CITATION: Cross v Commissioner for Fair Trading, Office of Fair Trading [2005] NSWADT 69 DIVISION: General Division APPLICANT PARTIES: Ronald Malcolm Cross RESPONDENT Commissioner for Fair Trading, Office of Fair Trading FILE NUMBER: 043150 HEARING DATES: 25/10/2004 SUBMISSIONS CLOSED: 11/24/2004 DATE OF DECISION: 03/31/2005 BEFORE: Montgomery S - Judicial Member APPLICATION: Property, Stock and Business Agents Act - Real Estate agent - certificate of registration - grant - Real Estate agent - certificate of registration - grant MATTER FOR DECISION: Principal matter LEGISLATION CITED : Property, Stock and Business Agents Act 2002 Clarke v Commissioner for Fair Trading [2004] 273 CASES CITED: Davidson v Commissioner for Fair Trading [2004] NSW ADT 200 McDonald v Commissioner for Fair Trading [2004] NSW ADT 124 Smith v Commissioner for Fair Trading [2004] NSW ADT 182 APPLICANT REPRESENTATION: B Compton, solicitor RESPONDENT J Coss, solicitor ORDERS: The decision under review is affirmed REASONS FOR DECISION 1 Mr Cross has held a certificate of registration as a Real Estate Salesperson under the Property Stock and Business Agents Act 2002 ("the PSBA Act") for some years. His certificate was due to expire in February 2004 and he applied to have it renewed. The Commissioner's delegate refused his application. 2 The decision to refuse to grant the certificate of registration is based on the Commissioner's view that Mr Cross is a disqualified person within the terms of section 16(1)(e) of the PSBA Act, because, within the preceding three years he was a director of a company, Park Trent Investments Pty Ltd ("the company"), at the time an Administrator was appointed to it, and when the Liquidator of the company was appointed. 3 An associated company, Everest Marketing Corporation Pty Limited ("Everest"), was also placed into administration and liquidation at the same time as the company. Mr Cross was not a Director of Everest, nor was he concerned in its management. 4 The company was incorporated on 4 May 1989. It lay dormant for several years but from 1 July 1997 began to engage in real estate marketing. It generated income from commissions paid by agents and developers. It obtained leads to potential purchasers of real estate from Everest, which conducted a telemarketing operation to attract such people. The company paid Everest for this service, and also had responsibility for the Telstra telephone account that Everest used in its business. In turn the company would introduce these people to properties being sold by various agents and developers, and if sales were made the company would receive commission from the various agents and developers. 5 Mr Cross has applied to the Tribunal for a review of the Commissioner's determination. Section 16(1)(e) provides that if the Commissioner, and therefore the Tribunal, is satisfied that Mr Cross took "all reasonable steps to avoid the liquidation or administration" then he is not a disqualified person. If the Tribunal finds that was the case then Mr Cross is not disqualified from holding a certificate of registration. Issues 6 It is not in dispute that an administrator was appointed to the company in March 2003, that a liquidator was appointed in April 2003 or that Mr Cross was a director of the company at those times. The issue for the Tribunal is whether or not, for the purposes of section 16(1)(e) of the Act, it can be satisfied that Mr Cross took all reasonable steps to avoid the liquidation or administration. Can the Commissioner be satisfied that Mr Cross took all reasonable steps to avoid the liquidation or administration? 7 The tests for establishing whether a person took all reasonable steps to avoid bankruptcy have been the subject of several decisions of this Tribunal. In Clarke v Commissioner for Fair Trading [2004] 273 the Tribunal's President O'Connor DCJ reviewed some of those decisions and stated at paragraphs 10 and 11: 10 It has expressed the following views as to the approach to be taken in examining the question of whether the licence holder took 'reasonable steps' to avoid the bankruptcy or insolvency: (i) A general inquiry into the wisdom or otherwise of the original financial dealings that ultimately ended in bankruptcy or insolvency is not contemplated by the Act. The point at which the inquiry commences is when the applicant was 'faced with the possibility' of bankruptcy or insolvency ( Davidson at [20]) or was 'aware' or 'should have been aware' ( McDonald at [21]) of that possibility. The focus is the steps taken to avoid the relevant event (see Smith at [17]) – in cases of the present kind, administration, and later liquidation. (ii) Subject to (i), in assessing reasonableness the Tribunal must examine all the relevant facts and circumstances. (McDonald at [25]), (iii) The steps taken by the applicant must be objectively reasonable in the sense that they would be those taken by a 'reasonable person endowed with the knowledge and experience of the [applicant]'. (McDonald at [26-27]) 11 To these should probably be added a fourth, though it is obvious enough from the provision: (iv) The person under notice has the task of satisfying the Commissioner that he or she took all reasonable steps to avoid the insolvency. 