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Grossman and Australian Investments and Securities Commission [2011] AATA 6 (12 January 2011)

Last Updated: 19 January 2011

Administrative Appeals Tribunal

DECISION AND REASONS FOR DECISION [2011] AATA 6

ADMINISTRATIVE APPEALS TRIBUNAL )

) No 2009/1215

GENERAL ADMINISTRATIVE DIVISION
)



Re
PETER GROSSMAN

Applicant
And
AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

Respondent

DECISION

Tribunal
Ms G Ettinger, Senior Member

Date 12 January 2011

Place Sydney

Decision
The Tribunal affirms the decision under review, and decides that the period of disqualification for five years is taken to have commenced from the date of service of ASIC’s decision of 18 February 2009.

................[sgd]..............................
Ms G Ettinger
Senior Member

CATCHWORDS

CORPORATIONS – Directors and officers – director and manager of three companies all of which went into liquidation – findings by liquidators of poor strategic management, breach of director’s’ statutory duties, and cash flow problems – order for disqualification from managing corporations – decision under review affirmed – disqualification for five years affirmed.


Corporations Act 2001 (Cth) ss 46, 47, 50, 206F


Murdaca v Australian Securities and Investment Commission (2009) 178 FCR 119; [2009] FCAFC 92

Quinlivan v Australian Securities and Investments Commission [2010] FCAFC 161

Re Feher and Australian Securities Commission (1997) 15 ACLC 1774

Re Guss and Australian Securities and Investments Commission (2006) 90 ALD 349; [2006] AATA 401

Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler [2002] NSWSC 483; (2002) 42 ACSR 80

Re Lelliott and Australian Securities and Investments Commission [2009] AATA 110

Re Quinlivan and Australian Securities and Investments Commission (2010) 113 ALD 599; [2010] AATA 113


REASONS FOR DECISION


12 January 2011
Ms G Ettinger, Senior Member

SUMMARY
  1. Mr Peter Grossman has appealed against the decision of the Australian Securities and Investments Commission (ASIC), which, on 18 February 2009, disqualified him from managing corporations for five years. The disqualification was on the basis that in managing and directing companies, Mr Grossman’s conduct showed a lack of commercial morality, a disregard for the interests of creditors, repeated misuse of the corporate structure and preference of his own interests over the interests of creditors. The five year disqualification was imposed because ASIC held that Mr Grossman’s conduct came within the worst case scenario.
  2. Mr Grossman exercised his right to appeal to this Tribunal against the decision of ASIC, and chose to appear only by way of written submissions, asking the Tribunal to make a decision on the papers.
  3. I have decided that the correct or preferable decision is to affirm the decision of ASIC. I am satisfied that the period of disqualification for the period of five years can be held to have commenced on service of ASIC’s decision of 18 February 2009. My reasons follow.

LEGISLATIVE ENVIRONMENT

  1. The relevant legislation is the Corporations Act 2001 (Cth) (the Act). Section 206F of the Act contains power for ASIC to disqualify a person from managing corporations, and provides relevantly as follows:
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.
...
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.

ISSUES BEFORE THE TRIBUNAL

  1. The issue before this Tribunal is whether disqualification from managing corporations is the correct or preferable decision to make in regard to Mr Grossman.
  2. It was not in dispute that Mr Grossman had been an officer of the three relevant corporations noted below which had been wound up, and that a liquidator had lodged a report about each. I was satisfied that ASIC had given Mr Grossman the relevant notice regarding the possibility of disqualification, and that he had had an opportunity of being heard on the question (section 206F(1)(a) and (b)).
  3. In order to decide whether disqualification is justified, (section 206F(1)(c)), I must have regard to the following considerations (section 206F(2)):

a) whether any of the companies involved being:

are related (section 206F(2)(a));


b) an evaluation of the Applicant’s conduct in relation to the management, business or property of the three companies named above (section 206F(2)(b)(i));

c) whether the disqualification of the Applicant would be in the public interest (section 206F(2)(b)(ii));

d) a consideration of any other appropriate matters (section 206F(2)(b)(iii)); and

e) if the Applicant’s disqualification from managing corporations is justified, whether the five year period or some other period of disqualification is appropriate.

AGREED FACTS

  1. As this matter was listed to be heard on the papers, I held a Directions Hearing with the parties in order to clarify certain matters. The parties agreed that the first nine paragraphs from the Applicant’s Statement of Facts and Contentions were accepted by both. The parties also agreed that paragraphs 2 - 8 of the Respondent’s Statement of Facts and Contentions are accepted by both. I have accepted that, and dealt with those matters in the paragraphs which follow.
    1. The Australian Securities and Investments Commission (ASIC) issued a notice styled “Areas of Concern Relating to Peter Anthony Grossman” dated 2 May 2008.
    2. The concerns in the Notice related to Peter Grossman's actions or failure to act whilst acting as an officer, (director and in some instances secretary) of Hot Metal, Vahuzun, and Bico Designs.
    1. Mr Grossman made submissions in response to the Notice on 29 August 2008.
    1. ASIC issued a second notice dated 3 December 2008 setting out an additional area of concern.
    2. Following receipt of the Second Notice, Mr Grossman made further submissions on 6 February 2009.
    3. ASIC issued a notice of disqualification to Mr Grossman by letter dated 18 February 2009, banning him from managing corporations without leave of ASIC for a period of five years.
    4. At all material times:
      1. Hot Metal was incorporated on 9 June 1999 with Mr Grossman appointed as director and secretary on 25 May 2001 until 8 October 2004.
      2. The sole shareholder of Hot Metal was Linda Ann Grossman who owned the only two shares in the paid up capital of Hot Metal at the time the voluntary administrator was appointed to Hot Metal on 13 May 2003.
      1. The voluntary administrator of Hot Metal became the creditors’ voluntary liquidator on 4 June 2003, and caused the company to be deregistered on 8 October 2004.
    5. On 22 September 2003 Richard Albarran the liquidator of Hot Metal lodged a report with ASIC pursuant to section 33 of the Act. At the time that the report was lodged the liquidator estimated that the dividend to unsecured creditors would be 0 – 10 cents in the dollar.
    6. At all material times:
      1. Vahuzun was incorporated on 26 March 1987 with Mr Grossman appointed as director and secretary on 30 June 2003 until 24 May 2005.
      2. Vahuzun’s shareholders at the time the voluntary administrator was appointed were:

(i) Linda Grossman 2 shares in the paid up capital;

(ii) Clare Grossman 2 shares in the paid up capital;

(iii) Leslie Grossman 2 shares in the paid up capital.

  1. Vahuzun had a voluntary administrator appointed to it on 25 November 2003, who later became the creditors’ voluntary liquidator on 22 December 2003, and ceased as such on 18 February 2005. On 22 November 2004 the liquidator of Vahuzun lodged a report with ASIC pursuant to section 533 of the Act. At the time that the report was lodged, the liquidator estimated that the dividend to unsecured creditors would be 0 – 10 cents in the dollar.
  2. Vahuzun was deregistered on 24 May 2005.
  1. At all material times:
    1. Bico Designs was incorporated on 24 June 1998 with Mr Grossman appointed as director on 1 July 2003, until 19 September 2007.
    2. Between 24 June 1998 and 19 September 2007, Joseph Biton was a director and secretary of Bico Designs.
    1. Between 24 June 1998 to 6 June 2006, Michael Cohen was a director of Bico Designs.
  1. Bico Design’s shareholders at the time the voluntary administrator was appointed were as follows:

(i) BICO Holdings 124 shares in the paid up capital

(ii) Mr and Mrs Grossman 46 shares in the paid up capital

(iii) Mr Grossman 20 shares in the paid up capital

(iv) Mr Nemeth 12 shares in the paid up capital

(v) Mr Cohen 1 share in the paid up capital

(vi) Mr Biton 1 share in the paid up capital.

