CITATION: McDonald v Commissioner for Fair Trading [2004] NSWADT 124 DIVISION: General Division APPLICANT PARTIES: Anthony McDonald RESPONDENT Commissioner for Fair Trading FILE NUMBER: 043098 HEARING DATES: 04/06/2004 SUBMISSIONS CLOSED: 06/04/2004 DATE OF DECISION: 06/22/2004 BEFORE: Hennessy N - Magistrate (Deputy President) 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 Administrative Decisions Tribunal Act 1997 Interpretation Act 1987 LEGISLATION CITED : Licensing and Registration (Uniform Procedures) Act 2002 Property, Stock and Business Agents Act 1941 Queensland Building Services Authority Act 1991 Coles Myer New South Wales Ltd v Dymocks Book Arcade Ltd (1996) ACL 355. Mills v Meeking (1990) 91 ALR 16 Minister for Immigration and Ethnic Affairs v Kurtovic (1990) 21 FCR 193 CASES CITED: Muir v Franklins Ltd [2001] QCA 173 (11 May 2001) O'Connell v Queensland Building Services Authority Q099-01 (20 December 2001) Pizer v Ansett Australia Ltd [1998] QCA 298 Young v Paddle Brothers Pty Ltd [1956] VLR 38 APPLICANT REPRESENTATION: J Ralston, solicitor RESPONDENT R Henderson, barrister ORDERS: 1. The decision of the Commissioner for Fair Trading to refuse to grant the applicant a certificate of registration under s 10 of the Property, Stock and Business Agents Act 2002 is set aside.; 2. In substitution for that decision, a decision is made to grant the applicant a certificate of registration under s 10 of that Act. REASONS FOR DECISION Introduction 1 In 2003, Mr McDonald applied to the Commissioner for Fair Trading (the Commissioner) for a certificate of registration under the Property, Stock and Business Agents Act 2002 (the Act) so that he could be a real estate agent sales person. The Commissioner refused to grant the licence on the ground that Mr McDonald was a "disqualified person". Anyone who has been an undischarged bankrupt in the three years preceding their application is disqualified from holding a real estate agent's licence. There is an exception if the Commissioner is satisfied that the person took all reasonable steps to avoid the bankruptcy. The Commissioner was not satisfied that Mr McDonald had taken all reasonable steps in this case. 2 The Tribunal must determine whether the Commissioner made the "correct and preferable" decision in refusing Mr McDonald's application. (See s 63 of the Administrative Decisions Tribunal Act 1997 (ADT Act).) The legal issues which arise in determining that question include: · the extent to which the circumstances giving rise to the bankruptcy are relevant as distinct from the steps the person took to avoid the bankruptcy; and · whether the test of reasonableness is an objective test, a subjective test or a combination of a subjective and an objective test. 3 A preliminary issue arose as to whether the Commissioner should have applied a previous Act, the Property, Stock and Business Agents Act 1941 (the 1941 Act) to Mr McDonald's application. The 2002 Act commenced on 1 September 2003. Mr McDonald gave evidence that someone from the Office of Fair Trading told him on 31 August 2003 that they would be accepting applications under the 1941 Act up until and including 4 September 2003, but that the applications had to be lodged by post. Mr McDonald posted his application on 4 September 2003 but it did not reach the Office of Fair Trading until the following day. Even accepting that evidence, I agree with the Commissioner's submission that a public servant cannot bind the Commissioner to act otherwise than in accordance with the law in force on the date the decision is made. (Minister for Immigration, Local Government and Ethnic Affairs v Kurtovic (1990) 21 FCR 193 per Neaves J at 196, Ryan J at 200-201 and Gummow J at 208.) Consequently, Mr McDonald's submission that his application should have been dealt with under the 1941 Act is rejected. After being asked to complete the new form relating to the 2002 Act, Mr McDonald lodged a fresh application. Findings of facts 4 It was not in dispute that when Mr McDonald went into voluntary bankruptcy on 18 November 1999, he had no other morally or legally acceptable option. The background to the financial circumstances which led to him becoming bankrupt began in 1992 when he became a director of Deesa Pty Limited (Deesa). Prior to that he had been employed in various jobs as a sales representative and a product manager. In January 1993 Deesa purchased the good will in a hotel in Taree for $160,000.00. Mr McDonald and another director ran the hotel while a third director maintained the financial records. 5 In the 1993/94 and 1994/95 financial years Deesa made losses and by June 1995 had an accumulated loss of $93,900.00. Deesa made a profit of about $48,500.00 in the 1995/96 financial year reducing its accumulated losses to $45,400.00. From mid 1997 Mr McDonald drew no wages or salary from the business but lived in the hotel with all expenses paid by the business. 