SEYMOUR and Australian Securities and Investments Commission

[2017] AATA 2581

SEYMOUR and Australian Securities and Investments Commission [2017] AATA 2581 (24 November 2017)

Division:TAXATION & COMMERCIAL DIVISION

File Number(s):      2015/3754 & 2015/3805

Re:Trevor John SEYMOUR

APPLICANT

AndAustralian Securities and Investments Commission

RESPONDENT

Decision

Tribunal:Mr P W Taylor SC, Senior Member

Date:24 November 2017

Place:Sydney

1. ASIC’s 17 July 2015 banning order under CorpAct s 920A is affirmed.

2. ASIC’s 17 July 2015 disqualification order under CorpAct s 206F is set aside. In substitution for that decision, the Tribunal is not satisfied that Mr Seymour’s disqualification under CorpAct s 206F is justified.

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

Mr P W Taylor SC, Senior Member

Catchwords

CORPORATIONS – ASIC – banning order – disqualification order – conduct as a director – irregularities in financial reporting and disclosures – residential property development – misleading or deceptive conduct – failure to comply with benchmarks 5 and 7 in Regulatory Guide 69 – number and value of loans in arrears – valuation basis of development and construction loans – auditors’ reports not relevant to objective materiality of loan and applicant’s knowledge and understanding of that materiality – no breach of Corporations Act s 728 – applicant knowingly involved in contraventions of Corporations Act s 1041H – applicant not involved in contraventions relating to policy and disclosure compliance – discretion to exercise banning and disqualification powers – applicant’s personal circumstances – banning order decision affirmed – disqualification order decision set aside and substituted

Legislation

Corporations Act 2001 ss 79, 206F, 283BF, 283HB, 728, 760A, 766A, 766C, 911A, 920A, 920B, 1041H

Cases

ASIC v PFS Business Development Group Pty Ltd (2006) 57 ACSR 553

Australian Securities and Investments Commission v Forge [2007] NSWSC 1489
Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592
Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; 238 CLR 304
Coakley and ASIC [2008] AATA 247
Demagogue Pty Limited v Ramensky (1992) 39 FCR 31
Gore v ASIC [2017] FCAFC 13
Guss v Australian Securities and Investments Commission [2006] AATA 401; (2006) 90 ALD 349
MGICA (1992) Ltd v Kenny & Good Pty Ltd 140 ALR 313
Murdaca v ASIC (2009) FCAFC 92; 178 FCR 119
O’Sullivan v ASIC [2017] AATA 644
Roumanus v Orchard Holdings (NSW) Pty Ltd [2012] FCA 775; (2012) 90 ACSR 677
Seagrim v ASIC [2012] AATA 583
Sutton v AJ Thompson Pty Ltd (in liq) (1987) 73 ALR 233
Taco Company of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177
Tweed v Australian Securities and Investments Commission [2008] AATA 5

Yorke v Lucas (1985) 158 CLR 661

Secondary Materials

ASIC Regulatory Guide 69 - Debentures and notes: improving disclosure for retail investor

ASIC Regulatory Guide 98 - Licensing: Administrative action against financial services providers

REASONS FOR DECISION

Mr P W Taylor SC, Senior Member

24 November 2017

1. Mr Seymour is a Fellow of the Institute of Public Accountants and an affiliate of the Institute of Chartered Accountants.  Prior to the decisions with which these proceedings are concerned, he was also a fellow of the Australian Institute of Company Directors.

2. Material to the present proceedings, Mr Seymour was a director of two companies.  Those companies, and the period of Mr Seymour’s directorships, were as follows:-

   (a)Provident Capital Limited (“PCL”):- From its 25 May 1998 incorporation, until after the company’s 24 October 2012 liquidation, Mr Seymour was a non-executive director.  In the period after 2000, he was one of the four people who were PCL directors at relevant times:- see further paragraph 16 below.  From at least 2005 onwards, Mr Seymour was the Chairman of PCL’s Audit & Compliance Committee (“PCL_AudCC”).

   (b)Cashflow Finance Solutions Pty Limited (“Cashflow”):- Mr Seymour was a non-executive director.  He was one Cashflow’s five directors at the time of its 20 April 2005 incorporation.  From about July 2007, and until after its 28 May 2013 liquidation, he was one of Cashflow’s three continuing directors:- see further paragraph 20 below.

3. On 17 July 2015, with effect from 24 July 2015, ASIC made two orders, whose review Mr Seymour seeks in the present proceedings.  They were:-

   (a)an order, under the Corporations Act 2001 (“CorpAct”) ss 920A & 920B, banning Mr Seymour from providing financial services for a period of 3 years

   (b)an order, under CorpAct s 206F, disqualifying Mr Seymour from managing corporations, for a period of 3 years.[1]

   [1]ASIC permitted Mr Seymour to continue to manage Raintron Pty Ltd, Garde Family Pty Ltd and Brentnalls NSW Pty Ltd (provided he was not the sole director of that company and continued to be involved in its day operations).

   Basis for the banning order

4. PCL was, in essence, a first mortgage lender - of funds it raised from debentures and wholesale borrowings.  (The nature and amount of funding liabilities, the extent of its loan assets and its cash flow, in the financial years from 2007 to December 2011, are summarised in Schedules 1, 2 and 3 to these reasons.)

5. ASIC’s 17 July 2015 banning order was based on criticism of Mr Seymour’s conduct as a director of PCL and, more particularly, in relation to the company’s disclosures about its March 2000, $4m mortgage loan agreement to fund the $1m purchase and $3m development of a project at Burleigh Heads.  The borrower - a project specific corporation named Burleigh Views Pty Ltd (“Burleigh Views”) - defaulted under the mortgage, never completed the development, and went into liquidation in August 2008.  Throughout at least the latter part of that period the Burleigh Views loan was PCL’s largest.  By the time of the August 2008 liquidation PCL had taken possession of the development, and the loan balance had increased to about $13.81m.  When PCL itself went into liquidation (more than four years later - on 24 October 2012) no significant additional work had been carried out, completion of the development depended on the outcome of an unresolved development application, and the loan balance had increased (as a result of fees, expenses and capitalised interest) to about $22m.  (Material events detailing the history of the Burleigh Views loan are summarised in a later part of these reasons:- see paragraph 28 below.)

6. Between October 2008 and March 2012 PCL published various Quarterly Reports (see paragraph 100 below) and half yearly Benchmark Reports (see paragraph 110 below).  Mr Seymour relevantly approved all of them - either formally at a PCL Board meeting, in a circular resolution, or in an email acknowledgment:- see Schedule 5 - PCL Quarterly & Benchmark Reports, Prospectus & Information Booklets;  Schedule 6 - PCL - Board Meetings, duration, minutes, and attendances. The Quarterly Reports were (typically) two page documents containing the compliance disclosures required by Corp Act s 283BF. The Benchmark Reports were seven or eight page documents that assessed PCL’s compliance with eight “benchmarks” in ASIC’s Regulatory Guide 69.

7. In its July 2015 decision reasons ASIC considered the Quarterly Reports were misleading or deceptive because they did not disclose the following matters relating to the Burleigh Views loan:-

   (a)that it had been in default since August 2008

   (b)that PCL had taken possession of the property as mortgagee, and that Burleigh Views was itself in liquidation

   (c)that all of PCL’s valuations of the Burleigh Views property (from 2004 until May 2012) addressed its value “as if” the development was complete, whereas the development:-

   (i)was incomplete, and

   (ii)had no current development approval for its completion

   (d)that the loan default had the capacity to prejudice the interests of PCL’s debenture holders.

8. ASIC considered the Benchmark Reports were misleading or deceptive, because they failed to comply with benchmark 5 relating to disclosure of the number and value of loans in arrears) and benchmark 7 (relating to the valuation basis of development and construction loans) in Regulatory Guide 69.  (The required benchmark contents are summarised in paragraph 107 below.)

9. ASIC noted that the PCL directors asserted a subjective view that the Burleigh Views loan exposure was unlikely to result in any material prejudice (because (i) the loan exposure was adequately covered by the realisable value of the property, and (ii) that realisable value was supported by an adequate existing valuation).  ASIC nevertheless considered the directors had not made the disclosures that were objectively required.

10. ASIC considered that Mr Seymour knew (i) from May 2008 onwards, that the Burleigh Views loan was in arrears, (ii) by around September 2008, or alternatively January 2009, that Burleigh Views had gone into liquidation and that the loan was in default, (iii) by around January 2009, that Mr O’Sullivan (PCL’s managing director) had become an external controller of the property, and (iv) by September 2009 that the Burleigh Heads property did not have the development consents necessary to complete the development, and whose availability had been assumed in the property valuations.

11. On that basis (and having regard to the view expressed in paragraph 9) ASIC found that Mr Seymour had engaged in misleading and deceptive conduct (within the scope of Corp Act s 1041H) in relation to his approval of:-

    (a)PCL’s 15 Quarterly Reports from October 2008 to March 2012

    (b)the seven Benchmark Reports PCL published between October 2008 and September 2011

    (c)each of PCL’s January 2012, March 2012 and April 2012 information booklets.

12. ASIC made no specific contravention finding about Mr Seymour’s conduct in relation PCL’s 2008, 2009 and 2010 Prospectus.  It nevertheless considered that Mr Seymour had approved each of those documents, and was aware of the inadequate disclosures they contained.

    Basis for the disqualification order

13. The 17 July 2015 disqualification order was based on (i) Mr Seymour’s status as a director of both PCL and Cashflow, and (ii) the liquidation of those companies in circumstances where their unsecured creditors were unlikely to receive any distribution from the realisation of the corporate assets. Those circumstances conditionally enlivened ASIC’s statutory discretion in Corp Act s 206F(1) to disqualify Mr Seymour from managing any corporation.

14. The exercise of that discretionary power is contingent on satisfaction that the particular director’s disqualification is “justified”. That satisfaction must be arrived at after regard to any relationship between the insolvent corporations:- CorpAct s 206F(2)(a). Such a relationship is likely to inform, but it does not preclude, an assessment that disqualification is appropriate:- Guss v ASIC [2006] AATA 401. In its 17 July 2015 reasons ASIC accepted that PCL and Cashflow were related corporations, found that they operated separate enterprises, and considered that their corporate relationship did not inhibit satisfaction that disqualification was “justified”.

15. Most of ASIC’s July 2015 reasons were devoted to Mr Seymour’s conduct in relation to PCL.  The references to Cashflow were limited to a statement of Mr Seymour’s status as a director, a description of Cashflow’s business and corporate history, and a characterisation of its net asset deficiency as “not insignificant”.  The reasons contained no findings about, and no criticism of, Mr Seymour’s conduct in relation to Cashflow.  They also accepted that Mr Seymour was a director of seven other companies, and that no criticism had been made of his conduct in relation to them.  In that respect, ASIC’s reasons acknowledged that Mr Seymour’s circumstances involved the minimum number of failed companies that satisfied the threshold for exercise of the disqualification factor, but effectively disregarded that as a merely “unfortunate” consideration.  ASIC then went on to conclude that disqualification was justified, essentially because of Mr Seymour’s role in relation to the misleading character of PCL’s Quarterly Reports, its Benchmark Reports and PCL’s December 2010 Prospectus.  ASIC considered that Mr Seymour’s breaches of duty (explicitly identified only in relation to PCL) were substantial and repeated, and that his approach in relation to “disclosure in the financial services industry … was sadly lacking”.  It was that conduct, together with what ASIC emphasised as the protective and deterrent considerations relevant to the exercise of the disqualification power, that led to ASIC’s expressed satisfaction that a three year disqualification was justified.

    PCL - business and board

16. Provident Asset Management Pty Ltd, the trustee of the O’Sullivan Trust and the Provident Trust, held all of PCL’s 100,000 fully paid $1 issued shares.  Mr Michael O’Sullivan was the PCL chairman.[2]  He and Mr Seymour had been appointed as directors very shortly after PCL’s 25 May 1998 incorporation.  In July 2000 they were joined on the Board by Mr Bersten.  He was a solicitor whose firm was a legal adviser to PCL.  Until 1 July 2007, Mr O’Sullivan was PCL’s only executive director.  At that time Mr Bersten became a full time legal adviser to PCL, and changed his status to that of an executive director.  On 30 July 2008, Mr John Sweeney, a chartered accountant with a background in management and financial services, joined PCL as an additional non-executive director.

