Semmens v Flavel

[1988] HCATrans 26

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Adelaide No A36 of 1987

B e t w e e n -

ROBERT JAMES SEMMENS

Applicant

and

KEVIN GEORGE FLAVEL

Respondent

Application for special leave

to appeal

WILSON J

DAWSON J

GAUDRON J

Semmens

TRANSCRIPT OF PROCEEDINGS

AT ADELAIDE ON FRIDAY, 19 FEBRUARY 1988, AT 11.44 AM

Copyright in the High Court of Australia

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MR M. DAVID, ~C: If the Court pleases, I appear with

myearneci friend, MR B. BEAZLEY, for the applicant.

(instructed by Poveys)

MRS. LANE: If the Court pleases, I appear for the

respondent in this matter. (instructed by the

Corporate Affairs Commission)

WILSON J:  Yes, Mr Lane. Mr David?

MR DAVID: If the Court pleases, the application for special

leave to appeal in this matter and my submission

is a question of public importance in that it

involves an interpretation of section 374c(2) of

what I might call the old COMPANIES ACT 1962
which was uniform legislation.

WILSON J:	But when did the code come into -
MR DAVID:	1981. But, of course, this Act is alive to a certain

extent because of the COMPANIES (APPLICATION OF

LAWS) ACT 1981 and indeed section 374c(2) is still

alive for matters that occurred before 1979 but as yet have to be investigated. And indeed.the

case before the Court was one such case.

WILSON J:	But it is of diminishing significance.
MR DAVID:	But in my submission still present. And,of

course, with the enthusiasm that companies are being

investigated these days we never know what might happen.

If the Court pleases, the section itself has

a penal sanction and in my submission it raises

two matters of importance in its interpretation

which on my research is this Court or other courts in the Commonwealth have not addressed. The first is the ambit to be given to the words, "if any

business of a company to which this section applies

has been carried on with intent to defraud

creditors of the company or creditors of any person

or for any fraudulent purpose". That arose

clearly in the matter before the Court and in

my submission, the interpretation of that

section, and indeed of those words "of any business of

·a company ..... for any fraudulent purpose" raises

peculair difficulties which are of public importance

in future prosecutions in relation to this

section. I leave that for a moment and go to

the second matter of public importance which I

seek to raise and that is whether the section

itself should be used in any prosecution other

than prosecutions which concein creditors of a

company. And as the Court will see section 374c(l)

deals with negligence in relation to creditors.

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Section 374c(2), the one that we are talking about,

talks about:

If any business of a company to which

this section applies has been carried on

with intent to defraud creditors -

it deals with creditors there -

of the company or creditors of any other

person or for any fraudulent purpose.

Now, it is my submission that it is a matter of

public importance whether that third situation

can apply to any case of fraud and that can be the

basis of a case of fraud or it must take its
colour from the rest of the section. In the case

before the Court therewas no question of it being

concerned with creditors, it was what I might

call a case of straight fraud involving the company.

They are the two matters upon which special

Court the background in relation to these matters.	leave is sought and if I could briefly tell the to that section in the Adelaide Magistrates Court
on 29 August 1985. There was a submission of no
case to answer on the basis that he was charged with
the wrong section because of the first matter which
I wish to argue. On that submission being rejected,
and without further evidence being called, the
magistrate convicted him of the five counts. On
appeal to a single judge, Justice Bollen, he
quashed the convictions, and on appeal by the respondent
the Full Court reinstated them. He was sentenced by
the learned special magistrate to six months.
imprisonment.

Very briefly, the unargued facts for the

purposes of all appeals are set out in the judgment

of Justice Bollen at page 21 of the appeal book

and also the decision of the majority of

Justice O'Loughlin at page 38 and page 41 of the

appeal book.

WILSON J:  Was it not a unanimous decision of the Full Court?

MR DAVID: It was a unanimous decision of the court. Very

briefly, if the Court pleases, the five counts
represent five companies established by the

applicant who carried on practice as an accountant.

