CITATION: Smith v Commissioner for Fair Trading [2004] NSWADT 182 DIVISION: General Division APPLICANT PARTIES: Brian Smith RESPONDENT Commissioner for Fair Trading FILE NUMBER: 043104 HEARING DATES: 27/07/2004 - 28/07/2004 SUBMISSIONS CLOSED: 07/28/2004 DATE OF DECISION: 08/24/2004 BEFORE: Hennessy N - Magistrate (Deputy President) APPLICATION: Property, Stock and Business Agents Act - Real Estate agent - cancellation of licence - Property, Stock and Business Agents Act - Real Estate agent - declaration that agent is disqualified person - Property, Stock and Business Agents Act - Real Estate agent - disqualification - Real Estate agent - cancellation of licence - Real Estate agent - declaration that agent is disqualified person - Real Estate agent - disqualification MATTER FOR DECISION: Principal matter LEGISLATION CITED : Administrative Decisions Tribunal Act 1997 Property, Stock and Business Agents Act 1941 Commissioner for Fair Trading, Office of Fair Trading v Lindfield (GD) [2004] NSWADTAP 28 CASES CITED: McDonald v Commissioner for Fair Trading [2004] NSWADT 124 Coles Myer New South Wales Ltd v Dymocks Book Arcade Ltd (1996) ACL 355 APPLICANT REPRESENTATION: G Evans, barrister RESPONDENT A Wilson, solicitor ORDERS: 1. The disciplinary decisions made in relation to the applicant are set aside; 2. In substitution for those decisions, the Tribunal determines that Mr Smith 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 Smith took all reasonable steps to avoid the bankruptcy REASONS FOR DECISION Introduction 1 Mr Smith is a real estate agent who was declared bankrupt on 9 April 2001. The Commissioner for Fair Trading (the Commissioner) is not satisfied that Mr Smith took "all reasonable steps" to avoid the bankruptcy. That finding means that, at the time the Commissioner made the decision, Mr Smith was a "disqualified person" under the Property, Stock and Business Agents Act 2002 (the Act). On that basis, the Commissioner cancelled his real estate agent's licence and made certain declarations. 2 Mr Smith applied to the Tribunal to review three decisions of the Commissioner. Those decision were to: a) cancel Mr Smith's licence; b) declare that Mr Smith is a disqualified person and that he is not entitled to hold a licence or certificate of registration until three years after the date on which he is discharged from bankruptcy; and c) disqualify Mr Smith from being involved in the direction or management or conduct of the business of a real estate licensee until three years after the date on which he is discharged from bankruptcy. 3 The Tribunal's role is to determine whether the Commissioner's decisions were the "correct and preferable" decisions. (See s 63 of the Administrative Decisions Tribunal Act 1997 (ADT Act).) Jurisdictional issue 4 Because Mr Smith applied for a stay of the Commissioner's decisions soon after the decisions were made, an internal review was not conducted at that stage. The general rule under s 55 of the ADT Act, is that a person cannot apply to the Tribunal for a review of a decision unless an internal review has been finalised. There is an exception under s 55(2)(c) where it is necessary for the Tribunal to deal with the application in order to protect the person's interests and the application was made within a reasonable time of the decision being made. The jurisdictional question is whether the Tribunal has exercised its discretion to accept Mr Smith's application despite the fact that the Commissioner had not conducted an internal review of the decisions. If the Tribunal has not done so, it has no jurisdiction to review the decisions. (Commissioner for Fair Trading, Office of Fair Trading v Lindfield (GD) [2004] NSWADTAP 28.) 5 During the course of the stay hearing, I did not expressly accept the application under s 55(2)(c) despite the fact that an internal review had not been finalised. I did tell Mr Wilson, who appeared for the Commissioner, that if the Commissioner wished to reconsider his decision he would have to ask the Tribunal to remit the matter for that purpose. In case it cannot be inferred from this comment that I exercised my discretion under s55(2)(c) of the ADT Act to accept the application, I do so now. I am satisfied that it is necessary for the Tribunal to deal with the application in order to protect Mr Smith's interests and the application to the Tribunal was made within a reasonable time following the decision of the administrator concerned. Background 6 Mr Smith was first licensed as a real estate agent in 1975. From 1976 to 1988 he was employed by Asher Real Estate and was given almost complete control of its operations while he was the manager. In 1988, following a falling out between the owners of Asher Real Estate and Mr Smith, Asher Real Estate took civil action against him in the Equity Division of the Supreme Court. Asher Real Estate claimed that Mr Smith had abused his position as manager to obtain financial benefits for himself. The matter was ultimately heard over a period of 12 weeks in 1993. An interim decision was handed down four years later on 7 November 1997. In the final decision, handed down on 24 September 1999, Hume J entered judgment against Mr Smith for $311,569.26. 