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Oaklands and Australian Securities and Investments Commission [2011] AATA 199 (10 March 2011)

Last Updated: 25 March 2011

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2011] AATA 199

ADMINISTRATIVE APPEALS TRIBUNAL )

) No 2011/0319

GENERAL ADMINISTRATIVE DIVISION
)

Re
BRUCE OAKLANDS

Applicant
And
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

Respondent

DECISION

Tribunal
Ms J L Redfern, Senior Member

Date of Oral Decision 10 March 2011

Date of Written Reasons 25 March 2011

Place Sydney

Decision
Until the determination of these proceedings or further order, pursuant to s 41(2) of the Administrative Appeals Tribunal Act 1975, the Tribunal stays the decision under review subject to the condition that the Applicant is not to manage any other corporation than Bluestone Construction Group Pty Ltd (A.C.N. 135 247 460).

.................[sgd].............................
Ms J L Redfern
Senior Member

CATCHWORDS

PRACTICE AND PROCEDURE – application for stay order – disqualification from managing corporations – relevant factors to be taken into account – competing public interest – stay granted with condition


Administrative Appeals Tribunal Act 1975 s 41

Corporations Act 2001 s 206F


Re Commonwealth of Australia v Quirke [1986] AATA 57; (1986) 9 ALD 92

Re Scott and Australian Securities and Investments Commission [2009] AATA 789

Re Zarfati and Australian Securities and Investments Commission (2008) 106 ALD 225; [2008] AATA 989

REASONS FOR DECISION


10 March 2011
Ms J L Redfern, Senior Member

BACKGROUND

  1. Mr Bruce Oaklands has sought a review of a decision of a delegate of the Australian Securities & Investments Commission (ASIC) disqualifying him from managing corporations for three years. The decision was made on 3 December 2010 but was not served until 22 January 2011.
  2. Mr Oaklands applied for a stay of the disqualification order on 28 January 2011. There was some delay in listing the matter and the application, which was contested, was listed for hearing on 10 March 2011.
  3. After hearing evidence from Mr Oaklands, reviewing documents, including a number of the documents lodged pursuant to s 37 of the Administrative Appeals Tribunal Act 1975 (the AAT Act), and considering both written and oral submissions of the parties, I granted a stay with the condition that Mr Oaklands was not permitted to manage any other corporation than Bluestone Construction Group Pty Ltd, and advised the parties I would provide written reasons. I also made directions about the interlocutory steps to be taken and listed the matter for hearing on 4 and 5 May 2011.
  4. These are my written reasons.