  1. A voluntary administrator was appointed to Bico Designs on 14 June 2006 and a creditors’ voluntary liquidator was appointed on 18 July 2006.
  2. On 13 September 2006 Jamieson Louttit the liquidator of Bico Designs lodged a report with ASIC pursuant to section 533 of the Act. At the time that the report was lodged, the liquidator estimated that the dividend to unsecured creditors would be 0 – 10 cents in the dollar. Bico Designs was deregistered on 19 September 2007. On 26 September 2006 Mr Louttit lodged a supplementary report with ASIC pursuant to section 533 of the Act.
  1. Hot Metal, Vahuzun and Bico Designs all failed owing substantial amounts in taxation and other statutory liabilities, at a time when Mr Grossman was a director of each of the companies and the secretary of Hot Metal and Vahuzun. These liabilities which, for Bico Designs, included $36,906 for the Department of Industry Tourism and Resources and the NSW Office of State Revenue, are as follows:
Company
ATO

($)
Superannuation

($)
Other Statutory Debts*
($)
Total outstanding
($)
Hot Metal
296,068
76,731
372,799
Vahuzun
602,132
83,700
685,832
Bico Designs
240,739
2,511
36,906
280,156
TOTAL
1,138,939
162,942
36,906
1,338,787

  1. The Applicant was an active manager of the affairs of each company before their respective failures. In particular, the Applicant was:
    1. the sole director and secretary of Hot Metal for the period from 25 May 2001 to 8 October 2004;
    2. the sole director and secretary of Vahuzun for the period from 30 June 2003 to 24 May 2005;
    1. one of three directors of Bico Designs for the period from 1 July 2003 to 19 September 2007; Mr Grossman was an employee of Bico Designs from 1 July 2002.
  2. The affairs of each company were managed in such a way immediately before their failure that the interests of some unsecured creditors were preferred over the companies’ obligations for taxation and other statutory liabilities.
  3. In the case of Vahuzun, the unsecured creditors that benefited were the Applicant, who was paid $180,000 and his wife, Linda Grossman, who was paid $165,832 in preference to paying Vahuzun’s statutory liabilities, which according to the company’s accounts was $602,139.81 payable to the ATO as at 30 June 2003, and $83,700 for superannuation.

CONSIDERATION OF THE ISSUES

  1. ASIC, and therefore the Tribunal’s power to disqualify a person from managing corporations for up to five years is enlivened by section 206F(1) of the Act. I am satisfied from the evidence before me that sections 206F(1)(a) and (b) have been satisfied. That arises from the fact that Mr Grossman was an officer of two or more corporations each of which was wound up, (section 206F(1)(a)(i)), and a liquidator lodged a report under section 533(1) of the Act, (section 206F(1)(a)(ii)), within the seven years before ASIC gave Mr Grossman a notice under section 206F(1)(b)(i). Further, I am satisfied that Mr Grossman had the opportunity to be heard on the question (section 206F(1)(b)(ii)).
  2. ASIC was satisfied that Mr Grossman’s disqualification for five years was justified, but of course that does not bind me. I must decide what the correct or preferable decision is in that regard. It remains therefore for me to consider whether I am satisfied pursuant to section 206F(1)(c) of the Act that the disqualification is justified, and for what period.
  3. As a preliminary issue, I note that Mr Grossman complained he had had to prepare his submissions to ASIC and the Tribunal without access to all his documents, because he had been obliged to provide his documents to the liquidators. That complaint was made at the Directions Hearing before me, and in his written submissions both to ASIC, and to the Tribunal.
  4. I offered Mr Grossman the opportunity of taking more time to obtain documents to which he says he did not have access, and says he could not refer, in preparing his submissions to ASIC, and to the Tribunal. His lawyer, Mr Farrar, declined the offer, and elected to proceed on the documentation before me.
  5. In order to decide whether I am satisfied pursuant to section 206F(1)(c) of the Act that the disqualification is justified, I must consider the indicia in sections 206F(2)(a) and (b).
  6. As Mr Farrar, the solicitor who represented Mr Grossman made submissions about the reports of the liquidators, I deal first with that issue.

Reports by the liquidators

  1. Section 533 of the Act deals with reports by liquidators which are relevant to each of the three companies subject of this matter. Mr Grossman has submitted that little weight should be given to these, because they were tick a box reports. Naturally, ASIC does not agree, and has made submissions about the duties and reporting obligations of a liquidator pursuant to section 533 of the Act, and the adverse consequences of failure to comply with section 533. The Respondent has also pointed out that the reports of the liquidators are in a standard format, which is a matter of administrative convenience, and provides no reason to doubt their reliability.
  2. Section 533 follows as relevant:
533 Reports by liquidator
(1) If it appears to the liquidator of a company, in the course of a winding up of the company, that:
(a) a past or present officer or employee, or a member or contributory, of the company may have been guilty of an offence under a law of the Commonwealth or a State or Territory in relation to the company; or
(b) a person who has taken part in the formation, promotion, administration, management or winding up of the company:
(i) may have misapplied or retained, or may have become liable or accountable for, any money or property of the company; or
(ii) may have been guilty of any negligence, default, breach of duty or breach of trust in relation to the company; or
(c) the company may be unable to pay its unsecured creditors more than 50 cents in the dollar;
the liquidator must:
(d) as soon as practicable, and in any event within 6 months, after it so appears to him or her, lodge a report with respect to the matter and state in the report whether he or she proposes to make an application for an examination or order under section 597; and
(e) give ASIC such information, and give to it such access to and facilities for inspecting and taking copies of any documents, as ASIC requires.
(2) The liquidator may also, if he or she thinks fit, lodge further reports specifying any other matter that, in his or her opinion, it is desirable to bring to the notice of ASIC.
(3) If it appears to the Court, in the course of winding up a company:
(a) that a past or present officer or employee, or a contributory or member, of the company has been guilty of an offence under a law referred to in paragraph (1)(a) in relation to the company; or
(b) that a person who has taken part in the formation, promotion, administration, management or winding up of the company has engaged in conduct referred to in paragraph (1)(b) in relation to the company;
and that the liquidator has not lodged with ASIC a report with respect to the matter, the Court may, on the application of a person interested in the winding up, direct the liquidator so to lodge such a report.
  1. I have examined the reports of the liquidators in relation to Hot Metal, Vahuzun and Bico Designs. I am satisfied that they are valid reports for the purposes of the Act, and should, along with the other evidence before me, be used as the basis of making the decisions which I have to make in relation to Mr Grossman’s disqualification. In saying so, I rely upon Murdaca v Australian Securities and Investment Commission (2009) 178 FCR 119; [2009] FCAFC 92, in particular paragraphs 99 to 120. At [101(b)], their Honours comment upon the purpose of the power granted to ASIC, and therefore to this Tribunal, to disqualify a person from the management of corporations, namely for the protection of all those persons who deal with corporations from the consequences of the actions of those corporate officeholders, who, either through incompetence or dishonesty or a combination of the two, bring about the failure of corporations and thus cause loss to others (Rich v Australian Securities and Investments Commission [2004] HCA 42; (2004) 220 CLR 129 at [47 – [50]) and the maintenance of professional management standards in the public interest (Visnic v Australian Securities and Investments Commission [2007] HCA 24; (2007) 231 CLR 381 at [11] and [26].)
  2. Further at [101(c)], their Honours state:
Section 206F does not give reports prepared by liquidators pursuant to s 533 of the Act any particular status or weight. ASIC may approach the exercise of its power of disqualification under s 206F(1)(c) in any way it thinks fit, subject to complying with s 206F(1) and (2) and subject to respecting and applying the principles referred to in subparagraph (b) above.

  1. I am satisfied that this Tribunal must exercise its powers as stated in the paragraph above and have done so throughout this matter.

Were any of the corporations, Hot Metal, Vahuzun or Bico Designs related to one another in terms of the legislation?

