Warne and Australian Securities and Investments Commission
[2009] AATA 340
•14 May 2009
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2009] AATA 340
ADMINISTRATIVE APPEALS TRIBUNAL )
) No: 2008/1982
GENERAL ADMINISTRATIVE DIVISION )
ReDavid Hastings WARNE
Applicant
AndAustralian Securities and Investments Commission
Respondent
DECISION
TribunalProfessor GD Walker, Deputy President
Date14 May 2009
PlaceSydney
DecisionThe decision under review is affirmed.
The tribunal notes that it would be appropriate for the respondent to correct its website and its advice to the ATO concerning the superannuation issue.
......................[sgd]..................
Professor GD Walker
Deputy President
CATCHWORDS
CORPORATIONS – Applicant an officer of two or more corporations wound-up within preceding seven years – inability to pay debts – banning order - disqualification from managing corporations for a period of 18 months – whether disqualification is correct and preferable decision - grounds for disqualification – whether applicant responsible for or contributed to failure of corporation - director's duties – due diligence – due care and skill - failure to properly monitor management - failure to properly inform himself of the financial position of the company - failure to have proper systems in place for the reporting of financial information - failure to take steps to prevent insolvency or winding up – interest free and unsecured loans – trade creditors – superannuation entitlements - whether period of disqualification is appropriate - public interest – good corporate governance
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RELEVANT ACT
Corporations Act 2001 (Cth) (the Act): ss 50, 180 to 182, 206F, 533
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CITATIONS
Cullen v Corporate Affairs Commission (NSW) (1989) 7 ACLC 121
Deputy Commissioner of Taxation v Clark (2003) 57 NSWLR 113
Morley v Statewide Tobacco Services [1993] 1 VR 423
Daniels v Anderson (1995) 37 NSWLR 438
Re One.Tel Ltd (in liq); ASIC v Rich (2003) 44 ACSR 682
Cashflow Finance v Westpac Banking Corporation [1999] NSWSC 671
Re HIH Insurance Ltd (in prov liq); ASIC v Adler (2002) 41 ACSR 72
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REASONS FOR DECISION
14 May 2009
Professor GD Walker, Deputy President
Basic facts
1. As at 9 October 2007, the applicant Mr David Hastings Warne was a director of Morgan Building & Property Maintenance Pty Ltd (Morgan) and had been since 6 April 2004, and a director of Bay Building Developments Pty Ltd (BBD) since 1 July 2004. The two companies formed part of a group (Bay group) involved in property development. Neither was a holding company or subsidiary of the other, nor a subsidiary of a holding company of the other.
2. In about February 2006 the Bay group collapsed and Mr Jonathon McLeod of McLeod Partners was appointed as administrator, and subsequently liquidator, of the group. At the time of the collapse, the Bay group was involved in construction projects at Corlette, Boat Harbour and Toronto, New South Wales.
3. On 1 June 2006, McLeod Partners lodged with the respondent (ASIC) a report under s 533(1) of the Corporations Act2001 (Cth) (the Act) concerning Morgan’s inability to pay its debts. The report estimated that the unsecured creditors of Morgan would receive a distribution as between zero and 10 cents in the dollar. Unsecured creditors have not so far received any distribution.
4. On 16 June 2006, McLeod Partners lodged with ASIC a report under s 533(1) of the Act concerning BBD’s inability to pay its debts. That report estimated that the unsecured creditors of BBD would receive a distribution of between zero and 10 cents in the dollar. So far unsecured creditors have received no distribution.
5. On 15 January 2008, the applicant was served with a notice requiring him to demonstrate why he should not be disqualified from managing corporations for a period of up to five years. The notice attached a list of ASIC's concerns and a list of documents on which those concerns were based.