LEGISLATIVE FRAMEWORK AND ISSUES

  1. The application for review relates to the decision by the delegate of ASIC to disqualify Mr Oaklands from managing corporations under s 206F of the Corporations Act 2001 (the Corporations Act). Section 206F(1) provides:
206F ASIC’s power of disqualification
Power to disqualify
(1) ASIC may disqualify a person from managing corporations for up to 5 years if:
(a) within 7 years immediately before ASIC gives a notice under paragraph (b)(i):
(i) the person has been an officer of 2 or more corporations; and
(ii) while the person was an officer, or within 12 months after the person ceased to be an officer of those corporations, each of the corporations was wound up and a liquidator lodged a report under subsection 533(1) (including that subsection as applied by section 526-35 of the Corporations (Aboriginal and Torres Strait Islander) Act 2006) about the corporation’s inability to pay its debts; and
(b) ASIC has given the person:
(i) a notice in the prescribed form requiring them to demonstrate why they should not be disqualified; and
(ii) an opportunity to be heard on the question; and
(c) ASIC is satisfied that the disqualification is justified.
(1A) To avoid doubt, the references in paragraph (1)(a) to corporations include references to Aboriginal and Torres Strait Islander corporations.
Grounds for disqualification
(2) In determining whether disqualification is justified, ASIC:
(a) must have regard to whether any of the corporations mentioned in subsection (1) were related to one another; and
(b) may have regard to:
(i) the person’s conduct in relation to the management, business or property of any corporation; and
(ii) whether the disqualification would be in the public interest; and
(iii) any other matters that ASIC considers appropriate.
(2A) To avoid doubt, the references in subsection (2) to a corporation includes a reference to an Aboriginal and Torres Strait Islander corporation.
Notice of disqualification
(3) If ASIC disqualifies a person from managing corporations under this section, ASIC must serve a notice on the person advising them of the disqualification. The notice must be in the prescribed form.
Start of disqualification
(4) The disqualification takes effect from the time when a notice referred to in subsection (3) is served on the person.
ASIC power to grant leave
(5) ASIC may give a person who it has disqualified from managing corporations under this Part written permission to manage a particular corporation or corporations. The permission may be expressed to be subject to conditions and exceptions determined by ASIC.
  1. It does not appear from the submissions of the parties that there is any dispute in relation to the application of s 206F(1) (a) and (b) of the Corporations Act. Mr Oaklands was a director of three companies that failed with estimated deficiencies totalling in excess of $15.5 million. Reports were lodged with ASIC under s 533(1) of the Corporations Act and notice was given to Mr Oaklands to “show cause” as to why he should not be disqualified. He was given a hearing and provided with an opportunity to respond to ASIC’s concerns.
  2. The key issue in dispute, which will ultimately be the subject of the review by this Tribunal, is whether disqualification is justified in the circumstances of the case.
  3. The delegate of ASIC decided that disqualification was justified and, apart from findings about the estimated significant deficiencies of the three failed companies, made findings of contraventions of the Corporations Act. Neither the parties nor the Tribunal will be confined to these findings at the hearing of the substantive matters but for the purposes of determining this application, it is convenient to consider the stay application in light of the decision and the arguments raised by Mr Oaklands as disclosed in the decision.
  4. Section 41(2) of the AAT Act provides:
The Tribunal may, on request being made, as prescribed, by a party to a proceeding before the Tribunal (in this section referred to as the relevant proceeding), if the Tribunal is of the opinion that it is desirable to do so after taking into account the interests of any persons who may be affected by the review, make such order or orders staying or otherwise affecting the operation or implementation of the decision to which the relevant proceeding relates or a part of that decision as the Tribunal considers appropriate for the purpose of securing the effectiveness of the hearing and determination of the application for review.
  1. In considering whether it is appropriate to make such an order the President, Downes J, (see Re Scott and ASIC [2009] AATA 789 at [4]) identified the following factors that should be taken into account:
  2. The Tribunal must have sufficient evidence before it to come to such a conclusion and, as such, for practical purposes the applicant in a stay application “bears the onus” of establishing that the considerations point to the granting of the stay: Re Zarfati and Australian Securities and Investments Commission (2008) 106 ALD 225; [2008] AATA 989.