    [2]On 16 February 2015, ASIC made two orders against Mr O’Sullivan:- (i) an order, under CorpAct s 920A, banning Mr Seymour from providing financial services for a period of seven years, and (ii) an order, under CorpAct s 206F, disqualifying Mr O’Sullivan (subject to some conditional exceptions) from managing corporations, for a period of five years. In O’Sullivan v ASIC [2017] AATA 644 the Tribunal substantially affirmed ASIC’s decisions.

17. Until about July 2007, PCL’s funding came exclusively from the issue of public debentures - under an 11 December 1998 Trust Deed.  (After about November 2004, Australian Executor Trustees Limited (“AETL”) was the trustee for the debenture holders.)  The trust deed granted the trustee a first ranking floating charge over PCL’s assets.  The charge crystallised in the event of any of eight specific contingencies.  One of them was PCL’s unremedied failure to comply with its deed obligations.  Relevant to the present matter, those obligations included:-

    (a)clauses 2.3 & 2.17:- timely payment of interest to debenture holders

    (b)clauses 5.1 & 5.2:- using the debenture funds principally for the purpose of providing finance facilities secured by registered first mortgage, on terms that otherwise complied with the deed

    (c)clause 5.2.1:- limiting the loan amounts to specific proportions of the value of the mortgaged property (in the case of loans for construction or development purposes the maximum loan to value ratio (“LVR”) was 70% of the, appropriately certified, projected end value of the development)

    (d)clauses 6.0.3 to 6.0.9:- keeping proper accounts, and providing the trustee with both monthly reports (in a prescribed form) and also copies of any accounts and reports lodged with ASIC

    (e)clause 6.0.12:- giving the trustee prompt notice of (i) any default, or potential default, under the trust deed and (ii) any material adverse change in PCL’s financial circumstances, including its ability to comply with the trust deed obligations.

18. From early August 2007 PCL also had a $100m wholesale funding facility with Bendigo and Adelaide Bank.  Thereafter PCL’s debenture funding declined from the June 2007 total (of about $208M) to $125m in June 2011, but its overall funding liabilities remained relatively stable (in the order of $210m).  Debenture funding typically provided about 60% to 70% of PCL’s total funding.  About 40% of that debenture funding was repayable within 12 months and was recognised as a current liability in PCL’s financial statements.  By the end of the 2011 financial year PCL’s wholesale funding liabilities approximated $90m, and it had about 3,000 debenture holders:- see Schedule 2.

    PCL - overview of material events

19. Apart from the events directly concerned with the Burleigh Views loan, the material dates and events in PCL’s corporate history are briefly summarised in the following subparagraphs:-

    (a)December 2007, 2008, 2009 & 2010:- PCL issued various Prospectus:- see paragraph 131 below.

    (b)22 December 2011:- ASIC wrote to PCL raising concerns about the adequacy of its financial disclosures, particularly in the light of the draft prospectus PCL had submitted to ASIC earlier that month.  ASIC requested PCL to (i) undertake not to issue (or roll over) any further securities, and (ii) engage an independent expert to report on the company’s solvency.  The particular matters ASIC cited as the reasons for its concern included (i) PCL’s uncertain prospects of recovering the Burleigh Views loan, having regard to projected development costs of $4m, and the apparent absence of required valuations, (ii) the level of loan arrears and the adequacy of PCL’s provisioning and, (iii) the absence of current “as is” valuations for “distressed properties”.

    (c)23 December 2011:- PCL responded to ASIC and indicated that it (i) had ceased accepting investments from new investors, (ii) had withdrawn its current Prospectus, and (iii) would prepare, and consult with ASIC about, an information booklet to be issued to existing investors.

    (d)January, March and April 2012:- PCL published three “Information Booklets” providing additional disclosure about its lending performance and financial circumstance:- see paragraphs 147 to 154 below.  The third of these booklets, appears to have been prompted by AETL’s concerns about PCL’s (i) apparently longstanding failure to include the Burleigh Views loan balance in its loan arrears reports, and (ii) inadequate response to AETL’s request for an explanation:- see paragraph 65 below.

    (e)8 June 2012:- AETL commenced proceedings in the Federal Court of Australia to enforce the debenture holders’ securities. (AETL acted in reliance on Corp Act s 283HB(1), and contended that 90% of PCL’s loans were non-performing.)

    (f)3 July 2012:- Following the 29 June 2012 publication of its reasons for judgment, the Federal Court appointed receivers to PCL.  (In those reasons Rares J found that PCL (i) was likely to have a net asset deficiency, including losses on the Burleigh Views loan and two other properties, and (ii) had no realistic prospect of raising funds to finance any asset shortfall.  Rares J also found that the loan arrears disclosure in the 2012 Information Booklets had been confusing and incomplete:- Australian Executor Trustees Ltd v Provident Capital Ltd [2012] FCA 728 at [45]-[[57], [58], [62]-[64].)

    (g)18 September 2012:- an administrator was appointed to PCL.

    (h)24 October 2012:- PCL was put into liquidation.  Its estimated deficiency was $77.746m.

    Cashflow - business and board

20. Messrs O’Sullivan, Bersten and Seymour had been directors of Cashflow since its April 2005 incorporation.  After July 2010 they were its only directors.  Corporate entities associated with Mr Bersten and Mr Seymour each held separate 24.5% shareholdings in Cashflow.  Provident Asset Management Pty Ltd, associated with Mr O’Sullivan, held 51% of Cashflow’s issued shares (as well as all of PCL’s issued shares:- see paragraph 16 above.)  Because of that latter shareholding, PCL and Cashflow were related corporations.

21. Cashflow’s April 2005 incorporation name was Provident Inventory Finance Limited.  The name indicated the nature of its business - as a provider of short term secured inventory finance across a range of industries.  Cashflow funded its activities under:-

    (a)Agreements with PCL:- specifically (i) a 21 September 2005, $5m facility agreement, and (ii) after 8 October 2007, a $3.6m secured (second ranking) loan under a Deed of Loan and Guarantee

    (b)Agreements with factors:- specifically (i) a $25m, 30 June 2006 Receivables Acquisition and Servicing Agreement (secured by a first ranking charge), and (ii) a 25 February 2009 novation of that agreement (to BBSFF Securitisation Ltd).  Under the terms of the receivables agreement Cashflow provided a general indemnity against related losses.  That indemnity was itself supported (subject to a 10% limit) by a deed of guarantee and indemnity between the factor company, PCL, Mr O’Sullivan and a Mr Nolan.  (Until July 2009 Mr Nolan had been Cashflow’s managing director.)  That deed indicated that Mr O’Sullivan and Mr Nolan were guarantors “in their personal capacity”, that the guarantees were joint and several and that they continued despite the discharge of any co-guarantor.

1. PCL had obtained AETL’s approval of the 21 September 2005 agreement on the basis that Cashflow held insurance covering 90% of its inventory finance receivables.  On 6 November 2007 Cashflow entered into such a policy of insurance, with Coface Services (Australia) Pty Ltd.

2. In the years after June 2006, the facility limit in the 30 June 2006 agreement appears to have been periodically reduced - first to $17m (sometime in 2008), then to $9m (sometime in mid 2009) and finally to $7m, in the latter part of 2009.  The fact of at least the latter two reductions can be inferred from the content of PCL’s Benchmark Report disclosures of its potential guarantee liability:- see Schedule 5.  (The inference arises from the fact that the guarantee amount was limited to 10% of the Cashflow facility.)

   Cashflow - overview of material events

3. Additional material dates and events relating to Cashflow were as follows:-

   (a)2008:- Cashflow’s peak trading activity was in the 2008 financial year.  It had provided finance totalling about $19m, and had about 34 full time staff.  But in the latter part of 2008 Coface refused to renew its policy of insurance, and also refused to pay policy claims.  Following that refusal the company ceased its financing activities; Mr Nolan resigned as Cashflow’s managing director, and attempted to end his future liability under the guarantee.

   (b)July to November 2009:- Cashflow terminated the employment of its sales staff, and commenced Federal Court proceedings against Coface in relation to the rejected policy claims.

   (c)23 April 2010:- Cashflow received legal advice about the enforceability of a $700,000 demand by BBSFF under the novated receivables agreement.  The thrust of the advice was that the assignments provided for in the agreement were likely to be ineffective.  Such a conclusion would invalidate BBSFF’s demand under the agreement itself, but give rise to the likelihood of an alternative, and greater, restitutionary claim against both Cashflow and the guarantors.  Such a claim could substantially exceed the liability limit expressed in the 30 June 2006 guarantee.  Cashflow’s solicitor advised that one of the entities related to PCL should attempt to purchase the contentious debt from BBSFF (for $700,000 or less), as a means of avoiding the potential restitutionary liability.

   (d)28 & 29 April 2010:- Mr O’Sullivan, as the Chairman of Cashflow, wrote to BBSFF on 28 April 2010.  He asserted that BBSFF’s entitlements under the receivables agreement were worthless whilst the Coface litigation remained unresolved, and that the guarantees were defective.  He proposed that PCL would purchase BBSFF’s interest in the receivables agreement.  BBSF responded with a demand under the 30 June 2006 guarantee for a $700,000 payment by PCL, O’Sullivan and Nolan.

   (e)4 May 2010:- Cashflow received further legal advice.  It essentially confirmed the views expressed on 23 April 2010 about BBSFF’s original $700,000 payment demand, and Cashflow’s potential restitutionary liability for a greater amount.

   (f)June to August 2010:- Cashflow (through Mr O’Sullivan and Mr Bersten) and BBSFF exchanged letters debating BBSFF’s entitlement to call on the guarantee, and a compromise involving PCL’s purchase of BBSFF’s interest.  BBSFF’s original position was that it would transfer the contentious receivables to PCL for $3m.  (That amount was imprecisely explained to have been arrived at after taking into account (i) the outstanding debt amount that had fallen due, (ii) the potential guarantee liability of $0.7m, and (iii) 50% of the principal of (unspecified) loans that would mature by 30 June 2010.)  Cashflow responded to BBSFF with a $650,000 proposal.

   (g)3 September 2010:- Cashflow’s liability to PCL was in the order of $2.3m.  PCL, Cashflow and BBSFF entered into a novation deed (executed by Messrs O’Sullivan and Bersten on behalf of PCL and Cashflow) and under which:-

   (i)PCL paid BBSFF $775,000.00

   (ii)PCL acquired BBSFF's interest in the 30 June 2016 receivables agreement, the related first ranking charge over Cashflow's assets, and the 30 June 2006 deed of guarantee

   (iii)PCL was released from all obligations to BBSFF under the 30 June 2016 agreement.

   (h)The novation deed resulted in PCL becoming Cashflow’s creditor under the receivables agreement, and extinguished its own obligations as a guarantor of Cashflow’s liabilities under the agreement.  That extinction of PCL’s guarantee obligation had no effect on the position of Messrs O’Sullivan and Nolan, because the guarantee expressly provided for their independent continuing liability, irrespective of the discharge of any co-guarantor.  However, PCL appears to have negotiated for BBSFF to release both Mr O’Sullivan and Mr Nolan from their guarantee obligations, and separate deeds of release were exchanged at the settlement of the novation transaction.  Those deeds provided for mutual releases, but no other consideration.

   (i)16 April 2012:- Mr Bersten recommended to the PCL Board that PCL advance $500,000 to Cashflow to pursue litigation against Coface.  PCL subsequently loaned $587,253 to Cashflow.

   (j)3 July 2012:- By this time Cashflow owed PCL $8.4m.  Following their appointment (see paragraph 19(f) above) PCL’s Receivers took action to take control of Cashflow’s proceedings against Coface.

   (k)27 August 2012:- PCL’s receivers appointed receivers of Cashflow, and it formally ceased trading.

   (l)18 December 2012:- Cashflow’s receivers settled the Federal Court litigation against Coface for $934,199.  (Cashflow’s liquidators subsequently repaid the loan PCL had provided to fund the litigation.)