Each company became a partner with natural people

in five different partnerships. This was all

agreed for the purposes of all appeals, no evidence

was called by the applicant at trial. It was

agreedand conunon ground that each company, and the
other partners of each partnership, carried on

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business of establishing an export market in the

United States for manufacturing sheepskin products

and opals. At that time in 1979 there was in

existence a statutory body, which has generated

a lot of litigation, known as the Export Development

Grants Board. Put very briefly, a claim was

made on the Export Developments Grants Board because

this was an export business. Those claims were

false and for the purposes of all appeals that was

agreed, that they were false. They were false in the

sense that no expenses were actually incurred,

but by a series of round robin cheques, materials

and services were gained on credit with a

certain person who,on receiving money and cheques

for the amount of work that in fact was to be

done, loaned back that appropriate amount virtually

the next day. So there were no expenses actually

incurred. It gave the impression that expenses

were incurred for the purposes of the Grants Board.

The Grants Board certainly were not fooled

by that and the grants were refused. If the

Court pleases, that behaviour, in doing that, was

the subject of the charges before the Court, five

charges all of which in fact mirror each other.

The point taken right at the beginning of the no

case stage before the magistrates court was that

on an interpretation of section 374c(2), it is

not the appropriate charge and it was made clear

to Mr Justice Bollen and to the Full Court that

there was no argument about the fraudulent nature

of what was done, or indeed that an offence of

some sort was committed anyway. It was on that

pristine point of whether section 374c(2) applied.

And the argument before Justice Bollen and the

Full Court, and indeed, the magistrate, was that

on an interpretation of section 374c(2), there is

difficulty in relation to this type of situation.

It was argued and is sought to be argued if leave is given that if any business of a company has

because of course the business of the company was	difficulties in this case for the prosecution,	export, there was no doubt that it was a legitimate
business of export, that in fact the false claim to the Grants Board, which was agreed,was not the
purpose of the business of the company - - -

DAWSON J: Stopping there, Mr David. That was a submission

which was put, but on the facts, the Full Court

held against you on that point, did not they?

t1R DAVID:  Yes, if the Court pleases, that is so, but the

Full Court held against us on the basis that, and

this is where the point of law is involved in my

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submission, on the basis that the business of
the company can embrace matters incidental to its

business.

DAWSON J:  No, I thought what the Full Court held was that

this was a purpose of the business - this was one

of the reasons these businesses were set up?

MR DAVID:  I think, Justice O'Loughlin says at page 49 at

the bottom and at page 50 at the top.

DAWSON J: Yes, that is what I had in mind.

MR DAVID:  Yes, that, but embraced in that, if Your Honour

pleases, is the suggestion that matters incidental

to the business of the company can in fact become

the business of the company. I could read from

Justice O'Loughlin where he says, this is at

page 48:

Usually, when examining the business

operations of a company that is engaged

in the export market, one would have no
great difficulty in saying that the business

of that company was carried on for the

~urpose of export - but the circumstances

surrounding the establishment of these

partnerships and the presence of a

Semmens company in each partnership indicates,

in my opinion, quite clearly, that their

respective businesses were not "normal

businesses". The partnership business,

and hence the business of the relevant
Semmens company, was not merely established

for the purposes of exporting sheepskin products and opals to the United States of America; it was, in my opinion,

established for the alleged benefit of

clients of Semmens' accounting practice

whereby they could obtain, for their

individual benefit, taxation deductions

ASSESSMENT ACT in a year of income without under section 51 of the INCOME TAX actually incurring any expenditure.

That did not seem to play any part in the trial

itself. But further on:

But to sustain that claim for a deduction,

two additional features were essential;

first, there had to be the appearance of

an actual business activity - hence it
was necessary for products to be purchased

so that they could be exported overseas

for sale; secondly, and in order to assure

the clients that they would not actually

lose money on trading activities, they were

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offered the "hedge" or protection of the
grants through the Grants Board - to be

received in a subsequent year.

