Dolevski v Hodpik Pty Ltd [2011] FCA 54 (7 February 2011)

Last Updated: 7 February 2011

FEDERAL COURT OF AUSTRALIA

Dolevski v Hodpik Pty Ltd [2011] FCA 54

Citation:		Dolevski v Hodpik Pty Ltd [2011] FCA 54
Parties:		MARINA DOLEVSKI SUING IN HER CAPACITY AS ASSISTANT COMMISSIONER OF TAXATION, SUPERANNUATION v HODPIK PTY LTD ACN 078 105 709, ANDREW PIKE and JILL STROUD
File number:		NSD 1137 of 2009
Judge:		YATES J
Date of judgment:		7 February 2011
Catchwords:		SUPERANNUATION – self-managed superannuation fund - contraventions of ss 62(1), 84(1) and 109(1) of the Superannuation Industry (Supervision) Act 1993 (Cth) (the Act) established – whether contraventions due to reasonable reliance on information supplied by another person or due to reasonable mistake such that defences under s 323(2) of the Act may be relied upon – whether respondents acted honestly in all the circumstances of the case such that defence under s 221(2) of the Act may be relied upon Held: Defences under ss 323(2) and 221(2) of the Act available. Application dismissed.
Legislation:		Superannuation Industry (Supervision) Act 1993 (Cth), ss 62(1), 82, 83, 84(1), 109(1), 221, 323
Cases cited:		Vivian (Deputy Commissioner of Taxation (Superannuation)) v Fitzgeralds [2007] FCA 1602; (2007) 69 ATR 834
Date of hearing:	15 November 2010, 2 December 2010
Place:	Sydney
Division:	GENERAL DIVISION
Category:	Catchwords
Number of paragraphs:	74
Counsel for the Applicant:	E A Collins SC
Solicitor for the Applicant:	Australian Government Solicitor
Counsel for the Respondents:	A Blank
Solicitor for the Respondents:	Colin Daley Quinn

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 1137 of 2009

BETWEEN:	MARINA DOLEVSKI SUING IN HER CAPACITY AS ASSISTANT COMMISSIONER OF TAXATION, SUPERANNUATION Applicant
AND:	HODPIK PTY LTD ACN 078 105 709 First Respondent ANDREW PIKE Second Respondent JILL STROUD Third Respondent

JUDGE:	YATES J
DATE OF ORDER:	7 FEBRUARY 2011
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1. The application is dismissed.
   

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using Federal Law Search on the Court’s website.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 1137 of 2009

BETWEEN:	MARINA DOLEVSKI SUING IN HER CAPACITY AS ASSISTANT COMMISSIONER OF TAXATION, SUPERANNUATION Applicant
AND:	HODPIK PTY LTD ACN 078 105 709 First Respondent ANDREW PIKE Second Respondent JILL STROUD Third Respondent

JUDGE:	YATES J
DATE:	7 FEBRUARY 2011
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1. In this proceeding the applicant, as delegate of the Commission of Taxation, seeks declarations and civil penalties arising out of certain alleged contraventions of the Superannuation Industry (Supervision) Act 1993 (Cth) (the Act).
2. The applicant alleges that the first respondent, as trustee of the Hodpik Superannuation Fund (the Fund), has contravened three civil penalty provisions of the Act: ss 62(1), 84(1) and 109(1). The applicant also alleges that the second and third respondents, as directors of the first respondent, were involved in the first respondent’s contraventions and are taken by s 194 to have contravened those provisions.
3. Subject to certain defences, the respondents accept that the Act has been contravened by the first respondent in the various ways pleaded by the applicant in its statement of claim filed on 9 October 2009. Similarly, the second and third respondents accept that they were involved in those contraventions with the consequence that they too would be taken to have contravened the Act in those ways. Each of the respondents say, however, that, by way of defence under s 323(2) of the Act, the contraventions were due to reasonable reliance on information supplied by another person or were due to reasonable mistake. Alternatively they say that, absent any such defence, but in reliance on s 221(2) of the Act, they acted honestly and that the Court should find that, having regard to all the circumstances of the case, each of them ought fairly to be excused for the contraventions.
4. As a consequence of the matters giving rise to the present proceeding, the Fund was issued with a notice pursuant to s 40 of the Act on 2 May 2008 stating that it was not a complying superannuation fund from the 2004 year of income. The effect of this notice was that the Fund lost its concessional tax treatment.

RELEVANT LEGISLATION

5. It is desirable at this stage to make further reference to some of the more important provisions of the Act concerning this matter.
6. Section 62(1) of the Act provides as follows:

(1) Each trustee of a regulated superannuation fund must ensure that the fund is maintained solely:

(a) for one or more of the following purposes (the core purposes):

(i) the provision of benefits for each member of the fund on or after the member’s retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged (whether the member's retirement occurred before, or occurred after, the member joined the fund);

(ii) the provision of benefits for each member of the fund on or after the member’s attainment of an age not less than the age specified in the regulations;

(iii) the provision of benefits for each member of the fund on or after whichever is the earlier of:

(A) the member’s retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged; or

(B) the member’s attainment of an age not less than the age prescribed for the purposes of subparagraph (ii);

(iv) the provision of benefits in respect of each member of the fund on or after the member’s death, if:

(A) the death occurred before the member’s retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged; and

(B) the benefits are provided to the member’s legal personal representative, to any or all of the member's dependants, or to both;

(v) the provision of benefits in respect of each member of the fund on or after the member’s death, if:

(A) the death occurred before the member attained the age prescribed for the purposes of subparagraph (ii); and

(B) the benefits are provided to the member’s legal personal representative, to any or all of the member's dependants, or to both; or

(b) for one or more of the core purposes and for one or more of the following purposes (the ancillary purposes):

(i) the provision of benefits for each member of the fund on or after the termination of the member’s employment with an employer who had, or any of whose associates had, at any time, contributed to the fund in relation to the member;

(ii) the provision of benefits for each member of the fund on or after the member’s cessation of work, if the work was for gain or reward in any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged and the cessation is on account of ill-health (whether physical or mental);

(iii) the provision of benefits in respect of each member of the fund on or after the member’s death, if:

(A) the death occurred after the member’s retirement from any business, trade, profession, vocation, calling, occupation or employment in which the member was engaged (whether the member’s retirement occurred before, or occurred after, the member joined the fund); and

(B) the benefits are provided to the member’s legal personal representative, to any or all of the member's dependants, or to both;

(iv) the provision of benefits in respect of each member of the fund on or after the member’s death, if:

(A) the death occurred after the member attained the age prescribed for the purposes of subparagraph (a)(ii); and

(B) the benefits are provided to the member’s legal personal representative, to any or all of the member's dependants, or to both;

(v) the provision of such other benefits as the Regulator approves in writing.