6. After a hearing attended by the applicant, an ASIC delegate, Mr Graeme Darcy Plath, having regard to the matters in s 206F(2) of the Act on 9 April 2008, disqualified the applicant from managing a corporation for 18 months from the date of service of the notice of disqualification, which was sent to the applicant on 9 April 2007. The disqualification is thus in effect until October 2009.
7. Morgan’s business was property construction as well as repairs and maintenance. It expanded from maintenance and repairs into construction in November 2004, but became insolvent in May 2006 and was wound up. Morgan has an estimated deficiency of $2,359,784.70 and owes unsecured creditors an estimated $1.8m.
8. BBD’s business was to provide funds and purchase shares in associated entities. It became insolvent and was wound up in April 2006. BBD has an estimated deficiency of $164,519.24 and owes unsecured creditors an estimated $215,988.48.
9. From about 22 November 2004 to about 16 February 2006, while the applicant was a director, Morgan lent to other companies of which the applicant was a director a total of $22,432.38. From about 6 July 2008 to about 10 February 2006, while the applicant was a director, Morgan provided loans to companies whose office holders were also directors of Morgan or BBD totalling $400,761.63. The loans were unsecured and interest free and were not made on a commercial basis. The loans have not been paid or recovered and the respondent contended that the applicant knew, or should have known, about them.
10. From about 26 October 2005 to about 16 November 2005, while the applicant was a director, BBD lent to Magnus Street Developments Pty Ltd (Magnus), of which the applicant was also a director, sums totalling $1,784. That amount has since been recovered by the liquidator.
11. From about 26 September 2005 to about 20 February 2006, while the applicant was a director, BBD made a number of loans totalling $54,684.84 to companies whose office holders were also directors of Morgan or BBD. The loans were unsecured and interest-free and were not made on a commercial basis. They were not adequately documented. The respondent maintained that the applicant knew, or should have known, of those loans. Only the loan to Magnus has been repaid or recovered.
The hearing
12. At the hearing, the applicant appeared in person, while Mr Alexander Kuklik of counsel, instructed by Ms Alice Rees of ASIC, appeared for the respondent. The documents before the tribunal comprised the documents produced pursuant to s 37 of the Administrative Appeals Tribunal Act1975 (the T documents), taken into evidence as Exhibit R1, together with the other documents tendered by the parties at the hearing. The applicant gave oral evidence in person.
The issues
13. The issues in these proceedings are:
(a)Is an order disqualifying the applicant from managing companies pursuant to s 206F the correct and preferable decision; and
(b)If a disqualification order is warranted, is 18 months an appropriate period of disqualification?
14. In determining these issues the following sub-issues arise:
Failure of companies
(a)Was the applicant responsible for, or did he contribute to, the failure of Morgan; and/or
(b)By failing to properly monitor management, by failing to properly inform himself of the financial position of the company and by failing to have proper systems in place for the reporting of financial information, did the applicant fail in his duties as a director of Morgan such that he failed to take steps to prevent it from becoming insolvent or being wound up?
(c)Was the applicant responsible for, or did he contribute to, the failure of BBD; and/or
(d)By failing to properly monitor management, by failing to properly inform himself of the financial position of the company and by failing to have proper systems in place for the reporting of financial information, did the applicant fail in his duties as a director of BBD such that he failed to prevent it from becoming insolvent or being wound up?
Loans
(e)Did the applicant consent to, acquiesce in or fail to prevent, Morgan's entering into loans with related companies which were interest free, unsecured and/or not in the interests of Morgan; or
(f)Did the applicant consent to, acquiesce in or fail to prevent BBD from entering into loans with related companies which were interest free, unsecured and/or not in the interests of BBD?
Superannuation entitlements
(g)Did the applicant consent to, acquiesce in, or fail to prevent Morgan from paying trade creditors in preference to paying the superannuation entitlements of employees in the period from October 2005 to February 2006?