  1. I now move to consider section 206F(2)(a), and to make a decision regarding whether any or all of the corporations relevant to this application, Hot Metal, Vahuzun and Bico Designs, were related entities.
  2. Section 50 of the Act provides that companies are related if a company is a holding company of another company, a subsidiary of another company or a subsidiary of a holding company of another company. Section 46 defines subsidiary for these purposes, and section 47 deals with when a company’s board is controlled by another company.
46  What is a subsidiary
A body corporate (in this section called the first body) is a subsidiary of another body corporate if, and only if:
(a)  the other body:
(i) controls the composition of the first body’s board; or
(ii) is in a position to cast, or control the casting of, more than one-half of the maximum number of votes that might be cast at a general meeting of the first body; or
(iii) holds more than one-half of the issued share capital of the first body (excluding any part of that issued share capital that carries no right to participate beyond a specified amount in a distribution of either profits or capital); or
(b)  the first body is a subsidiary of a subsidiary of the other body.
47  Control of a body corporate’s board
Without limiting by implication the circumstances in which the composition of a body corporate’s board is taken to be controlled by another body corporate, the composition of the board is taken to be so controlled if the other body, by exercising a power exercisable (whether with or without the consent or concurrence of any other person) by it, can appoint or remove all, or the majority, of the directors of the first-mentioned body, and, for the purposes of this Division, the other body is taken to have power to make such an appointment if:
(a) a person cannot be appointed as a director of the first-mentioned body without the exercise by the other body of such a power in the person’s favour; or
(b) a person’s appointment as a director of the first-mentioned body follows necessarily from the person being a director or other officer of the other body.
50  Related bodies corporate
Where a body corporate is:
(a) a holding company of another body corporate; or
(b) a subsidiary of another body corporate; or
(c) a subsidiary of a holding company of another body corporate;
the first-mentioned body and the other body are related to each other.
  1. The situation with regard to the three companies was as follows:

a) Hot Metal was incorporated on 9 June 1999 with Mr Grossman appointed as sole director and secretary from 25 May 2001 until 8 October 2004. The sole shareholder of Hot Metal was Linda Ann Grossman who owned the only two shares in the paid up capital of Hot Metal at the time the voluntary administrator was appointed to Hot Metal on 13 May 2003.

b) Vahuzun was incorporated on 26 March 1987 with Mr Grossman appointed as sole director and secretary from 30 June 2003 until 24 May 20O5. Vahuzun's shareholders at the time the voluntary administrator was appointed were:

(i) Linda Grossman 2 shares in the paid up capital;

(ii) Clare Grossman 2 shares in the paid up capital;

(iii) Leslie Grossman 2 shares in the paid up capital.


c) Bico Designs was incorporated on 24 June 1998. Mr Grossman was appointed as one of three directors from 1 July 2003 until 19 September 2007. (T3.8, page 167) Mr Grossman was an employee of the company from 1 July 2002. (T2, page 35) Joseph Biton was a director and secretary of Bico Designs between 24 June 1998 and 15 September 2007. Michael Cohen, was a director of Bico Designs between 24 June 1998 and 6 June 2006.

Bico Design's shareholders at the time the voluntary administrator was appointed were as follows:

(i) BICO Holdings 124 shares in the paid up capital;
(ii) Mr & Mrs Grossman 46 shares in the paid up capital;

(iii) Mr Grossman 20 shares in the paid up capital;

(iv) Mr Nemeth 12 shares in the paid up capital;

(v) Mr Cohen 1 share in the paid up capital;

(vi) Mr Biton 1 share in the paid up capital.


  1. From the above, it is clear that at the relevant time Linda Ann Grossman was the sole shareholder of Hot Metal, and that the Applicant was sole director and secretary from 25 May 2001 until 8 October 2004.
  2. Mr Grossman was appointed as sole director and secretary of Vahuzun from 30 June 2003 until 24 May 2005. Linda Grossman held two shares in the paid up capital of Vahuzun at the time the voluntary administrator was appointed.
  3. Accordingly Linda Grossman held all the shares in Hot Metal, and one third of the shares of the paid up capital in Vahuzun at the relevant time. There were common shareholders in the relevant companies at various relevant periods. Mr Grossman was sole director and secretary of Hot Metal and Vahuzun as indicated above, and one of three directors of Bico Designs.
  4. As to Hot Metal and Vahuzun, common shareholdings, and the fact that Mr Grossman was the sole director of both does not strictly bring them within the related definitions of sections 46, 47 or 50 of the Act.
  5. As to Bico Designs, I am satisfied that it was not related to the other two companies. It did business with Hot Metal, but they were not financially interdependent.
  6. However, I am mindful of the case of Re Feher and Australian Securities Commission (1997) 15 ACLC 1774, where the Tribunal held that an important factor was whether corporations were in substance, a single entity.
  7. Vahuzun’s primary business since 1991 had been the rental of the property which Hot Metal leased while Hot Metal was producing metal-based products, being jewellery design and casting. The Applicant submitted that Vahuzun’s main business was the rental of the property which Hot Metal occupied, so that when Hot Metal went into voluntary administration (in June 2003), Vahuzun could no longer continue. Mr Grossman’s submission was that Vahuzun could not find a tenant sufficiently quickly, and it therefore also ceased trading, and was wound up in November 2003. On that basis it could be argued that because Hot Metal was a tenant of Vahuzun, and that because they were interdependent financially, they might be related.
  8. I noted also from the report of the liquidator, Hall Chadwick, that Vahuzun agreed to guarantee a loan of $210,000 to Hot Metal from Bank West by providing security for this loan through a mortgage over its real property in which Hot Metal was a tenant.
  9. On the evidence before me, I am satisfied that Hot Metal and Vahuzun may have been related entities, and interdependent financially. I am also satisfied that Bico Designs was a separate legal entity, and not related for purposes of section 206F(2)(a) of the Act.
  10. However, even if the relationship of landlord and tenant and the guarantee of a loan between Hot Metal and Vahuzun could be considered to constitute a relationship pursuant to section 206F(2)(a) of the Act, there were still two corporate failures, within the relevant time frame, being Hot Metal/Vahuzun and Bico Designs, in satisfaction of section 206F(2)(a) of the Act.
  11. I am mindful also, that whether on the evidence any or all of the corporations are related, I may still find that the disqualification is justified. In that regard, I rely on Deputy President Olney in Re Guss and Australian Securities and Investments Commission (2006) 90 ALD 349; [2006] AATA 401 who stated at [13] and [14]:
[13] In determining whether disqualification is justified the decision-maker must have regard to whether any of the corporations were related to one another (s 206F(2)(a)). Although the statute does not expressly provide any guidance as to the consequences that may flow from a conclusion that the relevant corporations were related to one another, it is clear that a finding of such a relationship does not deprive the decision-maker of the authority to be satisfied that disqualification is justified. Rather, the provision in question merely requires that the decision-maker must have regard to the relationship between the corporations if indeed one exists. The corresponding (although not identical) provision in the former Corporations Law was s 600(4) which the explanatory memorandum to that law states will be relevant in the case of a failure of a group of companies which is in substance a single entity (para 1885).
[14] As a matter of statutory construction, the tribunal is of the opinion that a finding that the relevant corporations were related to one another would not deprive it of the ability to be satisfied that disqualification is justified if in the circumstances of the case other relevant matters support such a conclusion.
  1. I move then to consider Mr Grossman’s conduct in relation to the relevant businesses and companies.