7 On 9 April 2001 Mr Smith became a bankrupt on the basis of a creditor's petition. He was discharged from bankruptcy on 28 May 2004. Mr Smith says that his bankruptcy resulted from his inability to meet the judgement debt together with his legal costs of over $500,000.00. Legal framework 8 Under s 14 of the Act, a person is not eligible to hold a licence if the person is a disqualified person. A person is disqualified under s 16(1)(c) if the person: is an undischarged bankrupt or is a director or person concerned in the management of a corporation that is the subject of a winding up order or for which a controller or administrator has been appointed, unless (in the case of an undischarged bankrupt) the Director-General has certified that he or she is satisfied that the person took all reasonable steps to avoid the bankruptcy; (Emphasis added.) 9 Mr Smith was an undischarged bankrupt at the time the Commissioner made his decisions on 13 April 2004. He was discharged from bankruptcy on 28 May 2004. That was after the Commissioner made his decisions and before the matter was listed for hearing. The fact that Mr Smith has now been discharged from bankruptcy means that s 16(1)(c) no longer applies to his situation. The question arises as to whether the Tribunal should review the decision in the light of the facts as at the date of the decision, or in the light of subsequent events. 10 When conducting a merits review of a decision, the Tribunal only has jurisdiction to review "the reviewable decision". (See s 38 of the ADT Act). In this case the decision was to cancel Mr Smith's licence and to declare that he is a disqualified person and that he is not entitled to hold a licence or be involved in the direction or management or conduct of a real estate business for three years after the date on which he is discharged from bankruptcy. Section 63(1) of the ADT Act makes it clear that the Tribunal is to decide what the correct and preferable decision is having regard to the material then before it, including any relevant factual material. Is the fact that Mr Smith was discharged from bankruptcy after the Commissioner made his decisions "relevant factual material"? 11 In the context of an appeal against a decision of the Administrative Appeals Tribunal, the Federal Court discussed a similar issue in the case of Aged Care Standards and Accreditation Agency Ltd v Kenna Investments Pty Ltd BC200403995 – 1 July 2004. Branson JA decided at [25] that whether or not material is relevant depends upon the nature of the decision under review. The Federal Court noted at [29] that the Tribunal's role may or may not be part of an "administrative continuum". For example, when reviewing a decision that a person does not have an ongoing entitlement to a pension or benefit, the Tribunal's role would be to take account of the continuing facts relevant to that decision. However, where the decision under review relates to the cancellation of an entitlement, subsequent events are not relevant. (See Freeman v Secretary, Department of Social Security (1988) 15 ALD 671.) The Federal Court also emphasised that when conducting a merits review of a decision, the Tribunal is obliged to address the same question as the primary decision maker. 12 In this case the decision under review relates to the cancellation of an entitlement. In such cases, subsequent events are generally not relevant. Furthermore, the Commissioner was addressing the question of whether, as an undischarged bankrupt, Mr Smith was a "disqualified person." This Tribunal would not be addressing the same question as the Commissioner was addressing if it took into account the fact that Mr Smith has now been discharged from bankruptcy. That is not to say that the Tribunal cannot receive evidence of facts that occurred after the date of the decision under review. However, to be relevant to the Tribunal's decision, that evidence must bear on the merits of the decision as at the time that it was made. 13 Consequently, pursuant to s 16(1)(c) the issue for the Tribunal is whether the Commissioner made the "correct and preferable" decision in refusing to certify that Mr Smith took all reasonable steps to avoid the bankruptcy. In deciding that question, the fact that Mr Smith has since been discharged from bankruptcy is not relevant. Meaning of "took all reasonable steps to avoid the bankruptcy" 14 Reasonable person test. In McDonald v Commissioner for Fair Trading [2004] NSWADT 124 I decided that the question of whether an applicant has taken all "reasonable steps" is to be determined from the viewpoint of a reasonable person endowed with the knowledge and experience of the applicant. 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.) The more difficult issue arises when attempting to identify the scope of the term "steps to avoid bankruptcy." 15 Steps to avoid the bankruptcy. The Commissioner submitted that Mr Smith's conduct during the course of his employment with Asher Real Estate led to him being liable for the judgment debt, and ultimately to him becoming bankrupt. By engaging in "unlawful conduct" during the course of his employment, the Commissioner submitted that Mr Smith failed to take reasonable steps to avoid bankruptcy. Mr Evans, representing Mr Smith, took a much narrower view of the steps which are relevant. His submission was that a person can only take steps to avoid bankruptcy once the possibility of bankruptcy is apparent, or should be apparent, to that person. According to Mr Evans, none of the conduct in which Mr Smith engaged during the course of his employment with Asher Real Estate, or during the course of the Supreme Court proceedings, is relevant to the question of whether he took all reasonable steps to avoid the bankruptcy. 