Neato Employment Services Limited and Australian Securities and Investments Commission [2002] AATA 429 (6 June 2002)

Last Updated: 7 June 2002

DECISION AND REASONS FOR DECISION [2002] AATA 429

ADMINISTRATIVE APPEALS TRIBUNAL )

) No Q2001/684

GENERAL ADMINISTRATIVE DIVISION )

Re NEATO EMPLOYMENT SERVICES LIMITED

Applicant

And AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

Respondent

DECISION

Tribunal The Hon C R Wright QC., (Deputy President)

Date 6 June 2002

Place Brisbane

Decision Decision under review set aside. Application to change company type remitted to respondent to deal with the application on the basis that the applicant's creditors are not likely to be materially prejudiced by the change proposed.

[Sgd The Hon C R Wright QC)

Deputy President

CATCHWORDS

Corporations - company - change of type - alteration of details of registration - Notice by ASIC - whether company's creditors are not likely to be materially prejudiced - meaning of "materially" - "likely".

Corporations Act 2001 (C'th) - ss.163(2), 164(1)

REASONS FOR DECISION

6 June 2002 The Hon C R Wright QC., (Deputy President)

1. On 9 April 2001 NEATO Employment Services Limited ("NEATO") lodged an application with the Australian Securities and Investments Commission ("ASIC") pursuant to s163 of the then Corporations Law (now the Corporations Act 2001 (C'th) ("the Act")) to change the company's type from a company limited by guarantee to a company limited by shares. NEATO had previously been registered as a cooperative, Northern Employment and Training Organisation Co-operative Limited, under the Co-operatives Act 1997 (Qld) and it transferred its incorporation to a company limited by guarantee pursuant to the enabling provisions of the Act on 18 January 2001.

2. On 29 March 2001 the members of NEATO, Alan Burnett Gascoyne, Maria De Martini, Sandra Poletta, Maryann Petersen, Priscilla Ruth Miller and Ria Gascoyne passed a special resolution proposing that shares would be issued to each of these members in the event of a change in status of the company. Each of the members named is currently a guarantor of the company for the nominal sum of $10.

3. Section 164(1) of the Act provides that ASIC must give notice that it intends to alter the details of the company's registration, provided that ASIC is satisfied that:

(a) the application complies with s163; and

(b) the company's creditors are not likely to be materially prejudiced by the change.

4. On 9 April 2001 NEATO lodged an application for change of type with ASIC in accordance with s163 of the Act. ASIC was provided with information from the solicitors for NEATO which satisfied ASIC that it did not need to initiate consultation with general trading creditors of NEATO as it may otherwise have done pursuant to s164(2) of the Act.

5. At all material times the Department of Employment, Workplace Relations and Small Business ("DEWRSB") (now the Department of Employment and Workplace Relations) ("DEWR") was a creditor of NEATO pursuant to long-term contractual relations between the two entities, whereby DEWR provides Commonwealth funds to NEATO to enable it to provide training and other assistance to unemployed people and to secure employment for them. By reason of prepayment of Commonwealth funds to NEATO by DEWR and the process of acquittal of those funds by NEATO, at any given time DEWR will be a creditor of NEATO for substantial sums of money. The main area of operation is based upon the central coastal region of Queensland.

6. On DEWRSB becoming aware of NEATO's proposal to change the type of company, the Minister for Employment Services wrote to ASIC in the following terms:

"I have received a copy of a letter sent to my department in relation to the application by the board of NEATO Employment Services Limited ACN 095 639 768 [NEATO] to change from a company limited by guarantee to one limited by shares. I wish to object to the change.

The Commonwealth represented by my Department has a contractual relationship with NEATO as that organisation delivers employment services through Job Network on behalf of the Commonwealth.

Under the terms of the Employment Services Contract 2000-2003 ("the Contract") both Intensive Assistance and Job Matching have advance payments available and in the case of Job Matching these require acquittal by the organisation.

I am advised that at the present time the organisation has not acquitted a significant amount of the Job Matching retainer already paid to NEATO. The third milestone payment has not been paid. My department is in the process of recovering the amount outstanding but would be concerned that to advance any further monies before the amount outstanding is acquitted is not in the Commonwealth's interests.

In addition to this potential debt, the department has raised other debts against the organisation for overpayments or inappropriate claims which have not yet been repaid. My department can provide you with further details should you require them.

The Contract also requires the organisation to notify my department of changes to their structure, board of management or effective control of their organisation. In the present case I am advised this organisation is in breach of its Contract, as it has not so advised the department. My department became aware of the potential change from other sources.

The Contract also requires the organisation to notify the department of changes to their structure, board of management or effective control of their organisation. In the present case I am advised this organisation is in breach of its Contract, as it has not so advised the department. The department became aware of the potential change from other sources.

