Healey and Australian Securities and Investments Commission [2000] AATA 9 (14 January 2000)

Last Updated: 14 January 2000

DECISION AND REASONS FOR DECISION [2000] AATA 9

ADMINISTRATIVE APPEALS TRIBUNAL )

) No N1999/157

GENERAL ADMINISTRATIVE DIVISION )

Re GREGORY HARRISON HEALEY

Applicant

And AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

Respondent

DECISION

Tribunal Mr BJ McMahon (Deputy President)

Date 14 January 2000

Place Sydney

Decision The decision under review is varied by substituting a period of two years instead of a period of four years.

(Sgd) BJ McMahon

..............................................

Deputy President

CATCHWORDS

CORPORATIONS - section 600 Corporations Law - notice to show cause - whether there was sufficient reason to issue the notice - application of section 533 Corporations Law - Liquidators report - relevance of the directors fitness and conduct - procedural fairness - trustees right of indemnity - whether transfer of trust property extinguishes trustee right of indemnity - application for creditors of the trustee - lack of uncommercial or fraudulent conduct - chronic failure to file annual returns - failure to keep adequate books of account - failure to deliver nominated accounts to liquidator - disregard of duties as a director established for s600 notice

Corporations Law ss 292, 293, 476, 533(1), 588FB, 592(6), 600

Corporations Law 1993 ss 9, 576, 575

Companies Code s562A

Jorgenson v Australian Securities Investments Commission (1999) 30 ACSR 481

Re Sheslow and Australian Securities Commission (1994) 12 ACLC 740

Friend v Corporate Affairs Commission and another (1989) 7 ACLC 106

Dwyer v national Companies and Securities Commission (Number 2) (1989) 7 ACLC 743

Kardas v Australian Securities Commission 29 ACSR 304

Laycock v Forbes (1997) 150 ALR 186

Re Delonga and the Australian Securities Commission 13 ACLC 246

Global Funds Management (NSW) Let v Burns Philp Trustee Co Ltd unreported Supreme Court of NSW, 1990

Jennings v Mather [1901] 1 QB 108

Octavo Investment Pty Limited v Knight (1979) 144 CLR 360

Commissioner for Corporate Affairs (WA) v Ekamper (1988) 12 ACLR 519

REASONS FOR DECISION

Mr BJ McMahon (Deputy President)

1. This is an application to review a decision of a delegate of the respondent made under subsection 600(3) of the Corporations Law to prohibit the applicant from managing a corporation without the leave of the Court for a period of four years commencing from the date of service of the notice of prohibition dated 12 January 1999.

2. Section 600 is in the following terms:

"600 (1) For the purposes of this section:

(b) a relevant body is a section 600 body at a particular time if, and only if, within the period of 7 years ending at a time, a liquidator of the body has, under:

(i) subsection 533(1); or

(ii) a previous law corresponding to subsection 533(1);

reported or lodged a report with respect to, a matter relating to the ability of the body to pay its unsecured creditors; and

(c) a person shall be taken to be a relevant person in relation to a relevant body that is or was a section 600 body if, and only if, the person was a director of the body at any time during the period of 12 months ending on the day of the beginning of the winding up of the body.

(2) The Commission may give to a person who is a relevant person in relation to 2 or more relevant bodies that are, at the time of service, section 600 bodies a notice in writing requiring the person to show cause why the Commission should not serve on the person a notice under subsection (3).

(3) Where the Commission:

(a) has served on a person a notice under subsection (2); and

(b) has given the person an opportunity of being heard in relation to the matter;

the Commission shall, unless it is satisfied that it is not appropriate to do so, serve on the person a notice in writing prohibiting the person, for such period not exceeding 5 years as is specified in the notice, from managing a corporation.

(4) Where:

(a) the Commission has served a notice under subsection (2) on a person who is a relevant person in relation to 2 or more relevant bodies that were, at the time of service, section 600 bodies; and

(b) those 2 bodies have at any time been related to each other, or any of those bodies has at any time been related to any other of those bodies, as the case may be;

the Commission shall have regard to that fact in considering whether or not it is appropriate to serve on the person a notice under subsection (3).

(5) A person who is subject to a section 600 notice (whether served before or after the commencement of this section) must not, without the leave of the Court, manage a corporation.

(6) Section 91A defines what, for the purposes of this section, constitutes managing a corporation."

3. The relevant parts of section 533 are as follows:

"533(1) If it appears to the liquidator of a company, in the course of a winding up of the company, that:

(a) a past or present officer, or a member or contributory, of the company may have been guilty of an offence under a law of the Commonwealth or a State or Territory in relation to the company;

(b) a person who has taken part in the formation, promotion, administration, management or winding up of the company:

...

(ii) may have been guilty of any negligence, default, breach of duty or breach of trust in relation to the company; or

(c) the company may be unable to pay its unsecured creditors more than 50 cents in the dollar;

the liquidator shall:

(d) as soon as practicable lodge a report with respect to the matter ..."