6 In March 1998, after the relationship with his co-directors soured, Mr McDonald bought out their shareholding for $20,000.00 and became the sole director of Deesa. Business declined in 1998 due to competition from other venues, Council road works outside the hotel and declining returns on poker machines. 7 In December 1998 Deesa was having difficulty meeting its debts. It borrowed $30,000.00 from the National Australia Bank (NAB) to pay an overdraft from the bank and repay a previous investment loan. Mr McDonald gave a personal guarantee for this loan hoping that it would improve the financial viability of the business. The loan was secured by a fixed and floating charge over the assets of the business. 8 In January 1999, Deesa could not pay all the rent in full to its landlord, Beltion Pty Limited (Beltion). The landlord's general manager told Mr McDonald that he should look at his financial situation and introduced a prospective buyer for the business. The business was ultimately sold for $50,000.00 plus stock. $30,000.00 was paid to Beltion and $20,000 to various creditors. Several months later Mr McDonald received $20,000.00 for hotel stock. Mr McDonald requested that that sum be held in his solicitor's trust account in order to pay debts which were still owing. 9 After selling the business in early 1999, Mr McDonald returned to Sydney and obtained employment at an RSL Club. He said that soon after returning to Sydney he realised that Deesa was still unable to pay all its outstanding debts. In late May or early June he went to the Parramatta office of the Insolvency Trustee Service of Australia (ITSA) to seek their advice. They advised him to see a financial counsellor. Mr McDonald saw Mr Kevin Lane, a financial counsellor, in early June 1999. Mr Lane wrote in his notes of the interview with Mr McDonald that "There being no assets remaining in the company (other than $20,000 which as above would appear to be charged to NAB) there is strong likelihood these creditors would pursue action under the personal guarantee." 10 Mr Lane wrote to the Manager of the NAB at Taree on 29 June 1999 making an offer on behalf of Mr McDonald that, with the assistance of family members, he continue to pay the full monthly instalments of $1,417.76 on the loan of approximately $28,000.00 on the condition that the $20,000.00 in the solicitor's trust account be left alone so that other creditors could be paid out at the rate of about 70 cents in the dollar. Mr Lane acknowledged when making this proposal that it had not yet been put to the other creditors. 11 The estimate of the debts owed by Deesa in the letter from Mr Lane were not entirely accurate. Although Mr Lane estimated that Mr McDonald owed approximately $28,000.00 to NAB, in fact he owed them less than that – about $23,500. The estimate of $27,400 owed to other creditors was also incorrect. In fact he owed creditors more than that, namely $43,326.00. The letter from Mr Lane to the Manager of the NAB concluded with the following comment: Mr McDonald is firmly of the opinion that this proposal offers the best possible outcome for all concerned. Should the company be place "in liquidation", which would appear to be the likely result if a compromise is not reached, he is concerned this could also lead to him being pursued into personal bankruptcy on account of the personal guarantees given. Naturally he is anxious to avoid this situation. 12 In July 1999 NAB refused the proposed arrangement. Mr McDonald went into voluntary bankruptcy on 18 November 1999 after receiving advice from the Counselling Service. In January 2000 the NAB claimed the $20,000.00 held in the solicitor's trust account on the basis that it held a charge over Deesa's assets. ITSA, who held the $20,000.00 at the time, paid the money to NAB. Mr McDonald was discharged from bankruptcy by operation of law on 19 November 2002. Legal framework 13 Under s 10 of the Act a person cannot be a real estate sales person unless he or she holds a certificate of registration. In order to be eligible for a certificate of registration the Commissioner must be satisfied, among other things, that the applicant is not a "disqualified person". A person is disqualified under s 16(1)(d) if the person: (d) at any time in the 3 years preceding the application for the licence or certificate of registration, was an undischarged bankrupt, applied to take the benefit of any law for the relief of bankrupt or insolvent debtors, compounded with his or her creditors or made an assignment of his or her remuneration for their benefit, unless the Commissioner has certified that he or she is satisfied that the person took all reasonable steps to avoid the bankruptcy 14 There is no dispute in this case that Mr McDonald was an undischarged bankrupt at the time of the application. 