   (m)28 May 2013:- Cashflow was wound up.  The liquidator’s subsequent reports, of 24 September 2013 and 14 March 2014, opined that Cashflow had total creditors of $9.8m, unsecured creditors of $0.933m, and a $5.68m net asset deficiency.  The unsecured creditors were (i) Coface ($559,541), and (ii) lawyers (barristers: $113,630 & solicitors: $147,805) Cashflow had retained in relation to the proceedings against Coface.  The liquidator considered that Cashflow had been insolvent since about April 2010, as a result of its inability to comply with BBSFF’s demand.

   (n)31 December 2013:- Cashflow repaid PCL $500,000.

   (o)7 March 2014:- PCL’s liquidator provided ASIC with a supplementary report.  The liquidator noted that at the time of the September 2010 novation Cashflow had about $4.2m in loans that had been funded by BBSFF.  The liquidator made additional comments - to the following effect:-

   (i)PCL’s loan to Cashflow was not consistent with PCL’s 2008 (and subsequent) Credit Policy Manual, because it was a loan to a related party secured only by a second ranking charge

   (ii)There was no evidence of any minuted PCL Board discussion or approval of the decision to provide the Cashflow loan, or the later decision to release the guarantees provided by Messrs O’Sullivan and Nolan

   (iii)There were no available PCL Board minutes recording approval of the (apparently annual) extension of the Cashflow loan facility between 2008 and 2011

   (iv)There was no evidence of PCL having obtained legal advice in relation to the release of the O’Sullivan and Nolan guarantees

   (v)Mr Seymour did not appear to have taken part in the negotiation and execution of the September 2010 transactions with BBSFF.

   PCL - credit and procedure policies

4. By at least early 2007 PCL had various policy and procedure documents (“CPP manuals”) that governed its lending practices and loan management.  Departure from the CPP manuals required Board approval and written advice from Mr O’Sullivan.  The relevant CPP manuals, and the period to which each applied, were as follows:-

   (a)31 March 2008 to 8 September 2009:- Credit Policy and Procedure Manual Credit and Lending Department.  This 65 page manual had 15 sections and 8 Appendices.

   (b)9 September 2009 to 29 November 2009:- The Credit Policy Manual Credit and Lending Department version of the manual was somewhat shorter, and less detailed, than its predecessors.  This was partly because some provisions, and specifically those involving loan arrears and their reporting, were moved to an associated document that set out PCL’s “asset management policy” for non-performing loans.  The manual’s 43 pages comprised three main sections and six Appendices.  Appendix 2 set out the relevant LVR and loan limits for various categories of loan.  The Appendix did not specifically address construction and development purpose loans, but clause 3.27 of the manual itself indicated the fact of loan limits, and LVR requirements, for such loans.  Consequently, the absence of specific details in the Appendix may have been an oversight.  Later versions of the manual suggest that the loan limits were in fact included in a construction and development “product guide”.  Such a document was referred to in the manual Appendices, and appears to have been introduced some years earlier.

   (c)30 November 2009 to July 2010:- This Credit Policy Manual Credit and Lending Department manual had 51 pages, again with three main sections, and seven Appendices.  Appendix 2 again set out LVR requirements and loan limits but, like the previous CPP version, did not specifically address construction and development loans.

   (d)August 2010 to 31 January 2011:- The August 2010 manual had 43 pages, three main sections and five Appendices.  The manual amended Appendix 2 to include specific reference to construction and development loans.  It provided for a 65% limit under PCL’s credit policy, despite the 70% LVR limit under the debenture trust deed.  The manual still did not contain any specific loan amount limit, for construction and development loans, but there were general limits of $1.5m per loan and $3m per borrower.  Rather curiously, those limits are less than the $2.5m and $4m limits stated in the 22 December 2010 Prospectus for 2011:- see paragraph 58 below.

   (e)1 February 2011:- The 36 page 2011 manual was substantially similar to the August 2010 version.

5. The more important aspects of the CPP manual requirements are summarised (very broadly, and without specific regard to the precise periods of the currency of each requirement) in the following subparagraphs.  In that summary I have assumed, despite wording and format differences in the manual versions after September 2009, that the general nature of the requirements remained substantially the same.  (Reflecting that assumption the clause references I have included mainly relate to the 2007 and 2008 CPP manual versions.)

   (a)Extensions (cl 3.18 / cl 3.19 & cl 6):- Extensions after a loan’s initial term were treated as the making of a new advance.  As such they were generally, but not inflexibly, subject to the current loan policy requirements - including current valuation.  For example, cl 3.23 of the 2010 Manual conditionally permitted extension if a valuation was less than two years old and the loan had been conducted satisfactorily.

   (b)Default (cl 10.6 / 16.3 / 15.2):- At least up until the change in the manual format in 2009, loan default was defined to include (amongst other things) circumstances where (i) the borrower failed to make any required payment by its due date, (ii) the borrower failed to comply with any other loan obligation, (iii) the borrower became subject to external administration, or (iv) PCL determined there was likely to be a material adverse effect on the value of any security it held.  The absence of a specific default definition in the CPP manual after September 2009, did not involve any substantive policy change.  The substance of the definition was expressed in the Prospectus, and Information Booklet, documents PCL issued:- see paragraphs  19(d) above, and 131 and 147 below.

   (c)Interest capitalisation (cl 10.16 / cl 16.16):- From 22 February 2007 to 8 September 2009 (and subject to the managing director’s discretion), the CPP manual directed that calculation and charging of interest was to cease on loan accounts if a loan had been placed on a non-accrual status, no payment had been received in four months, or recovery of interest was either unlikely or reasonably unlikely.  After September 2009, PCL’s approach in relation to defaulting loans was contained in an asset management process document separate from the CPP manual.  The stated aim of that process was to minimise the risk of loss to PCL.  The Prospectus and Benchmark Report documents, in addressing loan arrears, appear to have included capitalised interest, where PCL considered that its recovery was “reasonably certain”:- see paragraph 114 below.

   (d)Loan to value ratios (cl 3.5 & 4.6):- Loans were subject to specific “LVR” restrictions, which varied according to the asset class and location.  Loans made for construction and development purposes were subject to a 70% LVR, relating to the projected end value of the development.  That LVR was required to take into account any interest to be capitalised during the loan term.  During the period from September 2009 to August 2010, the LVR for construction and development loans appears not to have been specified in the CPP manual itself:- see paragraph 25(b) above.  But the various Benchmark Reports and Prospectus documents indicate that it continued to apply - subject to a reduction to 65% in the period covered by the 2009 Prospectus:- see paragraph 139 below.

   (e)Loan limits (cl 4.2, 4.3, 4.6):- As at February 2007 individual loan limits varied from $5 to $15m depending on the type of loan.  Loans for development and construction purposes were limited to a maximum $15m amount and two year term.  From about September 2009 the CPP manual Appendices set out limits for various loan categories.  The limits originally ranged between $3m and $10m, but after August 2010 there was a $3m loan exposure limit for any borrower.  (In December 2010 those limits may have been further reduced - having regard to the contents of the 2011 Prospectus:- see paragraph 58 below.)  The loan limits after September 2009 did not appear to address construction and development loans specifically, but PCL’s Benchmark Reports from October 2009 onwards indicated that it had only one such loan (obviously the Burleigh Views loan).

   (f)Loan arrears reporting (cl 10.5 to 10.8 / cl 16.4 to 16.8 / cl 15.3 to 15.7):- Each default loan was to be included in weekly and monthly management arrears reports.  Where the loan default was more than 90 days, the loan was to be included in a monthly “Past Due” report, and included in the Board papers.  (After September 2009 the loan arrears category appears to have been extended to include loans that were fewer than 90 days in arrears.)  Where loan interest was more than four months in arrears, or the recovery of interest was “unlikely or reasonably unlikely”, interest was not to be accrued, unless the managing director considered doing so was appropriate.  The Board papers were required to include a specific report on default loans that had been placed on a “non-accrual” basis.  (These various requirements were explicit in the CPP manuals prior to September 2009.  The Board reports (as summarised in paragraphs 74 to 87 below) indicate that the requirements continued to operate, despite changes in the content of the CPP manuals.)  The actual content of the default loan reports to the Board, from 2007 to 2012, are summarised in Schedules 4.1 to 4.5.

   (g)Loan recovery (cl 10.10, 10.12 / cl 16.10, 16.12 / cl 15.8, 15.9):- Until the September 2009 CPP manual there were detailed provisions about the recovery process for loans in default.  Required recovery action was to begin (in the absence of compelling reasons to the contrary) within a month of the borrower’s default.  A time line guide indicated that security properties were to be realised within six months of default.  The loan recovery process was to be finalised within five weeks after the sale of the security property.  After September 2009 the (presumably similar) asset recovery process was detailed in PCL’s asset management document.

   (h)Valuations (cl 3.14 / cl 3.15 / cl 3.18, cl 4.6 / cl 3.27):- Any new loan was subject to prior current independent valuation by an approved valuer.  As at February 2007 any loan for development or construction purposes was required to have both “as is” and “on completion” values.  PCL’s relevant lending manager (or Mr O’Sullivan) was required to review any valuation and certify its compliance with a “checklist” of requirements - including the LVR and other aspects of the property details.  The requirement for both “as is” and “on completion” valuations for construction or development loans was evident in the valuation “checklists” and was carried through to the August 2010 CPP manual.  Each of the PCL prospectus from February 2008 to December 2010, and the 2012 Information Booklets, in their comments on Benchmark 7, indicated that PCL required both “as is” and “as if complete” valuations for construction or development loans.

6. The title and contents of the various CPP manuals indicate that they were primarily addressed to PCL’s management personnel.  But Mr Seymour acknowledged that the policy they reflected, despite the manuals being something of a “moving feast”, had been written and approved by the PCL Board.  He was certainly generally aware of the essential elements of the policy requirements relating to loan valuations, the relevant LVR requirements and arrears reporting.  His knowledge of the substance of PCL’s practices and obligations in relation to those matters, was apparent from the answers he gave in cross examination, and from his participation in the approval of the contents of the various Benchmark Reports, PCL Prospectus and the Information Booklets:- see Schedule 5 - PCL Quarterly & Benchmark Reports, Prospectus & Information Booklets and paragraph 71 below.

   Burleigh Views loan history

7. The Burleigh Views development was the subject of an 11 March 1998 “Town Planning Consent Permit” for the two stage construction of 36 townhouses.  Under the terms of the relevant Queensland legislation the planning permit would automatically lapse within four years (ie., by March 2002) unless either the dwellings had begun to be used, or the permit period had been extended.

8. By the latter part of 2003 Burleigh Views had made little progress with the development and the loan principal had increased to about $3m.  In December 2003, after having served formal default notices with a view to exercising its mortgagee power of sale, PCL had obtained a further valuation of the property.  That valuation, which wrongly assumed the continued existence of a valid planning permit, was $5.9m “as is”, and a gross $17.2m “on completion” of the proposed development.  Relying on that valuation, in April 2004 PCL entered into a deed of variation with Burleigh Views.  The deed contemplated further advances of $4.8m (resulting in a loan principal of about $8.89m) and repayment by 30 November 2004.

9. August 2004 to April 2007:- Construction work started on the first of the townhouses in August 2004.  The 30 November 2004 date passed without repayment, and the loan balance increased as a result of the capitalisation of accrued interest.  In November 2005 PCL demanded repayment of (what had become) the outstanding $9.6m loan principal, and served formal notice of its intention to exercise its mortgagee’s power of sale.  In August 2006, after a period of disruption of the construction work by landslip remediation work undertaken by the local Council, PCL (apparently temporarily) entered into mortgagee possession of the Burleigh Views property.