4. Section 533 imposes an obligation on a liquidator to lodge a report with ASIC if he or she forms an opinion that certain wrongdoing may have taken place or that the company may be unable to pay its unsecured creditors more than 50 cents in the dollar. Whilst, undoubtedly, the liquidator must have reasonable cause for expressing such an opinion, the making of a section 533 report is not reviewable by this Tribunal. If any affected party became aware of the existence of the report, it might be possible to have the making of the report judicially reviewed. Normally, however, the report is treated as confidential coming from the liquidator to the Commission.

5. Nevertheless, a copy of that report is normally served (and quite properly should be served) where a show cause notice is given under subsection 600(2). The persons affected by the report then have an opportunity to deal with matters occurring in the report, which are not so much allegations as suggestions of possibilities. Evidence that was adduced at the hearing before me by which the applicant sought to show that the liquidator acted in bad faith is therefore, in my view, irrelevant in the present proceedings. The possibilities raised by the liquidator in two reports relating to two relevant insolvent companies formed the basis for the show cause notice under subsection (2) which led to a consideration of all relevant matters by the delegate.

6. The applicant also complained of lack of procedural fairness in the carrying out of the statutory procedures. In my view, that allegation cannot be sustained. Although the applicant was unaware of the existence of the relevant section 533 reports until copies were served with the show cause notice, he was given an opportunity to respond to them. By letter dated 27 August 1998, he advised that he wished to make written submissions. He later requested an extension of time which was granted and ultimately, by letter dated 27 November 1998, he made lengthy written submissions. He was under the impression that he would be further consulted before the delegate's report was finally made. In this he was mistaken. It was quite open to the delegate to proceed on the basis only of written submissions. He was under no obligation, in effect, to provide a draft report. If Mr Healey (a solicitor of 20 years standing) did not request an oral hearing before the delegate and did not take the opportunity of testing some of the matters raised in the liquidator's reports at that hearing, he cannot now complain of procedural unfairness. He was given an opportunity to be heard in accordance with the terms of the statute. Although an oral hearing is obviously preferable where there are factual matters in dispute, it is not necessary that one should be held if the affected party does not require it (Jorgensen v ASIC (1999) 30 ACSR 481).

7. The applicant raised two objections to the validity of the section 533 reports. The relevant bodies (Nikutu Pty Limited and Badebi Pty Limited) and the applicant (who is a relevant person for the purpose of section 600(1)) were involved with a number of other companies in litigation with the Commonwealth Bank of Australia and the State Bank of NSW. This litigation has proceeded for some years. Mr Healey alleges an agreement (which he refers to as a "workout agreement") with the banks involving an orderly disposal of assets in return for some forgiveness of debt. The existence of this agreement has been disputed and has been the subject of lengthy proceedings in the New South Wales Supreme Court and the Court of Appeal. On the petition of the Commonwealth Bank, Mr Healey's estate has been sequestrated in bankruptcy. His trustee declined to support an application to the High Court of Australia for special leave to appeal against the Court of Appeal's decision. That decision of the trustee itself is to be reviewed in the Federal Court later this year. It is therefore Mr Healey's contention that until the litigation has been concluded it is not possible to say whether either of the two relevant companies will pay less than 50 cents in the dollar to unsecured creditors. In my view, this is not a valid objection to the foundation of the section 533 reports. Firstly, it is not necessary for the liquidator to show (let alone prove) a deficit of more than half. If a reasoned opinion of possible deficiency or misconduct is expressed, that alone is sufficient to enliven subsection 600(1). Once the Commission is vested with jurisdiction, it may examine not only the matters in the reports but also all other relevant matters touching upon the exercise of its discretion.

8. The second objection to the validity of the section 533 reports was that the creditors, being the two banks, had been secured and that, accordingly, there was no evidence that unsecured creditors would suffer the requisite deficit. In my view, this is also not a valid objection. There was evidence that on the sale of assets which were subject to various securities, there was an insufficiency to clear the secured debt. To the extent of that gap, the banks remain unsecured creditors. It is open to the liquidator to treat them in that way in expressing his opinion as to the possibility of a less than half dividend to creditors.

9. Before turning to the substance of the reports and to the facts to be considered, it is necessary to determine the basis upon which the commission should be "satisfied that it is not appropriate" to serve a subsection (3) notice. The legislation is silent on the criteria to be applied. No discretion, however, is completely at large.

