Scott and Australian Securities and Investments Commission [2010] AATA 54 (27 January 2010)

Last Updated: 28 January 2010

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2010] AATA 54

ADMINISTRATIVE APPEALS TRIBUNAL )

) No. 2009/4223

GENERAL ADMINISTRATIVE DIVISION		)
	Re		ANTHONY SCOTT

Applicant

And

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

Respondent

DECISION

Tribunal

Mr G. L. McDonald, Deputy President

Date 27 January 2010

Place Melbourne

Decision

The decision under review is affirmed.

......(sgd G L McDonald)......
Deputy President

CATCHWORDS – CORPORATIONS – whether disqualification as a company director after companies failed to return more than 50c in the dollar to unsecured creditors is justified – lack of financial records – exercise of due care and diligence – whether company traded while insolvent – period of disqualification – decision under review affirmed

Administrative Appeals Tribunal Act 1975 s 37

Corporations Act 2001 ss 180, 181, 182, 206F, 208F, 286, 344, 475, 533, 588FE, 588FGA, 588G and 597

Alto Controls Pty Ltd (in liq) v Newtronics Pty Ltd (in liq) [2009] VSCA 238

Dunn v Shapowloff [1978] 2 NSWLR 235

Culley v Australia Securities and Investments Commission [2009] FCA 1474

Guss and Australian Securities and Investments Commission [2006] AATA 401

Kardas v Australian Securities Commission (1998) 29 ACSR 304

REASONS FOR DECISION

27 January 2010

Mr G. L. McDonald, Deputy President

1. The applicant has applied to the Tribunal to review a decision of a delegate of the respondent imposing a disqualification on him from managing a company for a period of 18 months from 11 August 2009 pursuant to s 206F of the Corporations Act 2001 (“the Act”). Section 206F provides for a period of disqualification of up to five years on a person who has been an officer of two or more corporations:
   • (a) which have been wound up; and
   • (b) in respect of which a liquidator has filed a report under s 533 of the Act stating that the corporations have been unable to pay more than 50c in the dollar to the unsecured creditors.

While the above are preconditions to the exercise of the power to disqualify they are not absolute. Aside from the respondent having to issue a show cause notice and give a person an opportunity to be heard, which it is uncontested occurred in this case, the decision maker, including this Tribunal when undertaking a review, must be satisfied that a period of disqualification is justified.[1]

2. Dr Paul Vout represented the applicant and Mr Sam Rosenwarne represented the respondent. The Tribunal heard oral evidence from the applicant. Additionally Mr Anthony Cant, the final liquidator of the three companies concerned, also gave oral evidence. The Tribunal had extensive volumes of documents filed for the purposes of s 37 of the Administrative Appeals Tribunal Act 1975 (“the T documents”) including supplementary T documents as well as exhibits tendered during the course of the hearing. Written submissions were filed following the close of the hearing in respect of the time it took the respondent, after the filing of the s 533 liquidators’ reports to commence the administrative action which led to the applicant’s disqualification. The Federal Court held in Kardas v Australian Securities Commission[2] that a notice commencing such proceedings ought be issued by ASIC within a reasonable time. Leave was given for the parties to file submissions following the judgment of Tracey J, dealing with the same topic, in Culley v Australia Securities and Investments Commission.[3]
3. It is common ground and the Tribunal accepts that;
   • (a) at all relevant times the applicant was a director (who is by definition ‘an officer’) of the following three corporations:

(i) Swift Securities & Investments Pty Ltd (“Swift Australia”);

(ii) Trader Systems International Pty Ltd (“TSI”);

(iii) TSI Australia Limited (“TSI Australia”);

(b) all of the companies have been wound up;
(c) the liquidator has reported under s 533 of the Act that not any of the companies were able to pay more than 50c in the dollar to unsecured creditors;
(d) Swift Securities and Investments Limited (“Swift Malaysia”) was a public but unlisted entity incorporated in Malaysia. It had three directors, one being the applicant and another Mr Mark Bayoud. Mr Bayoud was located in Malaysia. Swift Malaysia operated a fund entitled the Blue Chip Pathfinder Fund (“the Blue Chip Fund”). The Blue Chip Fund invested in companies listed on the Australian Stock Exchange (“ASX”) via Swift Australia;
(e) Swift Australia utilised a computerised software system (“the Trader System”) which is described as “... interpretive analytical software for retail options traders”[4] to buy and sell ASX securities. The Trader System was developed by a company incorporated in Delaware America (Trader Systems International Inc) and operated under license to TSI Australia;
(f) TSI’s primary activity was research and development of the Trader System, with a view to improving it’s performance, undertaking training with respect to it’s use and marketing it for use in other Asian stock markets;
(g) Swift Malaysia also went into liquidation; and
(h) Mr Cant held a public examination of the applicant in respect of the liquidation of Swift Australia before a Registrar of the Federal Court of Australia on 12 December 2005.