8 The authorities to which the President referred are Davidson v Commissioner for Fair Trading [2004] NSW ADT 200; McDonald v Commissioner for Fair Trading [2004] NSW ADT 124; and Smith v Commissioner for Fair Trading [2004] NSW ADT 182. While these matters dealt with bankruptcy rather than liquidation or administration, I agree with the President's application of a similar approach in liquidation or administration matters. 9 The test of "reasonable steps" is that of what a reasonable person endowed with the knowledge and experience of the applicant would do. In applying this test I must consider two issues - (i) when did Mr Cross know, or ought he to have known, that the liquidation or administration in question was a possibility? and (ii) what steps did he take to avoid that liquidation or administration? 10 Mr Cross points to taking financial advice, paying off of company debts and his efforts in selling assets and attempting to negotiate a settlement with the ATO. 11 The Commissioner was not satisfied that Mr Cross took all reasonable steps to avoid liquidation or administration. He contends that rather than taking all reasonable steps to avoid the liquidation or administration, Mr Cross's conduct compounded the problem and hastened the liquidation or administration. When did Mr Cross know or ought he to have known that the liquidation or administration was a possibility? 12 Mr Cross contends that he did not realised that liquidation or administration was a possibility until his attempt to reach an agreement with the ATO in March 2003 failed. He said that until then he believed that the company was solvent. This belief was based on the view that at all times the company was owed commission equal to its debts. 13 The Commissioner contends that Mr Cross ought to have realised that liquidation or administration was a possibility from 1999. He refers to a report dated 1 April 2003 of the Liquidator, Mr Daniel Cvitanovic which states: "3.0 Circumstances leading up to voluntary administration The companies had been failing to pay various ongoing taxes and charges including PAYG tax, GST, payroll tax and superannuation since around March/April 1999. The companies have, since around August/September 2001, paid some of the arrears in taxes and other charges and other trade creditors from: (a) operating cash flow; (b) sales of real estate properties owned by Ronald Cross and associated entities; and (c) sales of other assets owned by associated entities. Various recovery actions were instigated by the ATO for the recovery of monies owned to it by both companies, and the directors chose to place the companies into Voluntary Administration." 14 Under cross-examination Mr Cains admitted that he told Mr Cross to comply with his statutory obligations and was unaware that they were not being met. The Commissioner submits that Mr Cross did not follow the advice and was on notice from 1999 that liquidation was a strong possibility. 15 The Commissioner contends that Mr Cross should have been aware that liquidation could have been a possibility in 1999 because by failing to pay the company's statutory obligations he was just delaying the day when the company would have to pay and when this occurred the company might not be in a position to pay the arrears and penalties. Further, by not provisioning for the payment of taxation liabilities he exposed the company's future cash flow. 16 The Commissioner further asserts that the expansion of the company in early 2000 to New Zealand and Perth on top of not paying the company's statutory obligations meant that it was increasing its expenses at a time when it was not paying its statutory obligations and the expansion was not a reasonable step. Under cross-examination Mr Cross admitted that no business plan had been developed for the expansion into West Australia and New Zealand and no seed capital was available. When Telstra wanted prompt payment of its accounts the company was not paying its statutory obligations and was incurring costs in an ill-fated expansion program. At that stage Mr Cross would have been very aware that liquidation was more than a possibility. 17 I agree with the Commissioner on this issue. It seems to me that a reasonable person endowed with Mr Cross's knowledge and experience would have realised that liquidation was more than a possibility when the company could not meet its statutory obligations. The Liquidator stated that this was the case from around March/April 1999. 