Brandt v Commissioner of Fair Trading, Office of Fair Trading [2005] NSWADT 26

CITATION: Brandt v Commissioner of Fair Trading, Office of Fair Trading [2005] NSWADT 26 DIVISION: General Division APPLICANT PARTIES: Kevin John Brandt RESPONDENT Commissioner for Fair Trading, Office of Fair Trading FILE NUMBER: 043183 HEARING DATES: 13/10/2004 SUBMISSIONS CLOSED: 10/13/2004 DATE OF DECISION: 02/17/2005

BEFORE: Montgomery S - Judicial Member APPLICATION: Property, Stock and Business Agents Act - Real Estate agent - declaration that agent is disqualified person - Real Estate agent - declaration that agent is disqualified person MATTER FOR DECISION: Principal matter LEGISLATION CITED : Property, Stock and Business Agents Act 2002 Clarke v Commissioner for Fair Trading [2004] NSW ADT 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 Brandt has worked in the Real Estate industry since 1964 and has been licensed as a real estate agent under the Property Stock and Business Agents Act 2002 ("the Act") for 4 years. He is presently working as a real estate agent in Orange and has been since 2002. He has an unblemished record in relation to his real estate licence. 2 In October 2000 Mr Brandt became bankrupt for the third time. He was discharged from that bankruptcy in October 2003. He had previously been bankrupt between June 1989 and June 1992 and between July 1996 and July 1999. 3 Section 14 of the Act provides that a person is eligible to hold a licence as a real estate agent only if the Commissioner for Fair Trading is satisfied that the person is not a disqualified person. Under section 16 of the Act a person is a disqualified person if they were an undischarged bankrupt at any time in the 3 years preceding the application for the licence unless the Commissioner is satisfied that the person took all reasonable steps to avoid the bankruptcy. A delegate of the Commissioner determined that he was not satisfied that Mr Brandt took all reasonable steps to avoid the bankruptcy and determined that Mr Brandt's licence was to be cancelled from 18 June 2004 and that he was to be disqualified from holding a licence until 20 October 2006. 4 Mr Brandt has applied to the Tribunal for a review of that determination. Events leading to the Bankruptcy 5 Mr Brandt was a director of Universal Group Holdings Pty Limited ("the company"). Mr Phillip Green was also a director of the company. The company operated three businesses: Universal Pre-Loved Manufactured Homes, Universal New Manufactured Homes and Re/Max Universal Realty. Mr Brandt and Mr Green had provided directors' guarantees in relation to the company's debts. 6 In 2000 the company experienced cash flow problems. Between mid March 2000 and August 2000 Mr Brandt and Mr Green sold several properties that they owned and the net proceeds of the sales were deposited into the trading account of the company. They also commenced negotiations with a potential investor to sell a 50% shareholding in the company on the basis that the investor would be a non-active financial partner. These negotiations failed to reach agreement. 7 In August 2000 they sought advice regarding the financial position of the company from a specialist corporate business adviser, Sims Lockwood. Sims Lockwood spent a day at the offices of the company and carried out an audit of its financial records. The company had no financial resources to pay for the proposed re-structure plan and so that avenue was not pursued. In an effort to avoid the insolvency of the company Mr Brandt and Mr Green decided to sell the business. In September 2000 they negotiated the sale to a separate purchaser. 8 Under the terms of the agreement the purchaser was to take over the company's assets and assume liability for its debts. The purchaser paid the company's $9,300 Telstra bill but paid no other debts of the company. It seems that the purchaser took over the business operations from 12 September 2000. Shortly afterwards Mr Brandt and Mr Green were locked out of their former offices. A few days later they were advised that completion of the agreement for sale was not proceeding. Mr Brandt and Mr Green did not enforce the agreement or recover possession of the business. They contend that they had no resources to force the completion of the agreement for sale or to commence proceedings to seek damages for breach of the contract and that they were physically unable to retake possession of the business or its assets. 9 Mr Brandt and Mr Green had no resources available to re-establish the business for a viable sale. Mr Brandt was left with no assets other than personal items. He moved to Armidale into a Department of Housing home and received unemployment benefits. In September 2000 he filed for bankruptcy with debts of $3,780. Vehicles leased by the company were surrendered and the company put into liquidation. The company went into liquidation in July 2001. It was deregistered in February 2002. Issues 10 There is no dispute that Mr Brandt has been bankrupt three times. The issue for the Tribunal is whether or not, for the purposes of section 16(1)(d) of the Act, it can be satisfied that Mr Brandt took all reasonable steps to avoid the last bankruptcy. 