CITATION: Smart v Commissioner for Fair Trading [2005] NSWADT 33 DIVISION: General Division APPLICANT PARTIES: Rodney Smart RESPONDENT Commissioner for Fair Trading FILE NUMBER: 043016 HEARING DATES: 9/09/2004 & 10/09/2004 SUBMISSIONS CLOSED: 02/10/2005 DATE OF DECISION: 02/22/2005 BEFORE: Rice S - Judicial Member APPLICATION: Property, Stock and Business Agents Act - Real Estate agent - cancellation of licence - Real Estate agent - cancellation of licence MATTER FOR DECISION: Principal matter LEGISLATION CITED : Property, Stock and Business Agents Act 2002 Brandt v Commissioner of Fair Trading [2005] NSWADT 26 CASES CITED: Davidson v Commissioner for Fair Trading [2004] NSWADT 200 Smith v Commissioner for Fair Trading [2004] NSWADT 182 McDonald v Commissioner for Fair Trading [2004] NSWADT 124 APPLICANT REPRESENTATION: G Evans, barrister RESPONDENT P Singleton, barrister ORDERS: 1. The decision to cancel Mr Smart's licence is set aside. ; 2. In substitution for that decision, the Tribunal determines that Mr Smart was not a disqualified person pursuant to s 16(1)(c) of the Property, Stock and Business Agents Act 2002 REASONS FOR DECISION Decision 1 For the reasons that follow, I set aside the Commissioner's decision and substitute a different decision. Mr Smart is successful in his application. Background to the application 2 Mr Rod Smart has been a licensed real estate agent since 1994. In May 2003 he was declared bankrupt on his own petition, and the Commissioner for Fair Trading issued Mr Smart with a notice to show cause why he should not be disqualified from holding his real estate agent's licence. Although Mr Smart responded to the notice, the Commissioner decided to cancel his licence. The Commissioner's decision was based on his view that Mr Smart, as an undischarged bankrupt, had not taken all reasonable steps to avoid the bankruptcy. Mr Smart has applied to this Tribunal for a review of the decision to cancel his licence. 3 Mr Smart was licensed, and the Commissioner made the decision to cancel his licence, under sections 14(1)(d), 16(1)(c) and 200 of the Property Stock and Business Agents Act 2002. The issue to be decided 4 The only question of fact to be decided is whether Mr Smart took all reasonable steps to avoid the bankruptcy. Mr Smart and the Commissioner agree, as do I, with the proposition that a person cannot be expected to take steps to avoid bankruptcy unless they are aware, or should be aware, that bankruptcy is a possibility (McDonald v Commissioner for Fair Trading [2004] NSWADT 124 at [21]). But they disagree on when it is that the reasonableness of Mr Smart's conduct should be assessed. 5 The difference turns on how the reference to 'bankruptcy' is to be understood. Is it bankruptcy that might eventuate, as one actually did in the circumstances, or is it the actual bankruptcy that did eventuate? The former is the broader view, and enables the Commissioner to say that Mr Smart, in the circumstances that he was in at the time, should have been aware for at least a year and maybe two that his becoming bankrupt was a possibility. The latter is a narrower approach, by which Mr Smart says that he was not aware until a few months before of the possibility of the actual bankruptcy that occurred, and he could not have been aware of the possibility of that bankruptcy any earlier. Mr Smart's history 6 In outline, Mr Smart's circumstances were these. He developed and operated a profitable real estate agency, under his own name, from 1994 until 2000, when he merged his business with another. The merger was not a success, and Mr Smart's income dropped considerably. During the period of the merged business he accumulated debts, and relied on loans from family and friends. The merger arrangement was terminated after twelve months, and in July 2001 Mr Smart set about re-establishing his own business. 7 During the years that his real estate business developed, merged and re-started, Mr Smart engaged in dealings that had financial consequences. He had been borrowing money periodically from his father since 1985, but had not been required to make repayments. In 1999 he invested in a tax minimisation scheme, taking out a loan with APT Finance and making regular interest payments on the loan. Also in 1999 he bought a home, taking out loans from a bank and his father. He tried unsuccessfully to sell the house in 2000, and in April 2001 he took out further loans from a trustee company and his father to fund renovations to the house. In June 2001 he entered a deed with his father acknowledging his liability to repay the debt that had been accumulated over the years. 8 So in July 2001, at the time that he re-started his business after the failed merger, Mr Smart had a number of financial liabilities, principally to the trustee company and his father, and sundry creditors. In August 2001 he received a claim for damages from his partner in the failed merger. In October 2001 and again in March 2002 he borrowed further funds from the trustee company. 