7. The respondents accept that, in the whole of the period from 10 October 2003 to at least 30 June 2007 (the relevant period), the first respondent failed to ensure that the Fund was maintained solely for one or more of the core purposes in s 62(1)(a) or one or more of the ancillary purposes in s 62(1)(b), by making four separate loans, with the consequence that s 62(1) has been contravened. I will describe the loans later in these reasons.
8. Section 84(1) of the Act provides:

Each trustee of a regulated superannuation fund must take all reasonable steps to ensure that the provisions of Division 2, and either Division 3 or 3A (whichever is applicable), are complied with.

9. This required the first respondent, as trustee, to take all reasonable steps to ensure that ss 82 and 83 of the Act were complied with.
10. Section 82 provides that if the market value ratio of a fund’s in-house assets exceeds 5%, the trustee must provide a written plan setting out the steps proposed to be taken in order to ensure that one or more of the fund’s in-house assets are disposed of so as to bring the market value ratio of in-house assets back down to 5% or less.
11. Section 83 provides that if the market value ratio of a fund’s in-house assets exceeds 5%, a trustee of the fund must not acquire an in-house asset.
12. The respondents accept that the loans were in-house assets of the Fund and that, in the relevant period, the market value ratio of the Fund’s in-house assets exceeded 5%. The respondents also accept that, contrary to s 83, the first respondent, in the relevant period, acquired further in-house assets (represented by the second, third and fourth of the loans) and that, contrary to s 82, the first respondent failed to provide a written plan as prescribed by the Act, with the consequence that s 84(1) has been contravened.
13. Section 109 of the Act provides as follows:

(1) A trustee or investment manager of a superannuation entity must not invest in that capacity unless:

(a) the trustee or investment manager, as the case may be, and the other party to the relevant transaction are dealing with each other at arm’s length in respect of the transaction; or

(b) both:

(i) the trustee or investment manager, as the case may be, and the other party to the relevant transaction are not dealing with each other at arm's length in respect of the transaction; and

(ii) the terms and conditions of the transaction are no more favourable to the other party than those which it is reasonable to expect would apply if the trustee or investment manager, as the case may be, were dealing with the other party at arm's length in the same circumstances.

14. The respondents accept that, when making the loans, the first respondent, as trustee, was not dealing at arm’s length with the borrower in each case and that the terms and conditions of the loans were more favourable to the borrower than would be reasonably expected if the first respondent had been dealing at arms’ length, with the consequence that s 109(1) has been contravened.
15. As I have noted, each contravention involves a civil penalty provision: see ss 62(2), 84(2), 109(2) and 193. In that connection s 196 of the Act provides as follows:

(1) This section applies if the Court is satisfied that a person has contravened a civil penalty provision, whether or not the contravention also constitutes an offence because of section 202.

(2) The Court is to declare that the person has, by a specified act or omission, contravened that provision in relation to a specified superannuation entity, but need not so declare if such a declaration is already in force under Division 4.

(3) The Court may also make against the person an order that the person pay to the Commonwealth a monetary penalty of an amount specified in the order that does not exceed 2,000 penalty units.

(4) The Court is not to make an order under subsection (3) unless it is satisfied that the contravention is a serious one.

(5) The Court is not to make an order under subsection (3) if it is satisfied that an Australian court has ordered the person to pay damages in the nature of punitive damages because of the act or omission constituting the contravention.

16. The applicant is a person who, by delegation, is empowered to make an application for civil penalty orders: see s 197.
17. As I have noted, the respondents rely, by way of defence, on s 323(2) of the Act. Section 323 provides as follows:

323 Relief from civil liability for contravention of certain provisions

Proceedings to which this section applies

(1) This section applies to:

(a) eligible proceedings (within the meaning of section 221); and

(b) proceedings under subsection 55(3).

Defences

(2) Subject to subsection (4), in proceedings against a person (the defendant) in respect of a contravention, it is a defence if the defendant establishes:

(a) that the contravention was due to reasonable mistake; or

(b) that the contravention was due to reasonable reliance on information supplied by another person; or

(c) that:

(i) the contravention was due to:

(A) the act or default of another person; or

(B) an accident; or

(C) some other cause beyond the defendant’s control; and

(ii) the defendant took reasonable precautions and exercised due diligence to avoid the contravention.

Meaning of another person

(3) For the purposes of the application of subsection (2) to the defendant, a reference to another person does not include a person who was, at the time when the contravention occurred:

(a) in any case—a servant or agent of the defendant; or

(b) if the defendant is a body corporate—a director, servant or agent of the defendant.

Notice to be given about reliance on defence

(4) If a defence provided by subsection (2) involves an allegation that a contravention was due to:

(a) reliance on information supplied by another person; or

(b) the act or default of another person;

the defendant is not entitled to rely on that defence unless:

(c) the court grants leave; or

(d) both:

(i) the defendant has served on the person by whom the proceedings were instituted a written notice giving such information:

(A) that would identify, or assist in the identification of, the other person; and

(B) as was then in the defendant’s possession; and

(ii) that notice is served not later than 7 days before the day on which the hearing of the proceedings begins.

18. The notice required by s 323(4) was given in the present case. No issue arises from the limitation imposed by s 323(3).
19. Alternatively the respondents rely on s 221 of the Act, which provides as follows:

(1) In this section:

eligible proceedings means proceedings for a contravention of a civil penalty provision (including proceedings under section 218) but does not include proceedings for an offence (except so far as the proceedings relate to the question whether the court should make an order under section 216).