10. In Re Sheslow and Australian Securities Commission 12 ACLC 740, I observed that at that stage (24 August 1994) there had been no decision of the Federal Court relating to section 600. There were, however, many decisions of State Courts which involved a consideration of its predecessor, section 562A of the Code. I reviewed the principal cases and attempted in paragraph 10 to synthesise the principles emerging from those cases as follows:

"10 It is not necessary therefore to establish "super competence". It is also clear that a s 600 notice should not be served for punitive reasons. It is for the protection of the community, whether or not the director should be punished. It is necessary to show only that the director has been honest and that he has not been guilty of gross incompetence, that he has an appreciation of commercial morality, that he has not displayed a cynical disregard for the trading advantages of limited liability and that generally speaking his activities have not been dishonest, unscrupulous, untrustworthy or irresponsible. If these are shown, it is not appropriate to serve a 600 notice. I propose to apply these tests in considering the conduct of the applicant."

11. I was not, of course, attempting to establish the law. Indeed it is not my function to do so and it would be quite improper for me to attempt such a task. The language which I used was not mine. It consisted of quotations from judgements of respected Judges in earlier cases. The reference to "dishonest, unscrupulous, untrustworthy, irresponsible, or merely incompetent, company directors" is a reference to a passage in the judgement of Powell J in Friend v Corporate Affairs Commission and another (1989) 7 ACLC 106 at 115. The reference to "gross incompetence", "appreciation of commercial morality" and "cynical disregard for the trading advantages of limited liability" is a reference to a passage in the judgement of Young J in Dwyer v National Companies and Securities Commission (Number 2) (1989) 7 ACLC 743 at 746. I have done no more than put together the judgements which are reviewed on pages 742 and 743 of Sheslow.

12. My conclusions appear to have been disapproved by Heerey J in Kardas v Australian Securities Commission 29 ACSR 304 at 312. His Honour said:

"Counsel submitted that the delegate failed to make any findings as to gross incompetence, a lack of appreciation of commercial reality, a cynical disregard of the trading disadvantages of limited liability, dishonesty, lack of scruples, untrustworthiness or irresponsibility.

This argument was based on a misconception. Insofar as Sheslow decided that, before a prohibition can be ordered under s 600(3), there must be a finding of gross incompetence, lack of appreciation of commercial morality etc etc, or that a director can avoid such an order by merely establishing the absence of these particular factors, then in my respectful opinion it misstates the law. The existence or otherwise of such matters is doubtless relevant for the exercise of the discretion under s 600(3). But that is a very different thing from saying, as the counsel in the present case and Sheslow appear to say, that these various matters constitute some kind of statutory criteria.

In Laycock v Forbes (1997) 150 ALR 186; 25 ACSR 659; 15 ACLC 1814 at 1821 Goldberg J said, after referring to Blunt v CAC (NSW) (No 2) (1988) 14 ACLR 270; 6 ACLC 1077 at 1079, the English case of Re Dawson Print Group Ltd [1987] 3 BCLC 601 at 604 and Dwyer v NCSC (No 2) (1989) 15 ACLR 386; 7 ACLC 743 at 746:

However, these considerations [ie breach of standards of commercial morality or "really gross incompetence"] are not found in the terms of the legislation. Section 533 requires a liquidator to lodge a report if it appears to him in the course of the winding up of a company that an officer may have been guilty of an offence, that a person who has taken part in the management or winding up of a company has misapplied money or been guilty of any negligence, default or breach of duty or that the company may be unable to pay its unsecured creditors more than fifty cents in the dollar. The matters set out in s 533 are disjunctive so that a liquidator may simply report on the fact that a company may be unable to pay its unsecured creditors more than fifty cents in the dollar without reporting on any particular matter in respect of a director. It seems to me therefore that it does not necessarily follow that a disqualification order can only be made after there is established some conduct which is in breach of standards of commercial morality or involves gross incompetence. As s 600(2) entitles the Commission to give a notice to a person who is a relevant person in relation to two or more relevant bodies it seems to me that the legislation contemplates that it would be open to the commission to serve a notice on a person prohibiting him or her from managing a corporation simply because that person had been a director of two or more companies which had been unable to pay their unsecured creditors more than fifty cents in the dollar. Putting the matter another way, the power given to the Commission under s 600 may be exercised because of the fact of such an association independently of pointing to any particular default on the part of the person to whom the notice is addressed.

I respectfully agree with his Honour. I would add that it is important not to lose sight of the circumstances which must exist before s 600 can apply, namely that a liquidator has reported on the existence of one or more of the serious matters referred to in s 533 in relation to two or more companies of which the person concerned was a director. As Lady Bracknell might say, to lose one company may be regarded as a misfortune, to lose two looks like carelessness. The bare fact of s 533 reports being made in respect of two or more companies has been seen by Parliament as sufficient to raise the question whether the director concerned should, for the protection of the public, be prevented for a substantial period from benefiting directly or indirectly from the privilege of limited liability.

It would be inconsistent with the legislative purpose to read into the plain words of s 600 some further pre-conditions such as "gross incompetence". After all, unsecured creditors can suffer just as much loss from ordinary incompetence. As Lord Wright said in Caswell v Powell Duffryn Associated Collieries Ltd [1940] AC 152 at 175:

Generally speaking in civil cases "gross" negligence has no more effect that [sic] negligence without an opprobrious epithet."