BACKGROUND AND FACTS

SWIFT AUSTRALIA

4. The respondent expressed a number of concerns in the notice it issued to the applicant relating to the operation of Swift Australia including that the applicant, as a director:
   • (a) failed to exercise due care and diligence (contrary to s 180 of the Act); and
   • (b) either did not exercise his power in good faith in the best interests of the corporation (contrary to s 181 of the Act) or alternatively that he improperly used his position to gain an advantage for himself or some other person (contrary to s 182 of the Act); and
   • (c) failed to keep proper records and failed to meet the financial reporting requirements of Parts 2M.2 and 2M.3 of the Act respectively (contrary to s 344(1)).[5]

The delegate did not find the concern relating to ss 181 and 182 to be made out and as those matters were not pursued in the hearing before the Tribunal they have not been part of the material that the Tribunal has taken into account. The issues connected with the failure to keep proper records and act with care and diligence to a certain extent overlap. The delegate’s finding in respect of Swift Australia focused on the failure to maintain financial records.[6]

5. The applicant was appointed a director on the day Swift Australia was incorporated, being 2 October 2000. He held 10 of the 20 issued shares, the balance being held by Mr Bayoud, who was the other director. Swift Australia traded in securities in the top 100 securities on ASX on behalf of Swift Malaysia. The latter company received its funding from investors in the Blue Chip Fund. Trading was carried out on behalf of Swift Australia by two stockbrokers – initially JB Were and later Tricom Equities. Mr Michael Cornips, who along with the applicant operated Swift Australia, after considering the analysis provided by utilising the Trader System gave buy and sell instructions to the stockbrokers.[7] Swift Australia paid TSI Australia licence fee for the use of the Trader System.[8] The period in which Swift Australia carried out the bulk of its trading was September 2001 to June 2003. It was the applicant’s evidence that a substantial number of trades occurred in that period.
6. It was intended from the outset that Swift Australia would become a funds manager. To commence this aspect of the business in early 2002 Swift Australia borrowed funds from Secure Finance and Investment Services (Australia) Pty Ltd (“Secure Finance”) and the LM Douglas Superannuation Fund (together “the borrowed funds”). The applicant in his oral evidence to the Tribunal denied that the LM Douglas Superannuation Fund had invested directly with Swift Australia and that it invested through the Blue Chip Fund.[9] However this is not consistent with what the applicant swore in paragraph 5 of his affidavit of 25 November 2009[10] where he identified the LM Douglas Superannuation Fund as an unsecured creditor of Swift Australia. The applicant concedes that all of the creditors of Swift Australia were required to agree to the settlement proposed in proceedings before a Registrar in the Federal Court and that the LM Douglas Superannuation Fund was one of those creditors. It must follow, and the Tribunal is satisfied, that the latter was also a creditor.[11] The total amount borrowed from Secure Finance was between $1M to $1.2M and $20,000 from the LM Douglas Superannuation Fund. The money loaned by Secure Finance was to be secured by the issue of shares in Swift Australia and Swift Malaysia.[12]
7. However before the borrowed funds could be applied it was decided that the proposed funds management business would not be proceeded with in the originally determined form. This decision was reached because it was decided that in order to make a profit more funds than those borrowed were needed than Swift Australia was likely to be able to attract. In order to overcome the limitations perceived to be connected to a lack of available funds the applicant told the Tribunal that Swift Australia formed a relationship with a large Sydney funds manager, Direct Portfolio Services Ltd (“Direct Portfolio”). The borrowed funds were, for some unexplained reason, transferred from Swift Australia to Swift Malaysia and invested in Direct Portfolio. In acknowledgement of the sum invested Direct Portfolio issued shares to Swift Malaysia.
8. A dispute arose and Swift Malaysia, issued proceedings against Direct Portfolio and Swift Australia (in liquidation). The latter counterclaimed. The claims were settled following mediation carried out before a Registrar of the Federal Court of Australia on 22 May 2006.[13] Approximately $280,000 was paid to the liquidator as the result of the settlement of its counterclaim.[14] However the liquidator estimated Swift Australia had a total estimated deficiency of $942,000.[15]
9. Swift Australia was wound up by order of the Federal Court dated 23 December 2004 on the petition lodged by Secure Finance. In his reasons the Registrar of the Court stated that on the evidence before him Swift Australia’s financial records “appear not” to comply with the requirements of s 286 of the Act.[16]
10. The applicant stated in the course of his compulsory examination by the liquidator in the Federal Court that documentation concerning deposits remitted from Swift Malaysia to Swift Australia were “sparse at the outset.”[17] When questioned about this in the hearing before the Tribunal the applicant explained that Mr Cornips, an accountant engaged by Swift Australia, had been instructed to prepare the documentation to replace documents which went missing during the course of Swift Australia moving premises in November 2002. The applicant stated it had been necessary that these be recreated from existing records held by third parties (for example, copies of bank statements).[18] The applicant said he was abroad at the time the move occurred and that he was not responsible for supervising the move which had been arranged by Mr Bayoud. In answer to questions in the liquidator’s examination in the Federal Court the applicant said he did not discover this for a month or so after the completion of the move.[19] This would have been in December 2002 or January 2003.