Applicable law
15. The following provisions, among others, are relevant to those issues:
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206F ASIC's power of disqualification
Power to disqualify
(1) ASIC may disqualify a person from managing corporations for up to 5 years if:
(a)Within 7 years immediately before ASIC gives a notice under paragraph (b)(i):
(i) the person has been an officer of 2 or more corporations; and
(ii) while the person was an officer, or within 12 months after the person ceased to be an officer of those corporations, each of the corporations was wound up and a liquidator lodged a report under subsection 533(1) (including that subsection as applied by section 526‑35 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006) about the corporation's inability to pay its debts; and
(b)ASIC has given the person:
(i) a notice in the prescribed form requiring them to demonstrate why they should not be disqualified; and
(ii) an opportunity to be heard on the question; and
(c) ASIC is satisfied that the disqualification is justified.
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Grounds for disqualification
(2)In determining whether disqualification is justified, ASIC:
(a)must have regard to whether any of the corporations mentioned in subsection (1) were related to one another; and
(b)may have regard to:
(i) the person's conduct in relation to the management, business or property of any corporation; and
(ii) whether the disqualification would be in the public interest; and
(iii) any other matters that ASIC considers appropriate.
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Notice of disqualification
(3)If ASIC disqualifies a person from managing corporations under this section, ASIC must serve a notice on the person advising them of the disqualification. The notice must be in the prescribed form.
Start of disqualification
(4)The disqualification takes effect from the time when a notice referred to in subsection (3) is served on the person.
ASIC power to grant leave
(5)ASIC may give a person who it has disqualified from managing corporations under this Part written permission to manage a particular corporation or corporations. The permission may be expressed to be subject to conditions and exceptions determined by ASIC.
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Applicant’s evidence
16. In his written statement dated 23 March 2009 (Exhibit A2), which he adopted at the hearing, the applicant testified that Morgan and BBD each had four directors who were common to both corporations. Two of the directors were also directors of other companies, and all the companies had a common management team headed by a general manager and accountant. The applicant believed that the team was experienced and competent. The companies’ advising and accounting professionals also provided support. The applicant believed the companies’ financial stewardship was in safe hands.
17. In the months before the companies went into administration, the applicant had sought advice from the chairman, general manager and accountant about their viability. He was assured that even though business conditions were difficult, there was a plan in place for the companies’ continued success. Those assurances were repeated in the weeks before the administration.
18. In mid-February 2006, the general manager, at a meeting of all four directors, announced that wages could not be met for the following week and tendered his resignation. The companies were then placed in voluntary administration.
19. The applicant has come to the conclusion that the primary reason for the companies’ failure was the use of Morgan and BBD cash flow in the preceding months to support other companies of which the applicant was not a director or a beneficiary.
20. The cash transfer was effected by way of loans to related corporations. Although that was generally done without the applicant’s knowledge or approval, he now realised that he should have made himself aware of their extent and ensured that they were made on a commercial basis. Even though he had received assurances about the financial health of Morgan and BBD, he did not closely examine their accounts or seek independent advice on accounting matters that he did not understand. He now realised that by failing to take those steps he had not fulfilled his duties as a director. The present application was not designed to question those facts but to correct the record for other errors of fact in the delegate’s reasons.
21. The first error, the applicant stated, which had been rectified since the application was lodged, concerned loans to related parties. The total of the loans had been reduced to $22,432.17 from Morgan and $1,784.40 from BBD, a very substantial reduction.
22. In relation to Morgan’s payment of employees' compulsory superannuation, he had sought and received assurances from the companies’ management team, until the companies were placed in administration, that all statutory obligations were being met when they fell due. The applicant had attempted to prove that and had supplied supporting documentation to the tribunal and the respondent. In due course he received the liquidator’s authority for the superannuation fund to release confirmation that the payments had been made.
23. The applicant stated that his goal in bringing the present application was to secure the correction of the record in relation to the situation as regards employee superannuation and his responsibility for it. He also believed that the penalty should be revised and reduced in light of the evidence he had provided.