13. I am, of course, bound by the authority of the Federal Court. As I understand His Honour's judgement, however, what has been disapproved are the conclusions which I drew and which are quoted above. The Court does not appear to have addressed the question whether the earlier cases (mostly NSW cases) are still to serve as a guide in determining the criteria to be applied under section 600. It may well be that they are now to be disregarded. Laycock seems to indicate that a mere failure to pay unsecured creditors more than 50 cents in the dollar by itself would be sufficient to justify a section 600(3) notice. If this is so, then the earlier State cases are clearly wrong.

14. It seems to me that there is a tension between the State and Federal authorities, which must ultimately be resolved by an appellate court. In Re Delonga and Australian Securities Commission 13 ACLC 246, this Tribunal (with a Judicial Member presiding) quoted from the judgment of Powell J in Friend's case, apparently with approval, but did not appear to deal with His Honour's observations in that case as helpful in determining relevant criteria. Instead, the Tribunal concluded as follows (at 254):

"Looking at these provisions in a general sense, their emphasis is upon a director's being open and frank in carrying out his or her duties and functions as a director of the company, upon his or her personal interests in dealing with the company, and upon his or her taking reasonable steps to ensure compliance with the accounting or reporting provisions of the Corporations Law and to ensure that the company only incurs debts when it is able to pay its debts as they fall due. Distilling the general principles yet further, the Corporations Law focuses upon the actions of directors in light of the need to protect the shareholders, actual and prospective, of the company and to protect the general public in so far as it attempts to ensure that the information which is given to the general public is adequate and accurate and that the general public does not deal with an insolvent company."

15. These observations are in general terms and do not appear to me to add to or detract from the authority of either stream of decisions.

16. For reasons which will later appear, I have not been troubled with these distinctions in arriving at my conclusions.

17. There were a number of allegations made by the liquidator in relation to both companies. After dealing with them the delegate reduced his area of concern to a smaller field. He based his findings on 5 failures set out in paragraph 9.48 as follows:

"9.48 I find Mr Healey's actions of:

9.48.1 transferring the Bronte property which hindered Nikutu's ability to be indemnified by the G H Healey Family Trust;

9.48.2 the failure to prepare profit and loss accounts and balance sheets for Nikutu subsequent to 30 June 1990;

9.48.3 failing to ensure that Nikutu maintained adequate books of account;

9.48.4 failing to deliver Badebi's books to the Official Liquidator;

9.48.5 failing to ensure the nominated companies and those companies noted at paragraph 8.9 lodged Annual Returns and/or lodged Annual Returns within the statutory period

have demonstrated his lack of understanding of the duties of a director and a disregard for the interests of creditors. His conduct indicates that it would be in the public interest for Mr Healey not to take part in the management of a company."

18. In addition to these 5 matters, the respondent's advocate relied upon 3 additional matters namely, the circumstances surrounding the transfer of the Chatswood property, a failure to prepare Reports as to Affairs in a timely way and a general lack of understanding of corporations law on the part of the applicant. I will deal with each of these matters in turn.

19. Nikutu Pty Limited was incorporated on 4 June 1982. According to the applicant, its principal activity was that of a corporate trustee and property investor. Prior to 1993 it purchased unit 6/461 Bronte Road, Bronte and continued to hold it on trust for the GH Healey Family Trust. This had been established by deed dated 1 July 1982. A relevant provision in the deed was an indemnity in the following terms:

"The Trustees shall be indemnified against all liabilities incurred by them in the execution of their duties hereunder and shall have a lien on the Settled Fund for such indemnity."

20. There was no question that the Bronte property was an asset of the trust and that neither of the banks had security directly over the property. In 1993, Nikutu was deregistered for failing to lodge annual returns. On 22 May 1995, a summons was filed for the winding up of Nikutu by the State Bank of NSW. The company was later reinstated for the purposes of winding up. In the meantime, by deed a new trustee (Northrim Pty Limited) was appointed for the GH Healey Family Trust. On 29 August 1995, Nikutu transferred the Bronte property to Northrim for a nominal consideration by way of a transfer from an outgoing to an incoming trustee. This transfer was subsequently registered on 13 October 1995. A liquidator was appointed to Nikutu on 20 October 1995. There is no question that Northrim was a related company. The liquidator, however, assumed that the transfer was for the purpose of defeating creditors of Nikutu "of recoverable assets from the GH Healey Family Trust pursuant to the indemnity". Accordingly, the liquidator considered that the transaction might be considered uncommercial pursuant to section 588FB of the Corporations Law and furthermore, the directors may have undertaken fraudulent conduct and may be guilty of an offence pursuant to subsection 592(6). This allegation appears to have been accepted by the delegate without any extensive enquiry, no doubt because there was no oral hearing where such an allegation might be tested.