11. The applicant told the Tribunal that were experienced with the accounting package utilised by TSI and that it was only after these were sorted out that he became aware of the deficiencies in the Swift Australia accounts.[20] This was either in early May 2003 or September 2004.[21] The applicant claimed that all of the documents he had were given to Mr Cant in Feb 2005.[22] A letter from the applicant to Mr Cant dated 2 February 2005 lists one of two cheque books as missing, 15 bank statements, the entire correspondence file and the trading file.[23] In answer to a question in his public examination the applicant said that the entire trading file had disappeared during the move.[24] The applicant produced some further documents during the course of his public examination.[25] In his supplementary report to the respondent Mr Cant listed extensive documentation which was missing[26] including taxation returns for the financial years ending 2002 and 2003, creditor and debtor records, balance sheets and profit and loss statements. Additionally the liquidator reported that financial records did not accurately record the $1M advanced by Secure Finance and that share investments made through the stockbrokers were not explained.
12. The Tribunal is satisfied and accepts the applicant’s evidence that some of the files went missing at the time that Swift Australia moved premises in November 2002. However Swift Australia continued to trade until June 2003 (according to the applicant) or October 2003 (according to the liquidator) and liquidation of the company did not commence until December 2004. According to the applicant, both the reconstruction of the missing pre November 2002 documentation and the installation of the new accounting systems had not been completed before the appointment of an administrator. The applicant told the Tribunal that he felt he had no justification to take either matter any further following the appointment of the administrator.[27]
13. The applicant also told the Tribunal that he had been overwhelmed by the failure of TSI in May 2003 and that this was an added reason why little had been achieved in the completion of the reconstruction of Swift Australia’s documentation.[28]
14. It was Mr Cant’s evidence that his firm undertook the exercise of recreating the documentation in order to gain a better understanding of what had occurred.[29] However it is fair to conclude, and the Tribunal does conclude, that Mr Cant had difficulty recalling details when giving his oral evidence to the Tribunal. He said on several occasions that he had not looked at the material for over four years and on other occasions that he could not recall. He agreed in cross examination that records may have existed which were subsequently lost in the November 2002 move. Neither in his statement[30] or in the s 533 report to the respondent does Mr Cant mention the applicant’s claim that records had been lost during the course of the November 2002 move. This is strange because the issue was raised during the applicant’s compulsory examination[31] which occurred prior to the submission of the s 533 report.
15. Mr Cant also misapprehended the basis on which Swift Australia conducted its investment business. It did not have clients for whom it invested but rather invested money provided to it from the Blue Chip Pathfinder Fund via Swift Malaysia. Accordingly there was no need for it to maintain ‘client ledgers’, that being one of the classes of documents that Mr Cant concluded had not been maintained.[32]
16. Mr Cant’s lack of apparent understanding of the operation of Swift Australia’s business, and hence of the records it could be expected to maintain, along with his failure to acknowledge the claims of the applicant as to the missing records until the hearing before the Tribunal result in less weight being able to be attributed both to the matters he reported to the respondent in the s 533 statement as well as to his evidence to the Tribunal. The Tribunal is satisfied that the conclusion reached in Mr Cant’s s 533 report and the evidence he gave to the Tribunal is as consequence not as reliable as might otherwise have been the case.
17. However in the end the Tribunal is unable to accept the applicant’s explanation for why:
    • (a) there remained substantially incomplete recreation of the documentation for the period pre November 2002 to the end of 2004 given Mr Cornips had been instructed on one version of the applicant’s evidence from as early as January or February 2003 to carry out a recreation of documentation, which according to the applicant would have been an easy exercise;[33] and
    • (b) in any event proper documentation was not maintained for the period following the move (that is, post November 2002) until June 2004 during which period, according to the applicant’s evidence, a large number of transactions were undertaken. If Swift Australia was to continue trading after it had been determined that the accounting system as defective then some interim measure should have been installed to ensure proper records were maintained pending the establishment of a more secure long term recording system.
18. The applicant also claimed that faults were experienced with TSI Australia’s accounting systems, upon which Swift Australia relied for its accounting records. TSI Australia and Swift Australia are two different companies and failure by one to install and maintain accounting cannot act as an excuse for failure in the other particularly when the business is one dealing with substantial financial transactions. Section 286(1) of the Act requires a company to keep written financial records that
    • (a) correctly record and explain its transactions and financial position and performance; and
    • (b) would enable true and fair financial statements to be prepared and audited.