10. 4 May 2007:- PCL’s April 2007 management accounts treated the then outstanding $9.7m loan principal as a loan in arrears - but with a projected completion valuation of $17.2m and an “LVR” of 57%.  On 4 May 2007 PCL agreed to refinance the loan for an additional 12 month term.  Significant aspects of the agreement were:- (i) additional Stage 1 construction costs of $0.75m, (ii) a peak Stage 1 debt, and overall loan limit, of $13.1m, (iii) Stage 1 sales of $10.8m during the Stage 2 construction, (iv) Stage 2 construction costs (including contingencies) of $4m, and (v) a peak Stage 2 debt of $7.2m.  The agreed interest rate was 16.5%, reduced to 10.5% for prompt payment, and able to be capitalised at that rate if the loan was not in default.  The refinancing agreement was subject to valuation (on both an “as is” and “on completion” basis) for the second stage of the development and compliance with a 70% LVR on the completion value.  The refinancing appears not to have been more formally documented, and the borrower did not provide the contemplated valuation until around September 2007.  Nevertheless, PCL’s May 2007 management accounts recorded the Burleigh Views loan as a “new loan”, with an outstanding principal of $11.7m, and a limit of $13.5m.

1. February to May 2008:- On 29 February 2008 PCL issued a supplementary prospectus in response to ASIC’s issue of Regulatory Guide 69.  In the section of the prospectus dealing with Benchmark 7, PCL addressed the Burleigh Views loan (although without referring to it by name).  The prospectus statement indicated that (despite the terms of the May 2007 refinancing and its own credit policies) PCL had agreed to the “new loan” months before obtaining any updated valuation, and had not obtained its own recent valuation.  The statement was in the following terms:-

   The Company has made only one loan where the loan accounts for more than 5% of the total value of the Company’s loan portfolio. The loan amount is $12,026,966 based on an initial valuation made as at 23 December 2003 for construction funding purposes and which assessed the “as if complete” value at $17,222,000; the work is nearing completion, and the borrower has supplied a valuation report dated September 2007 assessing the “as if complete” value at $26,000,000 (exclusive of GST). The security property is located on the Gold Coast in Queensland.

2. Shortly before lodging the supplementary prospectus PCL had received a conditional $13.2m offer to purchase the development, and must have been aware of Burleigh Views’ likely inability to meet the May 2008 repayment obligation.  That probability would only have been confirmed when, on 17 April 2018, PCL received from Burleigh Views a tentative suggestion that it had found a buyer prepared to pay $12m for the property.  No doubt influenced by those indications, PCL began investigating the sale of the property and obtained an April 2008 marketing submission from Ray White Marketing.  That submission stated it was a preliminary opinion and assumed the currency of development approval.  It also (i) stated that it could not be relied on as a formal valuation, and (ii) strongly recommended that PCL obtain a formal valuation.  Against the background of those statements, the submission provided an estimated gross realisation of $9.9m to $11.7m for the substantially complete 18 dwelling Stage 1, and $1.9m to $2.25m for the Stage 2 development site, on the assumption that it had a valid development consent:- see Schedule 7 - Burleigh Views property valuations / estimates / feasibilities.  The lower end of this appraisal range would have served to confirm the reasonableness of the $12m proposal from Burleigh Views.

3. May to September 2008:- After Burleigh Views failed to make the May 2008 repayment PCL continued to capitalise interest (although only at the lower 10.5% rate).  In June 2008, PCL took control of the property, as mortgagee in possession.  On 18 August 2008, Mr O’Sullivan exchanged emails with Mr Fulker (PCL’s chief operating officer), acknowledging that the loan had reached the $13.5m principal limit, the loan arrears report table was to be updated by including capitalised interest for July 2008, and that a decision would have to be made about any future interest capitalisation.

4. Three days after that email exchange, Burleigh Views went into liquidation, and the loan balance had accumulated to $13.8m.  On 28 August 2008 Mr O’Sullivan spoke to the liquidator.  He reported that PCL had been in control of the property since about mid June 2008.  At the end of August 2008, and despite the recent email communications suggesting it had been treated as in default during May, June and July 2008 (see paragraph 34 above), the Burleigh Views loan was certainly not included in, and had been deliberately removed from, PCL’s loan arrears report.  On 5 September 2008, Mr O’Sullivan gave instructions to give ASIC formal notice that PCL had gone into possession of the property.  (That notice was lodged with ASIC on 9 September 2008.)  Late in the afternoon of 16 September 2008 Mr O’Sullivan received a $9.717m offer to purchase the 18 townhouses in the first stage of the Burleigh Views development.

5. October 2008 to June 2009:- In early October 2008, shortly after the 30 September 2008 approval of the June 2008 financial statements, PCL’s auditors provided an audit management report.  That report, which was addressed to Mr Fulker, expressed concern about the absence of adequate information for balance date impairment assessment of default loans.  It identified, as an important issue, the absence of current “as is” valuations for PCL’s arrears loans.  On 14 October 2008 Mr Fulker, no doubt following up on the August 2008 email exchange with Mr O’Sullivan, gave an email instruction (with a copy to Mr O’Sullivan) that interest on the Burleigh Views loan was to continue to be capitalised, and the loan was to be removed from the September 2008 arrears report.  His explanation for this instruction was that “we are working on this loan file to continue the facility into the next phase”.  On the following day, Mr Fulker attended the PCL Board meeting, and circulated the October 2008 audit management report to the directors.

6. PCL’s process of responding to the October 2008 audit management report included the investigation of valuations for the loans in arrears.  On 4 November 2008 Mr O’Sullivan rejected an enquiry about selling Stage 2 (for $2.6m) - because (i) the two development stages were still on the same title, and (ii) he considered that completing the development gave PCL the best chance of recovering its loan.  On 6 November 2008 Mr O’Sullivan contacted the valuers who had provided the September 2007 Burleigh Views valuation (referred to in paragraph 32 above).  He was told they regarded the valuation as no longer current and that it could not be merely endorsed in favour of PCL.

7. Another of the steps PCL took in response to the October 2008 audit management report was the preparation of a schedule of its largest default loans.  The first version of that schedule - the “Top 5 Loans” as at 31 October 2008 - was tabled at the 13 November 2008 PCL Audit Committee meeting, which Mr Fulker attended.  The $14.064m Burleigh Views loan was the last, but by far the largest, of the listed arrears loans.  The table indicated the loan’s “maturity date” (11 November 2008) and “current LVR” (72.9%).  The meeting minutes expressly recognised the loan as being in default, despite the fact that, like three of the other listed loans, its stated “maturity date” was after 31 October 2008.  (That inconsistency suggests PCL’s practices did not regard the “maturity date” as the determinative consideration in identifying the arrears status of a particular loan.)  The minutes of the meeting record that Mr Seymour, the audit committee chairman, was to communicate with Mr O’Sullivan, and ask him to provide an update on the status of the five default loans at the 19 November 2009 Board meeting.

8. The day after his attendance at the 13 November 2008 PCL_AudCC meeting Mr Hornby (PCL’s chief financial officer) circulated the papers for the 19 November 2008 Board meeting, and drew attention to the arrears loan spreadsheet they contained.  Consistent with Mr Fulker’s 14 October 2008 email, but rather surprisingly, in view of the discussion at the PCL_AudCC meeting, the loan arrears spreadsheet did not include the Burleigh Views loan.  (Neither did it include three of the other largest arrears loans).  But the contents of the 13 November 2008 meeting minutes compel the conclusion that Messrs Bersten, Sweeney and Seymour were at that time well aware of both the substantial loan balance and the default status of the loan.  In addition, the Board minutes of the 19 November 2008 meeting record the fact of Mr Bersten and Mr Seymour’s briefing to the Board meeting about “the matters discussed at” the 13 November 2008 audit committee meeting.  (The fact of a lengthy and detailed discussion having in fact occurred at the meeting is suggested by both that aspect of the minutes and the almost four hour duration of the meeting:- see Schedule 6.1.)

9. There was a one and three quarter hour PCL_AudCC meeting on 17 December 2008.  Prior to the meeting Mr Fulker had responded to the auditors about the October audit management letter, and advised them that PCL was in the process of preparing a list of arrears loans and valuation dates, for Board review.  PCL was also reviewing the process for preparation of impairment statements (including valuation reports).  The PCL_AudCC meeting minutes record that Mr Fulker reported that communication to Mr Seymour and Mr Sweeney.  They also record the tabling of the latest loan arrears report, discussion of the report, and Mr Sweeney’s recommendation that it be amended to include some additional information about the particular loans. 

10. The 17 December 2008 PCL Board meeting began about 15 minutes after the end of the PCL_AudCC meeting.  Messrs O’Sullivan and Bersten joined Mr Seymour and Mr Sweeney, for the Board meeting.  The Board minutes record that Mr Seymour reported on the matters discussed during the audit committee meeting.  After his report, Mr Bersten tabled a draft of PCL’s Prospectus 11 and requested the other directors’ comments within the next two days.

11. The papers circulated for the 17 December 2008 Board meeting did not include the Burleigh Views loan as being in arrears.  However they did include, perhaps for the first time, a schedule of “Top 10 Loans”.  That Schedule listed the Burleigh Views loan and recorded (i) a loan balance of $14.192m, (ii) an 11 November 2008 “maturity date” (patently indicating that the loan was in fact in arrears), (iii) a total security value of $19,285,714.29 and a total loan to valuation ratio (“TLVR”) of 70%.  There were a number of difficulties with this report.  First of all the loan was not listed as having any “arrear days” - despite the expired maturity date.  Second, the recorded maturity date of 11 November 2008 conflicted with the twin realities of (i) May 2008 being the last contractually agreed repayment date, and (ii) PCL’s post September 2008 formal control of the property as mortgagee in possession.  Third, the two decimal place precision of the stated security value was patently artificial.  It bore no relationship to any actual valuation.  It was, in fact, simply a “backward calculation” based on the May 2007 loan principal of $13.5m.  Fourth, even disregarding the artificial precision of the security value, the stated 70% TLVR ratio was in fact arithmetically wrong, and understated.

12. The use of the arithmetically derived $19.2m valuation figure in the Top 5 and Top 10 Loans schedules discussed at the 19 November and 17 December 2008 meetings was particularly anomalous in the light of the remarks about the Burleigh Views loan in both the February 2008 supplementary prospectus (see paragraph 32 above) and in the Benchmark Report for the 30 June 2008 half year:- see paragraph 122(a) below.  Mr Bersten had circulated the Benchmark Report, with its specific statement about the September 2007 valuation of $26m, to Messrs Seymour and Sweeney on 28 October 2008.  Each of them had approved its contents.  Three days later, Mr Sweeney expressed his concern, in the context of the audit management report criticisms, about out of date valuations for properties where the loans were in arrears.  The Prospectus 11 draft circulated at the 17 December 2008 meeting noted the post June 2008 economic downturn, the related potential increase in credit risk, changed property values and PCL’s decision not to provide any new construction loans:- see paragraphs 135 & 137 below.  All of these considerations (specifically including the contents of the discussion at the 13 November 2008 PCL_AudCC meeting) point towards the probability that at the end of 2008, all of the directors were well aware of the default status of the Burleigh Views loan, the uncertainty surrounding the property’s current valuation, and the uncertain prospect of its satisfactory realisation.

13. That probability is enhanced by regard to Mr O’Sullivan’s recollection about his approach to the Burleigh Views loan after PCL went into possession.  In his April 2015 affidavit, and in evidence in his own Tribunal proceedings, Mr O’Sullivan asserted that after PCL went into possession as mortgagee, and certainly by December 2008, he had come to, and thereafter consistently maintained, and discussed with the other Board members, a recovery strategy that involved completion of the second stage of the Burleigh Views development before attempting to sell any of the residential units.  The reasons for this view included (i) avoiding the risk of “Stage 1” buyers being discouraged by ongoing construction on “Stage 2”, and (ii) avoiding the risk of being required to provide a significant discount for any “one line” sale of the entire development in its “as is” incomplete state.

14. At the February 2009 PCL Board meeting. as part of Mr O’Sullivan’s report, there was specific discussion of PCL’s loan arrears and provisioning.  Later, at the June 2009 meeting, the Board noted that PCL had made a formal response to the auditors about the audit management report.

15. July 2009:- PCL’s internal accounting records attribute to Mr O’Sullivan an instruction to extend the Burleigh Views loan to 30 June 2010.  This instruction (together with later similar instructions) likely accounts for the fact that the Burleigh Views loan was typically not included in the loan arrears reports provided to the directors for the monthly Board meetings.  Nevertheless, until May 2010, the Top 10 Loans reports that were included in the Board papers consistently recorded 11 November 2008 as the loan maturity date - and thus patently indicated that the loan was in fact in arrears:- see Schedules 4.2 & 4.3.