9 In May 2002 he sold the house, and the proceeds were fully expended on repaying most of his debts, including to the trustee company, his father, his wife, his own business, and a judgment debt. 10 In August 2002 Mr Smart became aware that the tax minimisation scheme had failed, and in October he was served by APT Finance with a District Court claim for almost $114,000. APT Finance obtained a judgment debt against Mr Smart, and Mr Smart negotiated instalment repayments. He defaulted on those payments, and APT Finance served a bankruptcy notice. Mr Smart tried to borrow funds to repay the debt but was unsuccessful. He was advised to go into voluntary bankruptcy, which he did in May 2003. The Commissioner's argument 11 Relying on considerably more detail than appears in the above outline, the Commissioner says that it is as early as June 2001, when he had suffered significant financial loss, had terminated the merger arrangement, and was setting out to re-establish his business, that Mr Smart at least should have been aware that bankruptcy was a possibility. The Commissioner says that Mr Smart was at this time facing serious financial difficulties, and was actually aware of the risk that he might become bankrupt. The Commissioner relies on Mr Smart's deed with his father as some evidence of his apprehension that he faced a very uncertain financial future. 12 The Commissioner says that at numerous times Mr Smart was or should have been aware that bankruptcy was a possibility: in August 2001 when he faced a claim for damages from the merger and the prospect of legal fees; in October 2001 when he had to borrow further funds to meet expenses; in March 2002 when he again had to borrow; in July 2002 when he restructured the business. The Commissioner says that Mr Smart failed to take all reasonable steps (or, what amounts to the same thing, took unreasonable steps) to avoid bankruptcy. He says that Mr Smart made decisions that exposed him to financial risk, failed to make provision for the possibility of debt, generated creditors any of whom might have taken steps to bankrupt him, and took steps that were unreasonable in light of the bankruptcy that eventuated. He says that what Mr Smart should have done was to get advice on the merits of signing the deed with his father, refuse to sign the deed in its terms, apply the proceeds of the sale of the house differently, and not to family debts. 13 There is, the Commissioner submits, a causal nexus between the way Mr Smart managed his affairs and the bankruptcy that eventuated. For example, the Commissioner's cross-examination of Mr Smart repeatedly suggested that as Mr Smart's father was unlikely to have called in the debt that was repaid from the sale of the house, it was unreasonable of Mr Smart to pay that amount rather than to have it available for other creditors he knew of or should have anticipated at the time. Problem with the Commissioner's argument 14 At the heart of the Commissioner's position is the submission that bankruptcy is a state of being unable to pay debts when they are due, and that a person who is reckless as to their capacity to pay their debts as they fall due is not taking reasonable steps to avoid bankruptcy. 15 But a person who is reckless as to their capacity to pay their debts may never in fact be bankrupt, while a person who is very careful to avoid bankruptcy might nevertheless become bankrupt. The issue of bankruptcy does not arise in the abstract – it is asked of the particular bankruptcy that the person is in. The issue is whether the person in question took steps to avoid the bankruptcy in question. They cannot do so unless they are aware, or should be aware, that that bankruptcy is a possibility. The test is not whether a person is aware of the possibility of bankruptcy at large; bankruptcy is always the theoretical end point of any debt. 16 The logical extension of the Commissioner's position, which he put in his opening submissions, is that the possibility of bankruptcy exists at all times in business, and that a person is required at all times to take reasonable steps to avoid it. That is, at least, an unreasonably onerous test. In any event it is much more than is necessary to give effect to the intention of the legislation. The Act is concerned to ensure that licensed real estate agents demonstrate financial responsibility, principally because they will be entrusted to hold money on behalf of a client (see McDonald at [20]). It is not necessary for that purpose to show prudence and caution in all financial dealings. The test set by the Parliament is concerned with a person's bankruptcy, and attention focuses on that bankruptcy and the steps taken to avoid it. This is a considerably narrower inquiry than that proposed by the Commissioner, who has submitted that the Act is intended to identify any questionable financial conduct prior to bankruptcy. 17 The approach proposed by the Commissioner is at odds with the view taken by this Tribunal in McDonald and again in Smith v Commissioner for Fair Trading [2004] NSWADT 182. I agree with the Tribunal in Smith at [16] when it says, with its own emphasis, that a person must have taken reasonable steps to avoid the bankruptcy, not steps to avoid the circumstances, such as the incurring of debts which ultimately resulted in the person becoming bankrupt. Focus is on 'the' bankruptcy that has given rise to the disqualification and consequent licence cancellation. This is the approach that has been taken since by the Tribunal in decisions such as Davidson v Commissioner for Fair Trading [2004] NSWADT 200 and Brandt v Commissioner of Fair Trading [2005] NSWADT 26. In Davidson the Tribunal noted at [40] that because of the limited scope of the inquiry it was unnecessary to examine in detail material relating to earlier financial transactions. 