During the course of his compulsory examination the applicant was asked but was unable to recall a number of, or the circumstances surrounding a number of, payments[34] recorded in Swift Australia’s cheque book. This highlights the importance of proper financial records being maintained as required by s 286 of the Act. Without those circumstances being recorded it is tantamount to impossible to determine the profit and loss or prepare proper accounts for a company.

19. The applicant acknowledged that he felt overwhelmed by the situation he found himself in from May 2003 (at which time TSI Australia and TSI were placed under voluntary administration by the applicant) but that it did not provide an excuse for the failure to keep proper financial records for Swift Australia.[35] Despite the reservations expressed earlier in these reasons concerning Mr Cant’s evidence there is in the Tribunal’s view sufficient reliable evidence which satisfies it that there was a failure to keep proper financial records during the period in which the applicant was a director. As a director the applicant has responsibility for this failure.
20. On 23 December 2004 Swift Australia was wound up by order of the Federal Court of Australia on the application of Secure Finance.[36] Separate Reports as to Affairs (“RATA”) were prepared and filed with the liquidator by the applicant and Mr Bayoud. That prepared by the applicant and dated 3 February[37] disclosed he and Mr Bayoud as unsecured creditors each being allegedly owed $100,000 by Swift Australia. Neither the applicant or Mr Bayoud filed proofs of debt and neither participated in the return to unsecured creditors.[38] The RATA is required to be filed within 14 days of the order winding the company up.[39] The liquidator made a request on 23 December 2004[40] but the report was not filed until 2 February 2005. The Tribunal acknowledges that it is important that a RATA be filed expeditiously so that the liquidator is in a position to have initial information before him/her – particularly if there may be matters which require immediate attention in order to preserve benefits which may flow to unsecured creditors. In circumstances, as here, where the winding up order is made near to the major official annual public holiday period some laxity may be understandable. The Tribunal while it has considered this in the exercise of its overall discretion it does not believe that the delay, either alone or in combination with other matters, is something which ought, in this case, play any part in the consideration of whether the applicant should be disqualified.
21. The RATA filed by the applicant disclosed Swift Australia as being owed two sums from Swift Malaysia being $194,941.56, and $225,666.71, both of which are stated to have an unknown realisable value.[41] The RATA disclosed total qualified assets of $421,754.04. The RATA dated 18 February 2005, prepared by Mr Bayoud, also provided a qualified estimate of a surplus of $421,754.04, somewhat differently constituted in insignificant detail than that outlined in the RATA prepared by the applicant.[42] Neither RATA disclosed what Registrar Efthim[43] found, at the time he ordered that Swift Australia be wound up, namely a debt of in excess of $1M owing from Swift Australia to Secure Finance. This is a curious omission from the RATA prepared by the applicant because the Registrar’s judgment and reasons are dated 23 December 2004 and the applicant’s RATA is dated 3 February 2005 that is, the RATA post dates a court decision which determined the debt existed yet the applicant makes no mention of this debt in the RATA. Section 475 of the Act requires a director to file a report as to the affairs of a company. The section requires to report to be ‘verified’ by the maker and clearly a failure to provide an accurate report can amount to a breach of the director’s duty of care and diligence.
22. The liquidator filed a preliminary report dated 7 February 2005 in which he stated that the apparent causes of the Swift’s failure were poor financial control, including a lack of records, and poor strategic management of the business.[44] In a supplementary report dated 17 November 2008 the liquidator added “poor business ethics of the directors” as an additional reason for the failure of the Swift Australia.[45] The final accounts for Swift Australia lodged by the liquidator with the respondent on 26 June 2009 noted Secure Finance was an unsecured creditor in the sum of $1M. That such a large outstanding creditor is not mentioned in the applicant’s RATA is a matter of concern and supports the conclusion that the Tribunal reaches that the applicant, in his capacity as a director of Swift Australia, failed to exercise a sufficient degree of care and diligence in ensuring the creation and maintenance of financial records as is required for companies under s 286(1) of the Act.
23. The Tribunal is not persuaded, on the evidence before it, that the applicant had ’poor business ethics‘. However the failure to secure the keeping and maintenance of financial records is in the Tribunal’s view a matter of justifiable concern. While because of the limited shareholding in Swift Australia shareholders may not have been concerned there is not only the interests of creditors but also a public interest in corporations operating in accordance with the requirements of the Act – particularly as they relate to the keeping of financial records. A director has a responsibility to ensure that appropriately secure processes for the keeping of such records are in place but also that they maintained.

TSI AND TSI AUSTRALIA

24. TSI and TSI Australia are part of a number of companies which share the same directors and/or have common shareholders.[46] They have been regarded as related by the liquidator and the delegate.[47] The Tribunal accepts that should be treated as related companies.
25. The notice to show cause issued referred to the following failures on the part of the applicant:

(a) a failure to exercise due care and diligence;[48] and
(b) permitting the companies to trade while insolvent.[49]

The delegate decided that the evidence before him did not warrant a finding that the companies traded while insolvent.[50] However he decided that the applicant had failed to exercise due care and diligence with respect to the following:

(a) TSI: liquidator’s estimate of deficiency $2,113,492 (of which at least $1.2M was owed to Secure Finance) including failure to pay:

(i) fringe benefits tax and BAS payments to the ATO totalling $124,875.52;

(ii) State Revenue Office of Victoria payroll tax of $118,408 (including interest and penalties);

(iii) employee entitlements of $64,495; and

(iv) superannuation guarantee payments of $4,938.

(b) TSI Australia: liquidator’s estimate of deficiency $3,517,749 including:

(i) employee entitlements of $44,694; and

(ii) failure to collect debts including $546,117 owing from TSI.[51]

Before the Tribunal it was maintained by the respondent that TSI and TSI Australia had traded while insolvent.[52]