11 Mr Brandt points to his efforts to address the company's financial situation by selling assets and directing the proceeds to the company, attempting to negotiate a partial sale of the business, seeking advice from Sims Lockwood and then negotiating a complete sale of the business. 12 The Commissioner was not satisfied that Mr Brandt took all reasonable steps to avoid bankruptcy. He contends that Mr Brandt had not provided sufficient information that would allow him to be satisfied of this issue. Mr Brandt had not provided details about the nature or quantum of the debts owed by the company or the extent of Mr Brandt's liability for those debts or the identity of the petitioner for the winding up of the company. Nor had he provided information as to the cause of his bankruptcy, what action, if any, he took to meet the debts that led to his bankruptcy or what legal, business rescue or accounting advice he sought or obtained. In relation to the failed sale of the business he provided no information as to whether he reported to, or otherwise sought assistance from the Australian Companies and Securities Commission, Police or any other regulatory body. Mr Brandt appears not to have taken any clear positive steps to address this issue. This failure to take steps to protect himself or to assert his rights inevitably meant that he would experience financial hardship. 13 The Commissioner also considered that Mr Brandt's failure to ensure that the purchaser signed the agreement for the sale of the business and that he was provided with a copy of it, demonstrates a serious lack of good judgement and a reckless disregard for one's own financial affairs. Accordingly, the Commissioner considered that Mr Brandt should not be permitted to conduct transactions such as sales except under proper supervision. Can the Commissioner be satisfied that Mr Brandt took all reasonable steps to avoid the bankruptcy? 14 The tests for establishing whether a person took all reasonable steps to avoid bankruptcy have been the subject of several decisions of this Tribunal. Of relevance are those of Deputy President Hennessy in McDonald v Commissioner for Fair Trading [2004] NSW ADT 124 and Smith v Commissioner for Fair Trading [2004] NSWADT 182 and those of President O'Connor DCJ in Davidson v Commissioner for Fair Trading [2004] NSW ADT 200 and Clarke v Commissioner for Fair Trading [2004] 273. 15 In these decisions it was considered that it was relevant to assess what steps the applicant had taken to avoid bankruptcy after he knew or ought to have known that bankruptcy was a possibility. The test of "reasonable steps" is that of what a reasonable person endowed with the knowledge and experience of the applicant would do. The application of the test therefore requires the Tribunal to consider two issues - (i) when did Mr Brandt know, or ought he to have known, that bankruptcy was a possibility? and (ii) what steps did he take to avoid the bankruptcy? When did Mr Brandt know or ought he to have known that bankruptcy was a Possibility? 16 The problem in fixing a time that Mr Brandt knew, or ought to have known that bankruptcy was a possibility, is the lack of detail provided by Mr Brandt in relation to financial side of the company's operations. All he has said is that the company experienced financial difficulties early in its existence and that he and Mr Green's property portfolio was sold to sustain the company's cash flow. The Commissioner contends that Mr Brandt ought to have known that bankruptcy was a possibility from at least April 2000. This seems to me to be a reasonable assessment. It is clear from the evidence that from mid March 2000 Mr Brandt and Mr Green had determined that the company was in difficulty and that it was necessary to take action to address it. It is also clear that despite the input of funds the situation was worsening. What steps did Mr Brandt take to avoid the bankruptcy? 17 The second issue for the Tribunal to decide is whether or not Mr Brandt took all reasonable steps to avoid the bankruptcy. In McDonald and Smith Deputy President Hennessy considered that reasonable steps to avoid the bankruptcy included such matters as selling property to pay debts, negotiating with creditors to achieve settlement and taking financial advice and acting on that advice. Sale of assets 18 It is not suggested that Mr Brandt took any steps to shelter his assets. Mr Brandt has given evidence of selling property and injecting funds to improve the company's position. Mr Brandt claimed that the proceeds of sale were deposited into the company's trading account but provided no proof of this. It is unclear whether the proceeds went to pay company debts or whether they were used to carry on the business. There is evidence of the company leasing vehicles as late as April 2000, which suggests that the company's liabilities were still being increased at that stage. 