(2) If, in eligible proceedings against a person, it appears to the court that the person has, or may have, contravened a civil penalty provision but that:

(a) the person has acted honestly; and

(b) having regard to all the circumstances of the case, the person ought fairly to be excused for the contravention;

the court may relieve the person either wholly or partly from a liability to which the person would otherwise be subject, or that might otherwise be imposed on the person, because of the contravention.

(3) If a person thinks that eligible proceedings will or may be begun against him or her, he or she may apply to the Court for relief.

(4) On the application under subsection (3), the Court may grant relief under subsection (2) as if the eligible proceedings had been begun in the Court.

(5) For the purposes of subsection (2) as applying for the purposes of a case tried by a judge with a jury:

(a) a reference in that subsection to the court is a reference to the judge; and

(b) the relief that may be granted includes withdrawing the case in whole or in part from the jury and directing judgment to be entered for the defendant on such terms as to costs as the judge thinks appropriate.

(6) Section 323 provides for additional relief from liability.

FINDINGS OF FACT

20. The second and third respondents are husband and wife.
21. From 20 July 1987 until 31 May 2003, the second respondent was employed by Qantas Airways Limited in various logistical capacities, including as a storeman with Qantas Flight Catering, and as an inventory analyst and stores manager. He completed a TAFE diploma in management in 1998, although that course did not touch upon superannuation, trusts or corporate structures. He left Qantas to explore better prospects, which I describe below.
22. The third respondent is a neurophysiologist. She was initially employed in public hospitals in New South Wales but, for approximately the last 14 years, she has worked as an independent contractor to medical practitioners in New South Wales.
23. The first respondent was incorporated on 7 April 1997 and has been the vehicle through which the third respondent has provided her services as a neurophysiologist. The second and third respondents are the only directors and shareholders of the first respondent and were the only directors and shareholders in the relevant period. I am satisfied on the evidence that, in the relevant period, they directed and controlled the first respondent and that, in light of the facts to which I will now refer, the concession that, subject to the defences raised, they were involved in the first respondent’s contraventions (and thus contravened the Act) was properly made.
24. In 1989 the third respondent engaged Mr Douglas Witham to act as her accountant and tax agent. At that time Mr Witham carried on practice as a public accountant and registered tax agent under the name of Witham & Associates Accountants (Witham & Associates) at Brighton-Le-Sands in New South Wales. In 1991 the second respondent also engaged Mr Witham as his accountant and tax agent. Mr Witham continued to act as accountant and tax agent for each of the second and third respondents until 2004, when the practice of Witham & Associates was sold, with effect from 31 July 2004, to a company operated by Mr Dominic Strati.
25. Witham & Associates were involved, predominantly, in the preparation of income tax returns, including returns for individuals, partnerships, companies, superannuation funds and trusts. The practice also prepared business activity statements with the introduction of goods and services tax in 2000. From time to time the practice also assisted its clients to establish small, self-managed superannuation funds. Mr Witham handled most of the face to face contact with clients. He then delegated a large part of the work to his employees. When the practice was sold in July 2004 it employed 11 people, comprising seven accountants (including Mr Witham) and four support staff, and had between 2,700 and 3,000 clients.
26. Some time during the 1999 tax year, the second and third respondents decided to establish their own superannuation fund. The second respondent initially believed that he could roll-over his superannuation entitlements with Qantas into that fund. He subsequently received advice from Qantas that this was not possible at that time. The second and third respondents wanted to establish their own superannuation fund because they believed that they would have greater control over how their superannuation was invested and could avoid high management fees for what they otherwise perceived to be poor benefits offered by public funds. They engaged Witham & Associates to set up the Fund and to advise them in relation to the conduct and management of the Fund. They dealt with Mr Witham. Mr Witham, in turn, engaged a company called Corporate Network Ltd to arrange for the preparation of all necessary documents.
27. The Fund was established by deed dated 1 December 1999. The second and third respondents attended upon Mr Witham who took them through (it would seem cursorily) the necessary documentation that had been prepared and that needed to be signed, to which signature flags had been attached. At this time Mr Witham also discussed the Fund’s investment strategy (including that there needed to be an investment strategy and a mix of investments) with the second and third respondents, albeit in general terms.
28. It is accepted by the parties that the first respondent has been the only trustee of the Fund and that the second and third respondents are the only members of the Fund. The Fund is a self managed superannuation fund within the meaning of s 17A of the Act and, since around 1 May 2003, has been a regulated superannuation fund within the meaning of s 19 of the Act.
29. Witham & Associates prepared the income tax returns for the Fund for the 2000, 2001 and 2002 tax years. Although having been established on 1 December 1999, and despite the second respondent’s initial intention to roll-over his superannuation entitlements with Qantas, the Fund received no contributions and had no assets in respect of those tax years. However, in the 2003 tax year, inward roll-overs and transfers totalling $100,980 were made to the Fund, representing the second respondent’s superannuation entitlements from Qantas. These monies were deposited into a bank account in the name of the first respondent as trustee for the Fund with the Qantas Staff Credit Union. As at 30 June 2003, the Credit Union Account had a balance of $102,880.54, representing the total contributions to and assets of the Fund as at that date.
30. During the 2003 tax year the second and third respondents asked Mr Witham to acquire a company for them to be used as the vehicle through which a Bakers Delight franchise would be acquired. The evidence shows that the second respondent was the prime mover in this proposed venture and that he proposed to take on (and has taken on) the primary role of managing and running the franchise business. Mr Witham arranged for the shares in a company that were owned by some other clients of Witham & Associates to be transferred to the second and third respondents. Thereafter, that company was within their exclusive control. The company’s name was then changed to Chrijos Enterprises Pty Limited (Chrijos).
31. The second respondent was primarily interested in one of two possible Bakers Delight franchises – an existing franchise at Padstow (a suburb in south-west Sydney) and a new franchise to be operated near Wynyard Station (in George Street, Sydney). In early 2003 the second respondent provided Mr Witham with projected figures relating to both sites, and possibly others. He asked Mr Witham to “look these over”. These figures had been given to the second respondent by Bakers Delight. Mr Witham suggested to the second respondent that he “would do better at Wynyard”. The second and third respondents pursued this option.
32. Although the second and third respondents sought legal advice from a solicitor in relation to the execution of legal documents relating to the acquisition of the franchise (such as the franchise agreement and a licence agreement providing for occupation of the Wynyard premises), such financial advice as they sought in relation to the acquisition of the franchise was sourced from Witham & Associates and, in particular, Mr Witham.
33. The second and third respondents expected that the franchise would commence in about August or September 2003, but there were delays. The franchise business eventually commenced operation on 3 November 2003 (with settlement of the acquisition not occurring until approximately three months later in February 2004).
34. The second and third respondents initially anticipated that the acquisition costs of the new franchise would be approximately $385,000. This was based on an estimate given by Bakers Delight. The evidence does not disclose when this estimate was given. What is clear is that the second and third respondents needed to borrow money to fund the acquisition. It is not suggested that, at this time, Chrijos had any assets or that the second or third respondents had any liquid assets that could be used for the acquisition.
35. It emerged in the course of the second respondent’s and the third respondent’s oral evidence that Mr Witham played a significant role in this regard, effectively organising finance with Bankwest (which he had recommended to the second and third respondents) and providing advice in relation to options presented by the bank. In his own oral evidence Mr Witham acknowledged that finance with Bankwest had been arranged through his office and that commission had been earned as a result. Bankwest agreed to lend, in total, the sum of $385,000. The proposal was that $225,000 would be lent to Chrijos (secured by charge over the company and all its assets) and that $160,000 would be lent to the second and third respondents (secured by mortgage over their residence), which would then be on-lent by them to Chrijos for the purposes of the acquisition. This proposal required them to re-finance their residence with Bankwest.
