FEDERAL COURT OF AUSTRALIA Schwartz, in the matter of Babybelle Pty Ltd (ACN 116 052 683) [2007] FCA 1469 Corporations Act 2001 (Cth) ss 206A, 206B, 206G Adams v Australian Securities and Investments Commission (2003) 46 ACSR 68 IN THE MATTER OF BABYBELLE PTY LTD (ACN 116 052 683); SPENCER SCHWARTZ VID 697 OF 2007 GORDON J 4 SEPTEMBER 2007 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VID 697 OF 2007 IN THE MATTER OF BABYBELLE PTY LTD (ACN 116 052 683) SPENCER SCHWARTZ Plaintiff JUDGE: GORDON J DATE OF ORDER: 4 SEPTEMBER 2007 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The application be dismissed. 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 VID 697 OF 2007 IN THE MATTER OF BABYBELLE PTY LTD (ACN 116 052 683) SPENCER SCHWARTZ Plaintiff JUDGE: GORDON J DATE: 4 SEPTEMBER 2007 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 By an ex parte application dated 7 August 2007, the plaintiff ("Mr Schwartz") sought leave under s 206G of the Corporations Act 2001 (Cth) ("the Act") to manage a proprietary company formed under the Act, namely Babybelle Pty Ltd (ACN 116 052 683) ("Babybelle"). In fact, Mr Schwartz sought leave to be appointed a director of Babybelle although the application was not in those terms. 2 In accordance with s 206G(2) of the Act, Mr Schwartz lodged notice of the proposed application with the Australian Securities and Investments Commission ("ASIC") at least 21 days before commencing the proceedings. ASIC forwarded a letter to Mr Schwartz' solicitors informing them that they did not oppose the application and did not propose to attend the hearing of the application. 3 Section 206G is in Pt 2D.6 of the Act which is entitled "Disqualification from managing corporations". Mr Schwartz became disqualified by the operation of s 206B(1)(b)(ii) of the Act which provides that a person becomes automatically disqualified from managing a corporation if the person is convicted of an offence that "involves dishonesty and is punishable by imprisonment for at least 3 months." 4 On 14 April 2005, Mr Schwartz pleaded guilty to 5 charges, namely contravention of s 1350 of the Social Security Act 1991 (Cth), two contraventions of s 215 of the Social Security (Administration) Act 1999 (Cth) and two contraventions of s 135.2 of the Criminal Code Act 1995 (Cth). 5 The prosecution summary was as follows: "1. The defendant was in receipt of Austudy payments between 5 July 1995 and 30 June 1998, and Youth Allowance (student) between 1 July 1998 and 23 October 2003. 2. In early 1998, the defendant advised DEETYA that he was enrolled to undertake a Bachelor of Commerce at Melbourne University between 1 March 1998 and 30 November 1998. On 1 July 1998, Centrelink commenced administration of Austudy and the defendant was transferred to Youth Allowance (student). 3. On 4 December 1998, the defendant advised Centrelink he would be continuing his studies at Melbourne University until 15 November 2002. As a result of lodging his initial claim form with DEETYA, and subsequent contacts with Centrelink, the defendant received payments of Austudy and subsequently Youth Allowance (student) between January 1998 and 24 October 2003. 4. On 11 June 2002, information was received from Melbourne University that the defendant was granted a leave of absence by Melbourne University between 31 July 2001 and 31 December 2001. He did not study at any other institution in this period. The defendant resumed his full time studies at Melbourne University in 2002. 5. As a result of the defendant ceasing study between 31 July 2001 and 31 December 2001, and failing to advise Centrelink of this fact, he received payments of Youth Allowance (student) to which he had no entitlement. (Charges 3 & 4) 6. In addition, the defendant was employed on a casual basis with Priceline between 26 September 1997 and 1 December 2002. As a full time student, the defendant was entitled to an income bank that exempted part of his earnings from assessment for benefit purposes. On 29 October 1999, the defendant's income bank was depleted, and as a result his income began affecting his benefit entitlement. During the charge periods, the defendant earned $34,235 gross, or an average of $450 gross per fortnight. 7. On 21 August 2001, the defendant commenced casual employment with Smart Health Australia. This employment ceased on 26 September 2001. During this period, the defendant earned $1,028 gross. 8. Between 10 October 2001 and 11 November 2001, the defendant was employed on a casual basis with Data Connection Pty Ltd. During this period, the defendant earned $1,746 gross. 9. The defendant advised Centrelink of his employment with Priceline, but under declared his earnings. Although the defendant earned $34,235 from Priceline during the charge periods, he only declared earnings totalling $14,003 during these periods. The defendant did not advise Centrelink of his employment and earnings with Smart Health Australia and Data Connection Pty Ltd. (Charges 1, 2 & 5) 10. As a result of failing to advise Centrelink that he had ceased study in semester 2 of 2001 and under-declaring his earnings he obtained social security payments to which he was either not entitled or only partially entitled. 11. The offending was detected on 11 June 2002 as a result of data matching between Centrelink and the Educational Institution, and on 10 September 20003 (sic) as a result of data matching between Centrelink and the Australian Taxation Office. 12. The defendant was not interviewed in relation to this matter." 6 The amount that was obtained dishonestly was $13,578.94. Mr Schwartz was placed on two good behaviour bonds under s 20(1)(a) of the Crimes Act 1914 (Cth) with $600 recognisance. 