15 The Licensing and Registration (Uniform Procedures) Act 2002 gives the Commissioner power to either grant or refuse an application for registration. Section 23 of that Act gives this Tribunal power to review a decision refusing to grant a certificate of registration. The parties agreed that the decision not to certify that the applicant took all reasonable steps to avoid the bankruptcy, was part of the decision to refuse to grant the certificate of registration. Meaning of "took all reasonable steps to avoid the bankruptcy" 16 Issues. This is the first time these words in the Act have been interpreted by any New South Wales court or tribunal. Two questions which arise are the extent to which the circumstances giving rise to the bankruptcy are relevant as distinct from the steps taken to avoid the bankruptcy and whether the test is subjective, objective or a combination of the two. 17 Circumstances vs steps taken. The Queensland Building Tribunal (the Queensland Tribunal) has developed some jurisprudence on the meaning of "reasonable steps" in the context of a person becoming bankrupt. Section 56AC of the Queensland Building Services Authority Act 1991 (the Queensland Act) provides, in part, that an individual is excluded from being granted certain categories of licence if he or she has become bankrupt within 5 years before applying for the licence. The exception in s 56AD(8) states that: The authority may categorise the individual as a 'permitted individual' for the relevant event only if the authority is satisfied, on the basis of the application, that the individual took all reasonable steps to avoid the coming into existence of circumstances that resulted in. . .(becoming bankrupt). (Emphasis added) 18 One important difference between the provisions in the Queensland Act and those in the NSW Act is that the reasonable steps in the Queensland Act relate to the coming into existence of the circumstances that resulted in the bankruptcy whereas the reasonable steps in the NSW Act relate to the avoidance of the bankruptcy itself. Mr McDonald's legal representative submitted that this distinction means that the Queensland Tribunal is justified in examining all the circumstances that resulted in the bankruptcy whereas the NSW Tribunal can only look at the steps taken, or not taken, by an applicant in order to avoid bankruptcy. The Commissioner's legal representative took a broader view. 19 Meaning of "reasonable steps to avoid the bankruptcy" Section 33 of the Interpretation Act 1987 provides that: In the interpretation of a provision of an Act or statutory rule, a construction that would promote the purpose or object underlying the Act or statutory rule (whether or not that purpose or object is expressly stated in the Act or statutory rule or, in the case of a statutory rule, in the Act under which the rule was made) shall be preferred to a construction that would not promote that purpose or object. 20 This provision requires a court or tribunal to take into account the purpose of the legislation even if the meaning of the provision is clear. ( Mills v Meeking (1990) 91 ALR 16 at 30-31.) One purpose of the Act is to protect sellers and buyers of homes from dishonest or disreputable real estate agents. 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. Taking all reasonable steps to avoid bankruptcy is consistent with being financially responsible. Consequently, the purpose of the Act is consistent with interpreting the phrase taking "all reasonable steps to avoid the bankruptcy" according to its ordinary meaning. 21 A person cannot be expected to take steps to avoid bankruptcy unless he or she is aware, or should be aware, that bankruptcy is a possibility. Mr McDonald says that Mr Lane advised him around June or July 1999 that he would have to consider personal bankruptcy if NAB did not accept his offer. However, Mr McDonald's legal representative conceded that the Tribunal should have regard to the steps Mr McDonald took (or failed to take) from January 1999 when he was unable to pay his rent in full and his landlord advised him he should look at his financial situation. 22 The Commissioner's legal representative disagreed. She submitted that the Tribunal should look at circumstances prior to January 1999 because the financial situation of Deesa had been declining for some time before that date. Mr McDonald was not even drawing a salary from the business during the period between mid 1997 and 1999. 23 In my view, Mr McDonald should have known know that bankruptcy was a possibility by January 1999. Whether he should have known prior to that date depends on the circumstances. Deesa experienced mixed financial fortunes from the time it bought the hotel in Taree. It made substantial losses in its first few years of trading, but managed to make a profit of in the 1995/96 financial year. From at least January 1998 the financial picture for the company deteriorated. Mr McDonald's relationship with his co-directors deteriorated and he bought out their shareholding. A combination of external factors including competition from other venues, Council road works outside the hotel and poor returns from poker machines led to the situation in January 1999 when Deesa could not pay the rent in full. 24 Given the fluctuating financial position of Deesa, the possibility that business may have picked up if external factors had not intervened and the fact that, in December 1998, Mr McDonald was successful in securing a loan from NAB, I agree with the applicant's representative that the relevant date is January 1999. That is the date at which Mr McDonald should have known that there was a possibility of him becoming bankrupt. 