36. However, before operation of the franchise commenced, Bakers Delight revised its estimate and advised the second and third respondents that the sum required to complete the acquisition of the franchise would be $440,000, which included an amount for goods and services tax. The evidence does not disclose the breakdown of the additional amount that was required (in particular, the amount said to be required to pay goods and services tax).
37. The evidence from the respondents at this point in the chain of events is somewhat incomplete and confusing. Significantly, the evidence in chief of the second and third respondents (represented primarily by the reading of two affidavits of the second respondent sworn on 9 April 2010 and 11 November 2010 and two affidavits of the third respondent sworn on 9 April 2010 and 15 November 2010), on analysis, varied in substantial respects from the oral evidence given by them in the course of cross examination.
38. In his affidavit sworn on 9 April 2010 the second respondent said that “Chrijos had sufficient funds to complete the purchase of the bakery business but had insufficient funds to pay GST on the purchase and insufficient funds for immediate operating capital”. He said that, as a consequence, Chrijos secured a further short term (three month) line of credit with Bankwest in the amount of $40,000. However, after Chrijos commenced trading, he determined that Chrijos would have insufficient funds to repay the short term line of credit and to meet “ongoing capital requirements”. He said that he and the third respondent then had a meeting with Mr Witham some time before 10 October 2003. According to the second respondent’s affidavit, the second and third respondents showed Mr Witham “the trading figures of Chrijos” and Mr Witham said words to the effect of: “Just borrow it from your Super and we will fix up the paperwork later ... Draw up a simple loan agreement and charge 8%”. The significance of such a meeting occurring and of such advice being given some time before 10 October 2003 lies in the fact that, on that date, the first respondent lent $80,000 to Chrijos as “start up capital” for the franchise to be conducted at the Wynyard premises. This was the first loan to give rise to the contraventions pleaded in the statement of claim.
39. The third respondent gave the same account in her affidavit of 9 April 2010. Conspicuously, a number of paragraphs in this affidavit mirror corresponding paragraphs of the second respondent’s affidavit of the same date, giving rise to some concern that both affidavits had been prepared in a formulaic manner. Another concern is that both affidavits recount facts at a high level of generality, glossing over important facts. For example, both affidavits conspicuously lack relevant detail in relation to such matters as the respondents’ dealings with Bakers Delight on the acquisition of the franchise and with Bankwest in relation to the financing of that acquisition, particularly at the critical time when Bakers Delight revised its estimate of the funds required to complete the acquisition of the franchise, when more detailed evidence could reasonably have been expected on these matters.
40. Quite apart from these deficiencies, it is clear, in any event, that the account, as given in each of these affidavits, cannot be accurate in all respects, in light of the accepted fact that Chrijos did not commence to operate the franchise until 3 November 2003. Thus it cannot be the case that, based on Chrijos’ actual trading figures, the second respondent determined at a time prior to 10 October 2003 that Chrijos would have insufficient funds to repay any short term line of credit advanced by Bankwest or that he or the third respondent showed Mr Witham actual trading figures in relation to Chrijos’ conduct of the franchise at a time prior to 10 October 2003. Moreover, as to the question of the repayment of credit accommodation granted by Bankwest, the evidence shows quite clearly that, in the period 30 September 2003 to 29 June 2004, Chrijos maintained a credit balance in its account with Bankwest, except for an isolated occasion on 18 February 2004 (obviously long after 10 October 2003) when the account went into debit for that day only for the relatively small sum of $1,179.83. Apart from this one instance the account records show that no occasion arose for Chrijos to use any short term line of credit because the loan of $80,000 (that is, the first loan) together with cash deposits from the takings of the franchise business were sufficient to meet Chrijos’day-to-day expenses as well as, it would seem, certain acquisition costs of the franchise (including goods and services tax). Thus there could not have been a concern, based on actual trading results, that Chrijos would be unable to repay temporary credit accommodation granted by Bankwest at any time relevant to this matter.
41. In his subsequent affidavit sworn on 11 November 2010 the second respondent referred to his earlier affidavit in this regard and added that his recollection was that the meeting with Mr Witham was “set up to discuss the fact that there was a shortfall to pay for the purchase and there was no operating capital for the business”. He said that “the meeting took place in the boardroom at Doug Witham’s office”.
42. In her subsequent affidavit sworn on 15 November 2010 the third respondent also gave, in identical terms, her recollection as to why the meeting with Mr Witham was set up. She added that she recalled Mr Witham saying, in effect: “You can borrow money from your super as long as you pay it back”.
43. These additional statements by the second and third respondents were not necessarily inconsistent with the account that had been given by them in their previous affidavits. However, when seen in light of the subsequent cross examination of each deponent, it becomes plain that the additional statements in the subsequent affidavits really presaged a different account of circumstances leading to the alleged meeting with Mr Witham that was more in keeping with other facts. It is to that account to which I now turn.
44. In cross examination it emerged from the second respondent that when Bakers Delight gave the revised estimate to complete the acquisition, it was also drawn to the second respondent’s attention that there was a shortfall of $55,000 between that amount of the revised estimate ($440,000) and the respondents’ intended borrowings with Bankwest ($385,000). Not unreasonably, Bakers Delight asked in effect: how would the balance be paid? The second respondent gave evidence that this revised estimate was given by Bakers Delight in the month immediately preceding the opening of the franchise business for trade and that, because Mr Witham “did all of the running around for us with the loans”, the second and third respondents arranged to see him within one week of the revised estimate having been provided.
45. It also emerged from the second respondent’s cross examination that, at this time, quite apart from the total amount of $385,000 to be advanced by it, Bankwest had also agreed to provide short term credit accommodation in the amount of $40,000 for the purpose of paying, for example, goods and services tax on the acquisition. In other words, according to the second respondent, it was “part of the loan package”. However, even taking into account the availability of additional funds to be provided by credit accommodation, there was going to be a shortfall in the amount required to complete the acquisition. It also seems that, at this time, the second and third respondents had come to the realisation that they had no working capital whatsoever for what was a start-up business. The effect of this evidence was that it was in these circumstances at this time that the meeting with Mr Witham had taken place.
46. The second respondent gave further evidence in cross examination that, at this meeting, the fact that “we came up short on the figure that Bakers Delight wanted and we needed working capital” was discussed. There is some confusion in the second respondent’s oral evidence as to whether it was suggested by Mr Witham or by the second respondent himself that an additional $80,000 was needed. I do not think that the resolution of that matter is of significance. According to the second respondent, Mr Witham advised that “with a new business the more working capital you’ve got, the better you are ...” The second respondent said that, at this meeting, there was no discussion about the term of any such loan.
47. In cross examination the second respondent accepted that, on reflection, the statement made in his affidavit of 9 April 2010 that Chrijos had sufficient funds to complete the purchase of the bakery was not correct; the fact was that Chrijos had “insufficient funds to complete the whole project”. He also said that the statement in his affidavit about showing the “trading figures of Chrijos” to Mr Witham was intended to be a reference to showing “the settlement figures ...the cost of actually going into that business”; in other words the “figures” to which the second respondent was intending to refer in his affidavit was in fact the revised estimate provided by Bakers Delight. The second respondent also volunteered the fact that the credit balance in Chrijos’ account (because of the loan of $80,000 from the first respondent) was such that there was no practical need to use the short term credit that had been extended by Bankwest after the business commenced to trade.
48. In cross examination the third respondent gave evidence that she and the second respondent realised before the business commenced to trade that they had insufficient funds to run it and to pay goods and services tax and other monetary liabilities that would be incurred in the short term. She said that she could recall having a meeting with Mr Witham in which he told the second and third respondents that they could borrow the funds they needed from the Fund. However, she could not be specific about when the meeting occurred. She gave this evidence:

Q: Now, do you recall one way or another whether or not the meeting you go on to describe in your affidavit with Mr Witham took place before the shop was opened or after the shop was opened and if you want me to put the question again, I will?
A: We had discussions with him throughout the whole process. So before it opened, whilst it was open and then he retired in the meantime.

49. She was later pressed on this issue:

Q: Is it possible – I want to suggest to you, Ms Stroud, that, in fact, the conversation you recall, you say in your affidavit that was sworn this morning, having with Mr Witham, in fact, took place well after the opening of the business in November 2003; that’s possible, isn’t it?
A: It’s possible, but I don’t think so.

50. Mr Witham gave evidence that he had no recollection of any such meeting with the second and third respondents. In fact, he said that he had no recollection of meeting the second and third respondents after 18 August 2003, being the date on which the income tax returns for the Fund for the 2000, 2001 and 2002 years were signed by the second respondent.
51. Mr Witham said that it was his practice when meeting a client to make a file note to record the meeting and that this file note was placed on the paper file maintained with respect to that client. He said that if he had had any meeting with the second and third respondents, as alleged by them, then he would have made a file note of the meeting in accordance with his usual practice. Following the sale of Witham & Associates to Mr Strati, Mr Witham kept no records in relation to the first, second and third respondents, the Fund or Chrijos. He did not seek to approach Mr Strati to consult such records for the purpose of making his affidavit.
52. However, he denied that he had had any such meeting or that he had given the second and third respondents any advice about borrowing from the Fund. He said that he did not in October 2003, and does not now, have a detailed knowledge of the relevant provisions of the superannuation legislation which restrict the ability of a superannuation fund to lend fund monies to a member of the fund or to parties associated with the fund. However, he was aware in October 2003 that making such loans was restricted by legislation and that any loan by the first respondent to Chrijos would have been subject to those restrictions.
53. It is plain that there is a contest on the critical question of fact in this case, namely whether there was a meeting before 10 October 2003 between the second and third respondents and Mr Witham in which Mr Witham gave the advice which the second and third respondents say he gave. It seems to me that the resolution of this matter turns largely on the determination of that critical question of fact.
54. I have gone into some detail on what I regard as significant discrepancies between the affidavit evidence of the second and third respondents and the oral evidence given by them because those discrepancies are capable of reflecting adversely on their credit, particularly where there is a clear contest between the second and third respondents and Mr Witham on the critical question of fact I have identified. However, I was impressed by the open and candid way in which each of the second and third respondents gave their oral evidence. I am confident that they were striving to be as accurate as possible as to their recollection of events leading up to the opening of the new business. Having reflected on the matter, I have come to the view that the differences between their affidavit evidence and their oral evidence more likely result from an inattention to detail and an inability to marshal effectively and to communicate with precision, at the time the affidavits of 9 April 2010 were prepared and made, all the facts and circumstances that should have been presented as confronting the second and third respondents in the period leading up to the opening of the new business, rather than from dishonesty.
55. Although I have not found it easy to reach a view on the critical question of fact, I accept, after some anxious consideration, that the second and third respondents were told by Mr Witham, prior to 10 October 2003, that money could be borrowed from the Fund and that they acted on that advice and information. In that connection I also accept that he told them that the first respondent should charge interest at the rate of 8% per annum and that the borrowing should be documented by creating a simple loan agreement. I am persuaded to this view for the following reasons:

(a) The second and third respondents were, at that time, unsophisticated in business and financial matters. I am satisfied on the balance of probabilities that they consulted Mr Witham, as their accountant of some long-standing, in relation to the acquisition of the franchise. I am also satisfied on the balance of probabilities that Mr Witham provided advice to the second and third respondents in relation to the acquisition and that Mr Witham played a significant and active role, either himself or through his employees, in organising finance for the respondents with Bankwest. Mr Witham, in cross examination, acknowledged that “one of the people in our office had relations with Bankwest” and that commission was earned “by the company that does those loans”. In the context in which that evidence was given, I understood Mr Witham to be referring to a company associated with the practice of Witham & Associates.

(b) I am satisfied on the balance of probabilities that, in the month immediately preceding the opening of the business, Bakers Delight did provide a revised estimate to the second respondent of the amount that would be required to complete the acquisition of the franchise and that this led to a realisation by the second and third respondents that there would be insufficient funds available to them and Chrijos, by way of loans and credit accommodation from Bankwest, to complete the acquisition and to carry on the business in the short term.

(c) The shortfall in available funds was obviously a matter that would have been of considerable concern to the second and third respondents at that time, particularly in light of the fact that completion was looming and there appears to have been no other available means of obtaining financial assistance to complete the acquisition and to enter into possession of and run the new business.

(d) In these circumstances it seems to me to be highly likely that, when confronted with these realisations, the second and third respondents would have consulted Mr Witham on this question, as a matter of some urgency. I find that they did so. I therefore do not accept Mr Witham’s evidence that there was no such meeting.

(e) Having reached that conclusion, it seems to me that the second respondent’s evidence of what occurred at the meeting should be accepted in preference to Mr Witham’s lack of recollection of any meeting having occurred at all. These were matters of particular concern to the second respondent at the time, as the prime mover in the new venture. I accept that these were also matters of significant concern for the third respondent. However, while she did not abdicate her decision-making to the second respondent, the tenor of the third respondent’s evidence leaves me with the clear impression that she trusted and depended, not unjustifiably, on the second respondent to fully grasp and deal with the business and financial aspects of this new venture and to deal with the problems that might arise in that regard. It seems to me to be more likely that the second respondent would have greater recollection than the third respondent of events and of what transpired at the meeting. Having said that, I am of the view that the evidence given by the third respondent is consistent with and supportive of the evidence given by the second respondent in that regard.

(f) In observing the way in which they gave their oral evidence, and in considering the explanations they gave in responding to the questions put to them, I formed the strong view that the second and third respondents were persons who would both seek and act on advice in relation to financial and other matters in respect of which they have little experience. In all the circumstances, it seems to me to be unlikely that they would unilaterally take the step of borrowing from the Fund, and documenting that borrowing in the way that they did, in the absence of advice that they could do so. In all the circumstances, Mr Witham was the likely source of that advice.

(g) Although the affidavit evidence of the second and third respondents bears the criticisms I have made of it, their oral evidence provided a persuasive picture of the events that confronted them at the time. I am satisfied that they gave their evidence honestly. Taking into account all the objective circumstances, I am satisfied that their evidence of what occurred at the meeting is more likely than not an accurate statement of what occurred.

(h) Correspondingly, these matters would not have been of any particular significance to Mr Witham at the time. There is no particular reason why Mr Witham would have any independent recollection of events in the latter part of 2003 concerning the acquisition of the franchise. He made plain his view that, in the absence of having a recollection of a significant event, he would not accept the likelihood of it unless shown a file note. However it is clear that he did not seek to consult the relevant files for the purpose of giving his evidence. Indeed, he made it clear that he did not have access to the relevant files. He simply relied on his recollection, or lack of it. I should add that, although being responsive to particular statements made in the (unfortunately) very general affidavits of the second and third respondents of 9 April 2010, Mr Witham’s affidavit nevertheless did not reveal what I find to have been the significantly more extensive and active role he played in advising and assisting the second and third respondents in the acquisition of the Bakers Delight franchise that came to be revealed in the oral evidence of all witnesses. His affidavit gave the impression that, although knowing of the intended acquisition of the franchise, his involvement was limited to procuring Chrijos as the corporate vehicle by which that franchise would be operated. That was plainly not the case.

THE LOANS

56. The relevant loans were as follows:

(a) A loan by the first respondent to Chrijos for $80,000. The terms of the loan are recorded in a loan agreement dated 10 October 2003 that was signed by the second and third respondents (the first loan). The loan agreement provides for interest fixed at the rate of 8% per annum and that the loan is to be repaid in full on sale of the franchise business or on termination of the franchise agreement. The evidence is that an amount of $39,346.28 together with an unrevealed amount of interest is still outstanding under the loan agreement.

(b) A loan by the first respondent as trustee of the Fund to itself (in its personal capacity) in the amount of $21,648.70, for the purpose of paying out a lease on a motor vehicle that had been leased to it and used by the third respondent (the second loan). The purpose of paying out the lease was to allow the sale of the vehicle at an auction in December 2003. The terms of the loan are recorded in a loan agreement dated 28 November 2003 that was signed by the second and third respondents. The loan agreement provides that the loan was to be a short term loan at the discretion of the first respondent that was to be interest free and repaid in full by 28 January 2004, failing which “interest is charged, on a daily basis, at an annual rate equivalent to 15% compounding”. The loan has been repaid in full.

(c) A loan by the first respondent as trustee of the Fund to itself (in its personal capacity) in the sum of $27,800 for the purpose of purchasing a motor vehicle (the third loan). The loan agreement is dated 1 April 2005 and was signed by the second and third respondents. The loan agreement provides that the loan was to be for a five year term and that “interest is fixed @ 8% p.a. reducible”. In this connection the loan agreement provides for monthly payments of $563 payable by 60 instalments. The loan has been repaid in full.

