reason is on occasion unavailable when matters relating to the conduct of the business are required to be decided by a director.

22.     There is prima facie force in that argument, as the successful conduct of any business or other substantial organisation, especially in times of economic uncertainty, usually requires the presence of a senior decision-maker on a day-to-day basis.

23.     As regards the second factor, it is in the public interest that ASIC should be able to discharge its statutory functions of maintaining proper standards in commercial and financial dealings.  At the same time, it would not be in the public interest for any viable and legitimate business enterprise to fail, thereby jeopardising the employment of its staff, who in the present case number about 25.  Ensuring that an experienced senior manager is on the premises and able to deal with problems as they arise would help to reduce the risk of such a failure.

24.     Uncontroverted evidence suggests that the engagement by Elders of the services of Mr Peter Baker, an experienced accountant and registered tax agent, will ensure that EPA’s accounting and financial practices will be such as to ensure that the interests of creditors, including the ATO, and shareholders will be protected.

25.     Mr Pope conceded that the applicant’s application for review of the determination would not in itself be made nugatory by the refusal of a stay.  At the same time, however, it would appear from the evidence before the tribunal at this stage that the applicant’s activities as a director and manager have at all relevant times been confined to the conduct of the printing business at Addison Road, Marrickville.  There seems to be no immediate danger that if a partial stay were granted he would seek to use his position as a director of EPA for any wider financial and commercial purposes.

26.     In a practical sense, therefore, if the printing business were to fail through insufficiency of day-to-day decision-making capacity on the premises, ultimate success in the application would be in the nature of a Pyrrhic victory for the applicant.

27.     The respondent did not submit that the application was devoid of any prospects of success but pointed out that it turned on a number of disputed issues of fact.  One of those, it appears from the delegate’s decision, is likely to be the extent to which the applicant was entitled to rely on others and the extent of his personal derelictions of duty.

28.     Such matters are inherently open to argument and one could not exclude the possibility that the application could be successful.

29. In my view, it is appropriate to grant a partial stay under s 41(2) of the AAT Act of the decision under review to permit the applicant to hold the position of director and manager of Empire Printing (Australia) Pty Ltd pending the tribunal's decision on the principal application.

30.     Liberty to apply should be reserved.

I certify that the 30 preceding paragraphs are a true copy of the reasons for the decision herein of Professor GD Walker, Deputy President

Signed:   ........................[sgd]......................................................
               Renee Wallace, Associate

Date/s of Interlocutory Hearing:    14 October 2008
Date of Interlocutory Decision:     6 November 2008
Solicitor for the Applicant:             Mr J Pope, Pope & Spinks, solicitors
Solicitor for the Respondent:        Ms A Rees, ASIC
Counsel for the Respondent:        Dr M Allars