21. It was not until final written submissions from the respondent's advocate that the basis of the allegation was clarified. It was in these terms:

"Nikutu had a right of indemnity against trust assets for debts incurred by it as the trustee in the proper exercise of its powers pursuant to the trust deed.

Just as the trust property belongs to the beneficiaries, Nikutu's right of indemnity is a lien which is property which belongs to Nikutu, as trustee.

The financial accounts for Nikutu show "Receivables" as an asset of Nikutu. The Liquidator's section 533 Report states at page 8 that "the Receivables" refers to the indemnity for acting as trustee of the GH Healey Family Trust". This has not been disputed by Mr Healey.

In Global Funds Management (NSW) Ltd v Burns Philp Trustee Co Ltd (in provisional liq) Mr Justice Rolfe considered a financier's right to trust assets. He found that the financier's right to trust assets arises from its right to be subrogated to the trustee's right of indemnity. The trustee's right of indemnity in respect of a liability properly incurred has an equitable "charge or right of lien" which gives the trustee the right to make deductions from the trust property to satisfy the right of indemnity and if need be, to sell trust assets.

If the trustee becomes insolvent, the trust property is excluded from being property divisible among the insolvent trustee's creditors. However, because the lien over the trust property is not itself trust property, but is the trustee's own proprietary right against the trust property, the lien is the property of the trustee and as such it forms part of the insolvent trustee's property which is divisible among the trustee's creditors. That the trustee's lien is property of the trustee, and not that of the trust estate, was made clear in Jennings v Mather.

It is submitted that Nikutu's right of indemnity constitutes an equitable proprietary right in the nature of a first charge or a right of lien over trust assets.

Upon the dissolution of Nikutu, the equitable proprietary right in the company vested in the ASC pursuant to the provisions of section 576 of the Corporations Law as it was in 1993.

In 1993, section 576 stated as follows:

576(1) Where, after a company has been dissolved, there remains in this jurisdiction or elsewhere outstanding property of the company, the estate or interest in the property, at law or in equity, of the company of its liquidator at the time when the company was dissolved, together with all claims, rights and remedies that the company or its liquidator then had in respect of the property vests by force of this section in the Commission.

576(2) Where any claim, right or remedy of the liquidator may under this Law be made, exercised or availed of only with the approval or concurrence of the Court or some other person, the Commission may, for the purposes of this section, make exercise or avail itself of that claim, right or remedy without such approval or concurrence.

576(3) Where a company is dissolved, then, notwithstanding that the books of the company vest in the Commission by reason of subsection (1), the person who was the last director of the company or the persons who were the last directors of the company before the company was dissolved shall retain the books of the company (other than books of the company that any liquidator of the company is required to retain under subsection 542(2)) for a period of 3 years after the date on which the company was dissolved.

"Outstanding property" is defined in section 9 of the 1993 Corporations Law as "in relation to a body corporate that has been dissolved, means outstanding property (other than unpaid capital, whether called or uncalled) that was vested in the body, to which it is entitled, or over which it has a disposing power, when it was dissolved, but that neither the body or its liquidator got in, realised on or otherwise disposed of or dealt with."

"Property" is also defined in section 9 to mean "any legal or equitable estate (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action".

It is submitted that Nikutu's right of indemnity, being an equitable proprietary right, was property which vested in the ASC upon the dissolution of the company pursuant to section 576.

The property could only be transferred from Nikutu to another entity either by way of an application to the ASC under section 575 or after reinstatement of the company.

It is submitted that Nikutu and the parties who executed the transfer on its behalf contravened section 575 of the Law when Nikutu's common seal was affixed to the transfer by not making an application to the ASC or firstly reinstating the company."

22. The amounts shown as "receivables" at page 8 of the liquidator's report (referred to above) were $1,614,765, $894,635, and $1,152,659 for the years 1988, 1989 and 1990 respectively. The liquidator simply mentioned in passing that "the 'receivables' refers to the indemnity for acting as trustee of the GH Healey Family Trust". Without further evidence I find it difficult to understand how such large amounts could be liabilities incurred by Nikutu in the execution of its duty as trustee of a trust referable to the asset of a suburban home unit. There was no further evidence put before me in explanation of this statement. On the basis of the above reasoning the amounts might be claimed not only by ASIC as the legal owner but also by the financiers as subrogated creditors.

23. Octavo Investment Pty Limited v Knight 144 CLR 360 appears to be the basis of the claim of a financier to subrogation to rights of indemnity. That case dealt with a trading trust. The High Court confirmed the general right of trustees to reimbursement in these words:

"Property which is an asset of a trading estate carried on by a trustee is properly described as trust property: Dowse v Gorton [1891] A.C. 190; Jennings v Mater [1901] 1 Q.B., at p.111. However, as we have already indicated, that does not mean that the cestuis que trust are necessarily entitled to call for the delivery of the property. If the trustee has incurred liabilities in the performance of the trust then he is entitled to be indemnified against those liabilities out of the trust property and for that purpose he is entitled to retain possession of the property as against the beneficiaries. The trustee's interest in the trust property amounts to a proprietary interest and is sufficient to render the bald description of the property as "trust property" inadequate. It is no longer property held solely in the interests of the beneficiaries of the trust and the trustee's interest in that property will pass to the trustee in bankruptcy for the benefit of the creditors of the trust trading operation should the trustee become bankrupt."