THE EVIDENCE

  1. Mr Oaklands is the managing director of Bluestone Construction Group Pty Ltd (BCG) but he is not the sole director, his wife Mrs Joslyn Oaklands having been appointed a director on 24 January 2011. This was presumably in response to the notice of disqualification served on 22 January 2011. Mr Oaklands is the nominated supervisor under a licence held by BCG under the Home Building Act 1989 (NSW). He also holds his own licence under this Act. There is no evidence Mr Oaklands must remain as managing director of BCG to hold this position.
  2. Mr Oaklands gave evidence that BCG has about 35 employees and approximately 100 subcontractors. It has been established since February 2009 and has entered into a number of substantial construction contracts since this time. BCG undertakes residential and commercial construction work. Contracts entered into include a contract with Sky Central Pty Limited for approximately $1.4 million which was due to be completed by June 2011, four contracts with Nahas Construction Pty Ltd entered into on 25 June 2010, 20 July 2010, 30 July 2010 and 28 February 2011 for a total of $2,645,000 and a contract with the Glenfield Junction Joint Venture (GJJV) dated 5 July 2010 which involved developing a scope of works and was likely to be in the vicinity of $1.5 million. The latter contract nominated Mr Oaklands in the “Key Personnel” schedule as managing director and under clause 19 BCG was required to notify GJJV if the key personnel could not perform the function assigned and prior written approval was required if BCG wanted to employ someone to perform the function. Mr Oaklands referred to another contract for Sydney Water which he did not produce to the Tribunal.
  3. Mr Oaklands gave evidence that an audit had recently been conducted by the union on whether BCG was complying with its obligations in respect of employee entitlements. He said the audit results found BCG was complying but Mr Oaklands did not provide any written evidence of the audit or the findings.
  4. Mr Oaklands told the Tribunal he negotiates all contracts and the customers of BCG consider Mr Oaklands as a key person in the management of the company. BCG employs a number of supervisors and while they are able to supervise building projects, Mr Oaklands said those supervisors would not have sufficient experience to manage BCG or negotiate contracts and deal with customers, suppliers and the unions. It would not be appropriate to appoint these supervisors as directors to manage the company. He has been involved in the building industry for 24 to 25 years and has been managing companies for 15 to 18 years. There is no one who could replace him. Mrs Oaklands is responsible for wages and the accounts and helps Mr Oaklands manage the company but she has insufficient experience to manage the company by herself. She also looks after the Oaklands’ young children and is expected to give birth to their baby shortly.
  5. Mr Oaklands continued to manage BCG after 22 January 2011 as he had lodged his application for review and a stay on 28 January 2011 and understood, incorrectly, there was a stay pending the hearing of his application for review. He was surprised no stay was operating and said he had been told by “someone” at the Tribunal that he did not have to be concerned about this issue until the matter was listed. He did not understand he had been in breach of s 206A of the Corporation Act, which provides that a person must not manage a corporation once they have been served with a notice of disqualification. Mr Oaklands did not obtain legal advice at the time he lodged the application, but subsequently obtained advice and was legally represented at the hearing of the stay application.
  6. At the end of the hearing in June 2010, Mr Oaklands was told by the delegate he would be notified of any decision within 28 days. This was not disputed by ASIC and is confirmed by the transcript of the hearing before the delegate. When he received no notification within that time period he assumed ASIC had determined not to make a disqualification order.
  7. Mr Oaklands told the Tribunal that if a stay is not granted and he is required to resign as managing director of BCG, there was no one else who could manage BCG as he had experience, knowledge of its operations and was “the face” of the company. Customers would lose confidence and this may lead to BCG closing down.
  8. Mr Oaklands gave evidence about the liquidation of Canada Bay Earthworx Pty Ltd which went into liquidation on 25 August 2010. The liquidation of this company was referred to in ASIC’s submissions. Mr Oaklands was a director of this company from February 2009 until 30 June 2010. It was originally managed by a relative of his wife. He joined the company to work out whether steps could be taken to “save it”. The only debt was a debt to the ATO, which he understood was disputed.

CONSIDERATION

PROSPECTS OF SUCCESS

  1. ASIC submits, correctly in my view, that it is not the role of the Tribunal to conduct a preliminary hearing of the issues to be raised at the substantive hearing of the application. The Tribunal must consider whether there are facts and circumstances which, if established at the substantive hearing, would provide a basis for success: Re Commonwealth of Australia v Quirke [1986] AATA 57; (1986) 9 ALD 92 at 95.
  2. In the present case, it is argued by ASIC that Mr Oaklands does not dispute a number of the key findings of the delegate and his prospects on the review are therefore insufficient to warrant a stay.
  3. It is not disputed that Mr Oaklands was a director of three companies with substantial estimated deficiencies being: Wedmora Church St Parramatta Pty Ltd (WCP) with a deficiency of over $9.2 million, Wed Property Services Pty Ltd (WPS) with a deficiency of over $6.1 million and A.C.N. 107 785 346 Pty Ltd - formerly Citilink Developments Pty Ltd (CDP) - with a deficiency of $138,288.
  4. The relevant findings of the delegate were:
  5. The delegate also referred to the fact that Mr Oaklands was a director of two other companies that failed in 2000. There was no finding of contravention but this was considered by the delegate to be relevant to Mr Oaklands’ understanding of his obligations to assist the liquidator. By inference, this can only be relevant to the finding referred to in paragraph 23(b) above.
  6. Mr Oaklands contends there is dispute in relation to these matters and whether disqualification is justified in the circumstances.
  7. According to the decision of the delegate, the liquidator estimated that WCP was insolvent from November 2005. The company was wound up on 16 August 2006. In the hearing before the delegate, Mr Oaklands argued that disputes with a supplier, Hanson Precast Pty Ltd, about the supply of non-complying precast concrete slabs led to the delay in a major building project being undertaken by WCP. The delay had a “domino effect” on claims against WCP from the developer and other suppliers and demands were made on WCP in June and July 2006 in relation to these claims, which ultimately led to its liquidation.
  8. The delegate accepted there was a dispute and that Mr Oaklands had “acted quite professionally to identify and highlight the poor quality of material, which may have led to substandard construction in turn leading to a possible public disaster”. The delegate, nonetheless, found that Mr Oaklands was a director at the time WCP incurred the debts to suppliers when it was reasonable to suspect WCP was insolvent or would become insolvent. The delegate found no evidence that Mr Oaklands took reasonable steps to prevent WCP from incurring the debt and this was in breach of s 588G of the Corporations Act.
  9. The question of whether a construction company incurs a debt in circumstances where there are contentious contractual disputes may involve complex issues of law and fact. The question of whether a director has failed to take reasonable steps to prevent the company incurring such debts raises further complexities. It is not possible to ascertain from the reasons of the delegate whether these matters were considered or the basis on which the delegate concluded Mr Oaklands failed to take reasonable steps. As such, Mr Oaklands may be able to establish he did not breach s 588G of the Corporations Act and disqualification would not be justified on this ground.
  10. The second key finding of the delegate related to a contravention of s 475 of the Corporations Act. There is no material before me on this issue from Mr Oaklands and for the purposes of this application I will assume there has been such a contravention. Section 475 is an important provision and a strict liability offence under the Corporations Act but breach of it would not of itself justify disqualification.
  11. The third key finding was a breach of s 182 of the Corporations Act because Mr Oaklands, as a director of WPS, arranged loans from the company to him totalling $888,094. Mr Oaklands does not dispute the loans but disputes the contravention of s 182. No particulars are provided. It appears the delegate found the breach on the basis that there was no evidence the transactions were “legitimised via loan agreements or terms as to repayment of those loans”. This would not, of itself, establish a breach of s 182.
  12. The principal submission made by Mr Oaklands in response to the notice to show cause and at the ASIC hearing, which was repeated in written and oral submissions on this application, was to the effect that WCP, WPS and CDS were related corporations and their failure occurred because they were involved in a major building project, which was delayed through the unforeseeable breach of building standards by a supplier. This had a domino effect on other claims against WCP and on the solvency of the related companies, WPS and CDS. The collapse of the companies was in 2006 and since that time he had established and was managing BCG. The company was successful and had significant construction contracts. There was no evidence of breaches in relation to this company.
  13. These matters, and the question of whether Mr Oaklands has contravened a number of provisions of the Corporations Act, should be the subject of argument at the substantive hearing. In my view there is sufficient evidence about prospects, subject to the other considerations, to warrant a stay.