26. The applicant, along with Mr Fairbank, was appointed a director of TSI and TSI Australia on the dates the companies were incorporated being 23 February 1999 and they ceased being directors of both companies on 9 December 2008.[53] Mr Bayoud was also a director of TSI Australia. Both companies were placed in voluntary administration by the applicant on 15 May 2003. Mr Adrian Duncan and Ms Karen Mathers of Knights Insolvency Administration were appointed as joint administrators,[54] and on 22 July 2003 joint liquidators of both companies. On 1 October 2004 Ms Mathers ceased being a joint liquidator. Mr Duncan continued as sole liquidator of both companies.
27. The applicant told the Tribunal that both TSI and TSI Australia were wholly owned by Trader Systems International Inc (“the Delaware Company”), a Delaware company in which the applicant is (or was) a shareholder. It appears a small proportion (777 shares of 31,100 issued for TSI Australia) was held by another company.[55]
28. According to a statutory declaration provided by the applicant to the delegate TSI was established to research and develop the software which operated as the Trader System, and to provide training course for users of the System.[56] It seems TSI’s activities, because they involved research and development, would be dependant on loans and research grants. It was not anticipated that TSI would be profitable in the early stages. TSI, held an Investment Advisers Licence issued by the respondent, until it was cancelled on 27 May 2003.[57] In about March 2003 TSI applied to the Australian Taxation Office (“ATO”) to be granted research and development (“R and D”) status. The applicant maintained that he had been reassured by an unnamed officer of the ATO that it was likely that TSI would be successful in its application[58] but that the application would only be considered after the tax returns for both TSI and TSI Australia had been submitted. The applicant also maintained that the accountant for TSI and TSI Australia had assured him that if the ATO granted R and D status to TSI then the 150% anticipated deductibility would more than offset the then liabilities for both companies.[59]
29. It was submitted that a director was entitled to rely on undertakings or promises that funding will be forthcoming to meet debts in determining whether a company is trading while insolvent – regardless of whether those undertakings are or are not binding.[60] As the Court in Alto Controls v Newtronics Pty Ltd held, any such assessment must be made on the basis of commercial reality in light of the surrounding circumstances.[61]
30. The Tribunal notes that in the statutory declaration made by the applicant on 10 July 2009 he mentions only that the company accountant (Mr Geoff Missen) assured him that if R and D status application succeeded that it was only the R and D expenses which would be covered and no mention is made of any officer of the ATO saying that the application was likely to succeed. All that was mentioned is that the ATO officer said that the application would not be considered until after (outstanding) tax returns were filed.[62] However even accepting that the applicant had obtained such an oral undertaking and accepting that he was entitled to rely on that undertaking being given it is difficult to conclude that as late as March 2003, a mere two months before the companies moving into liquidation with debts totalling several million dollars that the deductibility however generous would be sufficient to offset the total accumulated debt. The Tribunal is satisfied that it was not commercially realistic for the applicant to conclude that the considerable debt incurred by both companies would able to be met by any favourable tax deductibility which may be forthcoming from TSI’s acquisition of R and D tax status. In any event as the applicant conceded in his evidence he understood there was no certainty until the ATO had accepted the application.[63] Having regard to that evidence the Tribunal is satisfied the circumstances are not such that what was said to the applicant by the unidentified officer of the ATO could be taken with sufficient certainty to amount to undertaking upon which a director could rely.
31. According to the applicant an investor (Mr Steven Girotto) had agreed in 1999 or 2000 to fund TSI upwards of $US7M but subsequently withdrew his financial support following the 9/11 disaster and the financial retreat in the American stock market generated by that disaster. The applicant told the Tribunal that only about one third of what had been promised was ever paid.[64] The applicant stated that he considered a cause of TSI’s failure was “failure of the original investor to provide the full amount of capital as agreed originally.”[65] The applicant maintained that after the withdrawal of Mr Girotto’s promised funding arrangements occurred Swift Malaysia agreed to fund both the creditors of TSI and TSI Australia. The applicant told the Tribunal that Swift Malaysia provided funds of $2.2M between approximately May 2002 and May 2003. In exchange bonds were issued which could subsequently be converted into a shareholding in TSI. Swift Malaysia withdrew from providing any further funding in May 2003. At that point the applicant placed TSI and TSI Australia into voluntary liquidation.
32. Additionally the applicant told the Tribunal that the original TSI accounting computer program was found to be defective, as the result of it double entering some transactions, commencing in 2000. It took until end of 2002 to have the defective data re-entered.[66] This too was cited by the applicant as a reason for not filing TSI’s tax returns for the tax years ending 2000 and 2001 on time rather than the company continuing trading while insolvent.
33. A director’s report in relation to TSI dated 10 June 2003 was prepared for the administrators by the applicant.[67] Mr Fairbank also completed a director’s report.[68] The report completed by the applicant discloses liability to the ATO of $105,000 being unremitted PAYE tax withheld from wages paid to about 20 employees over a period of approximately 12 months.[69] The applicant explained in his oral evidence to the Tribunal that the failure to remit the PAYE tax had arisen in about a year before TSI went into liquidation and that he had arranged with the ATO that the outstanding amount be paid by instalments.[70] He told the delegate that he had been unaware of any liability to the Victorian office of State Revenue as he and the other director had relied on the company accountants to inform them of any liability but no information had been given.[71]
34. TSI Australia was anticipated to promote and sell and arrange training programs to support the users of the Trader System in respect of the research carried out by TSI.[72] The applicant listed TSI Australia’s liabilities in a report to the administrator dated 15 May 2003 as including $84,000 to local creditors, $320,000 to Trader Systems International Inc and $1M to Swift Malaysia.[73] In the RATA he completed the applicant estimated a shortfall of $2,028,381.[74]
35. In his reports to the respondent dated 9 December 2004 under s 533 the liquidator stated that the causes for the failure of TSI and TSI Australia were the same namely:
    • (a) poor strategic management of the business;
    • (b) inadequate cash flow or high cash use;
    • (c) trading losses.[75]

The liquidator did not accept TSI had liabilities to either Trader Systems International Inc or to Swift Malaysia. The liquidator appears to have decided that TSI traded while insolvent because he had assessed the company as having a “negative asset position”.[76]