18 I agree with Mr Smart that the Commissioner has confused the circumstances that, in hindsight, one can see led to bankruptcy, with the steps that the person took to avoid the bankruptcy that occurred. While a person's history of financial dealings can, in hindsight, be seen to have contributed to their later becoming bankrupt, and while they might be open to criticism for having not taken the best or most effective steps that could have been taken at the time, a large part of such an inquiry will be irrelevant for purposes of deciding whether a person took all reasonable steps to avoid the bankruptcy that occurred, as was observed in Davidson. 19 A reason for the Commissioner's promotion of the broader approach may be what appears to have been an inadvertent omission by the Tribunal when it set out the test in McDonald. That omission has opened the way for the Commissioner to make an argument that is not open on an accurate statement of the test. Section 16 of the Property Stock and Business Agents Act asks whether "the person took all reasonable steps to avoid the bankruptcy". In McDonald the Tribunal said that the relevant time for this inquiry is when the person "is aware, or should be aware, that bankruptcy is a possibility". In so saying the Tribunal failed to accurately reflect the precise terms of the Act, and omitted the definite article from before the word 'bankruptcy'. More accurately reflecting the terms of the Act, the relevant time for the inquiry is when the person "is aware, or should be aware, that the bankruptcy is a possibility". The definite article, as it appears in the Act, directs attention to the bankruptcy that has caused the person to be disqualified, and significantly narrows an attempt to look more broadly at the person's financial history. Knowledge of the possibility of the bankruptcy 20 When is the time at which the steps Mr Smart knew or should have known that his bankruptcy was a possibility? To answer this it is necessary to identify the circumstances that led directly to the bankruptcy in question. 21 Mr Smart was managing to re-establish his business during 2002. He was earning income and meeting liabilities and getting back on an even keel. While he had to answer claims from creditors, such as building sub contractors from the renovations, the claims were manageable. He made his minimum monthly credit card payments. During this period Mr Smart had no more reason to have thought bankruptcy was possible than he had had back in 2001. He denies that in July 2002, when he restructured his business, he was in financial difficulty – I agree that on the evidence he had no reason to see himself in any more financial difficulty than a small businessman earning income and managing debt. He denies that in July 2002, he knew of the possibility of bankruptcy, and on the evidence I am satisfied that he had no reason to think then that the bankruptcy that eventuated was possible, or indeed that any bankruptcy was possible beyond, as I said above, its being a possible theoretical end point of any debt. 22 Mr Smart says that the financial blow came in October 2002 when he received the demand from APT Finance. Although he had known in May 2002 that the scheme had failed, he believed then that he would have, at least, no liability to APT because the lots he had bought would be sold. 23 The demand in October 2002 told a different story. That was money he did not have at short notice, and that he could not borrow. At that point he was in financial circumstances that he knew he would have difficulty managing. The Statement of Affairs filed in relation to his bankruptcy bears this out. Of the $1.5m owing to creditors, 50% was owing to his own company and wife and a further 25% to his parents; these were manageable debts in the circumstances. The APT Finance debt represented more than a third of the remaining 25% of amount owing to creditors. Most of the other creditors known to Mr Smart at the time were friends, or related to credit cards on which he was making monthly payments. Mr Smart was not aware at the time, and indeed did not know until February 2003, of a judgment debt against him that led to an unrelated bankruptcy notice being served. 24 I am satisfied that Mr Smart's bankruptcy was principally a result of the APT Finance debt that arose from the collapse of the tax minimisation scheme. 25 In asking whether Mr Smart should have known that bankruptcy was a possibility, I consider the question from the point of view of a reasonable person endowed with the knowledge ands experience of Mr Smart (see Mc Donald at [27]). Mr Smart was an experienced business man who mixed widely in business circles. He concedes he was aware from news reports of the bankruptcy of high profile business people. He knew when he received notice of the APT Finance debt that he was in serious financial difficulty. He knew that his only hope of managing the debt was to agree to and meet instalment payments. He knew that his ability to make those payments was dependent on anticipated commission income which, although likely, was nevertheless conditional. When he received notice in October 2002 of the APT Finance debt, Mr Smart should have known that bankruptcy was a possibility. He says that he did not actually think about it as a possibility until he was threatened with it in the course of the debt negotiations in December 2002. That may be so, and little turns on the timing in the circumstances, but a reasonable person endowed with the knowledge and experience of Mr Smart should have known of the possibility in October. Steps to avoid the possibility of the bankruptcy 26 From that time, did Mr Smart take all reasonable steps to avoid the bankruptcy? This is not the same as asking whether he took all possible steps (see McDonald at [29]). The question invites an inquiry into whether there were reasonable steps that could have been