CONSIDERATION OF MR GROSSMAN’S CONDUCT IN RELATION TO THE MANAGEMENT, BUSINESS OR PROPERTY OF ANY CORPORATION

In relation to Hot Metal

  1. By way of establishing the setting for Mr Grossman’s conduct in relation to Hot Metal, I note it was incorporated on 9 June 1999 with Mr Grossman appointed as sole director and secretary on 25 May 2001, until 8 October 2004. It appears from the documents that Hot Metal was producing metal-based products, being jewellery design and casting.
  2. ASIC held that Hot Metal was undercapitalised, that Mr Grossman made share market losses of $250,000 which had detrimental effects on Hot Metal’s ability to remain viable, and that Hot Metal failed owing statutory debt to the ATO of $296,068 and $76,731 in superannuation.
  3. Mr Albarran, the liquidator, and ASIC, also considered that Hot Metal may have traded while insolvent which would be a contravention of section 588G of the Act. Mr Albarran postulated however, that in relation to creditors, it was possible that the company chose not to pay its debts as and when they fell due, and that this may not have been a reflection of its ability to do so.
  4. In considering Mr Grossman’s conduct, I am mindful that ASIC noted Hot Metal ceased paying superannuation and income tax at the end of 2000. When Hot Metal went into liquidation, it owed $76,731 in superannuation guarantee payments for the years ended 30 June 2001 and 2002. The documents indicate it continued to trade until the end of the 2002 financial year, and conducted some share transactions until early May 2003. However, Hot Metal had obtained a loan from Bank West, and was paying the ATO by instalments which it was able to do until March 2003 (going into administration in May 2003). Mr Grossman said of the loan of $210,000 obtained from Bank West through the assistance of Vahuzun that $180,000 had been paid to the ATO, and $30,000 to other creditors. Mr Grossman submitted that in May 2003, at the time of the appointment of the liquidator to Hot Metal, the real property owned by Vahuzun had been sold, and the loan from Bank West was repaid.
  5. Mr Grossman submitted that as soon as he became aware that his company could not pay all its debts, he appointed a voluntary administrator, and that up to that point, Hot Metal had been paying all its trade creditors and the ATO by instalments as arranged.
  6. Accordingly, ASIC did not make any findings in relation to its concern regarding the possibility Hot Metal had traded while insolvent. Ultimately ASIC did not find against Mr Grossman on that alleged breach of section 588G. The documentation before me does not satisfy me to the requisite standard that such breach had occurred.
  7. As to the liquidator’s findings that Hot Metal was undercapitalised; Mr Grossman stated in a letter of 23 May 2003, that Hot Metal had been incorporated with very little capital or resources, that it had grown rapidly within the first two years, and that in trying to fund the growth through the company’s earnings, cash flow problems had developed. He says that the company was undercapitalised before he became a director, and that he had no part in that. As far as I am concerned, as a sole director, or before coming director and secretary, Mr Grossman was in a position to know, or should have informed himself of that situation. I do not accept Mr Grossman’s argument in regard to undercapitalisation.
  8. Mr Grossman submits that between July 2000 and July 2002 over 80 percent of Hot Metal’s gross weekly production was derived from orders placed by Bico Designs. The latter had its own factory, and only the casting and dressing was carried out by Hot Metal. Bico Designs would in effect do the finishing, coating and packaging to make the items ready for commercial sale. He submitted that in approximately March 2002 Bico Designs ceased placing orders with Hot Metal in circumstances beyond Hot Metal’s control, and which caused it to have a cash flow and profitability crisis. He stated that he could not restore the relationship as Bico Designs was importing the castings from Asia at a cheaper price.
  9. Mr Grossman submitted that he attempted unsuccessfully to produce and market a jewellery range by Hot Metal. Then, in mid 2002 when Bico Designs approached him to assist in their production, and to assume control of its factory operations, he says he worked out a scheme in order to maximise the return for Hot Metal. This included some of Bico Designs’ employees moving to Hot Metal, and the operations of Bico Designs moving to Hot Metal and taking over its lease.
  10. In his Affidavit dated 25 February 2008, filed in proceedings in the District Court lodged by Ms JN, (an ex-employee of Bico Designs and President, Bico USA), in 2005, in regard to her relationship with Bico Designs and its directors, Mr Grossman gave a different version of events with regard to the transfer of the business of Hot Metal to Bico Designs.
  11. In the Affidavit, Mr Grossman deposed as relevant to this issue, that:
...
iv. Ownership of all manufacturing equipment in the Newtown premises would be transferred to Bico Designs.
v. Peter Grossman and Linda Grossman would cease their employment with Hot Metal and be employed by Bico Designs at an agreed wage which included a car.
vi. Bico Designs would take no part of Hot Metal including the creditors and debtors ledgers of Hot Metal.
  1. I am mindful that Bico Designs in taking over the business of Hot Metal was not required to take responsibility for its statutory debts. Those are strong indications therefore that the transfer of the business of Hot Metal to Bico Designs was to avoid Hot Metal’s statutory debts.
  2. Mr Grossman’s lawyer, Mr Farrar, submitted in a document to ASIC dated 6 February 2009, at [4] and [5] that:
[4] ... The Agreement as deposed to by Mr Grossman in the Affidavit was in response to certain allegations made by a former employee of BD, [JN] ... Distinct issues were raised in those proceedings in relation to [Ms JN’s] involvement in the business and other related issues. The Affidavit was not sworn for the purpose of addressing concerns of ASIC and as such it is not proper to rely upon the content of the Affidavit, absent having regard to its context. To do so, it is submitted creates a misleading and incorrect picture.
[5] In relation to the Affidavit, Mr Grossman believes that on closer reflection it did not fully and accurately record the arrangement that was to be entered into, and indeed, that was in fact entered into between the parties...
  1. Mr Farrar added that because the proceedings with Ms JN were resolved without a formal hearing, Mr Grossman did not have the opportunity of correcting factual errors in the Affidavit.
  2. I noted that Mr Grossman, in paragraph 2 of the Affidavit stated that: I believe that the information contained in this affidavit is true. It seems that he swore it in front of a solicitor on 25 February 2008. I am mindful, as no doubt Mr Farrar is, and Mr Grossman should be, that swearing a false Affidavit is a serious matter, and cannot be dismissed by explaining that it was intended for matters related to a District Court hearing rather than for ASIC or the Tribunal.
  3. As to the poor strategic management of the business reported by the liquidator; Mr Grossman replied that the loss of approximately $250,000 had occurred due to an investment in the share market in 2000. He stated that in that regard he had acted on the advice of a friend whom he believed had knowledge of the stock market. He stated that prior to the significant losses ultimately sustained by Hot Metal, that Hot Metal was heavily involved in trading in shares based on advice from professional advisers. Hot Metal had made large sums of money from its trading activities before the share market collapsed, and was in fact reinvesting the monies that it had already made from share investments. He feels that he could not have known about the potential losses in advance, and that it was as a direct consequence of those that he could not pay his statutory obligations in respect of taxation and superannuation.
  4. Mr Grossman also disputed the treatment of the share trading losses which were treated as capital losses rather than trading losses by the ATO. I am satisfied that even if the share trading losses had been treated otherwise, the outstanding superannuation guarantee for the years 2001 and 2002 was $76,731. There is no question superannuation moneys cannot be offset by any losses so that, regardless, Hot Metal would still have had a debt to the ATO.
  5. On 28 March 2008, Mr Albarran wrote to ASIC regarding the under capitalisation and other problems.
  6. Ultimately, Hot Metal failed with assets of approximately $30,000, and liabilities of approximately $293,309 and a deficiency of approximately $263,309. The amount outstanding for the superannuation guarantee for the years 2001 and 2002 was $76,731.
  7. I am satisfied from the evidence and submissions before me that:

In relation to Vahuzun

  1. By way of establishing the setting for Mr Grossman’s conduct in relation to Vahuzun, I note it was incorporated on 26 March 1987, with Mr Grossman appointed as director on 30 June 2003 until 24 May 2005, when the company was deregistered. The company owned real estate in Sydney which it leased out from 1991. The lease of Vahuzun’s property by Hot Metal was its main source of income, and Mr Grossman submitted that when Hot Metal went into voluntary administration in May 2003, Vahuzun lost its main client. Accordingly, the property had to be sold.
  2. At the time that the liquidator’s report was lodged on 22 November 2004, the estimate was that the dividend to unsecured creditors would be 0 – 10 cents in the dollar.
  3. Mr Grossman indicated that when he became a director of Vahuzun, on 30 June 2003, the real property owned by Vahuzun had already been sold by a decision of its directors, and the loan of $210,000 from Bank West which it had guaranteed for Hot Metal, was repaid. Vahuzun, was placed into voluntary administration on 25 November 2003, and deregistered on 24 May 2005. At the time of the liquidation, the company owed $685,832 in statutory debts, being $602,132 to the ATO and $83,700 for superannuation payments.
  4. The liquidator in preparing his section 533 report dated 22 November 2004 attributed the failure of the company to poor strategic management of the business, inadequate cash flow or high cash use, and found contraventions under sections 180 – 183 of the Act in relation to directors’ and officers’ duties and insolvent trading pursuant to section 588G of the Act.
  5. ASIC held that Mr Grossman failed to exercise his powers and discharge his duties as a director of Vahuzun with care and diligence in contravention of section 180 of the Act.
  6. The main issue here was the failure of Vahuzun, the inability of the company to pay its statutory debts, and the disposal of funds from the sale of the property, previously leased to Hot Metal. There is no disagreement that $180,000 was paid to Mr Grossman in wages, and $165,832 to his wife, Linda Grossman, (at some time between July and October 2003), from the proceeds of sale of the property.
  7. Mr Grossman denied being involved in, or having responsibility for decisions made before he became a director on 30 June 2003. He submits that he was not part of the decisionmaking which resulted in the payment of wages to him and to his wife out of the proceeds of sale of the property. Mr Grossman tendered a resolution passed by the Board of Vahuzun on 1 July 2002, which in effect stated that in recognition of the work of Mr Grossman and his wife Linda Grossman had done on behalf of the company over the years, he be paid a wage of $180,000 p.a., and his wife, $166,000 p.a. The resolution was signed by Linda Grossman as a director of Vahuzun, and shareholders Linda Grossman, and Mr Grossman’s parents Leslie and Clare Grossman.
  8. Mr Grossman conceded that when he became aware of Vahuzun’s financial position, which was at a time after he had been paid a wage from the company, that he could have repaid some of the money to assist with working capital requirements of Vahuzun at the time. I note however that he did not do so.
  9. He also said that there was a number of documents which set out strategic management, and identified who was involved, and the level of involvement by such persons. Further, he says, there were documents such as development proposals, appraisals and related plans concerning the development of the property which would show that, if successfully developed, Vahuzun would likely have been able to pay all of its creditors. He submitted that there were also limited documents which showed the financial state of Vahuzun at the time he was appointed as director, indicating that he was not fully aware of the financial issues facing Vahuzun.
  10. In coming to a conclusion about Mr Grossman’s conduct in relation to Vahuzun, of which he was a director and secretary from June 2003 to May 2005, when it was deregistered, I noted the liquidator’s opinion that the failure of the company was due to poor strategic management of the business, inadequate cash flow or high cash use, and contraventions of section 180 – 183 of the Act, and insolvent trading pursuant to section 588G of the Act.
  11. I am satisfied that Mr Grossman had been working with Vahuzun since mid-2002, and became a director, on 30 June 2003, when Vahuzun was in financial difficulties due to Hot Metal having terminated its lease. He knew or should have informed himself that superannuation payments and tax liabilities were outstanding, before becoming a director, and should have known its financial situation. Accordingly, Mr Grossman should not have accepted the payment of $180,000 even though he says it was a formal resolution of former board members, which, I note, included his wife. I note he has accepted in submissions made on his behalf to this Tribunal, that he could have repaid the money to assist with Vahuzun’s requirements, although the fact is he did not do so. What remained of the proceeds of sale of the property was approximately $70,200 which was nowhere enough to pay Vahuzun’s statutory liabilities of $685,832 owing when it went into administration.
  12. Accordingly, Mr Grossman acted to benefit himself at the cost of meeting statutory liabilities in breach of his duties as a director of a company. I agree with ASIC’s finding that he failed to exercise his powers and discharge his duties as a director of Vahuzun with care and diligence in contravention of section 180 and 182 of the Act. The liquidator’s suspicions regarding insolvent trading were not followed up by ASIC, and no finding was made in that regard. I have not considered whether there was insolvent trading by Mr Grossman as a director of Vahuzun.

In relation to Bico Designs


  1. By way of establishing the setting for Mr Grossman’s conduct in relation to Bico Designs, I note it was incorporated on 24 June 1998 with Mr Grossman appointed as director on 1 July 2003, until 19 September 2007. Mr Grossman had been employed at Bico Designs since mid-2002. The other directors were, Joseph Biton between 24 June 1998 and 15 September 2007, (also company secretary), and Michael Cohen, between 24 June 1998 and 6 June 2006. At the time the liquidator’s section 533 report was lodged, he estimated that the dividend to unsecured creditors would be 0 – 10 cents in the dollar.
  2. ASIC found that Mr Grossman was involved in the management of Bico Designs that led to its failure. It also held that the transfer of Bico Designs to Bico Australia Pty Ltd (Bico Australia), was done for the purpose of preferring particular unsecured creditors and avoiding other unsecured creditors, including the ATO and which was owed approximately $243,000 or $253,000 ([18] & [19] of ASIC’s decision and T-documents page 264). Other liabilities as shown by the liquidator were approximately $54,000 for superannuation, $13,464 for the NSW Office of State Revenue, approximately $69,000 for other liabilities, and $120,000 for contingent liabilities for the Ms JN litigation, respectively.
  3. Mr Grossman’s main submissions were that he was not the sole director, and that the other directors had made some business decisions before he became a director on 1 July 2003. He also referred to a dispute with Ms JN, initially an employee of Bico Designs, who was appointed President of Bico USA Incorporated (Bico USA). He denied having been involved in the plans for her to commence the USA operation (Peter Grossman Affidavit of 25 February 2008).
  4. I noted that contrary to Mr Grossman’s submissions, and as is obvious from the fact Ms JN’s Employment Agreement was signed by Mr Grossman, and from the material in the T-documents, it is more likely than not that Mr Grossman was involved in the decision to send Ms JN to the USA and in the contractual negotiations with her. Further evidence of that is contained in a board resolution dated 19 November 2002 of a board meeting held on 1 November 2002, of which Mr Grossman was one of the signatories: - It is resolved that a new Bico office in the United States of America be established.
  5. I noted that Ms JN commenced litigation against Bico Designs in the District Court of NSW in a Statement of Claim filed on 16 November 2005. In it, Ms JN stated that in November 2002, Messrs Biton, Cohen and Grossman of Bico Design offered her an employment contract to move to the USA, to commence Bico USA, and to expand the business of Bico Designs in that way.
  6. Mr Grossman denied a role in the poor strategic decisions which eventually contributed to the failure of Bico Designs. Mr Grossman’s submissions state that the decision not to continue to support the USA operation led to litigation by Ms JN, and having to defend the proceedings was both time consuming and expensive. He said that large sales had been made to overseas distributors in Germany, Spain, South Africa. England, and Italy based on the provision of very large credit accounts, all transacted before he became a director. Mr Grossman said that nearly all resulted in write-offs by Bico Designs, and emphasized that he played no part in the original decision making process or implementation. Mr Grossman submitted that the litigation with Ms JN was causing diversion of the management team from attention to the business.
  7. He stated as follows [in Clarification of Applicant’s Final Submissions at [15]]:
In relation to BD, the applicant does not make any concession regarding the manner in which BD was managed. The applicant was not the sole director and was responsible in concert with others regarding the management of BD...

  1. I am satisfied from the evidence and submissions that Mr Grossman played an active role in Bico Designs where he commenced work with the company in mid-2002, and which continued when he became a director on 1 July 2003. I also accept from the documents that ASIC’s findings in relation to Mr Grossman vis-à-vis the operations of Bico Designs is right.
  2. I have noted that ASIC had further concerns about Phoenix style transactions in which Mr Grossman was involved. I have explored those in the paragraphs which follow.

WERE THERE PHOENIX STYLE TRANSACTIONS?