36. The applicant agreed that both TSI and TSI Australia traded at a loss from at least the 2000 tax year but denied that they traded while insolvent.[77] The applicant stated that figures resulting from the defective accounting system may have given the liquidator the impression that TSI was trading while insolvent. The Tribunal is satisfied that this is unlikely to be the case because according to the applicant’s evidence the defect had been discovered and a new system was installed and the old records corrected by the end of 2002. The other matters referred to were the funding difficulties outlined earlier in these reasons – the fall in interest in the stock market activities following the 9/11 disaster and difficulties experienced in finessing the Trader System software.
37. On 12 July 2006 the Federal Court of Australia declared that payments made by TSI totalling $38,319.55 and $66,827.05 by TSI Australia constituted unfair preferences under s 588FA of the Act.[78] The Court made orders under s 588FF of the Act. An order made under s 588FF relates to a voidable transaction under s 588FE of the Act. A voidable transaction under s 588FE occurs when the company carries out an insolvent transaction. Tribunal would not be satisfied that the evidence is sufficiently clear for it to make a reliable finding that either TSI or TSI Australia traded while insolvent except for the fact that orders against each of the companies was made in the Federal Court of Australia. The Court determined that the transactions were void under s 588FE of the Act and that further the applicant and Mr Fairbank, as the directors of the two companies, were to personally repay the amounts to the Commissioner.[79]
38. The Tribunal accepts that an order made by a Judge of the Federal Court of Australia cannot be gainsaid before it. Accordingly the Tribunal is satisfied that both TSI Australia and TSI traded while insolvent.
39. Additionally the respondent claimed that Ms Mathers had raised an issue as to a lack of record keeping by TSI and TSI Australia. The applicant maintained that all of the documentation including computer records of transactions, had been given to Ms Mathers.[80] The applicant claimed tax returns had been filed – despite there being no record found in either TSI or TSI Australia’s files held by the respondent. Additionally the ATO had no records of tax returns being filed for the 2001 and 2002 financial years. The applicant claimed that the liquidator firm (Knights Insolvency) had itself gone into liquidation and that documents may have been lost in the process.[81] This is a speculative suggestion. However the issue of what documentation was provided in respect of TSI and TSI Australia remained unresolved on the evidence now before the Tribunal. The unresolved nature of that evidence is highlighted by the following. The applicant by chance located a copy of the tax returns for TSI and TSI Australia for the financial year ending 2001 and produced them to the Tribunal.[82] There is the possibility that the returns were prepared but not filed. That however would also be a speculative conclusion because the only evidence before the Tribunal is that of the applicant that the returns were prepared and filed by MBA Partners, the accountants for TSI and TSI Australia.[83] In the absence of hearing evidence from the liquidator the Tribunal is unable to determine whether the applicant failed to establish or maintain proper financial and other records for either or both of TSI and TSI Australia.
40. Some of the amounts identified by the liquidator as being debts owing by TSI were not listed in the questionnaire completed by the applicant for example the employees entitlements. The applicant claimed that he was unable to list these as the documentation had by the time he completed the questionnaire already been given to the liquidator.[84] When questioned further on this the applicant explained that while he was aware amounts were owing he did not know the details. He said he made no mention of them in the questionnaire because he was emotionally upset at the failure of the companies and found it a personally very difficult time. This is not a satisfactory reason for the failure to disclose. Directors are obliged to provide all the information they can to administrators and liquidators. It is not necessarily expected that details will always transpire to be accurate. However enough information to alert an administrator or liquidator of amounts which may be owing and some indication of the amount understood to be owing is a minimum requirement. In this case the Tribunal is satisfied that applicant failed to discharge this responsibility to an acceptable standard.
41. The liquidator also listed a failure to provide strategic management as a cause of failure. The absence of evidence as to what the liquidator meant by this resulted in it being difficult for the Tribunal to determine. It is reasonably clear from the evidence of the applicant, which was not challenged on these points, that factors other than a lack of strategic management influenced the failure of both companies. The Tribunal accepts that there was a collapse of so called dot com companies (in both the United States of America and Australia) following the 9/11 event. This caused a drop in market interest in the stock exchange which, as the applicant maintained, adversely affected the business of both companies. That along with the withdrawal of funding first by Mr Girotto and subsequently by Swift Malaysia were matters outside the control of the applicant. They are matters for which he cannot be held responsible. The liquidator does not seem to have had, or if so he had insufficient, regard to these factors in his determination that the applicant failed to provide strategic management to the companies.
42. It was submitted on behalf of the applicant that some of the debts listed as owing by TSI were also listed as debts of TSI Australia (for example, the amount owing to the Victorian State Revenue Office).[85] The Tribunal is satisfied that in some cases the same debts were wrongly recorded by the liquidator twice. There was no suggestion that the amounts which were double listed would have made a material difference that is have resulted in either company returning more than 50c in the dollar to unsecured creditors. In the end this was not a sufficiently weighty issue to influence the Tribunal’s determination.

WHETHER DISQUALIFICATION IS JUSTIFIED

43. An administrative decision maker must reach a conclusion in a case such as this by determining, on the balance of probabilities, whether or not the applicant’s conduct is such that it warrants a finding that a director ought be disqualified. Clearly the findings in respect of Swift Australia support such a finding. A failure to keep proper financial records is an essential part of operating a proprietary limited company.[86]
44. There is a public interest, as well as an interest particularly by unsecured creditors, in directors providing information to administrators and liquidators so that the rights of creditors can be adequately protected and any financial returns resolved both expeditiously and at a minimum cost in order that the highest return can be achieved. In cases where a liquidator is obliged to go to considerable lengths to establish an accurate financial status because of a lack of information provided by a director then the creditors are disadvantaged in that any returns are consumed in the additional time taken to ascertain the circumstances. This aspect is apparent in relation to all of the companies under consideration. In addition the Tribunal notes added public expense was involved in that ASIC was obliged to fund the liquidator’s public examination of the applicant because there were insufficient funds in Swift Australia to reimburse the costs involved.
45. Trading while insolvent is a serious matter. The Tribunal is not entitled to draw any conclusion from the evidence before it that the applicant intentionally permitted the companies to trade while insolvent. Indeed the evidence before the Tribunal suggests, and the Tribunal is satisfied, that the applicant was using his best endeavours to ensure that the companies were placed in a position where, because of the line of credit arranged in the last instance through Swift Malaysia, that the companies met their debts. The applicant was obviously conscious of the financial strain and again used his best endeavours to make suitable arrangements with the ATO to ensure liabilities were met. His action in moving both companies into administration occurred within a short time frame of him realising that there was no hope that the companies were going to be able to meet their liabilities.