(d) A loan by the first respondent as trustee of the Fund to Chrijos in the sum of $10,000 for the purpose of funding the purchase of a motor vehicle from the first respondent (the fourth loan). The loan agreement is dated 11 May 2005 and is signed by the second and third respondents. The loan agreement provides that the loan was for a three year term. It does not expressly state any interest rate, but it does provide for monthly payments of $313.36 by 36 instalments. It is clear that these repayments incorporate a component for interest. This loan has also been repaid in full.

CONSIDERATION

57. As I have found, at all relevant times the first respondent was within the exclusive control of the second and third respondents and acted through them. The knowledge of the second and third respondents of matters pertaining to the Fund was also the first respondent’s knowledge.
58. I am satisfied in all the circumstances that the making of the first loan was due to reasonable reliance on information supplied by another person, namely Mr Witham. In that instance the information was that a loan could be made by the Fund, including to persons who were associated in some way, directly or indirectly, with the Fund. Specifically, such a loan could be made to Chrijos. The information was not qualified in the sense that such a loan was subject to any particular monetary limit. In particular, the information was not qualified in terms of the proscription in s 83 of the Act. The only apparent limitations on the information appear to be that interest should be charged and that the loan should be documented. Those limitations were obeyed in the case of the first loan.
59. I am satisfied in all the circumstances that it was reasonable for the second and third respondents (and hence the first respondent) to rely on that information. Mr Witham was a trusted adviser whom the second and third respondents consulted not only on taxation matters but also in relation to the establishment of the Fund and the acquisition of the Bakers Delight franchise. As I have found, the second and third respondents were persons who would seek and act on advice in relation to financial and other matters in respect of which they have little experience. They did so in this case, which led directly to the giving of the information on which they relied. I am satisfied that they had no reason to doubt the reliability of the information they had been given or its suitableness in the circumstances.
60. In this latter regard, the applicant did advance a submission based on clause 1.9 of the deed establishing the Fund. That clause included the following references:

Trustee’s Powers

The Trustee must manage the Fund for the benefit of the Members and has wide powers that are subject to restrictions which are set out in the Relevant Law [a reference which includes the Act] and also in the Rules.

The Trustee may invest the Fund in investments of any kind provided these are allowed by the Relevant Law...

There are investment restrictions in the Relevant Law relating to “in house assets”. Generally, all investments must be made on an “arms length basis” and investments that confer a benefit on a “related party” are subject to restrictions in the Relevant Law. A Related Party includes a relative or a business associate or a related company, partnership or trust of the Members, the Trustee or the Employer.

The Relevant Law and the Rules contain major restrictions on the power of the Trustee to borrow...

61. The applicant submitted that the evidence makes good the proposition that the second respondent read that clause, presumably at the time he signed the trust deed or shortly thereafter. It followed, according to the applicant’s submission, that, in light of that fact, the second respondent could not have been acting with due care if in fact he did act on the advice and information he says that Mr Witham gave him in respect of the first loan.
62. In my view the evidence does not make good the proposition on which the submission is based. In cross examination, the second respondent said that he could not recall whether the trust deed was a document which Mr Witham took him through, although he accepted that it was possible that that did happen. In that connection the second respondent gave the following evidence:

Q: What I’m asking you about, Mr Pike, is whether you have a practice today of before signing a document, reading it?
A: As to reading it to the best of my ability?

Q: Yes?

A: I mean - - - 

Q: Let me perhaps clarify that. What I mean by a practice is in general terms, if someone brings you a document to sign, is it your custom to read the document before you sign it?

A: I think if I could say it depends on the person who is giving me the document.

Q: I see. Now, a matter such – sorry, a document such as this which is a trust deed in relation to the establishment of the Hodpik superannuation fund, is it your evidence that this document was provided to you by Mr Witham?

A: Yes, it was.

Q: And is this – let me, perhaps, ask this question. You’ve given an answer in relation to your practice or custom today, are you able to recall what your practice was in terms of signing documents in 1998, 1999?

A: Specifically in relation to Mr Witham or - - - 

Q: Generally. Now, let me ask it again, I don’t want to confuse you. If someone came to you in 1998, 1999 and asked you to sign a document, would it be your custom to read it before you signed it?

A: Yes.

Q: And does it follow from that that in – sorry, let me withdraw that. Do you accept, Mr Pike, that in accordance with your practice at the time, you would have read a copy of the trust deed before you signed it?

A: I would assume I would look over it but I can’t have a solicitor there every time I sign something.

Q: Yes?

A: I have to rely on the advice of my accountant. If my accountant says to sign something, I will sign it.

Q: Yes, but you’ve answered, I think, in answer to some questions, and no criticism is made of you in this respect, you don’t specifically recall what Mr Witham told you in relation to the documents that he provided you at the time of the establishment of the fund, do you?

A: I don’t think a lot was said, no.