16. August & September 2009:- On 13 August and 28 September 2009 PCL received letters from the Gold Coast City Council advising that the 1998 planning permit for the Burleigh Views property had lapsed in 2002 - because the development had not been completed and used by that date.  The Council informed PCL that (i) no further development of the site could occur under the 1998 permit, (ii) a new Gold Coast planning scheme had come into effect in 2003, and (iii) any new planning permit application would be subject to assessment under the 2003 planning scheme.  Mr O’Sullivan said (in his April 2015 affidavit) that he discussed the approval lapse with the other PCL directors.  That claim is apparently consistent with the timing of Mr Seymour’s 6 November 2009 suggestion that the directors should visit the Burleigh Views property:- see paragraph 84 below.

17. October to December 2009:- On 30 October 2009, the same day that Mr Bersten sent his memo about the form of the loan arrears report (see paragraph 84 below), PCL received a letter from its planning consultants suggesting that PCL obtain legal advice about the validity of the Burleigh Views planning permit.  On 10 December 2009, in a further email to Mr O’Sullivan, the consultants reported the substance of that advice - that the Council was likely correct in contending the 1998 planning permit had lapsed.  The consultants added their own views that the Council was (i) unlikely to refuse a further permit for the 18 townhouses that had already been substantially constructed, (ii) likely to make any such approval conditional on an open space restriction that would effectively preclude further residential development of the site, and (iii) unlikely to approve the construction of the additional 18 townhouses contemplated by the 1998 development proposal and planning permit.

18. On 23 December 2009 PCL lodged its debenture Prospectus 12.  It included a new statement about the valuation of the Burleigh Views property.  It said that the latest valuation of the property had been undertaken in December 2009 and had assessed the “as if complete” value at $26.8m, exclusive of GST:- see paragraph 139 below.  This statement was an inaccurate interpretation of an exchange of emails on 15 December 2009 between Mr O’Sullivan and the valuer who had carried out the December 2003 valuation.  In that exchange the valuer, alluding to a “final report” that appears never to have been provided, set out a “gross realisation” spreadsheet.  The spreadsheet gave a total value of $26.68m (inclusive of GST).  That total value reflected assessments of $12.27m for the first 18 townhouses, and $14.31m for the additional 18 townhouses contemplated for the completed Stage 2.

19. April 2010:- On 1 April 2010 PCL received formal legal advice confirming that the development permit for the Burleigh Views Property had indeed lapsed - for the reasons previously claimed by the Gold Coast Council.  Later in April Mr Hornby circulated the Board papers.  He told the directors that the loan arrears report (in the form previously requested by the directors - see paragraph 84 below) was now being automatically generated by the accounting system.  He also drew attention to the Top 10 Loans schedule, and informed the directors, without explanation, that the Burleigh Views loan maturity date should read 31 December 2010 (instead of the printed date of 11 November 2008).  On 21 April 2010 the Board approved the Benchmark Report for the half year ended 31 December 2009.  That report adopted the $26.68m value, and described it (incorrectly) as exclusive of GST:- see paragraph 122(b) below.

20. August and September 2010:- On 11 August 2010 Mr Hornby sent an email to Mr O’Sullivan informing him about a planning meeting with PCL’s auditors in relation to loan impairment and provisioning.  He advised Mr O’Sullivan that the auditors had selected the Burleigh Views loan file for examination, and suggested that it would save a lot of time if the auditors were provided with an overall summary of the loan.

21. The auditors provided their report on 14 September 2010.  It did not express any criticism of PCL’s accounting treatment of the Burleigh Views loan, but it did report that one of the outstanding matters was the absence of valuations for the Burleigh Views property, and for another property.  This report was considered at the 15 September 2010 PCL_AudCC meeting.  The people present were Messrs Seymour, Sweeney and Bersten, three representatives from PCL’s auditors, Messrs Hornby and Fulker, and PCL’s finance manager, Mr Kennedy.  According to the meeting minutes, there was detailed discussion of various matters, specifically including loan arrears reporting and the Burleigh Views loan.

22. After the 15 September 2010 PCL_AudCC meeting Mr O’Sullivan obtained an “update” of the Burleigh Views valuation:- see Schedule 7.  That update involved another exchange of emails, in which the valuer, after alluding to an “almost complete” (but never produced) valuation report, provided another spreadsheet, which ascribed a total value of $23.08m to the development.  Several hours later the valuer provided a further spreadsheet.  This version reverted (without explanation) to the $26.68m total in the December 2009 spreadsheet:- see paragraph 49 above.

23. 14 October 2010:- In early October 2010 Mr Seymour, who said he was concerned that PCL should attempt either to sell the property, or at least let out the completed townhouses, visited the Burleigh Views property.  He reported to the Board at the 14 October 2010 meeting.  The meeting minutes record, although with unfortunately brief ambiguity, that he noted the progress of the works and the position of the project.  In his May 2016 affidavit, Mr Seymour expanded somewhat on that brevity.  He said that at the time of his October 2010 inspection all of the 18 constructed townhouses had been repaired and repainted, apparently in readiness for sale.  However, he also formed the view, in apparent consistency with what Mr O’Sullivan had previously said to the Board, that any sale of these “Stage 1” dwellings would be difficult - because of the realities of access to the property.  Any potential purchasers would likely be deterred by the prospect of significant disruption during any subsequent construction of the remaining 18 townhouse contemplated for the second stage of the development.  It is abundantly clear that, from at least this time onwards, all of the PCL directors, and certainly Mr Seymour, understood that recovery of the Burleigh Views loan depended on the completion of “Stage 2” of the development.

1. December 2010 to April 2011:- On 15 December 2010, after the PCL Board meeting that day, PCL’s planning consultants reported to Mr O’Sullivan on the outcome of their meeting with Council about obtaining the development approval necessary to complete the Burleigh Views development.  The consultants reported that whilst the Council was generally happy with the proposal to construct Stage 2 of the development, it was concerned about conflict with the new planning scheme.  In particular, a major issue was the location of the site within an environmental corridor, whose importance the Council regarded as having “vastly increased” since the 1998 approval.  Council indicated they would require (i) a report from an environmental consultant, (ii) a geotechnical analysis of the site (having regard to past issues with landslip), and (iii) a bushfire hazard report.

2. About a fortnight after the March 2011 PCL Board meeting Mr O’Sullivan responded cryptically to an enquiry from the Burleigh Views liquidator about PCL’s progress in realising the property.  Mr O’Sullivan told the liquidator that the timeframe for disposing of the property was uncertain and depended on the completion of the Stage 2 works.  He also told the liquidator, against the reported current loan balance of $19.481m, that PCL did not expect the sale of the property would result in any surplus, after repayment of the loan.

3. May to August 2011:- On 27 May 2011, following on from the earlier meeting in December 2010, Mr O’Sullivan and Mr Bersten wrote to the Gold Coast City Council providing PCL’s formal consent to the lodgement of a new planning permit for the construction of the Stage 2 development of the Burleigh Views property.  In mid July 2011 the Council issued a lengthy letter raising 30 separate issues where PCL was required to provide additional information.  Amongst the matters the Council raised were concerns about slope instability, geotechnically certified buildings, pedestrian and vehicular access, visual amenity, and landscaping to meet ecological and fire hazard concerns.  Despite the length, and apparent complexity, of the matters the Council had raised, PCL’s planning consultant reported that the Council had not raised any general objection to the application.  However, it was not until 20 January 2012 that PCL responded to the Council’s information request:- see paragraph 64 below.

4. On 27 August 2011 Mr O’Sullivan asked PCL’s valuer for a further update of the Burleigh Views property.  He told the valuer that the first 18 units in “Stage 1” were 95% complete, but that PCL considered it best to market the two stages in combination, once the “Stage 2” construction had been finalised.  In relation to that prospect he said that PCL was “simply” waiting on Council confirmation, and anticipated construction commencement around October / November 2011.  When the valuer had not responded promptly, Mr O’Sullivan said he would be happy with a report similar to the September 2010 letter.  The following day, the valuer provided a further copy of that letter, but one with the date changed to 30 August 2011.

5. In the meantime, on 29 August 2011 a prospective investor, having read PCL’s 2011 Prospectus, sent an enquiry that specifically focussed on the disproportionate size of the Burleigh Views loan.  The question the investor raised, and the internal response it provoked within PCL was as follows:-

   (a)Investor email:-

   In your Prospectus 2011 pg.9 you mentioned that the maximum limits for each loan is $2.5 million, and the maximum limits for each borrower is $4million. However, in page 7, there are details of one loan that is valued at $17,518,058, which significantly exceeds both the $2.5 million/loan limit and the $4 million/borrower limit.  Is there any particular reason why the loan is concentrated in this one loan & borrower?

   (b)Hornby (PCL Chief Financial Officer) email to Bersten:-

   This is Burleigh Views - Malcolm I am sure you would be best able to eloquently summarise this one

   (c)Bersten email response to Hornby:-

   The maximum loan and borrower limits on page 9 are our current policy limits, as is noted in the same phrase.  The largest loan of $17,518,058 is a construction facility made originally in 2004.

   (d)PCL email response to investor:-

   Regarding question 2: The maximum loan and borrower limits on page 9 are our current policy limits, as is noted in the same phrase.

   The largest loan of $17,518,058 is a construction facility made originally in 2004. Also please refer to p10 point 6 regarding the latest valuation as at September 2010.

6. 26 September 2011:- Another investor made a specific enquiry about the Burleigh Views loan - in the light of the disclosure contained in the April 2011 Benchmark Report (see paragraph 126 below), and the absence of the June 2011 report (it was not approved by the Board until October 2011).  The question the investor raised, and the internal response it provoked within PCL were as follows:-

   (a)Investor email:-

   I could not locate the ASIC RG 69 Disclosure Report for the quarter ended 30 June 2011 on your company’s website and would appreciate you forwarding me a copy.

   Can you please also advise:-

   - if the Wholesale Funding Facility was extended and if so when to; and

   - what is the current progress of the 1 property development loan currently being developed by Provident and its current valuation.

   (b)PCL’s “client services manager” officer’s email to Bersten:-

   I received this enquiry, are you able to assist with a response?

   (c)Bersten email response:-

   Until Mike returns, I would rather not attempt to describe where the project is up to. However, you could give the following response to the enquiry:

   The most recent valuation for the property being developed with the development loan was made in August 2011 and confirmed the “as if complete” valuation remains at $26,680,000.

   (d)PCL email response to investor:-

   Regarding the development loan, the most recent valuation for the property being developed with the development loan was made in August 2011 and confirmed the ”as if complete” and the valuation remains at $26,680,000.

7. October 2011 to May 2012:- From mid October to early December 2011 PCL officers began feasibility assessments for the proposed completion, and sale, of the Burleigh Views development.  These assessments involved various assumptions about (i) the net GST liability that would apply to the realisation of the completed development, (ii) the anticipated construction costs ($3m), and (iii) the timing of the sales of completed townhouses.  The last of these assessments (in December 2011) anticipated that the completed development would result in a small surplus (of about $121,000) after repaying the projected loan balance:- see Schedule 7.

8. In January 2012 PCL received an updated valuation report.  This referred to inspections in July and October 2011 - perhaps indicating that it had been commissioned before Mr O’Sullivan’s 27 August 2011 email, and long delayed.  The report noted that PCL’s mid-2011 application for a new planning permit was still pending, and that the Council was waiting for PCL’s response to its request for further information to be submitted.  On the assumption that the required planning permit would be obtained, the 2 January 2012 valuation adhered to the previous $26.68m (GST inclusive) assessment of the gross realisable sale proceeds.  This valuation did not take into account construction timing and costs.  Consequently it provided no basis for any greater net result than what had been projected in the feasibility assessments.