DISQUALIFICATION

TIMING

46. On behalf of the applicant it was submitted that there was unreasonable delay in the respondent issuing its notice to demonstrate why disqualification should not occur. Section 206F of the Act empowers the respondent to disqualify a person from managing a corporation if that person was an officer of two or more corporation within a seven period fail and return less that 50c in the dollar to unsecured creditors. While no express time frame within which ASIC must take action following receipt of a s 533 report the Tribunal accepts that in accordance with the judgment of Heerey J in Kardas v Australian Securities Commission[87] s 206F (like its predecessor s 600 which was being considered in the Kardas case) is subject to an implied term that the power will exercised with ‘reasonable promptness’. His Honour stated:

Once a liquidator’s report in respect of a second “s 600 company” triggers the power of disqualification, that power, if it is to be exercised at all, should be exercised with reasonable promptness. A person potentially the object of that power should not be kept in an indefinite state of uncertainty. More importantly, since the purpose of a s 600 disqualification is prophylactic rather than punitive, there should be as little delay as possible in taking steps to protect the public.
What is a reasonable time will depend on the circumstances. The affairs of companies vary greatly in their complexity. But the commission does not, as it were, start from scratch. It will, ex hypothesi, have the benefit of a liquidator’s report and no doubt the liquidator would usually be willing and able to provide further information and explanation on request.[88]

47. The chronology relating to the companies is as follows:
    • (a) The liquidator provided initial s 533 reports into TSI and TSI Australia dated 9 December 2004;[89] and
    • (b) Supplementary reports dated 14 January 2005 were lodged in respect of both TSI and TSI Australia.[90]

Since it is accepted that TSI and TSI Australia are related companies and should be treated as one no power to issue a notice arose as the result of the failure of these companies.

48. An initial; s 533 report into Swift Australia is dated 17 August 2007.[91] No mention is made in that report of the liquidator undertaking any public examination of the applicant under s 597 of the Act with the report curiously stating that there was no intention to hold any public examinations.[92] However a public examination of the applicant had been conducted on 15 December 2005.[93] Mr Cant told the Tribunal that it was unusual for him to hold a public examination and that he had held only about half a dozen in 20 years as a liquidator.[94] Mr Cant said that the public hearing had been held for two reasons:
    • (a) ASIC had called on liquidators to provide information to it concerning company failures to assist it in undertaking the better regulatory practises; and
    • (b) there had been an accumulation of records which had taken time, including the time taken to reconstruct transactions.
49. Part of the delay may be attributed to the time it took for the action commenced by the liquidator in relation to the ownership of shares in Direct Portfolio to be resolved, including obtaining approval of the settlement by the creditors (occurring on 26 July 2006).[95] However Mr Cant gave no substantive reason as to why no mention had been made in his initial report to ASIC of TSI or TSI Australia or as to the delay between the acceptance of the mediated outcome occurring on 26 July 2006 and the production of the supplementary report to the respondent almost 18 months later.
50. It took just on five months (from 17 November 2008 until 20 April 2009) for the respondent to issue the show cause notice. The respondent claims it was reasonable for it to wait for the receipt of the supplementary report before considering whether a show cause notice should issue. This may be because the liquidator in his initial report:
    • (a) did not recommend any further inquiry be taken by ASIC; and
    • (b) notified ASIC that there was no proposal to lodge any supplementary report; and
    • (c) no recovery proceedings were being undertaken or considered; and
    • (d) the liquidator was unaware of the officers being officers of other companies; and
    • (e) estimated that it would take between six months and a year to complete the administration from the date of the report.

In nearly all respects the above matters were misleading. In particular the liquidator had undertaken a public examination of the applicant, it was on the public record that the applicant had been a director (officer) in other companies which had failed to return more than 50c to unsecured creditors and the liquidator was aware of and had participated in securing the settlement in recovery proceedings which had issued.

51. ASIC can only act on the reports liquidators supply. There was no reason why ASIC should take any action with respect to the initial erroneous report prepared on behalf of the liquidator. It was only after receipt of the supplementary report that ASIC was in a position to consider if action was warranted. A period of five months is not unreasonable for it to consider and determine that it would send a show cause letter. It follows that the Tribunal is unpersuaded that ASIC has caused undue delay in initiating action having regard to the circumstances of this case.
52. The matters referred to above in their totality warrant consideration of the imposition of a period of disqualification. As the delegate pointed out in his reasons[96] the purpose of the imposition of a period of disqualification is not to punish a person (although clearly it may have that result) but to protect the public. The applicant is a legal practitioner of long standing and is of an age where the likelihood of him successfully re-establishing himself in the corporate world, if a disqualification is imposed, is not high. Nevertheless the Tribunal notes that there were substantial sums of money involved and that the unsecured creditors will recover nothing, that there has been a failure of competence in the maintenance of financial records and trading while insolvent and that employees’ entitlements were unable to be met from funds available and had to be paid by taxpayers through the Commonwealth’s General Employee Entitlement and Redundancy scheme. It was submitted on behalf of the applicant if any period of disqualification was warranted then it should be limited to the time the ban was imposed by the delegate, being 10 August 2009 to the date the Tribunal delivers this decision. That would be a period of about five months.
53. The Tribunal is satisfied that a ban for approximately five months is too short having regard to the circumstances outlined earlier in the reasons. The breaches are of a magnitude which warrants a ban for a more substantive period even taking into account the personal circumstances of the applicant. The delegate reached a decision that a period of 18 months was warranted. The Tribunal is satisfied that an 18 month ban is justified in the circumstances of this case.

DETERMINATION

54. For the reasons expressed the Tribunal affirms the decision under review.

I certify that the 54 preceding paragraphs are a true copy of the reasons for the decision herein of

Mr G. L. McDonald, Deputy President

Signed: ........(sgd G Horzitski)..........