24. From this, their Honours concluded:

"Once it is recognised that a trustee may enjoy a right of indemnity over trust property in respect of liabilities incurred by him in the administration of the trust, it follows that the creditors of a trust business may have resort to the assets of the trust to the extent of the liabilities incurred by the trustee."

25. Creditors of the trust are therefore entitled to be subrogated to an insolvent trustee's right to indemnity, but only to the extent of the liabilities incurred by the trustee in the administration of the trust in relation to a particular asset. So far as I am aware, there is no authority for the assertion that a similar right is enjoyed by the Commission, pursuant to the provisions of section 576. It is not necessary, however, to express an opinion on this matter.

26. If there are any amounts for which Nikutu is entitled to be indemnified from that part of the trust assets represented by the Bronte property, then the transfer of the property from one trustee to another will not extinguish that right. If there is a right vested in a creditor (or in ASIC) to establish a claim against the right of indemnity, then it can be pursued, whether or not the original trustee continues to perform its functions under the trust deed. If there is a right of subrogation, then it is a right in rem to be satisfied out of the trust property. The mere transferring of legal title would not have precluded any relevant creditor from exercising any relevant right which it perceived or, if the property was subsequently sold, from exercising that right against property to which the proceeds could be traced. In short, I do not see how the interests of creditors have in any way been prejudiced by the appointment of a new trustee of the GH Healey Family Trust and by the transfer of legal title of the Bronte property to that new trustee. Certainly, the conduct of the applicant as a director of Nikutu in arranging for such an appointment and subsequent transfer could not, in my view, be regarded as uncommercial or fraudulent conduct or conduct attracting the application of either section 588FB or section 592(6).

27. The property at 34 Fullers Road, Chatswood was owned as to one half by Mr Healey's estranged wife and as to the other half by Nikutu Pty Limited as trustee for the GH Healey Family Trust. There had been proceedings in the Family Court between Mr and Mrs Healey resulting in an order made by agreement. This was subsequently varied by the parties. It dealt with a rearrangement of ownership of various property assets between Mr and Mrs Healey and the trust. As a result of these agreements, and as a result of continuing pressure by St George Bank as mortgagee, which had threatened to exercise its power of sale, it was decided to sell the Chatswood property. The sale was made to Pempro Pty Limited as trustee for the Pempro Trust on 30 March 1995. The consideration was sufficient to discharge the mortgage to St George Bank. The Pempro Trust borrowed from another mortgagee in order to finance the purchase. It was the liquidator's view that as the property was not sold to "an independent third party" the transfer appeared to have been an attempt to defeat creditors of Nikutu Pty Limited. Again the allegation was made that the conduct was uncommercial and that there may have been fraudulent conduct.

28. The delegate (at paragraph 9.23) was not satisfied with the evidence put before him that such an allegation of misconduct could be sustained. On the evidence put before me, I am also of the view that it could not. Although there were connections between the vendor and purchaser trusts and links between Mr Healey and those entities, it does not at all follow that this was an uncommercial transaction. The fact that Mrs Healey gave up her interest as part of an overall settlement of property matters with her former husband, the fact that she was separately represented and the fact that she wished to see the children of the marriage well provided for, indicates to me that it is more likely than not that this was an arms length transaction. Certainly there is no evidence to support a suggestion of criminal conduct on the part of Mr Healey. It is not my function, of course, to determine whether such conduct did take place. This can be established only after judicial process. As a discretionary factor, however, in determining whether Mr Healey is fit to manage a corporation or whether an examination of his past and present conduct shows that it is in the interests of the public to prohibit him from taking part in the management of corporations for a specified period, the transactions in relation to the Chatswood property may, in my view, be ignored.

29. The other matters raised by the delegate and by the respondent's advocate relate to failures to maintain adequate books of account, to deliver books to the liquidator, to prepare annual accounts and to lodge annual returns.

30. There is no doubt that the relevant accounts for Nikutu were not prepared. Prior to the December 1995 amendments, this company (and Badebi) was obliged to file annual returns and accounts. Failure to provide these accounts may be an offence under sections 292 and 293. The principal reason given by Mr Healey for his failure to ensure as a director that the company prepared and furnished these documents was that he was unsure of the values to be attributed to the assets of the company. At the relevant time, the affairs of both companies were under the control and direction of both banks. It was Mr Healey's submission that there was no effective capacity remaining with the directors to enable them to complete in a true and fair sense the required financial records. I do not accept this reason and, indeed, at the hearing I had the impression that Mr Healey no longer put it forward seriously. There is no reason why accounts could not have been prepared over a period in excess of 7 years with notes forming part of the accounts explaining any uncertainties in the minds of the directors. Mr Healey is a solicitor and is accustomed to receiving professional advice. His failure to ensure that these accounts were prepared must, in my view, be regarded seriously.