A) Transfer of Hot Metal’s business to Bico Designs

  1. ASIC, referring to paragraphs 62 – 83 of the reviewable decision, submitted that Mr Grossman failed to exercise his powers and discharge his duties as a director of Hot Metal with care and diligence, in good faith, in the best interests of the corporation, and for a proper purpose by engaging in Phoenix activity in that he allowed Bico Designs to acquire Hot Metal’s business without assuming liability for its statutory debts. In particular, I noted that Hot Metal failed with debts of $296,068 to the ATO which included superannuation for employees outstanding for the 2001 and 2002 years.
  2. In that connection, I noted that in his Affidavit of 25 February 2008, Mr Grossman made a number of claims about the agreement dated June 2002 to transfer Hot Metal’s business to Bico Designs. Mr Grossman deposed at [10] and [11] of the Affidavit:
    1. Formal contracts were never drawn up and legal advice was never sought. The arrangement was based on trust and a handshake, and a handwritten agreement I drew up with Joseph Biton setting out the main details.
    2. The agreement was:
i. Hot Metal Ltd would cease all manufacturing activities.
ii. All Hot Metal staff would be made redundant with chosen staff offered employment with Bico Designs Pty Limited.
iii. The rented premises occupied by Hot Metal in Newtown would be taken over by Bico Designs.
iv. Ownership of all manufacturing equipment in the Newtown premises would be transferred to Bico Designs.
v. Peter Grossman and Linda Grossman would cease their employment with Hot Metal and be employed by Bico Designs at an agreed wage which included a car.
vi. Bico Designs would take no part of Hot Metal including the creditors and debtors ledger of Hot Metal.
vii. Linda Grossman would receive one third of the shares of Bico Designs and Peter Grossman would be appointed a Director of Bico Designs.
viii. All retained profits of Bico Designs as of the 30 June 2002 would be distributed as dividends to shareholders prior to the new shareholding being granted.
ix. The agreed arrangements would begin on 1 July 2002 and would be completed by 1 July 2003.
  1. The abovequoted is what Mr Grossman deposed on 25 February 2008 in relation to a District Court action about the agreement to transfer the business of Hot Metal to Bico Designs. Of particular note were the clauses that: Ownership of all manufacturing equipment in the Newtown premises would be transferred to Bico Designs, and that Bico Designs would take no part of Hot Metal including the creditors and debtors ledgers of Hot Metal.
  2. In the paragraphs above I have noted submissions made on Mr Grossman’s behalf which indicated that his Affidavit (dated 25 February 2008), was prepared in regard to litigation with Ms JN, and not for other purposes, and that its contents may therefore not reflect the actual situation. In particular, he submitted that between July 2000 and July 2002 over 80 percent of Hot Metal’s gross weekly production was derived from orders placed by Bico Designs. Bico Designs had its own factory during that period, with only casting and dressing carried out by Hot Metal. He states that in approximately March 2002, Bico Designs almost wholly ceased placing orders with Hot Metal, because it obtained its castings from Korea at a cheaper price. Mr Grossman submits this was not a situation he could have anticipated, and caused him cash flow and financial problems. He submitted that Hot Metal could then have been placed into administration. However, he said that he sought other methods of remaining in business, and when Bico Designs approached him to assist in their production, he did so from mid-2002, becoming a director from 1 July 2003.
  3. Mr Grossman’s submissions state that in July 2002 Hot Metal entered into an agreement with the ATO (following what I noted to be a statutory demand), to pay approximately $3,000 per week, an arrangement which continued for the following six months. He submitted that he sought a variation in January 2003, but continued to pay the ATO until May 2003, (a total amount of approximately $146,000), when Hot Metal went into administration.
  4. Mr Grossman submitted that notwithstanding the agreement as shown in his Affidavit, BD did not acquire the business or assets of HM, and as such had no obligation to offer consideration or assume the liabilities of HM. No clients of HM were transferred to BD (BD was HM’s single largest client) and HM never gave or sold assets to BD. Accordingly, Mr Grossman submitted, the arrangement far from being detrimental to HM, allowed the repayment of over $146,000 to the DCT... He submitted that the plant and equipment of Hot Metal was leased to Bico Designs, and was sold by the liquidator, to Linda Grossman at a figure determined by him, being $40,000 (including GST) so that he, Mr Grossman did not secure a benefit at the expense of Hot Metal or its creditors, and that he acted responsibly in his role as a director of Hot Metal.

The Tribunal’s conclusions

  1. In coming to a conclusion, I have considered whether Mr Grossman allowed Bico Designs to acquire Hot Metal’s business without assuming liability for its statutory debts, and therefore failed to exercise his powers and discharge his duties as a director of Hot Metal with care and diligence, in good faith and in the best interests of the corporation.
  2. I heard no oral evidence from Mr Grossman, and he was not able to be cross-examined in connection with this appeal from ASIC’s decision. However it appears from Mr Grossman’s Affidavit that he thought, at least in 2008, that deposing to one version of events for a particular purpose such as the District Court proceedings with Ms JN was different from submitting, perhaps more accurate details regarding the transactions between Hot Metal and Bico Designs for purposes of ASIC and this Tribunal.
  3. I noted that the plant and equipment of Hot Metal were sold by the liquidator to Linda Grossman, the Applicant’s wife, for $40,000 in June 2003.
  4. In defending his position as a director of Hot Metal, I am mindful that Mr Grossman submitted Hot Metal paid off a part of the company’s tax liabilities in an arrangement with the ATO between mid-July 2002 and May 2003, following a statutory demand. However, Hot Metal ceased paying income tax and superannuation at the end of 2000, and failed with debts of $296,068 to the ATO, and $76,731 in superannuation entitlements for employees outstanding for the 2001 and 2002 years.
  5. I am satisfied from the documents before me that whatever the actual agreement regarding the transfer of business from Hot Metal to Bico Designs, (whether according to Mr Grossman’s Affidavit or later submissions), Hot Metal failed owing the statutory debts to the ATO, and in superannuation payments given in the paragraph above. Accordingly, I formed the opinion that the transaction was for Hot Metal to avoid its statutory responsibilities and the activity could be characterized as Phoenix-like.

B) Sale of Bico Designs to Bico Australia

  1. Further activity ASIC held to be Phoenix-like was Bico Designs entering into an Agreement for Sale of Business with Bico Australia Pty Ltd (Bico Australia), on 9 June 2006 five days prior to the appointment of the administrator on 14 June 2006. I am mindful that Bico Australia was registered in NSW on 1 June 2006, and that its directors were Joseph Biton and Peter Grossman, the latter also being appointed the secretary.
  2. ASIC considered that Mr Grossman may have breached his duties under sections 180, 181, and/or 182 of the Act as the Agreement for Sale gave unfair preference to particular unsecured creditors of Bico Designs to the exclusion of other unsecured creditors of the company.
  3. I noted, as Mr Grossman submitted, that the Agreement for Sale of the business dated 9 June 2006, was prepared by Tress Cox Lawyers, that there was a valuation and report by Hymans Asset Management (Hymans), and correspondence with Jamieson Louttit & Associates, the liquidators, appended. The valuation of the assets given by Hymans was $684,655 and the purchase price for the assets was shown as $1,574,065, (exclusive of GST), a far higher price than that at which the assets were valued, as ASIC also remarked. Bico Australia, the purchaser, paid Bico Designs $300,000 on 13 June 2006. However, Bico Australia did not assume responsibility for certain of its liabilities including the ATO. The export market development grant of approximately $80,000 was also excluded.
  4. Not surprisingly Mr Grossman submits that no Phoenix style transaction took place. Mr Grossman submits the business of Bico Designs was independently valued, and that a large sum of money was paid as part of the purchase cost. He submitted that the transaction was handled by Tress Cox Lawyers who advised on all issues, and drew up the sale documents. The claim that the sale of the business was non-commercial or a Phoenix operation was not supported by fact, he submitted, and was not pursued by the liquidator.
  5. Mr Grossman submitted that complete and well kept records of all Bico Design’s activities were provided to the voluntary administrator and liquidators, including all bank statements, cheque books, invoices and bills. He submitted that all the transactions were meticulously recorded in detailed MYOB records maintained by a book-keeper, and that a full and transparent record of all company transactions was available to the liquidators.
  6. Mr Grossman submitted that two separate liquidators examined the records, in search of insolvent trading, preferential payments, inappropriate loan transactions, Phoenix activity, and other voidable transactions, noting that one of the liquidators was appointed through the insistence of Ms JN. He emphasized that the result of these examinations was that no action was pursued against Mr Grossman or any other director for any action or alleged action that caused a detriment to Bico Designs.
  7. Mr Grossman submitted that one of the primary bases for the failure of BD was the failed USA operation, and the actions of Ms JN. The defences/submissions/position set out in his documentation, he said were re-put as supporting the reasonableness of Mr Grossman’s actions to show that Mr Grossman did have regard to the statutory obligations, but was not solely in a position to address them. Further, that he did not breach his director’s duties when his position in Bico Designs is fully considered and appreciated, and that the deficiency was caused by actions that well pre-dated his involvement with Bico Designs.