Associate, Grace Horzitski

Dates of Hearing 26 and 27 November 2009

Date of Decision 27 January 2010

Counsel for the Applicant Dr P. Vout

Solicitor for the Applicant Mr B. McGrath

Counsel for the Respondent Mr S. Rosewarne

Solicitor for the Respondent Mr T. Chalke,

Australian Securities and Investments Commission

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[1] Section 208F(1)(c) of the Act.
[2] (1998) 29 ACSR 304.
[3] [2009] FCA 1474.

[4] T documents, T4.9, page 242. This is also the description given by the applicant in the RATA he signed on 10 June 2003 at T documents, T4.9, page 385.
[5] T documents, T4, pages 34 to 37.
[6] T documents, T3, page 20.
[7] T documents, T4, pages 34 to 37.
[8] T documents, T4.5, page 141.
[9] Transcript, pages 13 and 14.
[10] Exhibit A2.
[11] Exhibit A1, paragraph 9.
[12] T documents, T4.5, page 110.
[13] Exhibit AS-1 to Exhibit A1.
[14] Exhibit A1, paragraph 10.
[15] T documents, T4.5, page 82.
[16] T document, T4.5, page 116.
[17] T document, T4.5, page 129.
[18] Transcript, page 16.
[19] T documents, T4.5, page 131.
[20] Transcript, page 53.
[21] May 2003 according to the liquidator: T documents, T4.9, page 244 or September 2004 according to the applicant: Transcript, page 15.
[22] T documents, T4.5, page 154.
[23] Exhibit ARC-3 to Exhibit R1.
[24] T documents, T4.5, page 151.
[25] T documents, T4.5, page 153.
[26] T documents, T4.5, page 85.
[27] This is not correct as for instance s 475(8) of the Act provides that a person required to prepare a report must be given reasonable costs to complete the report. While the property of company in liquidation vests in the liquidator an officer required to prepare a report may be given access to the necessary records in order to complete the report.
[28] Transcript, page 16.
[29] Transcript, page 59.
[30] Exhibit R1, paragraphs 9 to 11.
[31] T document, T4.5, page 131.
[32] Exhibit R1, paragraph 9.
[33] Exhibit A1, paragraph 6.
[34] T documents, T4.5, page 157 and following.
[35] Transcript, page 16.
[36] T document, T4.1, pages 108 to 116.
[37] Exhibit ARC-4 to Exhibit R1.
[38] Transcript, page 65.
[39] Section 475(4) of the Act.
[40] Exhibit ARC-1 to Exhibit R1.
[41] Exhibit ARC-4 to Exhibit R1.
[42] T documents, T4.3, page 66.
[43] T documents, T4.5, page 114.
[44] Exhibit R1, paragraph 11 and Exhibit ARC-5 to Exhibit R1.
[45] T documents, T4.5, page 81.
[46] T documents, T4.19, page 242.
[47] T document, T3, page 21.
[48] Section 180 of the Act and T documents, T4, pages 37 to 41.
[49] Section 588G of the Act and T documents, T4, pages 37 to 41.
[50] T documents, T3, page 25.
[51] T documents, T4, page 37 to 41.
[52] Transcript, page 57.
[53] TSI: T documents, T4.7, pages 193 to 194. TSI Australia: T documents, T4.12, pages 422 to 423.
[54] T documents, T4.7, page 194 and T documents, T4.12, page 425 respectively.
[55] T documents, T4.14, page 467.
[56] T documents, T13, page 1400.
[57] T documents, T4.9, page 240.
[58] Transcript, page 55.
[59] T documents, T13, page 1400, paragraphs 7 and 8.
[60] Dunn v Shapowloff [1978] 2 NSWLR 235.
[61] Alto Controls Pty Ltd (in liq) v Newtronics Pty Ltd (in liq) [2009] VSCA 238, at [55]-[56].
[62] T documents, T13, page 1400.
[63] Transcript, page 55.
[64] Transcript, page 33 and 39 the applicant said about a quarter had been contributed.
[65] T documents, T7.9, page 640.
[66] Transcript, pages 39 to 40.
[67] T documents, T4.9, page 384.
[68] T documents, T4.14, page 409.
[69] Transcript, page 25.
[70] Transcript, page 27.
[71] T documents, T12, page 1390.
[72] Transcript, pages 24, 39 and 42.
[73] T documents, T4.14, 632.
[74] T documents, T4.14, page 551 and Transcript, page 42.
[75] TSI: T documents, T4.8, page 208. TSI Australia: T documents, T 4.13, page 432.
[76] T documents, T4.9, page 216.
[77] Transcript, page 43.
[78] T documents, T11 pages 1364 to 1367.
[79] Under s 588FGA(3) of the Act.
[80] Transcript, pages 53 and 55.
[81] Transcript, pages 18 to 19.
[82] Exhibit AS-5 to Exhibit A1.
[83] Transcript, page 18 to 19.
[84] Transcript, page 30.
[85] Transcript, pages 44 to 45.
[86] Guss and Australian Securities and Investments Commission [2006] AATA 401 at [46] per Deputy President Olney.
[87] (1998) 29 ACSR 304.
[88] (1998) 29 ACSR 304 at 313 to 314.
[89] T documents, T4.8, page 208 and T documents, T4.13, page 432 respectively.
[90] T documents, T4.9, page 212 and T documents, T4.14, page 436 respectively.
[91] T documents, T4.4, page 72.
[92] T documents, T4.4, page 74.
[93] T documents, T4.5, page 118.
[94] Transcript, pages 58 and 60.
[95] T documents, T4.6, page 188.
[96] T documents, T3, pages 29 to 30.