18 While the evidence suggests that the company had outstanding commissions that would have been sufficient to cover its debts, it should have been equally apparent that recovery of those commissions would be difficult if not impossible. It seems that the expansion was an effort to trade out of difficulty but in my view a reasonable person in Mr Cross's position would not have taken steps to expand the business without firm financial advice. This would have necessitated providing the advisor with a full and frank disclosure of the company's financial state. The fact that Mr Cains was unaware that the company's statutory obligations were not being met suggests that this did not occur. What steps did Mr Cross take to avoid the liquidation or administration? 19 The issue of whether Mr Cross's steps to avoid the liquidation were reasonable must be considered in light of the circumstances that existed at the time. The Tribunal's Deputy President Hennessy in Smith at [16] distinguished the need to have taken reasonable steps to avoid the liquidation or administration from the need to have taken steps to avoid the circumstances, such as the incurring of debts, which ultimately resulted in the person becoming bankrupt. This seems to me to be the correct approach. 20 It is therefore necessary to consider what steps Mr Cross took once he was aware of the possibility of the liquidation or administration. The Tribunal authorities have consistently considered that reasonable steps to avoid the liquidation or administration included such matters as selling property to pay debts, negotiating with creditors to achieve settlement and taking financial advice and acting on that advice. 21 Mr Cross provided an Affidavit in which he outlined the steps that he says he took to avoid the administration and the subsequent liquidation of the company, and also the steps he has taken since the company went into liquidation to take over a large proportion of its obligations. However, in my view he has not provided an adequate explanation for the steps taken in the period following the time at which he should have been aware of the possibility of the liquidation or administration. 22 Mr Cross gave evidence of disposing of company assets to pay its debts. This included sale of part of its rent roll and the sale of motor vehicles. It is not suggested that Mr Cross took any steps to shelter his own assets. Mr Cross has given evidence of having disposed of more than $1 million worth of his own real estate portfolio to furnish the company's debts. 23 Mr Cross refers to the payment of debts to Telstra and the Bank. He was able to do this by increasing the company's indebtedness to other interrelated companies. It seems that the debt to the ATO was in excess of $285,000. Unpaid superannuation contributions totalled almost $270,000 and the Office of State Revenue was owed over $212,000 in Payroll Tax. The evidence shows that Mr Cross made attempts to reach agreement for repayment of the debt to the ATO and in fact an agreement was reached but the company was unable to comply with it. He made a final attempt to reach another agreement in March 2003 but this was unsuccessful. On liquidation of the company trade creditors were owed a total of $729,889.17. There is no evidence of any offers to creditors other than the ATO and it is probable that there were no such offers. 24 In my view, the steps that Mr Cross took in the unsuccessful expansion program were not reasonable given the fact that the company was unable to meet its statutory obligations. The unsuccessful expansion program was a significant contributing factor to the liquidation. 25 Mr Cross gave evidence that the company had both an internal and external accountant. He states that he took financial advice from both of them however the external accountant was not aware of the company's failure to meet its statutory obligations. The failure to inform the external accountant of the true financial situation must have impacted on the value of the financial advice that the company received. This in turn must have affected the external accountant's assessment of the company's solvency. When Mr Cross attempted to negotiate with the ATO in March 2003 it was too late to avoid the liquidation. 26 In these circumstances it cannot be said that Mr Cross had taken all reasonable steps to avoid the administration and the liquidation. 27 Accordingly, I agree with the Commissioner's determination that Mr Cross is a disqualified person for the purposes of the Act. In my view, the Commissioner made the correct and preferable decision. The decision under review is therefore affirmed. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.