The Tribunal’s conclusions

  1. ASIC drew the inference that the sale of the business was done to transfer the business of Bico Designs, and to avoid paying the ATO and its other statutory liabilities. Given the date of incorporation of Bico Australia (1 June 2006), its directors being Joseph Biton and Mr Grossman (also Bico Designs directors), and the exclusion of responsibility for liabilities, in particular to the ATO, leads me to strongly come to that same conclusion as ASIC. I am mindful that a voluntary administrator was appointed to Bico Designs on 14 June 2006, and that it failed owing $280,156 of which $240,739 was owed to the ATO.

WHETHER DISQUALIFICATION WOULD BE IN THE PUBLIC INTEREST

  1. Having concluded in the paragraphs above that Mr Grossman’s conduct in relation to the management and business of Hot Metal, Vahuzun and Bico Designs was in breach of his duties as a director, and that the powers in section 206F of the Act were enlivened, I next considered whether disqualification would be in the public interest.
  2. ASIC in its decision of 18 February 2009 drew attention to section 206F(2)(b) of the Act, and the fact that that subsection requires a consideration of, amongst other things, whether disqualification would be in the public interest. It concluded that Mr Grossman’s conduct:
has demonstrated a serious lack of commercial morality by failing to pay group tax and superannuation and other statutory liabilities in relation to all three relevant companies. ... Mr Grossman has not acknowledged what he has done and does not appear to regret his actions, which demonstrates to me that he has a complete lack of appreciation of his duties as a director, and that he is not a suitable person to be concerned in the management of corporations. Given the seriousness of the concerns I have found against Mr Grossman, public protection considerations outweigh the consequences of a disqualification order on him.

  1. In coming to a conclusion, I am mindful the Tribunal in Re Quinlivan and Australian Securities and Investments Commission (2010) 113 ALD 599; [2010] AATA 113 stated at [76]:
... We acknowledge the public has an interest in ensuring that the managers of corporations conduct the corporation’s affairs with basic levels of honesty, diligence and skill. That expectation manifests itself most obviously in the statutory duties in ss 180-184 of the Act. The public has an interest in ensuring that corporations are managed in compliance with the laws of the land, including the taxation laws. If a company’s manager persistently demonstrates an inability or unwillingness to comply with those laws, disqualification may be in the public’s interests.

  1. In regard to disqualification, Mr Grossman’s advisers submitted at [20] and [21] of the Applicant’s Statement of Facts and Contentions dated 27 July 2009:
20. Mr Grossman’s primary contention is that his conduct when viewed in context of all available facts and information is such that a banning order should not have been made against him.
21. Mr Grossman’s second contention is that if his conduct is considered now ‘with the benefit of hindsight’ that decisions that were made or matters that he was involved in may have been handled differently and potentially better during his directorship of the relevant companies. As such, he would be prepared to accept that objectively considered his actions may warrant a banning order, but that such a banning order would be in the lowest end of the range. ASIC has imposed the maximum ban of five years based on Mr Grossman’s conduct being a worst case. Mr Grossman contends that having regard to cognate matters and ‘offences’ that the penalty imposed was manifestly excessive.
  1. In the submissions dated 9 April 2010, Mr Farrar, on behalf of Mr Grossman, expanded on [20] and [21] of the Statement of Facts and Contentions (as reproduced above). In summary he submitted:
  1. I noted that Mr Grossman continued as recently as in his submissions of 9 April 2010 to argue that documents to which he has had no access because they were submitted to the liquidators would demonstrate that he was not, for example, personally responsible for the undercapitalisation of Hot Metal. He submits that records relating to the timing and payment of creditors which could have assisted him in his argument were not available to him. I am mindful that before commencing to write these Reasons for Decision, at a Directions Hearing at which Mr Grossman was represented by his lawyers, and which ASIC also attended, I offered him the opportunity of an adjournment in order to attempt to obtain further documentation. That offer was refused on his behalf by his lawyer, and Mr Grossman opted to proceed with the material which was before the Tribunal.
  2. I was satisfied from the evidence before me, and it is not in dispute that all the three relevant companies failed with taxation and other statutory liabilities outstanding to the amounts discussed in the paragraphs above. In addition to outstanding taxation liabilities I am mindful that outstanding superannuation payments on behalf of employees were to the value of $76,731 in relation to Hot Metal, $83,700 in relation to employees of Vahuzun, and $2,511 in relation to Bico Designs. That formed the not insubstantial sum of $161,942 at a time when Mr Grossman was sole director in two companies, one of three directors in Bico Designs, and secretary in Hot Metal and Vahuzun.
  3. Re Hot Metal; I am satisfied from the evidence before me that Hot Metal lost substantial amounts of money because Mr Grossman invested unwisely on the share market. If he did not know that the company was undercapitalised when he became the sole director and secretary, he did not inform himself as he should and could have before taking on that onerous position and its attendant responsibilities. I am satisfied from the evidence that he has operated with poor strategic management of the business. I am also satisfied from the evidence and submissions that the transfer of the business of Hot Metal to Bico Designs without the latter assuming responsibility for its statutory liabilities is likely to have constituted a Phoenix-like activity.
  4. Re Vahuzun; I am satisfied from the evidence and submissions that Mr Grossman benefited to the detriment of other creditors, particularly when he and his wife agreed to accept wages totalling more than $345,000 out of the sale of the real estate owned by Vahuzun, leaving only $70,200 to cover statutory liabilities of $685,832. I have noted Mr Grossman’s concession that he could have paid back certain amounts when he became aware of Vahuzun’s financial situation, which I note he did not do. I am satisfied he should have, or could have known of that situation before the sale of the real estate, in particular because Hot Metal had been Vahuzun’s tenant, and its main source of income. Mr Grossman further insisted that that because the directors (of which he only became one on 1 July 2003), signed a resolution in 2002 that he and his wife be paid the above-noted wages, he had nothing to do with the decision. I have noted that Mrs Grossman was a member of the Board which signed the resolution, and that Mr Grossman had worked with Vahuzun since 2002.
  5. Bico Designs: I noted Mr Farrar’s submissions that Mr Grossman does not make any concession regarding the manner in which Bico Designs was managed because he was not the sole director, and was responsible with others. I am satisfied from the evidence and submissions that Mr Grossman was involved in the discussions and the decision to commence the Bico business in the USA which ultimately failed and caused Bico Designs financial difficulties. I am also satisfied that he engaged in Phoenix-like activity in transferring the business of Bico Designs to Bico Australia in 2006.
  6. As noted above, the public has an interest in ensuring that corporations are managed in compliance with the laws of the land, including the taxation laws. Mr Grossman presided as director over the demise of all three companies over a short period of years. He was sole director of Hot Metal, and Vahuzun, and also secretary in two out of the three companies. They went into liquidation with an estimate by the liquidator that in each case the dividend to unsecured creditors would be 0 – 10 cents in the dollar. All three owed substantial amounts of money to the ATO, and for superannuation. I am mindful that where a company’s manager persistently demonstrates an inability or unwillingness to comply with the law, disqualification is likely to be in the public’s interest.
  7. I have found that Mr Grossman’s involvement in the three companies as a director, and sole director in two of the three indicates that he has a lack of appreciation of his duties as a director. The affairs of each company were managed in such a way immediately before their failure that the interests of some unsecured creditors were preferred over the companies’ obligations for taxation, superannuation and other statutory liabilities. Mr Grossman has expressed no contrition in relation to any of the failures.
  8. Mr Grossman argued right throughout, amongst other things:
  1. For all those reasons, Mr Grossman is not a suitable person to be concerned in the management of corporations. Taking into account the protection of the public, and the interests of the public, and in terms of general deterrence, he should be disqualified pursuant to section 206F of the Act from managing corporations. The correct or preferable decision is to impose a disqualification order pursuant to section 206F of the Act.
  2. I moved then to consider the duration which should apply to the disqualification.