24. In relation to the contention that he had allowed, or acquiesced in, the payment of trade creditors of Morgan in preference to honouring its employees’ superannuation entitlements between October 2005 and March 2006, the applicant stated that the Colonial First State (Colonial) statement of 28 November 2008 (part Exhibit A1), in conjunction with the liquidator’s spreadsheet showing his calculation of the arrears for November 2005 and December 2005 (part T43), showed that the superannuation payments had been made. The debits dated 29 December 2005 ($3,044.71) and 27 January 2006 ($3,025.44) corresponded exactly with the liquidator’s calculation of what he believed were the arrears. The amounts due for November and December had demonstrably been paid. The January and February entitlements had not been paid, but the companies had gone into administration on 26 February 2006 when those payments were due.
25. The applicant was cross-examined about his responsibility for the failure of Morgan and BBD and in the making of inter-company loans by the two companies to other associated companies.
26. He conceded that he had relied on financial statements in relation to the two companies that were not a sufficient or accurate guide to their true situation. He had not asked for balance sheets, profit and loss data or cash flow information and had relied on end-of-year statements for that purpose. He accepted that the information supplied was not adequate for him to make financial decisions about the direction of the company and admitted that he had been concerned about the growth of amounts payable in relation to receipts. Although building corporations have “lumpy” differences between payables and receivables, the information gave cause to undertake further investigation.
27. He had received assurances from the other directors and the general manager but did not request additional documentation. In hindsight, he agreed that prudence should have dictated that he obtain documentary material that would enable him to satisfy himself, rather than relying on oral assurances by the general manager without further enquiry.
28. From June 2005 on, he had ceased receiving reports about inter-company loan balances, although he knew that loans were still outstanding, and that other loans could be made. He was not told of any such further loans, but sought no information about them. He had chosen to rely on information received at regular board meetings.
29. The applicant pointed out that the oral assurances he had received were specific and positive. He was told that a large development project was being refinanced and that this would enable all sums owing to Morgan to be reconciled. Pre-sales were going well. He had no reason to think that the project was not on track.
30. The applicant was not cross-examined about his evidence in relation to the superannuation issue.
Applicant’s submissions
31. The applicant conceded that in retrospect he had not informed himself sufficiently well and had relied too much on the general manager’s oral assurances that a secured loan would correct the accounting discrepancies but that did not happen. The great majority of loans to related companies, especially those provided in the second half of 2005, were made without his knowledge or approval.
32. In relation to the superannuation issue, the applicant said he had taken active steps to obtain the liquidator’s authority for Colonial to provide him with details of payments made by or on behalf of Morgan. That authority had been obtained, but Colonial could not release details relating to the accounts of particular employees. Comparison of the liquidator’s calculations with the payments to Colonial showed that they corresponded exactly, however.
33. In a written submission dated 25 March 2009, the applicant reported that since the hearing he had asked the broker representing Colonial if those funds, as a total, were deposited into employee accounts, without requesting individual account details. He said that if he received that advice he would forward it to the tribunal and the respondent immediately.
34. In any event, the record of the Morgan purchases supplier summary for the period from 8 October 2005 to 27 February 2006 showed that except for payments to sole trader subcontractors and weekly account suppliers, the company did not make any payments to trade creditors from early January 2006. Consequently, as the December superannuation entitlements had been paid, it was plain that trade creditors had not been paid in preference to employee superannuation entitlements.
35. The liquidator’s letter of 3 July 2006 (part T44) to the Australian Taxation Office (ATO) had been the basis for the ATO’s superannuation guarantee default assessments (part T44). They were thus issued on the basis of incorrect advice from the liquidator.
36. On the question of the public interest and severity of the penalty, the applicant submitted that in Cullen v Corporate Affairs Commission (NSW) (1989) 7 ACLC 121, the main issue had been the non-payment of entitlements, a matter that he had now disproved.