25 Subjective or objective test? In assessing reasonableness the Tribunal must examine all the relevant facts and circumstances. (Coles Myer New South Wales Ltd v Dymocks Book Arcade Ltd (1996) ACL 355.) In relation to the objectivity or subjectivity of the test, the Queensland Tribunal has consistently applied a decision in O'Connell v Queensland Building Services Authority Q099-01 (20 December 2001) where the Member said: . . . in approaching the question of whether all reasonable steps have been taken to avoid the relevant event, one puts oneself in the shoes of, in this case, the Applicant, his experiences, his education and his knowledge of the world. In my view the test is not an objective one, the test is not what an insolvency practitioner would have done, nor is the test as to what a professional company director would have done, it is, is what this man . . . did reasonable for him to have done. 26 While the Member states that the test is not an objective one, it has an element of objectivity in the sense that the steps taken by the applicant must be objectively reasonable even though they are to be assessed in the light of the applicant's knowledge and experience. The Queensland Court of Appeal captured the essence of the test in the following passage from Pizer v Ansett Australia Ltd [1998] QCA 298 at [15]: It makes little practical difference whether one approaches "the reasonable steps" issue from the viewpoint of the plaintiff endowed with the qualities of a reasonable person or of a reasonable person endowed with the knowledge and experience of the plaintiff. Some of the cases. deal with the issue in the first mentioned way, although strictly speaking the second mentioned way would seem to accord more literally with the statute. 27 The Queensland Tribunal has approached the test from the viewpoint of the applicant endowed with the qualities of a reasonable person. While there may be no substantive difference between the two approaches, I prefer to apply the test from the point of view of a reasonable person endowed with the knowledge and experience of the plaintiff. That approach accords with another Queensland Court of Appeal decision, Muir v Franklins Ltd [2001] QCA 173 (11 May 2001) which involved a different statutory context. In that case, the Court was asked to determine an appeal relating to an application to extend the limitation period so that a plaintiff could bring a claim for damages. One question to be determined was whether the plaintiff had taken all reasonable steps to ascertain the material facts. Thomas JA concluded at [15] that: Whether the claimant has taken all reasonable steps is to be determined from the viewpoint of a reasonable person endowed with the knowledge and experience of the plaintiff. 28 What steps did Mr McDonald take and were they reasonable? Mr McDonald had little experience in financial management when Deesa bought the hotel. His expertise and experience had been in sales. One of the other directors maintained the financial records. After January 1999, Mr McDonald took the following steps to avoid bankruptcy: 1. He sold the business on advice from the landlord when he was having difficulty paying the full amount of the rent. 2. He used the proceeds of the sale to pay debts owing to creditors. 3. He placed the proceeds from the sale of stock into his solicitor's trust account so that it could be used to pay creditors. 4. In late May or early June, after obtaining employment, he sought advice from ITSA. 5. He followed ITSA's advice and went to see a financial counsellor in June 2003. 6. He took the advice of that counsellor and made an offer to NAB which would potentially have resolved his financial situation without going into bankruptcy. NAB rejected that offer. 29 Mr McDonald is not required to take all possible steps to avoid bankruptcy, but rather all reasonable steps to do so. ( Young v Paddle Brothers Pty Ltd [1956] VLR 38 at 42.) In my view the steps he took were consistent with the steps a reasonable person, endowed with Mr McDonald's limited knowledge and experience, would have taken to avoid bankruptcy. Orders 1. The decision of the Commissioner for Fair Trading to refuse to grant the applicant a certificate of registration under s 10 of the Property, Stock and Business Agents Act 2002 is set aside. 2. In substitution for that decision, a decision is made to grant the applicant a certificate of registration under s 10 of that Act. 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