THE DURATION OF THE DISQUALIFICATION

  1. In coming to a decision that Mr Grossman should be disqualified from managing corporations pursuant to section 206F of the Act, I have held, as stated in the paragraphs above, that the indicia in section 206F(1)(a) and (b) were met. I have also found that Hot Metal and Vahuzun may be related in terms of section 206F(2)(a) of the Act, but that Bico Designs was in any case unrelated in the terms of the legislation. I can, and have found Mr Grossman’s disqualification is justified, given all of the other indicia in the legislation are met. In particular, I have found on an evaluation of the Applicant’s conduct in relation to the management and business of the three companies, and a consideration of the public interest, that Mr Grossman should be disqualified from managing corporations.
  2. What remains for me is to decide is the appropriate period of disqualification, which commenced with ASIC’s decision to impose the maximum period, being a five year disqualification, commencing from the date of service of ASIC’s notice of decision dated 18 February 2009. The disqualification period imposed by ASIC on Mr Grossman of five years reflects in its terms, disqualification which should only be imposed in the worst cases. ASIC imposed that term because it characterised Mr Grossman’s conduct as involving a lack of commercial morality, having a disregard for the interests of creditors, preference of his own interests over the interests of creditors, and repeated misuse of the corporate structure. In the reviewable decision, ASIC’s delegate stated: Mr Grossman’s management of the affairs of the companies concerned falls considerably short of the standard of competency that is expected of someone in his position.
  3. The liquidators have in the case of all three companies estimated that the dividend to unsecured creditors would be 0 – 10 cents in the dollar.
  4. Mr Farrar stated on behalf of Mr Grossman in the Applicant’s Statement of Facts and Contentions at [21]:
... ‘with the benefit of hindsight’ that decisions that were made or matters that he was involved in may have been handled differently and potentially better during his directorship of the relevant companies. As such, he would be prepared to accept that objectively considered his actions may warrant a banning order, but that such a banning order would be in the lowest end of the range. ... Mr Grossman contends that having regard to cognate matters and ‘offences’ that the penalty imposed was manifestly excessive.

  1. In that regard, I have dealt above with Mr Farrar’s further submissions dated 9 April 2010, in which he expanded on paragraphs 20 and 21 of the Statement of Facts and Contentions.
  2. From the Tribunal’s point of view, it is necessary to bear in mind that disqualification, although appearing punitive, and which may cause hardship, is for the purpose of the protection of the public. General deterrence is also a factor to be taken into account in deciding whether, and for what period, a banning order ought to be made (Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler [2002] NSWSC 483; (2002) 42 ACSR 80).
  3. Accordingly, in coming to a decision on penalty, I have referred to authoritative case law in the area, in particular Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler [2002] NSWSC 483; (2002) 42 ACSR 80, particularly when considering matters which might be taken into account when determining the duration of a disqualification order, (Santow J at [56]). I am mindful nevertheless that his Honour’s reasons were intended to be indicative rather than a fixed and comprehensive code.
  4. I have noted from Re Quinlivan and Australian Securities and Investments Commission (2010) 113 ALD 599; [2010] AATA 113, where the Tribunal increased the period of disqualification ASIC imposed from three to five years, that certain matters which I have also considered were taken into account. I am mindful that in the recent decision of the Full Court in Quinlivan v Australian Securities and Investments Commission [2010] FCAFC 161, the Court upheld the Tribunal.
  5. In considering Mr Grossman’s situation in comparison with Mr Quinlivan’s I note that in Mr Grossman’s case there was no earlier bankruptcy which was relevant in Quinlivan. There is also in Mr Grossman’s case no allegation that his records were unsatisfactorily kept. However, obvious similarities between Messrs Quinlivan and Grossman which I have found were failure to ensure compliance with obligations under the taxation laws and reluctance to accept responsibility for the failures of the various companies which suggests a lack of insight and contrition. Mr Grossman has also sought to explain away his unfortunate experiences with reference to external factors without having proper regard to his own shortcomings. In relation to Vahuzun, in particular, Mr Grossman, with his wife, accepted in excess of $345,000 from the sale of the real estate of which Hot Metal had been the tenant, thereby leaving only a small amount of money which did not suffice to deal with the statutory liabilities. Vahuzun as has already been stated, failed with liabilities of $685,832 of which $602,132 was owed to the ATO, and $83,700 in superannuation.
  6. Further, unlike Mr Quinlivan who gave undertakings about certain ways of handling matters in the future, Mr Grossman did not give any undertakings about any future conduct.
  7. I also considered the case of Re Hres and Australian Securities and Investments Commission (2008) 105 ALD 124; [2008] AATA 707. Notwithstanding this was a case of disqualification of a financial services provider, I also considered the observations of Senior Member Taylor SC in Re Hres to be apposite. The learned Senior Member said [at 247]:
The appropriate period of any disqualification is properly informed by the nature of the impugned conduct and its objective seriousness, both in terms of the extent of the departure from appropriate standards and its actual consequences. The considerations that may properly inform the exercise of the power cannot be prescribed exhaustively. They are summarised in ASIC’s regulatory guide 98 table 2. Those matters parallel the criteria identified by Santow J in his influential judgement in ASIC v Adler at [56]: see Rich. The thrust of the considerations suggested by both Santow J and in regulatory guide 98 is that a banning order is appropriate where the person’s impugned conduct involves serious incompetence or misconduct. Within that description are included advice outside the scope of the scope of the person’s licence or authority and advice that lacks a reasonable basis. Even lesser compliance defaults may justify a banning order. These include failure to provide relevant disclosures and failure to make adequate enquiries about a client’s individual circumstances. The shortest periods of banning or disqualification are regarded as most appropriate to situations where the person’s impugned conduct has not involved serious incompetence and where there is a real satisfaction of the person’s likely due compliance with their relevant duties and obligations. There is a general suggestion that a 3-year banning period marks a conventional threshold that distinguishes between impugned conduct that has involved serious incompetence and conduct of lesser seriousness.

  1. I was mindful also of the case of Re Lelliott and Australian Securities and Investments Commission [2009] AATA 110, also the case of a financial services provider, where the Tribunal held that persons entrusted with a financial services licence pay if they breach the trust placed in them when granted a licence, and that those who fall short of the standards set must expect that the privilege will be withdrawn. The Tribunal found in the case of Lelliott that a period of two years was excessive having regard to the objective seriousness of the conduct, and its consequences. Mr Lelliott impressed the Tribunal as someone who had learned from his mistakes, and someone who was genuinely contrite about his conduct, and regarded a ban of nine months as being appropriate, and representing a proper response to the nature of the conduct, the need for general deterrence, and Mr Lelliott’s circumstances.
  2. The Tribunal in Lelliott relied on the fact that Mr Lelliott did not contest ASIC’s case, putting in issue only the length of the banning order. I am mindful that the Applicants in Hres, and Grossman were of a completely different mindset, and that Mr Grossman expressed no contrition, and argued as a primary position that he should not be disqualified, and only secondarily that should that be inevitable, then the period of the banning order imposed by ASIC was excessive.
  3. Having reviewed Mr Grossman’s actions over the relevant period in relation to the three companies of which he was a director, his attitude towards his statutory responsibilities, and his present attitude as conveyed by his lawyer, I am of the view that the five year period of disqualification is appropriate. I am satisfied for it to have commenced from the service of ASIC’s decision of 18 February 2009.

THE TRIBUNAL’S CONCLUSIONS

  1. I am satisfied from the evidence and submissions before me that section 206F(1) of the Act has been satisfied, and that the grounds in section 206F(2) have been made out.
  2. The correct or preferable decision is that Mr Grossman should be disqualified from managing corporations pursuant to section 206F(1) of the Act for a period of five years, commencing from the date of service of ASIC’S disqualification order of 18 February 2009.

DECISION

  1. The Tribunal affirms the decision under review, and decides that the period of disqualification for five years is taken to have commenced from the date of service of ASIC’s decision of 18 February 2009.

I certify that the 130 preceding paragraphs are a true copy of the reasons for the decision herein of Ms G Ettinger, Senior Member


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

Associate


Date of Hearing On the papers (reserved 22 November 2010)

Date of Decision 12 January 2011

Solicitor for the Applicant Mr D Farrar, Farrar Lawyers

Counsel for the Respondent Ms E Cheeseman

Solicitor for the Respondent Ms M Adofaci, ASIC

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