37. He had suffered serious embarrassment because of an incorrect media release issued by the respondent. After he had complained to the press officer, the offending release had been removed and replaced with a correct one (see T1, pp43, 45, 47). The respondent’s website and the liquidator’s advice to the ATO should be similarly corrected, and if the issue of superannuation had a significant bearing on the severity of the penalty, the penalty should be reassessed in light of the references he had provided.
Consideration
38. At the hearing the applicant conceded in hindsight he had not sufficiently informed himself about the affairs of the companies and had relied excessively on the general manager’s oral assurances about the loans to related companies. Seemingly by way of mitigation, however, he pointed out the oral assurances had been quite specific about forthcoming refinancing measures and current pre-sales levels and he had also believed that any additional information that was necessary would be provided at the regular board meetings.
39. That reliance did not, however, relieve the applicant of his personal obligation to monitor the management and financial position of the two companies or to set up appropriate reporting procedures and safeguards.
40. The authorities make it clear that a corporate director must take an active personal role in the conduct of a corporation, and cannot simply rely on management. In Deputy Commissioner of Taxation v Clark (2003) 57 NSWLR 113 at 140, Spigelman CJ said:
Although the standard of skill may vary in accordance with the particular skills of the director, the core, irreducible requirement of skill involves an objective test, such as “ordinary competence” … or “reasonable ability” …. An equivalent objective test applies to the core, irreducible requirement of diligence, such as “reasonable steps to place themselves in a position to guide and monitor the management of the company”.
41. Directors have an obligation to make enquiries about the company’s financial position, especially where, as in the present case, they have reason to believe the company may be experiencing trading difficulties: Morley v Statewide Tobacco Services [1993] 1 VR 423 at 448; Daniels v Anderson (1995) 37 NSWLR 438 at 500.
42. The accounts provided to the applicant were insufficient to give a proper basis for the management of either company and the applicant made no independent inquiries in relation to their contents. The increase they showed in the ratio of payables to receivables did in fact cause the applicant some concern, but should also have prompted him to obtain better financial statements so that he could personally ascertain the position of the two companies. The oral assurances that he received in response to the inquiries he did make were not sufficient for that purpose.
43. In relation to the loans to related companies, the applicant was aware that they were interest free and unsecured. He argued that many of the loans were made after June 2005 when the management reports and financial statements he received ceased to refer to them.
44. While that is true, he should have made active enquiries to ascertain whether and to what extent those loans still existed. Assuming that he was unaware of the loans made after June 2005, it was part of his duty of diligence to make himself aware of them and of the terms on which they were made.
45. The respondent submitted that employee superannuation entitlements were not paid for the period from October 2005 to February 2006. It further submitted that the Colonial statement merely established that amounts corresponding with the November and December superannuation entitlements were transferred from the bank account of one of the group companies, but did not establish that payments were actually made to any employees. The respondent also relied on the ATO default assessments, which have not been revoked, as showing that the payments have still not been made to employees.
46. At the hearing there was no incontrovertible evidence that the sums were actually disbursed to the employees entitled to them, but neither was there any such evidence that they were paid to particular trade creditors. The undisputed fact that the amounts corresponded precisely is some evidence of an intention to pay those sums to the persons entitled, however.
47. In addition, the applicant has given evidence of the active steps he has taken to obtain documentary corroboration of the correct payment of the superannuation entitlements. He was eventually able to secure the liquidator’s authority for the superannuation fund to release confirmation that payments had been made and endeavoured to have the matter further investigated and corrected.
48. Further, in an exchange of emails after the hearing, the applicant was successful in obtaining, through his accountant and the broker representing Colonial, two tables (file 16 and file 21) showing Colonial's records of the superannuation payments made into the accounts of named individual Morgan employees for November and December 2005, totalling $3,044.71 and $3,025.44 respectively. While the respondent replied that the tables were vague and inconclusive, I think they are clear enough to enable an inference to be drawn. I am therefore satisfied on the preponderance of probabilities that the applicant did not allow, or acquiesce in, the payment of trade creditors of Morgan in preference to its employees’ superannuation entitlements between October 2005 and March 2006.