7 The circumstances in which Mr Schwartz offended were said to relate to an earlier period in his life. The evidence before the Court, including evidence from Mr Goodman (the sole director of Babybelle), was that Mr Schwartz had repaid his debts, including the debt to Centrelink, and had undertaken counselling. The size and nature of the other debts were not explained. Nor was Mr Goodman's relationship with Mr Schwartz. LEGISLATION 8 At the outset, it must be recalled that s 206A(1) of the Act provides that a person, such as Mr Schwartz, who is disqualified from managing a corporation commits an offence if: "(a) they make, or participate in making, decisions that affect the whole, or a substantial part, of the business of the corporation; or (b) they exercise the capacity to affect significantly the corporation's financial standing; or (c) they communicate instructions or wishes (other than advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation) to the directors of the corporation: (i) knowing that the directors are accustomed to act in accordance with the person's instructions or wishes; or (ii) intending that the directors will act in accordance with those instructions or wishes." 9 Section 206B(2) of the Act provides for the period of disqualification. In relation to Mr Schwartz, it started on the day that he was convicted (14 April 2005) and lasted for 5 years after that day: s 206B(2)(a). That period will end in April 2010. 10 Section 206G(1) of the Act provides that: "A person who is disqualified from managing corporations may apply to the Court for leave to manage: (a) corporations; or (b) a particular class of corporations; or (c) a particular corporation, if the person was not disqualified by ASIC." 11 The current application is an application under (c) for leave to manage a particular corporation, namely Babybelle. LEGAL PRINCIPLES 12 In Adams v Australian Securities and Investments Commission (2003) 46 ACSR 68, after considering the legislative history of the automatic disqualification of certain convicted persons from being a director or promoter of, or being in any way (whether directly or indirectly) concerned in or taking part in the management of corporations, Lindgren J summarized the principles relevant to an application under s 206G(1) of the Act as follows (at [8]): 1. The applicant bears the onus of establishing that the Court should make an exception to the legislative policy underlying the prohibition: Re Altim Pty Ltd[1968] 2 NSWR 762 ("Altim") at 764 as applied in Re Ferrari Furniture Co Pty Ltd[1972] 2 NSWLR 790 ("Ferrari") at 792; Re Macquarie Investments Pty Ltd(1975) 1 ACLR 40 at 42; Re Maelor Jones Pty Ltd (1975) 1 ACLR 4 at 13; Re Magna Alloys and Research Pty Ltd(1975) 1 ACLR 203 at 205; Re Zim Metal Products Pty Ltd(1977) 2 ACLR 553 ("Zim") at 555; In re Marsden(1981) 29 SASR 454 ("Marsden") at 460; Re Australian Limousin Breeders Society Ltd (1989) 7 ACLC 426 at 429-430; Murray v Australian Securities Commission (1993) 12 ACLC 11 ("Murray") at 13; Pace v Australian Securities & Investments Commission(1999) 17 ACLC 1764 ("Pace") at [21]; Re Seymour [2002] TASSC 85 at [6]. 2. That legislative policy is one of protecting the public, not one of punishing the offender: Altim at 764, as applied in Ferrari at 791-792; Zim at 555; Murray at 13: Chew v National Companies and Securities Commission[1985] WAR 337 ("Chew") at 340-341; Pace at [21]; Re Seymour at 2; Borsboom v Australian Securities Commission, unreported, Supreme Court of Western Australia, White J, 17 January 1997. 3. Another objective is to deter others from engaging in conduct of the particular kind in question: Chew at 340-341; Zim at 555; Murray v ASCat 13; Pace at [21]; Re Seymour, above, at [6]. 4. A further objective is the more general one of deterring others from abusing the corporate structure to the disadvantage of investors, shareholders and others dealing with a company: Re Marsden,above at 459; Zim at 555; Murrayat 13; Re Magna Alloys at 205; Pace at [21]; Re Seymour, above, at [6]. 5. The prohibition itself contemplates that there will be hardship to the offender. Therefore hardship to the offender alone is not a persuasive ground for the granting of leave: Chew at 340-341; Re Maelor Jones Pty Ltd(1975) 1 ACLR 4 at 13; Murrayat 14. 6. "The court in exercising its discretion will have regard to the nature of the offence of which the applicant has been convicted, the nature of his involvement, and the general character of the applicant, including his conduct in the intervening period since he was removed from the board and from management. Where, as here, the applicant seeks leave to become a director and to take part in the management of particular companies the court will consider the structure of those companies, the nature of their businesses and the interests of their shareholders, creditors and employees. One matter to be considered will be the assessment of any risks to those persons or to the public which may appear to be involved in the applicant's assuming positions on the board or in management", per Bowen CJ in Eq in Re Magna Alloys at 205, followed in Zim at 555-556. This passage does not purport to be an exhaustive statement of the matters appropriate to be taken into account by the Court as relevant to the exercise of its discretion under the section. Clearly, there can be no such exhaustive statement." REASONING 13 The evidence filed in support of the application is unsatisfactory in a number of respects. 