31. His failure to ensure that annual returns of the two companies were lodged within the statutory period is, in my view, another serious delinquency. In deciding how the Commission's discretion should be exercised, it is also relevant in my view to take account of similar conduct on the part of the applicant in relation to companies other than Nikutu or Badebi of which he was a director. This conduct and this history of chronic failure to lodge annual returns was not denied.

32. Particulars of the failures are set out in the written submissions of the respondent's advocate as follows:

"ASIC's data base indicates that the annual returns for Nikutu for the years 1991, 1992 and 1993 were outstanding. The 1990 annual return was lodged outside the statutory period.

Nikutu was struck off the register of companies in 1993 for failing to lodge annual returns.

ASIC's data base indicates that the annual return for Badebi for the year 1995 is outstanding.

Mr Healey has given evidence that the annual returns for Badebi had not been prepared for 2 years prior to the appointment of the liquidator (p12 transcript 26/10/99).

The 1985, 1986, 1987, 1988, 1989, 1990, 1991, 1992, 1993 and 1994 annual returns were lodged outside the statutory period.

In addition to Badebi and Nikutu, Mr Healey is or had been a director of Dabonu Pty Limited, Dubbo Ice Arena Pty Limited, Fapito Pty Limited, Niledo Pty Limited, Northrim Pty Limited and Pattune Pty Limited (pp63, 64 transcript 25/10/99).

ASIC's data base shows that Mr Healey was also a director of Fodala Pty Limited and Patstill Pty Limited. Mr Healey gave evidence that he was not sure whether he was a director of the former two companies (pp64, 64 transcript 25/10/99).

ASIC's data base shows that in respect of Dabonu Pty Limited Mr Healey was a director from a date "unknown" to 13 June 1996. The 1993, 1994 and 1995 annual returns for Dabonu Pty Limited are shown on the data base as outstanding and the 1990, 1991 and 1992 annual returns as being lodged outside of the statutory period. The company was deregistered on 13 June 1996 for failing to lodge annual returns.

The term "unknown" is used on the data base to indicate that the records were taken over on 1 January 1991 and held by the ASC in paper or microfiche. The precise date may be available by searching the microfiche or paper.

ASIC's data base shows that in respect of Dubbo Ice Arena Pty Limited Mr Healey was a director from 6 August 1986 to 13 June 1996. The 1993, 1994 and 1995 annual returns for Dubbo Ice Arena Pty Limited are shown on the data base as outstanding and the 1990, 1991 and 1992 annual returns as being lodged outside the statutory period. The company was deregistered on 13 June 1996 for failing to lodge annual returns.

ASIC's data base shows that in respect of Fapito Pty Limited Mr Healey was a director from 12 December 1986 to 24 June 1993. The 1990, 1991 and 1992 annual returns for Fapito Pty Limited are shown on the data base as outstanding. The company was deregistered on 24 June 1993 for failing to lodge annual returns.

ASIC's data base shows that in respect of Niledo Pty Limited Mr Healey was a director from a date unknown to 6 July 1994. The 1985, 1989, 1990, 1991 and 1992 annual returns for Niledo Limited are shown on the data base as outstanding. The company was deregistered on 6 July 1994 for failing to lodge annual returns.

ASIC's data base shows that in respect of Northrim Pty Limited Mr Healey was a director and secretary from 15 August 1995 to 3 July 1998. The 1995, 1996 and 1997 annual returns for Northrim Pty Limited are shown on the database as outstanding. The company was deregistered on 3 July 1998 for failing to lodge annual returns. It is noted that on pp71 and 72 of transcript of the hearing on 25 October 1999, Mr Healey claims to have resigned as a director of Northrim Pty Limited prior to the deregistration of the company.

ASIC's data base shows that in respect of Pattune Pty Limited Mr Healey was appointed as a director on 31 January 1989. The 1995, 1996 and 1997 annual returns for Pattune Pty Limited are shown on the data base as outstanding and the 1990, 1991, 1993 and 1994 annual returns as being lodged outside of the statutory period.

ASIC's data base shows that in respect of Fodala Pty Limited Mr Healey is shown as having been a director and secretary from 15 May 1990 to 24 June 1993. The 1990, 1991 and 1993 annual returns for Fodala Pty Limited are shown on the data base as outstanding. The company was deregistered on 24 June 1993 for failing to lodge annual returns.