9. On 20 February 2012 Herriotz International provided Mr O’Sullivan with an “approximate price” of $4.25m (plus GST) for the construction of the remaining units in Stage 2 of the Burleigh Views development.  Following that estimate PCL revised the earlier feasibilities to include those costs.  That revision, which assumed construction commencement in June 2012, reduced the previously estimated surplus to a $95,000 loss:- see Schedule 7, row 38.

10. On 6 March 2012 a loan arrears report Mr Fulker circulated to the directors recorded that on 20 January 2012 PCL had provided the Council with a response to the July 2011 additional information request.  It anticipated that Council would approve the application in late March or April 2012 and that construction of the remainder of the development would take six to eight months.  But in view of the delay the report stated that “as a contingency against future costs” a provision had been made against the loan.  That $2m provision was part of provisions totalling $11.8m that were included in the Top 10 Loans report in the papers for the PCL Board meeting on 15 March 2012.  (It was at that meeting that the PCL Board approved the publication of the second Information Booklet referred to in paragraph 151 below.)

11. Shortly after the March 2012 Board meeting, the publication of the 16 March 2012 Information Booklet, and following an independent report on PCL’s solvency, AETL wrote to PCL requiring it to provide information about a range of matters.  These included (i) the progress of valuations for the Burleigh Views property (and two of the other Top 10 Loans), (ii) the actions PCL was taking to recapitalise its balance sheet following loan provisioning it had made in its December 2011 financial statement, (iii) immediate correction of the past non-disclosure of loan arrears, particularly relating to the Burleigh Views loan, and (iv) a detailed explanation of the reasons why that non-disclosure had occurred.  PCL’s immediate response, a bland assertion that it believed it had met all its disclosure obligations, did not satisfy AETL.  It wrote again on 27 March 2012, expressing its “deep concern” about the apparent non-disclosure, and effectively demanded an explanation.  This complaint from AETL appears to have prompted PCL to publish the third version of the Information Booklet - to which I refer in paragraph 152 below.

12. At about the same time, AETL required PCL to obtain an updated valuation.  PCL obtained that valuation in early May 2012.  It reported that the Council had still not decided the new planning application, and was waiting for further geotechnical and hydrological reports to be submitted by PCL.  The report gave a (GST inclusive) valuation range of $3.83m to $16.2m for the completed development (on the assumption that the required planning permit would be granted by the Council):- see Schedule 7 row 39.

13. June 2012:- In the course of the 29 June 2012 reasons for judgment (see paragraph 19(e) above) Rares J noted the differing views expressed in the January and May 2012 valuations.  Rares J opined that (i) the sensible practical course was for PCL to complete the development, and (ii) the realisable value of the completed development was somewhere within the $16.2m to $26.68m range, and likely at or below the middle of that range.

    Burleigh Views property valuations

14. The various relevant valuations, sales estimates and feasibilities for the Burleigh Views property are summarised in Schedule 7 - Burleigh Views property valuations / estimates / feasibilities.  The Schedule indicates the general nature of the valuation (column F), the author (column G), the valuation range (columns R & S), and the approval and completion assumptions on which it was based (columns T & U).  PCL did not obtain any “as is” valuation after September 2007.  However, the April 2008 marketing submission can be interpreted as providing an “as is” estimate.  In the absence of more specific information, I have used that estimate in the Schedule (see column R, rows 22 to 38).

15. The various estimates and valuations were commonly expressed as GST inclusive, and usually did not quantify the impact of any GST liability on the realisation of the completed development.  Neither did they articulate, except in the case of the feasibility assessments from late 2011, specific assumptions about the projected development timing and costs.  In the absence of specific information in the actual reports, I have adopted the $4m completion cost contemplated in the May 2007 re-financing agreement:- see paragraph 31 above.  I have also adjusted the reported valuation to a GST exclusive amount, and included that in the Schedule (column V).  I have also included, in the case of the feasibility assessments, the projected loan value at the completion of the development (column X, rows 32, 34, 35 & 38).  Finally, I have calculated a TLVR value, and included that in the Schedule (column Y).

16. The valuation information summarised in Schedule 7 needs to be understood against the background of various matters.  They include (i) the events of February to May 2008 (see paragraph 32 above), (ii) PCL’s assumption of control of the property in June 2008, (iii) the impact of the global financial crisis after June 2008 (see paragraph 135 below), (iv) the reasoning that influenced PCL to remove the Burleigh Views loan from the arrears list at the end of 2008, and (v) Mr Seymour’s October 2010 inspection, and his apparent view that the Burleigh Views property was not readily saleable unless and until the second stage of the development had been completed:- see paragraph 54 above.  Against the background of those matters, the information in Schedule 7 (read with an understanding of the Board reports summarised in Schedules 4.1 to 4.3) justifies the following propositions:-

    (a)Despite the requirement in the May 2007 refinancing agreement (see paragraph 31 above) PCL did not obtain an “as is” valuation for the Burleigh Views property at any time after that date.

    (b)The only “as is” assessments PCL obtained after May 2007 were in the September 2007 Colliers valuation and the marketing submission in April 2008.

    (c)PCL had the September 2007 Colliers valuation by about February 2008, and subsequently included references to its “as complete” valuation in the Benchmark Reports through to October 2009.

    (d)The “as is” estimate in the April 2008 marketing submission suggested a real risk PCL would not recover the loan balance from an “as is” sale of the property:- see Schedule 7 row 20, columns R, S, U, X, Z & AA.

    (e)The risk of an increasing shortfall from an “as is” realisation of the property became ever more apparent as the loan default continued during 2008, including after Burleigh Views’ liquidation in September 2008.

    (f)In November 2008 Mr O’Sullivan had been told by Colliers that the valuation was out of date and that they refused to endorse it in favour of PCL:- see paragraph 37 above.  The $26m valuation never formed the basis of the LVR values included in the monthly PCL Board Reports.

    (g)Despite having assumed control of the property in about June 2008, until the feasibility assessments between October 2011 and February 2012, PCL seems not to have obtained any meaningful assessment of the costs likely to be involved in completion of the development:- see Schedule 7 column T.

    (h)After October 2010, and even without taking into account construction costs and timing, the information being reported to the directors indicated that the Burleigh Views TLVR (based on the “as complete” valuation amounts) well exceeded (i) the 65% ratio suggested in the August 2010 CPP Manual (see paragraph 26(d) above), and (ii) the 70% ratio contemplated in the 1998 Trust Deed:- see Schedule 4.3 and the December 2010 Board Report, and Schedules 4.4 & 4.5.

    
    

    Provident’s Board meetings

17. The PCL Board met regularly.  The date and duration of the formal Board meetings after February 2007 (where the meeting had been identified in the evidence) are summarised in Schedules 6.1 to 6.5.  The Schedules indicate the director attendees (and relevant invitees) and the length of the meeting minutes.  They provide a cryptic summary which indicates the regular presentation of a “Chairman’s report” (see paragraph 75 below) and notes other topics of apparent significance to the present proceedings, including the approval of Quarterly or Benchmark Reports and other similar documents (see the shaded rows in each Schedule).  (Specific details of the approval of the various reports are summarised in Schedule 5 - PCL Quarterly & Benchmark Reports, Prospectus & Information Booklets.)  Perusal of the information in the Schedules shows that:-

    (a)Mr Seymour attended every Board meeting between April 2008 and April 2012, including the meetings at which the 2012 Information Booklets were approved.

    (b)The typical Board meetings lasted for about two hours, but the meetings in October or November each year were usually significantly longer.

    (c)The variable brevity of the minutes, in comparison with the recorded meeting duration, invites the inference that the minutes noted the substance of significant discussions and resolutions at the meeting, but did not attempt to record all the details of the discussions.

18. The material provided to the directors for the Board meetings varied over time, but settled into a well established format after the end of 2008.  The dates of the various Board reports, and the period to which they relate, are set out in Schedules 4.1 to 4.5. Those Schedules summarise the report information about (i) the total loan arrears, (ii) the Burleigh Views loan balance, maturity, and LVR, and (iii) whether or not the Burleigh Views loan was included in the loan arrears report table provided to the directors:- see paragraph 26(f) above.

19. A broad summary of the sequence of events involved in the development of the content of the Board report information is set out below:- see paragraphs 74 to 87.  (The contents of the various Board reports and meeting minutes inform specific conclusions about the content of the information provided to the PCL Board about the Burleigh Views loan:- see paragraph 88 below.)

20. 2007:- During 2007 the Board papers appear to have included a set of monthly management accounts.  They contained detailed balance sheet and profit and loss statements, with comparisons to budget and past periods.  They also included (i) a list of loans where interest had not been brought to account (“non-accruing” loans), and (ii) a “loan arrears report”, a cashflow projection, and a short summary.  The “loan arrears report” listed the loans that were more than 90 days in arrears.  It detailed their respective current balances, monthly interest, number of months in arrears, and LVR.  It often (but not always) included a brief comment on the current recovery status of the loan.

21. May to October 2008:- The format of the Board report appears may have changed in about May 2008.  The available versions of the Board reports contain, in addition to the previous monthly management account format, a multi-page set of “power point” screen printouts.  The “power point” file was usually emailed to the directors shortly before the meeting and was the basis of a presentation by Mr O’Sullivan.  The power point printouts provided an abbreviated summary of the current trading results, with a short commentary on material changes, a budget comparison, and comments on other current matters.  They also contained a short commentary on loan arrears.  The commentary typically (i) quantified the total of loans 90+days in arrears, (ii) noted the change from the previous month, (iii) identified some of the particular loans that had been added to (or removed from) the list, and (iv) referred directors to an accompanying loan arrears report spreadsheet.  An explanatory chart plotted the loan arrears totals for the last 12 months.  It showed the loan totals in separate categories according to (i) the length of the arrears period, and (ii) their respective proportions of the total PCL loan portfolio.

22. The minutes of the 15 October 2008 meeting suggest that Mr O’Sullivan reported orally to the meeting and made some comments about arrears loans, apparently in addition to the content of the report.  The minutes do not detail the substance of what he reported to the other directors.  However, the objective facts were that PCL had already (i) taken control of the Burleigh Heads property in about June 2008, (ii) been informed of Burleigh Views’ liquidation, (iii) been in contact with the liquidator, (iv) lodged with ASIC formal notice of its assumption of control as mortgagee in possession, (v) received the 3 October 2008 audit management report, and (vi) made a decision (on 14 October 2008) to remove the Burleigh Views loan from the loan arrears report:- see paragraph 36 above.

1. Mr Seymour was knowingly involved in the opinion statement contraventions where I have recorded a finding to that effect in paragraph 214 above.  The basis for those findings is contained in my earlier findings about Mr Seymour’s knowledge of the Burleigh Views loan default, and his knowledge of the fact of, and the reasons for, PCL’s exceptional treatment of the loan once it entered into possession as mortgagee.

2. The characterisation of the various non-disclosures as misleading or deceptive requires an impressionistic assessment.  That assessment is influenced by the person’s knowledge, and status, function or responsibility in relation to the information, business or matter to which the contentious non-disclosure relates.  It is also influenced by the content, circumstances, purpose and recipient, of the communication from which the contentious information has been withheld:- ASIC v PFS Business Development Group Pty Ltd (2006) 57 ACSR 553 at [362]. The essential concept is that of a reasonable expectation that if information was known it would be disclosed:- Demagogue Pty Limited v Ramensky (1992) 39 FCR 31. Consequently the apparent materiality of the non-disclosed information is a relevant consideration in the characterisation of any contentious non-disclosure.

3. The Burleigh Views loan default, PCL’s entry into possession, and the loan recovery risk that prompted the exceptional treatment PCL accorded to the loan, were all material matters.  They were material because of the contents of Benchmark 5 (certainly after June 2010):- see paragraph 107 above.  They were also material because their disclosure was necessary to explain and assess the exceptional strategy, and to derive a proper understanding of PCL’s competence and candour in the management of the debenture business.  Contrary to ASIC’s submission however, I do not consider that Burleigh Views liquidation was itself a material matter.  PCL’s business was a secured lender that claimed to observe the benchmark loan to valuation ratios favoured by ASIC in Regulatory Guide 69.  The broad thrust of the disclosure requirements in Benchmark 5 related to the identification and quantification of default loans, and corresponding details of the action taken by the lender to enforce the loan security.  That structure pre-supposed the financial incapacity of the borrower, and placed a focus on the value and realisation of the secured property.  For these reasons, I do not consider that the liquidation of Burleigh Views was, of itself, a consideration whose non-disclosure was material, or otherwise provided a basis for characterising the contentious publications as misleading.