19 Mr Brandt has referred to negotiations to sell a 50% shareholding in the company. This assertion is unsubstantiated and no explanation has been given as to why the negotiations failed. There seems to me to be merit in the Commissioner's submission that they failed because the potential investor withdrew from the negotiations on simple business principles that it was a poor investment. 20 Mr Brandt also gave evidence of the steps taken to sell the business as a whole and that the purchaser took possession of the business even though the sale fell through. It is unclear whether these matters were brought to the attention of the relevant authorities but in any event no plausible explanation was given for his failure to take steps to recover the business or enforce the sale. Offers of settlement 21 Mr Brandt claimed that he had given a director's guarantee in relation to the company's liabilities. This assertion is also unsubstantiated but it is likely that at least some creditors would have required such guarantees. There is no evidence of any offers of settlement to the creditors. It is probable that there were no such offers. Mr Brandt stated that he had no ability to repay his debts because he was unemployed and in receipt of a pension. Taking financial advice 22 Mr Brandt referred to seeking advice from Sims Lockwood regarding the financial position of the company. However, he provided no evidence that he took any financial advice in relation to his own position. His evidence of the advice received is negligible and unsubstantiated. It is apparent that he did not act on whatever advice was received. 23 From his evidence it seems that Mr Brandt took no other financial advice until bankruptcy was imminent. In September 2000 Ford Credit and Esanda advised him that he should file for bankruptcy in order that they could collect on insurance policies. He subsequently telephoned ASIC and obtained the necessary forms and information and he then spoke to staff at the Insolvency and Trustee Service Australia, the government agency responsible for the administration and regulation of the personal insolvency system. What would a reasonable person endowed with Mr Brandt's knowledge and experience do. 24 The Act requires the Commissioner, and therefore the Tribunal, to be satisfied that Mr Brandt took all reasonable steps to avoid bankruptcy. In my view it is highly significant that Mr Brandt had been bankrupt on two earlier occasions. In those circumstances it is reasonable to assume that he would have had a heightened awareness of issues relating to bankruptcy. Even if it is accepted that a person with that experience might not necessarily be aware of what options were available to him, it is my view that a reasonable person would have sought advice. At the minimum a reasonable person would have obtained financial counselling. A reasonable person would then have acted on whatever advice was received. 25 Mr Brandt appears to have formed the view that his bankruptcy was inevitable as a consequence of guarantee that he had given as a director of the company. It seems that at least Ford Credit and Esanda had insurance policies that they could call on. Other creditors may have been in a similar position. A competent financial counsellor may or may not have been able to help him negotiate with the company's creditors and reach some form of resolution. It is conceivable that he could have negotiated an arrangement in relation to his personal debts. A reasonable person would then have at least attempted that course of action. Conclusion 26 Mr Brandt was an undischarged bankrupt within the 3 years preceding his application for the real estate agents licence. He is therefore a person disqualified from holding a licence under the Act unless he can satisfy the Tribunal that he took all reasonable steps to avoid the bankruptcy. Given his history of bankruptcy it must have been obvious to Mr Brandt from at least April 2000 that bankruptcy was a possibility because of the company's circumstances and his guarantee of the company's liabilities. From that time on the company's circumstances deteriorated. 27 Mr Brandt obtained some advice in relation to the company's situation but failed to take the matter further. He failed to take reasonable steps to enforce an agreement that might have addressed the situation completely. In my view, this failure made the liquidation of the company inevitable. As a guarantor he was in a potentially difficult situation but at that stage his personal debt was about $3,700. It is conceivable that he could have negotiated an arrangement in relation to his personal debts. Had he sought financial counselling he may well have received advice that could have assisted. At the minimum he would have received advice about enforcing the sale of business agreement. In my view he did not do what a reasonable person would have done. In the circumstances it cannot be said that he took all reasonable steps to avoid the bankruptcy. 28 I agree with the Commissioner's determination that Mr Brandt is a disqualified person for the purposes of the Act. In my view, the Commissioner made the correct and preferable decision. Accordingly, the decision under review is affirmed.