FEDERAL COURT OF AUSTRALIA CORPORATIONS - application for declaration that respondent has breached s 232(6) of the Corporations law - company agent for life insurance company and owner of client register - director in debt to life company - respondent devised and implemented scheme whereby company assigned register to life company to satisfy director's personal debt - no consideration for assignment - life company re-sells register to new company formed by director - application allowed by consent - penalty $5000 and costs $500 Corporations law: ss 79, 232(6). 1317EA, 1317EA(2) and 1317EA(3) AUSTRALIAN SECURITIES COMMISSION v MICHAEL GEOFFREY SPENCER NO. TG 3009 of 1997 HEEREY J HOBART 24 JULY 1997 IN THE FEDERAL COURT OF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ) TG 3009 of 1997 ) GENERAL DIVISION ) BETWEEN: AUSTRALIAN SECURITIES COMMISSION Applicant AND: MICHAEL GEOFFREY SPENCER Respondent JUDGE: HEEREY J PLACE: HOBART DATE: 24 JULY 1997 MINUTES OF ORDER THE COURT ORDERS THAT: 1. Declare pursuant to s 1317EA(2) of the Corporations Law that the respondent has by the following "specified act" contravened s 232(6) of the Corporations Law in relation to Harq Nominees Proprietary Limited (in liquidation): In or about June 1995 Michael Geoffrey Spencer devised and implemented a scheme whereby a director of Harq Nominees Proprietary Limited caused that company to assign its register of insurance clients to the AMP Society in order to satisfy a personal debt of $230,500 owed by the director to the AMP Society. 2. The respondent pay a penalty of $5,000. 3. The respondent pay the applicant's costs of and incidental to this application fixed at $500. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) ) VICTORIA DISTRICT REGISTRY ) TG 3009 of 1997 ) GENERAL DIVISION ) BETWEEN: AUSTRALIAN SECURITIES COMMISSION Applicant AND: MICHAEL GEOFFREY SPENCER Respondent JUDGE: HEEREY J PLACE: HOBART DATE: 24 JULY 1997 REASONS FOR JUDGMENT In this application the Australian Securities Commission (the Commission) under s 1317EA of the Corporations Law seeks a civil penalty order. The contravention alleged is a breach of s 232(6) of the Law which relevantly provides: An officer or employee of the corporation must not ... make improper use of his or her position as such an officer or employee, to gain, directly or indirectly, an advantage for himself or herself or for any other person or to cause detriment to the corporation. The respondent Mr Michael Geoffrey Spencer was not an officer of the company but he is liable as being involved in the contravention within the meaning of s 79. He was the accountant for the company concerned and devised the scheme which I shall shortly describe. The company, Harq Nominees Proprietary Limited, formerly known as Robert Falconer Proprietary Limited, was incorporated on 14 December 1978. Its principal activity was that of a corporate insurance agent for the AMP Society. It appears the shareholders of the company were Mr Robert John Falconer and his daughter, Christine Marie Falconer. Mr Falconer was a director of the company at all material times. The company was the owner of a register of clients to whom policies of insurance and associated products were sold. This was an asset of substantial value, indeed the only asset of the company. As at June 1995, Mr Falconer was personally indebted to the AMP Society in the sum of $230,500. I was told this debt arose out of a scheme which the AMP, along with other life companies, had instituted in the 1980s whereby large amounts of money were provided - to use a neutral term - to agents to secure their loyalty. The precise legal basis on which the money was provided seems to have been a matter of uncertainty and it was said that what was initially thought to be a gift somehow became a loan. One of the attendant problems was a liability on corporate agents such as the company in question for fringe benefits tax. Although the Australian Taxation Office initially took the view that the fringe benefits tax was not payable, this view changed in about 1993. By mid 1995 the company was liable for fringe benefits tax in the sum of approximately $154,900. During October 1994 the respondent devised an arrangement to stop further incurring of fringe benefits tax liability by the company. This arrangement required Mr Falconer to form a new company with the same directors and shareholders. The company would then sell the agency business, including the client register, to the AMP Society in return for a "cancellation" of Mr Falconer's loan. The AMP would then sell the agency to the new company for $230,500 which was to be left owing as an interest free loan repayable under Mr Falconer's retirement with no interest. Mr Falconer and the respondent implemented this proposal in about June 1995 and caused the company to assign the client's register to AMP in satisfaction of Mr Falconer's debt. The company received no consideration for the transfer of the register. The register was then immediately assigned by the AMP Society to the new company, Falconer Financial Services Proprietary Limited, which has the same directors and shareholders as the company. The company is now in liquidation and has no assets with which to pay its creditors. At the time the assignment of the register to the AMP was effected both the respondent and Mr Falconer knew the company had a fringe benefit tax liability of at least $98,000 for which the ATO had already issued a writ. The case of the Commission, which is accepted by the respondent, is that the respondent was involved in the contravention of s 232(6) in that he devised and implemented a scheme whereby a director of the company caused the company to assign its register of clients to the Society in order to satisfy a personal debt of $235,500 owed by a director of the company to the Society. The respondent did not act dishonestly but was negligent, careless and confused in giving advice to Mr Falconer and the company and in taking action on behalf of Mr Falconer and the company in relation to the assignment of the register. The respondent failed to analyse and consider the implications of the Corporations Law on the assignment of the register and did not realise what those implications were until advised of them by the liquidator of the company. Regrettably, the advice of the respondent displays ignorance of fundamental concepts of company law. On behalf of the respondent, counsel pointed out that he is previously of unblemished character. He has been in practice on his own account as an accountant for 22 years. He is married with three late teenage children. He is aged 49. He has suffered already in relation to this matter by the cancellation by the Australian Society of Accountants of a licence for a particular form of business. He has undertaken to engage in further education at the University of Tasmania to update his legal and accounting knowledge. His health has been affected by this affair. His attention was directed towards preventing fringe benefits tax accumulating. He rather assumed, or hoped, that the ATO would not seek to recover tax contrary to its earlier ruling. The maximum penalty is $200,000. The penalty proposed is $5,000 with costs agreed at $500. I am satisfied in all the circumstances, including the saving of the costs of further proceedings in this matter, and the effect that the matter has already had on the respondent and the unlikelihood of him contravening again, that the penalty sought is appropriate. There will be a declaration pursuant to s 1317EA(2) of Corporations Law that the respondent has by the "specified act" set out below contravened s 232(6) of the Corporations Law in relation to Harq Nominees Proprietary Limited (in liquidation): In or about June 1995 Michael Geoffrey Spencer devised and implemented a scheme whereby a director of Harq Nominees Proprietary Limited caused that company to assign its register of insurance clients to the AMP Society in order to satisfy a personal debt of $230,500 owed by the director to the AMP Society. There will be an order pursuant to s 1317EA(3)(b) of the Corporations Law that the respondent pay the applicant's costs of and incidental to this application fixed at $500. I certify that this and the preceding three (3) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey Associate: Dated: 24 July 1997 Counsel for the Applicant: Mr C W Green Solicitor for the Applicant: Australian Securities Commission Counsel for the Respondent: Mr B Ayliffe Solicitor for the Respondent: Ayliffe & Ayliffe Date of Hearing: 24 July 1997 Date of Judgment: 24 July 1997