CONSEQUENCES OF THE REFUSAL OF A STAY AND WILL THE APPLICATION FOR REVIEW BE RENDERED NUGATORY

  1. Mr Oaklands contends that if the stay is not granted he will have to resign from BCG, leaving the company without a managing director and effective leadership. His role as managing director is a key position in a company of its size. Moreover, he established the company and is the “key person” involved in its management and operation. Mr Oaklands contends that if he were not able to manage the company, customers may lose confidence in the company and this could lead to the breach of a number of significant contracts. It was not possible at this stage to appoint another person to take his place. Because of these factors, BCG may have difficulties continuing to trade if a stay is not granted and this would render the application for review nugatory.
  2. ASIC argues the contracts do not contain any provisions that require Mr Oaklands to remain as managing director or director of BCG. Mr Oaklands could take steps, and should have once he was aware an order may be made, to appoint another director or executive to manage the business. Mrs Oaklands was a director of BCG and could manage the business. It was not necessary for Mr Oaklands to be a director of BCG for the BCG building licence to remain valid and there is no evidence his disqualification would affect his personal licence. In any event, the interests of Mr Oaklands and those associated with him do not defeat the public interest in the disqualification remaining in place pending the determination of the substantive application.
  3. I accept ASIC’s submission that none of the contracts identified, save for the contract with GJJV, contain a provision that would cause BCG to breach the contract if Mr Oaklands resigns as a director. The GJJV contract does not directly contain such a provision, although it is clear from its terms that Mr Oaklands is considered to be a key person in the management of BCG and while it may not give rise to a formal right of termination, it is likely GJJV would be concerned. I also accept that the BCG licence does not require Mr Oaklands to be a director of BCG. However, there is evidence that Mr Oaklands is the driving force behind BCG. In a company of this size, the role of negotiating contracts, following up debts, negotiating with unions and overseeing multiple projects, would necessarily involve Mr Oaklands in the management of BCG, regardless of whether he is a director. There is no evidence Mrs Oaklands is equipped to take over this role and I accept the evidence of Mr Oaklands that no one could be appointed to replace him, at least in the short term. It is possible Mr Oaklands could, at some time in the future, appoint someone to take over many of the executive functions of a managing director and could confine himself to particular matters, falling short of management. While there was no evidence about this, it can be inferred that this would be a costly and difficult exercise, which may take some time to implement.
  4. In the absence of Mr Oaklands managing BCG, I am satisfied there is a real risk the operations of BCG will be compromised. I also note that Mr Oaklands is employed by BCG and any decline in trading and profitability of BCG may affect his interests.
  5. In summary, I am satisfied that the interests of Mr Oaklands, but more importantly BCG, would be prejudiced if a stay is not granted. I am not satisfied the review would be rendered nugatory but the effectiveness of any decision in his favour would be diminished if the business of BCG is damaged.