14 Babybelle was incorporated on 1 September 2005, some 5 months after Mr Schwartz was convicted of serious dishonesty offences. Babybelle has one shareholder and one director, Mr Goodman. I was informed from the bar table by Counsel for Mr Schwartz that Mr Goodman is a dentist and holds the share in his personal capacity. Until 1 March 2007, Babybelle's registered office was at 22 O'Loughlin Street, Ormond being the address from which the business is conducted. From 1 March 2007, the registered office of the business has been Mr Schwartz' home address. I was informed from the bar table that the registered office was changed because Mr Schwartz was doing most of the work. 15 The location of the registered office is not the only direct connection Mr Schwartz has to Babybelle. The affidavit evidence also discloses that: (1) Mr Schwartz is presently contracted to provide administrative services to Babybelle. (I was informed from the bar table that it is an "ad hoc" arrangement and was not recorded in writing); (2) Mr Schwartz' role is "to assist with the administration of the company and provide contract services relating to the importation and sale of goods including spa pools, heated towel rails and other sports equipment"; (3) the accounts of Babybelle, the banking of Babybelle and the contact with the external accountant are all "primarily undertaken by" Mr Schwartz. Moreover, many of the most vital aspects of the day to day running of the business are left to him; (4) in his work for the business, Mr Schwartz completes and signs government department forms and sells items over the website ebay.com.au; (5) the business of the company has "grown solely due to the hard work and dedication of [Mr Schwartz]". 16 This brief summary of the evidence raises serious questions about whether Mr Schwartz has contravened s 206A of the Act and continues to do so. As I have said, the evidence is unsatisfactory and I am neither required to nor able to resolve that issue. As noted earlier, the structure of the company and the manner in which it is presently managed are just some of the matters to be considered on an application such as this. 17 Mr Schwartz' disqualifying conduct was, by hypothesis, for dishonesty offences. It was conduct over a three year period and as I have noted earlier, the debt has been repaid. The "independent" evidence of his conduct since that date is the evidence of Mr Goodman who described Mr Schwartz as "a trustworthy, well-mannered, hard-working, well-rounded and successful individual". It was submitted by Counsel for Mr Schwartz that the contravening conduct occurred in a different period of his life and was now some 6 to 8 years ago. 18 So much may be accepted, but what I am required to do is to review the facts before me and, applying the principles outlined earlier, determine whether it is appropriate for the Court to grant Mr Schwartz leave to manage Babybelle. On the current material before the court, I am not persuaded that it is appropriate to grant Mr Schwartz leave to manage Babybelle. 19 In fact, what I have before me is an application for leave to do that which he appears to have already been doing – managing Babybelle. The reason for the application was said to be that Mr Goodman "can no longer actively run the business of [Babybelle] and if [Mr Schwartz] is unable to act as a director [Babybelle] may be forced to cease trading". No attempt was made to explain what Mr Goodman had done, or currently does in the business. I was informed from the bar table that the only person who worked in the business was Mr Schwartz who was an "ad hoc" contractor. When pressed, I was informed that there were financial reasons for the application. The financial reasons were said to relate to both Mr Schwartz and Mr Goodman. They were not explained. What is apparent from the activity statements of the company for the period from 1 July 2006 up to and including 30 June 2007 was that there was an external accountant who lodged the statements and the sales had increased each quarter. It may well be that, given the success of the business, Mr Goodman is unwilling to continue to act as a director with the attendant risks attached to that office. Moreover, what is to happen to his shareholding and whether he is to retain it is not explained. 20 One further matter to be considered is the assessment of risk to others and to the public which would appear to be involved in Mr Schwartz assuming a position as a director. The Court may, of course, grant leave subject to exceptions and conditions determined by the Court: s 206G(3) of the Act. Counsel for Mr Schwartz submitted that no conditions were necessary or appropriate especially given the views expressed by Mr Goodman that he supported the application. Even if I was minded to grant Mr Schwartz leave to manage Babybelle, conditions would need to be imposed. The risk extends beyond Mr Goodman to the public and to the persons and entities with whom Babybelle does business. Drafting appropriate conditions is difficult in the light of the current state of the evidence and, in particular, given the lack of evidence of who Babybelle deals with, has dealt with, the manner in which Babybelle is currently operated and the continued role, if any, of Mr Goodman. CONCLUSION 21 For the above reasons the application will be dismissed. However, it of course remains open to Mr Schwartz to make a fresh application if evidence becomes available that addresses the outstanding issues referred to above. I certify that the preceding twenty-one (21) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gordon. Associate: Dated: 4 September 2007 Counsel for the Applicant: Mr J Sear Solicitor for the Applicant: Williamstown Lawyers Date of Hearing: 4 September 2007 Date of Judgment: 4 September 2007