4. Mr Seymour was knowingly involved in the non-disclosure statement contraventions where I have recorded a finding to that effect in paragraph 214 above.  The basis for those findings is contained in my earlier findings about Mr Seymour’s knowledge of the Burleigh Views loan default, and his knowledge of the fact of, and the reasons for, PCL’s exceptional treatment of the loan once it entered into possession as mortgagee.

5. In relation to the remaining matters - those I have characterised as relating to policy and disclosure compliance (see paragraph 214(c) above) and not otherwise specifically addressed in the preceding paragraphs - I am not satisfied that Mr Seymour was “involved” in the various contraventions.  Each of them involved the quality and content of the valuations for the Burleigh Views property - and highlighted particular deficiencies in the content of the documents said to constitute the relevant valuation.  There is no evidence that Mr Seymour ever saw any of these valuations.  In his role as a non-executive director, he was not required to examine them, and he was entitled to accept information given to him by PCL management about their content and effect.  (That information appears to have been reflected in the content of the various disclosure documents, and in regular “compliance checklists” - asserting compliance with PCL’s CPP manual requirements - that were regularly provided by PCL management:- see paragraph 26(h) above.)

   Discretion - financial services

6. The findings I have made enliven ASIC’s CorpAct s 920A banning power. Mr Seymour’s submissions recognised that PCL had held an Australian Financial Services Licence after February 2003, and that from 14 February 2003 to 7 May 2008 he had been a “Responsible Person” for the purposes of PCL’s licence. Nevertheless, Mr Seymour contended its exercise was inappropriate. This contention emphasised the proposition that his conduct in relation to PCL’s funds management and reporting obligations had not been, relevantly, in connection with the provision of financial services.

7. Mr Seymour’s submission recognised that ordinarily “dealing in a financial product” would involve the provision of a “financial service”, and thus require the dealer to hold an AFSL:- see CorpAct ss 911A & 766A.  But it pointed out that if a person’s conduct only related to the issue of their own securities, then the person’s transactions were excluded from categorisation as “dealing in a financial product”:- see CorpAct s 766C(4). Underlying the submission was an emphasis on the general protective purpose of CorpAct Chapter 7, and on part of a passage (underlined below) from the reasons of Deputy President Jarvis in Seagrim v ASIC [2012] AATA 583.  In his reasons for decision the Deputy President first set out the Chapter 7 statement of purpose (in CorpAct s 760A), and then continued - as follows:-

   [88] I consider that the discretion to impose banning orders should be exercised in such a way as to achieve the objectives set out in this section.  It is accordingly appropriate to take into account that a principal consideration is that the power to make a banning order should be to protect the public from persons who do not comply with the requirements of the Act when providing financial products and services, and also to deter the persons whose conduct is in question and other persons in the industry from contravening the Act.  The imposition of banning orders will have a punitive effect on the persons banned, but the discretion should not be exercised by reference to that consequence, but rather by reference to the need to protect the public, and the deterrent effect of banning orders, which are the overriding considerations.  … personal hardship if a banning order is made is a mitigating factor which may be taken into account.

8. The preceding passage demonstrates the selective emphasis involved in Mr Seymour’s submission. There is a significant protective and deterrent purpose in the Chapter 7 provisions, and no reason to limit the appropriate exercise of the CorpAct s 920A power to persons who are (or were) either AFSL licence holders or authorised representatives, or to their conduct in relation to such a licence or status. Indeed the numerous alternative criteria that enliven the power are inconsistent with any such limitation. That inconsistency was noted, and the inappropriateness of the limitation contended for on Mr Seymour’s behalf rejected, in a 2008 decision of this Tribunal (seeTweed v Australian Securities and Investments Commission [2008] AATA 5) - and repeated in O’Sullivan v ASIC [2017] AATA 644 at [725]-[733].

   Mr Seymour’s personal circumstances - the banning order

9. I have previously noted the fact of Mr Seymour accountancy qualifications and his former status as a fellow of the Australian Institute of Company Directors.  It is necessary to elaborate on those, and other aspects of his personal circumstances.

10. Mr Seymour obtained his accountancy qualifications in 1984, at a time when he was a little over mid-way through an eleven year period of employment with the Commonwealth Bank.  By 1988 Mr Seymour held a position of Assistant to one of the Bank’s senior state managers in NSW.  But he then left that Bank and, for the next thirteen or so years he practised as an accountant in partnership with Mr Douglas Pritchard.  Mr Seymour has continued to practice as an accountant - until 2008 as a principal of Brentnalls NSW, a partnership, and since 2008 as a director of Brentnalls NSW Pty Ltd.

11. Prior to ASIC’s 2015 decision Mr Seymour had acquired a number of directorships (in addition to his former roles with PCL and Cashflow) and no doubt partly as a consequence of his extensive period of accountancy practice.  Those directorships included his role with the following entities:-

    (a)Brentnalls NSW Pty Ltd - where Mr Seymour is one of three directors.

    (b)Brentnalls NSW Financial Services Pty Ltd - a company that was part of a 2005 joint venture.

    (c)Brentnalls Financial Group Pty Ltd - another small investment company with the same directors.

    (d)OMB Investments Pty Ltd - a small investment company where Mr Seymour was one of three directors.

    (e)TTNT Holdings Pty Ltd - another similar company, with the same directors.

    (f)Raintron Pty Ltd - an entity that operates as the trustee of Mr Seymour's self managed super fund, and has two members of Mr Seymour's family as co-directors.

    (g)Garde Family Pty Ltd - an entity that is the trustee of the Garde Family Trust.  Mr Seymour is a director because of his role as an executor of the estate of one of the family members.

    (h)Jamaras Pty Ltd - a trustee company where Mr Seymour was one of two directors.

    (i)Nattoco Pty Ltd - another trustee company where Mr Seymour was one of two directors.

    (j)The Campbelltown Catholic Club Limited - of which Mr Seymour became one of nine directors in 2006.  The company operates as a registered Club and is a substantial enterprise.  Its business activities include the operation of a gym, golf course and a Rydges Hotel.

12. In its July 2015 reasons ASIC accepted that no criticism had been made of Mr Seymour’s conduct in relation to any of these corporate entities.  ASIC also accepted that the absence of complaint was a factor pointing against the justification for making a disqualification order.  That factor is strengthened by the support provided to Mr Seymour in the present proceedings by unequivocal commendations of his integrity and ability.  Those commendations have come from his accountancy practice colleagues and the Chairman of the Campbelltown Catholic Club Limited.

13. Mr Pritchard is the accountant with whom Mr Seymour began his practice in 1988.  Mr Pritchard declared having the highest possible regard for Mr Seymour’s professional and ethical ability.  Mr Snape is the Chairman of Brentnalls NSW Pty Ltd.  He described having known Mr Seymour since 1989, in various roles - initially as a client of Mr Seymour, than as a work colleague and later as a business partner and close personal friend.  He declared his complete trust in Mr Seymour’s conduct, ability, honesty and integrity.  Mr David Olsson is the Chairman of the Campbelltown Catholic Club Limited.  He has been a director of that company for ten years and served on the Board with Mr Seymour.  His association with Mr Seymour extends over a thirty year period.  He described Mr Seymour as a person of high integrity.  He described Mr Seymour’s membership of the Board as effective and valuable.  He described his role on the Board of the Club as one in which Mr Seymour “led our drive” towards best practice in the area of director education and training.

14. These endorsements of Mr Seymour’s inherent integrity, competence and experience are persuasive.  They are consistent with ASIC’s own finding, which expressly disavowed any suggestion that Mr Seymour had been dishonest or had sought to derive any personal advantage from his conduct.  The endorsements are also consistent with the impression I formed of Mr Seymour’s conduct, in so far I could discern it, from the numerous meeting minutes and contemporaneous correspondence that I have reviewed in relation to PCL.  Mr Seymour’s demeanour in the course of his evidence was less informative, but the circumstances of that testimony involved the daunting task of attempting to retrieve nuanced recollections of events and documents (typically not fulsome in their details) spanning a period of several distant years, and inherent complexity.  There is, in my view, no reason to dissent from the view that Mr Seymour is both a competent accountant and company director, and has a justified reputation to that effect.

15. Nevertheless, I am completely satisfied that Mr Seymour acquiesced in PCL’s exceptional treatment of the Burleigh Views loan, and that he did so with knowledge of the potential for a significant shortfall in the loan recovery.  It is not necessary for me to make any finding that his knowledge was actually and subjectively influential at the time of his approval of any particular publication.  I doubt that it was.  It is more likely that he mistakenly accepted the exceptional treatment of the Burleigh Views loan and failed to appreciate fully the objective significance of the repeated errors and non-disclosures in the various PCL reports and publications.  His acceptance of the various reports was lamentable.  There was never any justification for either the inaccuracies in the various reports and Prospectus, or for withholding from them a candid recognition of PCL’s recovery strategy and the risks and uncertainties that it involved.

16. Whatever justification there may have been, as a matter of commercial judgment, for the exceptional recovery strategy for the Burleigh Views loan, PCL’s disclosure contraventions were significant and sustained. Mr Seymour’s involvement in them was similarly sustained. The protective purposes of CorpAct Chapter 7, and in particular the deterrent purpose to which I have earlier referred, point compellingly to the appropriateness of a banning order being made.

17. In imposing a three year ban ASIC took into account the potential personal hardship Mr Seymour would encounter in his accountancy practice, as a result of changes to the exemptions in the Corporations Regulations, that would require him to hold either a financial services licence, or the status of an authorised representative, in order to provide financial advice to self managed superannuation fund clients after 1 July 2016. Nevertheless ASIC emphasised the protective purpose of CorpAct Chapter 7 and in particular its stated objectives - set out in CorpAct s 760A, in the following terms:-

    760A Object of Chapter

    The main object of this Chapter is to promote:

    (a)  confident and informed decision making by consumers of financial products and services while facilitating efficiency, flexibility and innovation in the provision of those products and services; and

    (b)  fairness, honesty and professionalism by those who provide financial services; and

    (c)       fair, orderly and transparent markets for financial products; and

    (d) the reduction of systemic risk and the provision of fair and effective services by clearing and settlement facilities.

18. Those objectives are not the universe of considerations relevant to the exercise of the power and, in particular, to the determination of the period of any ban.  Mr Seymour’s general personal honesty, ability and the foreseeable hardship that the ban would occasion are also relevant considerations.  But I do not regard them as materially influential in determining the appropriate period of the banning order.  The significance and sustained nature of Mr Seymour’s conduct are the most material considerations.  And the potential for significant personal hardship as a result of his limited ability to provide advice to SMSF clients is, in my view, ameliorated by his ability have other members of his practice provide that advice.

19. ASIC’s Regulatory Guide 98 Licensing: Administrative action against financial services providers provides a measure of guidance for, and is intended to promote a level of consistency in, the exercise of discretions such as that conferred by CorpAct s 920A:- see Coakley and ASIC [2008] AATA 247. As its name suggests, Regulatory Guide 98 provides guidance rather than a prescription. But it is a useful illustrative guide which emphasises the importance of drawing evaluative distinctions between conduct that is (i) careless or inadvertent, (ii) incompetent, irresponsible or highly careless, and (iii) dishonest or intentionally unlawful. In addition to those distinctions, the exercise of the discretion needs to take appropriate account of the conduct, or similar conduct, on the integrity of financial markets and their orderly operation and the confidence placed in them. According to the guidance contained in Regulatory Guide 98, a three year banning period is at the upper limit of the period appropriate for “carelessness or inadvertence” and at the lower limit of conduct that exhibits “incompetence, irresponsibility or a high level of carelessness”.