PUBLIC INTEREST AND CONSEQUENCES FOR ASIC

  1. ASIC contends that an adverse decision has been made against Mr Oaklands after a hearing before a delegate. ASIC is the regulator and has supervisory control over directors and managers and in exercising this function, has determined to disqualify Mr Oaklands. All things being equal, the public is entitled to the protection of that decision. Mr Oaklands contends there is no risk to the public or creditors. The collapse of the companies which are the subject of the decision was in 2006 and was in special circumstances. There is no evidence of any wrongdoing since this time and Mr Oaklands has been managing BCG, which is trading successfully, for the past two years. ASIC conducted the hearing in June 2010 but did not make a decision until December 2010 and failed to communicate the decision until 22 January 2011. The delay by ASIC suggests there is no real concern about any risk in Mr Oaklands continuing to manage BCG. ASIC was aware Mr Oaklands was managing BCG and referred to this in the decision. It would be against the public interest for a viable company which employs staff and has valuable contracts to be without leadership and management. If a stay is not granted pending the hearing, Mr Oaklands would have to cease managing BCG and there was no one who could replace him at this stage.
  2. I agree that the public interest is of paramount importance and the public should have the benefit of protective orders, even pending the substantive hearing of a matter. However, this must be balanced against the other factors relevant to the granting of a stay and the competing public interest in facilitating the continued effective operation of a business. In the present case, there is no identified risk of harm, Mr Oaklands has been managing a construction company for a number of years and there is no evidence of complaints or misconduct, other than those arising from the collapse of the companies in 2006. ASIC referred to the liquidation of Canada Bay Earthworx Pty Ltd in August 2010 but has made no allegation of wrongdoing. ASIC has delayed making its decision and acting on the disqualification order for over six months. I accept that this suggests ASIC has not identified any urgent risk that needs to be addressed, although I do not accept this means ASIC has no real concerns. The decision refers to a number of issues which, if established, are serious matters that may warrant disqualification.
  3. On the other hand, I was satisfied that if a stay is not granted, the operations of BCG may be compromised and this would be against the interests of employees, contractors, customers and suppliers. This is not a case where the disqualification orders are secret. There is no confidentiality order in place, nor would I make such an order based on the evidence, and third parties may be apprised of the disqualification order on ASIC’s website, notwithstanding any stay. This assumes ASIC has issued such a notice already. Moreover, the public interest can be advanced in this case by expediting the hearing to ensure the substantive issues are resolved at the earliest opportunity. The matter has been listed for hearing in early May 2011 and it is likely that the substantive matter can be resolved within the next two to three months.

CONCLUSIONS

  1. After examining the relevant factors to be considered, I was of the view that the balance favoured the granting of a stay. The issues are complicated, in dispute and there are some prospects of success. These matters should be determined at the substantive hearing but there would be prejudice to Mr Oaklands and BCG if a stay was not granted pending determination of the issues. The public interest would not be served by refusing the stay application and an early hearing date is the best way to resolve the competing interests. The stay granted was limited to BCG and was subject to further order. If there are any issues subsequently identified by ASIC, these issues can be raised and the question of whether the continuation of the stay is appropriate can be considered.

I certify that the 41 preceding paragraphs are a true copy of the reasons for the decision herein of Ms J L Redfern, Senior Member


Signed: ..............[sgd]..................................................................

Associate


Date of Interlocutory Hearing 10 March 2011

Date of Decision 10 March 2011

Date of Written Reasons 25 March 2011

Solicitor for the Applicant Ms A Drayton and Mr S Levitt, Levitt Robinson

Counsel for the Respondent Ms M Avenell

Solicitor for the Respondent Mr S Chung, ASIC

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