49. I am, however, satisfied that in relation to the failure of Morgan and BBD, and the making of loans by Morgan and BBD to related corporations on uncommercial terms, the applicant failed to act in accordance with the standard required of him. He breached his duty of due care and skill to Morgan and to BBD and failed to comply with s 180 of the Act: Re One.Tel Ltd (in liq); ASIC v Rich (2003) 44 ACSR 682; Cashflow Finance v Westpac Banking Corporation [1999] NSWSC 671. In relation to the inter-company loans, the applicant failed to comply with ss 180 to 182 of the Act: Re HIH Insurance Ltd (in prov liq); ASIC v Adler (2002) 41 ACSR 72.
50. Morgan and BBD failed and were placed in liquidation. Unsecured creditors of the corporations were owed a total of approximately $2m. Those unsecured creditors included public investors. It is in the public interest that standards of good corporate governance be maintained through the appropriate deterrents and that contraventions of the Act should be appropriately dealt with to maintain public confidence in the financial system.
51. The statutory requirements of s 206F(1)(a) and (b) were satisfied as the respondent served a notice on the applicant on 15 January 2008 requiring him to demonstrate why he should not be disqualified. On 25 March 2008, the applicant appeared before the ASIC delegate, Mr Graeme Plath, and was given an opportunity to be heard on the question (s 206F(1)(b)(i) and (ii)). Within seven years before being served with the notice, the applicant was a director of two or more corporations, including Morgan and BBD, and during that time each of the corporations was wound up and a liquidator lodged a report under s 533(1) of the Act about their inability to pay their debts (s 206F(1)(a)(i) and (ii)). Morgan and BBD are not related corporations within s 50 of the Act.
52. I am therefore satisfied that the disqualification is justified within the meaning of s 206F(1)(c).
53. As regards the severity of the penalty, guidance can be found in Cullen, which also concerned an ASIC banning order of a director of a group of construction companies that collapsed. The court found that it was a case of “inefficiency” and “bungling” and that the director “did not take appropriate action quickly enough to minimise loss … intermingled the affairs of different corporate entities … did not fully understand the obligations of a director [and] did not pay over group tax”. Young J was of the view that it was not the worst case, but not a trivial case, and disqualified the director for two years, taking into account that the applicant had not acted as a director for the previous six months.
54. The respondent submitted that, in the circumstances, the period of disqualification imposed on the applicant, 18 months, has already been set at the lower end of the scale to account for the applicant's relative culpability and circumstances, and that the period is more than reasonable and should not be further reduced. It does not agree that the issue of the alleged non-payment of superannuation entitlements was a major consideration when the delegate determined the penalty. Even if the question of superannuation were put aside, an 18-month disqualification was still appropriate given that the losses of the two corporations totalled almost $1m and the loans amounted to half a million dollars.
55. Given my findings in relation to the superannuation question, I do not think it is appropriate to find that the applicant’s conduct involved a lack of commercial morality. He did, however, fail to meet the standards of competence and diligence required of a company director, with serious financial consequences for employees and creditors of the two corporations.
56. For those reasons, I am satisfied that the disqualification for 18 months remains appropriate. It would also, however, be appropriate to correct the respondent’s website and its advice to the ATO in relation to the superannuation issue.
57. The decision under review is affirmed.
I certify that the 57 preceding paragraphs are a true copy of the reasons for the decision herein of Professor GD Walker, Deputy President
Signed: ......................[sgd]..................................................
Adele Veness, AssociateDate of Hearing: 23 March 2009
Date of Decision: 14 May 2009
Solicitor for the Applicant: Self-represented
Solicitor for the Respondent: Ms A Rees, ASIC
Counsel for the Respondent: Mr A Kuklik
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