63. I am not satisfied that, at the time the Fund was established, Mr Witham did anything more than take the second and third respondent through the documents that Corporate Network Ltd had caused to be prepared for the purpose of indicating where those documents should be signed. Mr Witham gave no evidence that he drew clause 1.9 to the attention of the second and third respondents or otherwise explained to the second and third respondents that there were restrictions in relation to in-house assets. Indeed, in his own evidence Mr Witham sought to distance himself from any detailed knowledge of the restrictions on lending imposed by the Act. The evidence really shows that the second and third respondents were completely oblivious to any such restrictions until they were informed by Mr Strati, in the course of an audit of the Fund after all the loans had been made, that the making of such loans was in contravention of the Act. The fact that they did not consult the trust deed either before or after they had been given the information in relation to the first loan, as a means of testing the reliability or appropriateness of the information they had been given, does not mean that their reliance on that information was not reasonable in all the circumstances.
64. As the present proceedings are “eligible proceedings” for the purposes of s 323(1) of the Act, I am satisfied that s 323(2)(b) operates as a defence for each of the respondents in respect of the contraventions of s 62(1), s 84(1) and s 109(1) pleaded in the statement of claim in so far as those contraventions arise from the fact of making the first loan.
65. The making of the second, third and fourth loans are in a somewhat different position. Mr Witham gave no advice or information to the second and third respondents in relation to those loans, which were made in quite different circumstances to those attending the making of the first loan. However, I am satisfied that, as a result of the giving of the initial information in relation to the first loan, the second and third respondents had formed the genuine but mistaken belief that it was legally and commercially appropriate for the first respondent, as trustee of the Fund, to make loans from the Fund, including to itself, provided interest was charged and the loan was documented. In the circumstances in which that belief was engendered, I am satisfied that, in proceeding on that basis in relation to the making of the second, third and fourth loans, the second and third respondents (and hence the first respondent) were acting on the basis of a mistake that was reasonable. Once again, they had no reason to doubt the reliability or appropriateness of the initial information that had been given to them. I accept that they believed that they were acting in accordance with that information.
66. Subject to one matter that I will mention, I am satisfied that s 323(2)(a) of the Act operates as a defence for each of the respondents in respect of the contraventions of s 62(1), s 84(1) and s 109(1) pleaded in the statement of claim, in so far as those contraventions arise from the fact of the making of each of the second, third and fourth loans.
67. The one matter that gives me pause is the fact that the second loan is expressed to be interest-free if repaid within the time stipulated. It might be argued, in relation to the making of that loan, that, in the circumstances, the contraventions were not due to reasonable mistake within the meaning of s 323(2)(a) because the second and third respondents were not acting on a mistake engendered by the information that had been given to them originally. I am not sure that, in those circumstances, it necessarily follows that those contraventions were, nevertheless, not due to reasonable mistake. However, it is not necessary for me to resolve that issue because, for reasons I will give, I am satisfied that the second and third respondents (and hence the first respondent) were nevertheless acting honestly and that, having regard to all the circumstances of the case, the respondents should be relieved, in any event, from any liability under the Act to which they would otherwise be subject by the making of the second loan. Thus, to that extent, the respondents can rely on s 221(2) of the Act.
68. However, before coming to the availability of s 221(2) of the Act, there is another matter I should note which was not specifically addressed in submissions. With the exception of the contraventions relating to s 82 of the Act, the other contraventions can be seen as arising directly from the fact of the making of the loans. Section 82 is in a different position because, given a certain state of affairs (namely, that the market value ratio of a fund’s in-house assets exceed 5% as at the end of a year of income after the 2000-2001 year of income) the trustee of a regulated superannuation fund is to take the specific step of preparing a written plan setting out, amongst other things, the steps the trustee proposes to take to ensure that one or more of the fund’s in-house assets are disposed of so as to bring the market value ratio of in-house assets back down to 5% or less.
69. In the present case it is accepted by the respondents that the market value ratio of the Fund’s in-house assets was 66.7% as at 30 June 2004; 69.59% as at 30 June 2005; 66.81% as at 30 June 2006, and 24.52% as at 30 June 2007. It is also accepted by the respondents that the first respondent did not prepare in any of the years of income ended 30 June 2004, 30 June 2005, 30 June 2006 and 30 June 2007, a written plan dealing with the matters prescribed in s 82(4) of the Act. Those contraventions cannot be said to be due to reasonable reliance on information supplied by another person or reasonable mistake. If anything, those contraventions can be said to be due to ignorance of the state of affairs giving rise to the obligation and, perhaps, of the obligation itself. Thus s 323(2)(a) and (b), on which the respondents rely, do not assist them in so far as the contravention of s 84(1) rests on the contravention of s 82.
70. I now turn to s 221. The applicant made clear that it did not advance a case that the respondents were acting dishonestly in relation to the making of the loans. I am satisfied that, in fact, the respondents were acting honestly, as witnessed by their documenting of the loan transactions and submitting that documentation to their accountant, Mr Strati. As I have found, they believed that they were acting legally and commercially appropriately in relation to the making of the loans.
71. The applicant submitted, however, in reliance on Vivian (Deputy Commissioner of Taxation (Superannuation)) v Fitzgeralds [2007] FCA 1602; (2007) 69 ATR 834, that the contraventions were serious, the relevant provisions having been characterised as “civil penalty provisions”. The applicant submitted that the second and third respondents should have read the trust deed establishing the Fund (which would have alerted them to clause 1.9 thereof and the fact that there were restrictions on lending) and that, in relation to the second, third and fourth loans, the second and third respondents should have obtained advice because those loans were made in circumstances significantly different to those attending the making of the first loan. These last two matters were relied upon as indicators of carelessness which told against the application of s 221(2) in all the circumstances of the case.
72. Undoubtedly the fact that Parliament saw fit to impose civil penalties for contravention of certain provisions of the Act signifies that such contraventions are serious matters. However, s 221 is specifically directed to such contraventions. Thus, whilst signifying the serious nature of such contraventions, the Act itself recognises that, in certain circumstances, a person contravening the Act should nevertheless be relieved from the consequences of that contravention, quite apart from the additional relief from liability provided by the defences in s 323 of the Act. The fact, therefore, that, by the process of characterisation relied on by the applicant, the contraventions are serious does not mean that, by that characterisation alone, a person contravening one of those provisions should be denied the availability of s 221(2). Section 221(2) specifically requires that the Court should have regard to all the circumstances of the case in considering whether a person who has nevertheless acted honestly ought fairly to be excused for the contravention.
73. I accept that the fact that the second and third respondents did not consult the trust deed or did not seek advice in relation to the making of the second, third and fourth loans are matters that comprise part of the circumstances of the case. However, I would not see those matters as being, of themselves, of such significance that s 221(2) cannot be applied in the present case. Mistakes have been made. But those mistakes can be seen to have their genesis in the fact that the second and third respondents did in fact seek advice which led them to believe that the Fund could make loans of the kind that were in fact made. There is nothing in the evidence to suggest that the second and third respondents acted in any underhand way. Quite to the contrary; they documented the loans believing that they were doing the right thing and believing, no matter how mistakenly, that they were acting legally and appropriately. I believe that they have tried to do the right thing, but have fallen significantly short of what the Act requires of them. Nevertheless, in all the circumstances, this seems to me to be an appropriate case in which the respondents are entitled to the benefit of s 221(2) to the extent that s 323 itself does not relieve them from liability.
74. For these reasons the application should be dismissed. I will hear the parties on the question of costs.
    

I certify that the preceding seventy-four (74) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates.

Associate:

Dated: 7 February 2011