Now, that is, in my submission, how he brings in the

application to the Grants Board being the·

purposes of the carrying on of the business of the

company.

DAWSON J:  I may be wrong but that seems to me to be saying

this was not an incidental of the business, this was

the very purpose for which it was formed, an essential-

MR DAVID:  Yes, and it is my submission, and I will make it

briefly, that that question has to be answered

and, in my submission, the question of whether

something like a tax deduction or, indeed, a claim to

the Grants Board is incidental or is the business

itself is the problem with the matter· before the Court.

DAWSON J: And it is a problem of fact, is it not? And the

finding is on the facts against you, but that is not

something which attracts special leave, is it?

MR DAVID:  Of course not. My submission is that nevertheless

there still has to be some guidance as to what we

mean by "business of the company": as distinct from

"any business of the company" or matters done

"incidental to the business of the company".

DAWSON J: Guidance might be nice but this is not the case to

give it in, is it, if the matter is concluded on the

facts?

MR DAVID: Yes. And if the Court pleases, if I could just go to

the modern COMPANIES ACT, if I could use that, which

seems to step around this problem rather nicely by

section 556(5) of that Act where it says:

If -

(a) a company does any act (including the

making of a contract or the entering into	of a transaction) with intent to defraud
creditors of the company or of any other
person or for any other fraudulent purpose -

et cetera, an offence will follow. And, if the Court

pleases, on that first matter I submit leave should

be given.

The second matter is the question of whether,

in fact, that section should be read down to include

some protection of creditors and not just be a

general section in relation to fraudulent behaviour.

And, if the Court pleases, one need only look at the section itself - and my argument, if leave would be

given, is that section 374c(l) deals- with negligence.

The rest of section 374c(2) seems to deal with matters

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of debts of the company and the protection of creditors
and, indeed, if one goes to the interpretation section,

section 374e, a:

"company to which this section applies" -

which is in section 374(2):

If any business of a company to which this

section applies .....

"company to which this section applies" -

is limited to companies which appear to be in the process of winding up, whether they are insolvent or not. And it is my submission if there was any general question cf an
offence of a fraudulent nature it would be strange that

it is limited to those companies and, indeed, the rest

of this section is dealing with, in fact, fraud or

negligence in relation to creditors. And,once again,

the modern COMPANIES ACT seems to overcome that by -

will make that much clearer by section 556(5), again,

where it says:

If -

(a) a company does any act (including the making

of a contract or the entering into of a
transaction) with intent to defraud creditors

of the company or of any other person or for

any other fraudulent purpose.

WILSON J: "or for any other fraudulent purpose". It seems

pretty broad. It is not confined to creditors.

MR DAVID: Yes. And that says "other"- this section, of

course, does not.

WILSON J: It repeats, substantially, 347c in this regard,

does it not?

MR DAVID: Except for the important word "other".

DAWSON J: What, you say that is a legislative recognition

of the lack of clarity of the old section

and it is a penal provision and must be given a

restrictive interpretation?

MR DAVID:  And which is still current in a limited sense. If

the Court pleases.

WILSON J: The Court does not wish to hear you, Mr Lane.

In this case there is a unanimous finding of fact

by the Full Court that the business of the company was

carried on for a fraudulent purpose and it would be

inappropriate for the Court,·by granting special leave
to appeal, to go behind that finding. Although Mr David

did not advance the second point as an integral ground

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Semmens

in support of the application for special leave, we

would add, with respect to it, that we are not

persuaded that there is any reason to doubt the

correctness of the decision of the Full Court on that

second question. It might be added that, as has already been noted, the section is of diminishing significance.

So, for these reasons, special leave is refused.

MR LANE~	I seek costs, if the Court pleases.
WILSON J:	Can you oppose that, Mr David?
MR DAVID:	I have nothing to say.

WILSON J: The application will be refused with costs.

AT 12.01 PM THE MATTER WAS ADJOURNED SINE DIE

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