ASIC's data base shows that in respect of Patstill Pty Limited Mr Healey is shown as having been a director and secretary from 31 January 1989 to 24 June1993. The 1990, 1991 and 1992 annual returns for Pastill Pty Limited are shown on the data base as outstanding. The company was deregistered on 24 June 1993 for failing to lodge annual returns."

33. Mr Healey gave evidence that he considered the filing of annual returns to be an administrative matter. That may well be so and an occasional failure to file returns in a timely manner might be overlooked. His failures are, however, widespread, chronic and continuous. In my view they show a disregard of his duties as a director and a disregard of the legitimate interests of creditors or potential creditors of the companies (Commissioner for Corporate Affairs (WA) v Ekamper 1988 12 ACLR 519 at 525).

34. The delegate also based his finding on a failure by Mr Healey to ensure that both companies maintained adequate books of account. He was also concerned that Mr Healey had failed to deliver specified books to the liquidator as requested. Both of these failures arise out of the unorthodox way in which Mr Healey chose to keep the accounting records of these companies.

35. They were kept through a subsidiary ledger on a computer system used in his legal practice. Mr Healey was under the impression that this was sufficient as the computer accounting system had been approved by the Law Society for recording trust account transactions. On the evidence put before me, it does not appear that the system met the requirements of the Corporations Law in force at the time. The specific books of account required by the Act and requested by the liquidator did not, and could not under this system, exist. Indeed, Mr Healey appeared to have an inadequate knowledge of the accounts, which were kept and ought to have been kept for Nikutu and Badebi. He allowed other persons to give instructions relating to input data for the companies and did not exercise a sufficiently close supervisory role over the accounting staff employed to assist in the preparation of accounts and financial statements. It is quite possible that separate accounts for each of the separate companies could not be prepared on the basis of the system then in effect.

36. Certainly, even on Mr Healey's evidence, it was not possible to give to the liquidator more books of account and records than he delivered. The delegate accepted this (as I do). The result however is necessarily a finding that the books of account which were maintained were inadequate. The failure to deliver nominated records to the liquidator and the failure to maintain adequate books of account are therefore closely linked. The failures must be considered as serious, particularly when one takes account of the standards expected of a person in Mr Healey's position.

37. In his written submissions, counsel for the applicant alleged a failure on the part of the liquidator to provide reports pursuant to section 476. There is no dispute that these reports were not filed within the time limited by that section. The liquidator's failure, however, is not the subject of this review. In any event, it was said to have been caused by a delay in each case on the part of Mr Healey in fulfilling his statutory duty to furnish Reports as to Affairs. He was requested to do so in the case of Nikutu on 25 October 1995 but did not comply with the request until 14 March 1996. The dates in relation to Badebi were 14 November 1996 and 5 March 1997. There may have been reasons for the delay on both sides. However, there was insufficient evidence directed to this issue to enable me to offer an opinion as to whether Mr Healey's' failure should affect the exercise of the discretion.

38. Similarly, the allegation made that Mr Healey has insufficient knowledge of the Corporations Law to support an appreciation of his responsibilities was not, in my view, made out. It is true that although a practising solicitor, Mr Healey did not claim any particular knowledge of Corporations Law. If a detailed expertise is to be required in order to determine whether a person is fit to manage a corporation, then there might possibly be few directors who would qualify. A knowledge meeting the general tests in Delonga may be all that is required. The overall consideration, however, is the protection of the public. Mr Healey's knowledge of company affairs is not such as to require his preclusion from management in order to protect the interests of the public.

39. I am, however, concerned with the lack of adequate accounting arrangements and the consequent inability to deliver specific books of account. I am particularly concerned with the continuing failure to prepare annual accounts and with the chronic failure to lodge annual returns for a large number of companies. In my view, these failures should be recognised by a section 600(3) notice. They are not merely incidental or casual failures from time to time but amount to a pattern of conduct. Although the purpose of a section 600 notice is not to punish the applicant, it is necessary to exercise the powers granted by that section to ensure that the general public, who would otherwise have had dealings with companies managed by the applicant, will be protected for a specified period from a possible recurrence of these delinquencies. Section 600 provides for a maximum disqualification period of five years. The delegate observed (and I agree with him) that such a period of prohibition should be imposed only in the worst cases. The period he chose was four years. I have, however, taken a different view from that of the delegate in relation to both the Bronte and Chatswood transactions. I consider a more appropriate period to be two years.

40. The decision under review is therefore varied by substituting a period of two years instead of a period of four years appearing in the delegate's decision.

I certify that the 40 preceding paragraphs are a true copy of the reasons for the decision herein of Mr BJ McMahon (Deputy President)

Signed: .....................................................................................

Jacqueline Healy, Associate

Date/s of Hearing 25, 26 & 27 October 1999

Date of Decision 14 January 2000

Counsel for the Applicant Mr TDF Hughes Jnr (SC)

Solicitor for Applicant Ms J Brouwer

Counsel for the Respondent Ms G Di Bartolomeo