taken to avoid the bankruptcy but were not taken. Such an inquiry cannot be an endless exercise in imagination, but is limited to a review of what steps would have been reasonable for the person in the circumstances to have taken. As the Tribunal said in McDonald at [20], if a person became bankrupt as a result of some wrongful or improper conduct or because of financial irresponsibility, it may be necessary to protect the public by excluding such a person from being a real estate sales person. The Act equates the taking of all reasonable steps to avoid bankruptcy with being financially responsible, and it is with this purpose in mind that the inquiry into what was done, or not done, should be made. 27 Mr Smart had managed his debts to that time, and the step he took in response to this debt was to seek time to repay it. In fact, when Mr Smart inquired, he found that the creditor was willing to accept an instalment agreement. 28 Was entering the agreement a reasonable step in light of his financial situation at the time? I am satisfied that is was. Mr Smart could reasonably have anticipated managing this debt as he had managed others. His evidence is that he believed that he could make the $1,500 a month payments that he negotiated. He expected to receive about $24,000 month in commissions and the Commissioner did not dispute this estimate; as I said above, the commissions were likely even though conditional. At the time that Mr Smart negotiated the instalment agreement he had offer and acceptance on a sale due for settlement in February that, by itself, would have realised commission income of $120,000. 29 The sale did not eventuate within the anticipated time, and Mr Smart was unable to pay the legal costs that he had undertaken to pay as part of the instalment agreement. He sought loans from family and friends without success. 30 Were there other reasonable steps that could have been taken? The Commissioner says that Mr Smart did not take the reasonable step of seeking timely advice on his financial situation. 31 Mr Smart said in his interview with an officer of the Commissioner that he sought advice in May 2003, some months after he had ceased making payments unde the instalment agreement. In evidence Mr Smart said that he sought advice sooner than this, as soon as March 2003 and even earlier, informally on a boat, on Boxing Day 2002. Mr Smart's evidence on this point is inconsistent. He protests that the circumstances of the interview with an officer of the Commissioner were oppressive, but his statement as to seeking advice in May was made only a third of the way into the interview, and the transcript does not indicate that Mr Smart was under the pressure at that stage of the interview that becomes apparent later in the transcript. In any event, in the more measured circumstances of answering the notice to show cause. Mr Smart referred again to having sought advice in May, and not earlier. 32 In evidence to the Tribunal Mr Smart then said that he had sought advice in March, and he recounts the conversation he had with an accountant. Mr Smart did not provide corroboration for this. The conversation he says took place on Boxing Day scarcely amounts to seeking advice. I am inclined to think that Mr Smart did not seek advice as to his financial situation until at least March 2003 and more likely May 2003. 33 The fact is that Mr Smart did seek financial advice, at a time when the bankruptcy was a possibility, but before it eventuated. That was a reasonable step. He could have taken that step sooner than he did, but in the circumstances it is as likely that earlier advice would simply have led to him petitioning earlier than he did for bankruptcy. I am not able to say on the evidence whether the possibility of bankruptcy was greater in May than it was in March, and I am not sure than that is relevant. As far as his inability to repay the debt was concerned Mr Smart was in no worse a financial situation in May than he had been in March. The advice he says he received in March was the same as the advice that he did receive in May – that he should consider bankruptcy as the only reasonable course available to him. There is no question on the facts, or argued by the Commissioner, that petitioning for bankruptcy himself, rather than waiting for a creditor's petition, was an unreasonable step on Mr Smart's part. There were no other reasonable steps Mr Smart could have taken. Findings and orders 34 I am satisfied that in and from October 2003 Mr Smart should have been aware for the possibility of bankruptcy. I am satisfied that in negotiating time to pay, in seeking loans to enable him to repay, and in seeking advice when he did, he took all reasonable steps to avoid the bankruptcy. I am satisfied that at the time he ceased attempting to pay the debt, because he was unable to, there were no further reasonable steps he could have taken to avoid the bankruptcy. 35 That being the case, Mr Smart is entitled to a certificate that he took all reasonable steps to avoid the bankruptcy. With that certificate Mr Smart is not a disqualified person, and the Commissioner is unable to cancel his licence on that ground. 36 Accordingly the decision to cancel Mr Smart's licence is set aside. In substitution for that decision, the Tribunal determines that Mr Smart was not a "disqualified person" pursuant to s 16(1)(c) of the Property, Stock and Business Agents Act 2002 at the time the Commissioner made his decision because Mr Smart took all reasonable steps to avoid the bankruptcy. 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.