20. My view is that Mr Seymour’s conduct was more than mere carelessness or inadvertence.  The exceptional treatment given to the Burleigh Views loan was patent to him.  It called for candid and full disclosure.  The strategy of excluding the loan default from PCL’s arrears reporting, ensured that exceptional treatment was unremarkable to, and unremarked upon by, AETL and debenture holders.  Whilst I do not suggest that strategy was dishonest, in the sense of being a deliberate strategy to mislead, it was a strategy conceived, and acquiesced in, because of its likely utility in avoiding unwelcome enquiry about a difficult loan.  That underlying strategy is evident in the internal communications to which I have referred (see paragraphs 59 & 60 above) and was, in my view, obvious to, and approved of by, Mr Seymour.  His conduct was at least irresponsible and had the potential to misinform debenture holders and undermine confidence in the segment of the financial market in which PCL operated.  For all of those reasons, a three year ban period is appropriate.

    The Corp Act s 206F(1) disqualification decision

21. It was uncontentious that the fact and circumstances of the liquidation of PCL and Cashflow at least potentially satisfied the criteria for the exercise of the disqualification power in CorpAct s206F(1) - subject to satisfaction that such an order was “justified”. As a matter of practical necessity, the process of achieving any necessary satisfaction must have regard to both the person’s conduct, and to the permissible period of any disqualification (a maximum of five years). There is an additional statutory permission to have regard to the public interest, and to any other matter that is considered appropriate:- Corp Act s 206F(2). In Murdaca v ASIC (2009) FCAFC 92; 178 FCR 119 the Full Court of the Federal Court of Australia said this about the exercise of the disqualification decision:-

    [101] … ASIC’s power to disqualify a person from the management of corporations must be exercised for the purposes for which it was granted.  Those purposes are the protection of all those persons who deal with corporations from the consequences of the actions of those corporate officeholders who, either through incompetence or dishonesty or a combination of the two, bring about the failure of corporations and thus cause loss to others (Rich v ASIC (2004) 220 CLR 129 at [47]-[50]) and the maintenance of professional management standards in the public interest (Visnic v ASIC (2007) 231 CLR 381 at [11] & [26]).

22. The protective purpose relates to both the personal conduct of the particular person, and also to the maintenance of appropriate standards in general.  In Australian Securities and Investments Commission v Forge [2007] NSWSC 1489 (21 December 2007) White J addressed the latter, in recognising the relevance of general deterrence in the exercise of the disqualification discretion:-

    [103] … A disqualification order is protective of the public for the period of disqualification against misconduct by the person disqualified.  However, that is not its only purpose.  The object of general deterrence is also of great importance.  That object is served by the public disapproval of the impugned conduct being marked not only by a declaration that the conduct has contravened the Act, but by an order for disqualification of the contravener from managing a corporation either for a fixed period or for life.  The shame or embarrassment which accompanies such an order is not designed as punishment, although it might have that effect, but serves as a general deterrent to others who might be tempted to breach their duties as directors or officers of a company.

1. The permissive consideration of any other appropriate matters enlarges the scope of enquiry to include the likelihood of the person’s future compliance with their obligations as a director, and the potential personal impact of the disqualification.  In Guss v Australian Securities and Investments Commission [2006] AATA 401; (2006) 90 ALD 349, Deputy President Olney observed, in relation to s 206F:

   First, it should be noted that the section sets a very high standard in that the power to disqualify may be activated if the person concerned has been an officer in only two failed corporations within a seven year period. Second, the section does not require it to be established that there has been a breach of the law; it is not an alternative to the prosecution of a person who may have committed an offence against the Act or otherwise engaged in unlawful or fraudulent conduct. Rather s 206F is aimed at the person who is a persistent failure, for whatever reason.

2. The notion that the discretion is primarily aimed at addressing “persistent failure” is not expressed in the actual wording of s 206F, and provides no basis for excluding the possible exercise of the disqualification power where the person’s impugned conduct is in fact confined to only one of the corporate insolvencies. On the other hand, both the mandatory obligation to consider whether any of the insolvent entities were “related”, and the permission to consider the person’s conduct in relation to the management of “any corporation” point tellingly to the potential relevance of a comparison of the person’s impugned conduct in relation to one corporation, with their unexceptional conduct in relation to the management of other corporations.

3. In the present matter at least four matters merit consideration in determining whether Mr Seymour’s disqualification is “justified”.  They are (i) his other directorships, and unexceptional conduct in relation to them, (ii) the absence of criticism of his conduct in relation to Cashflow, (iii) the nature of his conduct in relation to PCL, and (iv) the extent of his causal contribution to the failures of either PCL or Cashflow.  The latter is a particularly important consideration - having regard to the protective purpose identified in the Murdaca judgment:- see paragraph 240 above.

4. In relation to the first matter, I previously listed Mr Seymour’s other directorships, and referred to his qualifications, his experience and his reputation for honesty and competence:- see paragraphs 226 to 231 above. They are all significant considerations that point against satisfaction that his disqualification is justified. They do so because the protective purpose of CorpAct Chapter 2D are served by encouraging the appointment of competent and diligent persons as directors - perhaps even more so than by the various sanctions for misconduct.

5. In relation to the second matter, and as I have previously observed, there is no demonstrated basis for criticism of Mr Seymour’s conduct in relation to Cashflow:- see paragraph 207 above.

6. In relation to the third matter, I have made findings that Mr Seymour’s conduct in relation to PCL’s disclosures concerning the Burleigh Views loan were seriously deficient.  Those findings have led me to conclude that a three year banning order should be made under CorpAct 920A.  However, and despite the seriousness Mr Seymour’s disclosure deficiencies, they did not involve any explicit or implied criticism his conduct in the management of PCL - either generally or in relation to the Burleigh Views loan itself.  The sequence of events I described in the earlier sections of these reasons - particularly under the heading “Burleigh Views loan history” (see paragraphs 28 to 67 above) - tend to show that PCL had an extremely difficult recovery situation thrust upon it in June 2008 as a result of the combined circumstances of (i) Burleigh Views’ collapse, (ii) the incomplete state of the development, (iii) the deteriorating property market, and its inability to quit the loan without loss, and (iv) its own liquidity problems.  Those problems were then exacerbated by the subsequent discovery of (i) the lapse of the original development consent, (ii) the changed planning scheme that came into effect in 2003, and (iii) the practical impediments to complying, to the Council’s satisfaction, with the requirements of the new planning scheme.  As Rares J observed in the 29 June 2012 reasons for judgment, the practical course for PCL to adopt was to complete the development.  The valuation analysis contained in Schedule 7 supports that view - because it suggests that PCL was most likely to avoid significant loss by completing the development.

7. The reasons why PCL did not take any active steps to complete the development prior to August / September 2009, appear to have been primarily related to its own liquidity difficulties.  The actuality and magnitude of those difficulties appear to be illustrated by PCL’s balance sheet, and cash flow analysis for the year ended June 2009:- see Schedules 1 and 3.  After September 2009, PCL simply could not progress the development unless and until it obtained a renewed development approval.  And Mr Seymour’s own enquiries about the practicality of a “pre-completion” sale satisfied him that it was undesirable.  Throughout the period after September 2009, and despite his inspection of the Burleigh Views property in October 2010, Mr Seymour had no executive role at PCL.  Moreover, he was apparently informed that PCL was justifiably proceeding with a recovery strategy that was supported by valuation and was likely to minimise, if not entirely avoid, the extent of any loss on the realisation of the Burleigh Views security.

8. In relation to the fourth matter, for the reasons canvassed in the two preceding paragraphs there is no sound basis for concluding that any of Mr Seymour’s conduct contributed materially to the likely Burleigh Views loan shortfall at the time of PCL’s liquidation.  The deficiencies of his conduct (and that of the other directors and managers of PCL) in relation to the contents of the various disclosure documents may, on the other hand, have contributed to the loss of confidence and anxiety that prompted AETL to appoint receivers to PCL.  In that respect, his personal conduct may possibly have contributed to PCL’s ultimate deficiency, but the evidence, which established a corporation wide disclosure deficiency, is not susceptible to any specific conclusion in that regard.

9. Nor is there any basis either for impugning Mr Seymour’s conduct in relation to Cashflow or for characterising it as having contributed materially to Cashflow’s net asset deficiency.  As ASIC’s reasons for decision acknowledged, Cashflow’s fate was determined by the attitude Coface took in the latter part of 2009 - in refusing to renew Cashflow’s insurance policy and in refusing to honour policy claims.  Those actions by Coface effectively caused Cashflow to cease to operate.

10. The primary, and in my view only, basis for criticism of Mr Seymour’s conduct as a director is in relation to the misleading disclosures and non-disclosures in PCL’s various Reports, Prospectus and Information Booklets.  That conduct merits the three year banning order ASIC imposed.  That order has a significant effect in sanctioning Mr Seymour’s misconduct, and in emphasising the importance of compliance with financial services laws.  However, his misconduct was not, in my view, directly related to PCL’s management of its ordinary activities.  Neither has it been shown to have contributed materially to PCL’s ultimate deficiency.  As against that, I am affirmatively satisfied that in discharging all of his other roles as a director Mr Seymour has consistently acted competently and honestly and has not contributed, to any extent, to the insolvency and net asset deficiency of Cashflow.  And in those circumstances I am not satisfied that an order banning Mr Seymour from the management of any corporation is justified.

    Conclusions

11. ASIC’s 17 July 2015 banning order under CorpAct s 920A is affirmed.

12. ASIC’s 17 July 2015 disqualification order under CorpAct s 206F is set aside. In substitution for that decision, the Tribunal is not satisfied that Mr Seymour’s disqualification under CorpAct s 206F is justified.

I certify that the preceding 251 (two hundred and fifty-one) paragraphs are a true copy of the reasons for the decision herein of Mr P W Taylor SC, Senior Member

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

Associate

Dated: 24 November 2017

Date(s) of hearing:	6-10 & 13-15 February 2017
Counsel for the Applicant:	Ms K Morgan SC & Mr C McMeniman
Solicitors for the Applicant:	Ms A Rose, Webb Henderson
Counsel for the Respondent:	Ms K Williams SC & Ms M Avenell
Solicitors for the Respondent:	Mr N Goodstone, Australian Securities and Investments Commission

Schedules

1         PCL Profit & Loss // Balance Sheet - Summary

2.        PCL Financial Liabilities - Summary

3         PCL Cash Flow - Summary

4.1      PCL Reports 2007 & 2008

4.2      PCL Reports 2009

4.3      PCL Reports 2010

4.4      PCL Reports 2011

4.5      PCL Reports 2012

5         PCL Quarterly & Benchmark Reports, Prospectus & Information Booklets

6.1      PCL - Board Meetings, duration, minutes, and attendances - 2007 & 2008

6.2      PCL - Board Meetings, duration, minutes, and attendances - 2009

6.3      PCL - Board Meetings, duration, minutes, and attendances - 2010

6.4      PCL - Board Meetings, duration, minutes, and attendances - 2011

6.5      PCL - Board Meetings, duration, minutes, and attendances - 2012

7         Burleigh Views property valuations / estimates / feasibilities

8PCL - Audit and Compliance Committee Meetings, duration, minutes, and attendances

Schedule 1 - PCL Profit & Loss // Balance Sheet - Summary

Schedule 2 - PCL Financial Liabilities - Summary

Schedule 3 - PCL Cash Flow - Summary

Schedule 4.1 - PCL Reports 2007 & 2008

Schedule 4.2 - PCL Reports 2009

Schedule 4.3 - PCL Reports 2010

Schedule 4.4 - PCL Reports 2011

Schedule 4.5 - PCL Reports 2012

Schedule 5 - PCL Quarterly & Benchmark Reports, Prospectus & Information Booklets

Schedule 6.1 - PCL - Board Meetings, duration, minutes, and attendances - 2007 & 2008

Schedule 6.2 - PCL - Board Meetings, duration, minutes, and attendances - 2009

Schedule 6.3 - PCL - Board Meetings, duration, minutes, and attendances – 2010

Schedule 6.4 - PCL - Board Meetings, duration, minutes, and attendances - 2011

Schedule 6.5 - PCL - Board Meetings, duration, minutes, and attendances - 2012

Schedule 7 - Burleigh Views property valuations / estimates / feasibilities

Schedule 8 - PCL - Audit and Compliance Committee Meetings, duration, minutes, and attendances