Whilst it is acknowledged that the Commonwealth's creditor status technically may be unchanged, whether the company is one limited by guarantee or a proprietary company with share capital. I am concerned that the change in status may put its business at risk and the company's ability to meet its obligations under its Contract with the Commonwealth and to repay the outstanding monies may be jeopardised. It is on this basis that I object as I am not satisfied that the change is in the best interests of the Commonwealth, the community, of which NEATO is an integral part, and job seekers."

7. On 19 July 2001, ASIC's delegate made a decision for the purposes of s164(1)(a)(ii) of the Corporations Law that, on the material and submissions available to him, he was not satisfied that the company's creditors are not likely to be materially prejudiced by the change in status being sought by NEATO. Accordingly, the approval sought in respect of the change of status was refused.

8. On 6 August 2001, pursuant to provisions of s1317B of the Corporations Law, NEATO sought a review of the delegate's decision by the Administrative Appeals Tribunal. NEATO submits that the Minister's fears of possible prejudice are unfounded and that several of the facts asserted in his letter are incorrect.

9. It was clearly established by evidence given during the Tribunal hearing that the "significant amount of the job matching retainer already paid to NEATO" referred to in the Minister's letter to ASIC consisted of $59,682 representing a portion of job matching outcome figures which were not achieved by NEATO during a particular milestone period. NEATO's apparent indebtedness for this sum was a unique event which arose from the company having arranged with the Department to change the method of payment from the original one third prepayment arrangement at the commencement of a milestone period to a situation in which NEATO was only paid in respect of claims which it made following the delivery of services.

10. Furthermore, it was abundantly clear from Exhibit A1, a letter from DEWRSB to NEATO dated 17 April 2001, that DEWRSB had specifically requested NEATO not to repay this particular money until it received a debt notice from the DEWRSB. The debt notice was not received until after the ASIC decision adverse to NEATO, and it is equally plain that on receipt of the relevant debt notice, NEATO paid the sum due together with other minor amounts on 17 August 2001. These facts coupled with the virtually undisputed evidence of Mr Graham Mazlin, NEATO's auditor, and the evidence of Alan Burnett Gascoyne, the Managing Director, satisfies me that NEATO is in a strong financial position and is able to pay its debts as they fall due and is well placed to trade forward profitably in the future. The company has substantial cash reserves and there have been substantial profit increases in recent years.

11. There is no reason for concluding that if NEATO is transformed into a company limited by shares, the members of the company will strip the assets of the company to the detriment of creditors. That the transformation of the company would imbue the members with power to declare dividends out of the profits of the company is indisputable but this seems to me to be a most unlikely event and, in the circumstances, no more than an intriguing hypothesis.

12. It is noteworthy that DEWR has not sought to be made a party to the proceedings, although given the opportunity to do so, and does not now appear to express any particular concern about the proposed change in company type.

13. Another issue raised by ASIC in its statement of facts and contentions filed on 18 December 2001, that the Directors have failed to provide information required by s163(2) of the Act in their application, has now been addressed and is no longer a contentious issue.

14. Counsel for both parties to this review agree that conversion of a company limited by guarantee to a company limited by shares is a process clearly contemplated by the legislation. The only concerns specified for ASIC's attention are those provided for in s164, and consequently the only issue remaining for review by this Tribunal is the question whether the company's creditors are not likely to be materially prejudiced by the proposed change.

15. Counsel for ASIC conceded that in the context of the legislation "material prejudice" must be prejudice which is "substantial and not trifling". This proposition was not challenged by counsel for NEATO and is consistent with the decided cases referred to. It is a formulation with which I agree.

16. Counsel for ASIC also submitted that "likely" in the context of the test propounded should be read as being synonymous with "real chance" rather than "probable". It is plain that a term such as "likely" takes it meaning from the context in which it is used.

17. In Boughey v The Queen (1986) 161 CLR 10 in the context of a conviction for murder, the High Court had occasion to consider the phrase "likely to cause death in the circumstances". The majority concluded that the "likely" so used conveyed a notion of substantial and not remote chance, regardless of whether or not it is more or less than 50 per cent. Brennan J (as he then was) expressed a contrary view. There is however no need to pursue counsel's interesting debate upon this matter, as I accept Mr Daubney's submission, that, irrespective of the meaning attributed to "likely" in the circumstances of this case, NEATO passes the statutory test. By that I mean that it is my finding, based on the evidence taken at the review hearing, that the company's creditors are not likely to be materially prejudiced by the change in company type which has been proposed. I am satisfied that is the correct conclusion in the circumstances.

18. NEATO's application to review accordingly succeeds, and the application to change company type is remitted to ASIC to give effect to the conclusion which I have just stated.

I certify that the 18 preceding paragraphs are a true copy of the reasons for the decision herein of The Hon C R Wright QC., (Deputy President)

Signed: K L Miller .....................................................................................

Personal Assistant

Date/s of Hearing 17 May 2002

Date of Decision 6 June 2002

Counsel for the Applicant A M Daubney

Solicitor for the Applicant Damien Bourke & Associates,1/145 Eagle St, Brisbane

Counsel for the Respondent J A Logan

(ASIC represented themselves - no solicitor)