16 Principles of statutory interpretation. The words "steps to avoid bankruptcy" must be interpreted according to their ordinary meaning. (See McDonald v Commissioner for Fair Trading [2004] NSWADT 124 at [19] and [20].) Although the same phrase has been used in several NSW statutes none has yet been judicially considered. (See Home Building Act 1989, s 40(2C); Conveyancers Licensing Act 2003, s 10(1); and Valuers Act 2003, s 9(1).) Some light can be shed on the ordinary meaning of this phrase by comparing it with similar tests in other legislation. The Queensland Building Services Authority Act 1991 uses the term "all reasonable steps to avoid the coming into existence of circumstances that resulted in. . .(becoming bankrupt)." While under the Corporations Law a director has a defence to insolvent trading if he or she "took all reasonable steps to prevent the company incurring the debt." (See s 588H(5) of the Corporations Law). By choosing not to refer to the circumstances giving rise to the person incurring the debt or the circumstances that resulted in the person becoming bankrupt, the New South Wales legislature, when enacting s 16 of the Act, expressed its preference for a narrower test. 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. 17 Conclusion. On the basis of this analysis I accept the submission made by Mr Smith's representative that 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. The circumstances which led to the debts being incurred or the general circumstances giving rise to the bankruptcy, are not relevant. Consequently the steps Mr Smith took or did not take while he was employed by Asher Real Estate, or during the course of defending himself in proceedings before the Supreme Court, are not relevant. Only the steps that Mr Smith took or failed to take in order to avoid bankruptcy are relevant. Mr Smith may have failed to take steps to avoid bankruptcy if, for example, he entered into financial arrangements in order to shield assets from creditors or claimed bankruptcy in order to avoid paying debts. Positive steps to avoid bankruptcy include obtaining financial advice, attempting to negotiate with the creditor/s and pursuing the "alternatives to bankruptcy" contained in Parts IX and X of the Bankruptcy Act 1966 (Cth). Those alternatives include debt agreements and arrangements with creditors. Since their introduction in 1996, debt agreements have become a common alternative to bankruptcy for people whose unsecured debts are less than $66,885 (as at 20 March 2003) and whose income is relatively low. Under Part X a debtor may enter into a deed of assignment, a deed or arrangement or a composition with creditors. By doing so the debtor may avoid bankruptcy. Steps taken (or not taken) by Mr Smith 18 Mr Smith's evidence was that he became aware that bankruptcy was a possibility in September 1999 when the Supreme Court handed down its final decision. He realised at that time that unless his cross-claim against Asher Real Estate was successful (which it was not) he would not be able to pay the judgement debt. In determining whether Mr Smith failed to take steps to avoid bankruptcy, the financial and property transactions in which he engaged at or around the time when he became aware that bankruptcy was a possibility, are relevant. During the period from February 1999, to April 2001 when he was declared bankrupt, Mr Smith engaged in the following financial and property transactions: a) In February 1999 he sold his residential real estate and used the proceeds to reduce his business loan with Macquarie Bank. b) In August 1999 he repaid his father in law $20,000 that he had previously borrowed to pay legal fees. c) On 10 June 2000 he sold his investment property for $145,000 and used the balance available to him of $20,000 to reduce the amount he owed in legal fees. 19 None of these transactions demonstrate a failure to take steps to avoid bankruptcy. On the contrary, they were designed to reduce his debts and not, for example, to shield assets from his creditors. 20 During the same period, Mr Smith took the following steps to avoid bankruptcy: a) In September 2000 Mr Smith consulted with his ex-wife, who was a solicitor. She attempted to negotiate a settlement with the judgement creditor's solicitor. b) On 15 December 2000 he obtained financial advice from his accountant. c) In December 2000 Mr Smith offered Asher Real Estate his share in the Lake Haven real estate business, which he then owned with his wife. There was no response to that offer. d) Mr Smith consulted with two partners from the insolvency firm Lawler Partners throughout 2000. One of those partners suggested a Part X settlement but advised that he would need a majority of creditors to agree to it. Mr Smith took the view that because he had already attempted unsuccessfully to negotiate a settlement with his creditor, there would be no point making an application under Part X of the Bankruptcy Act. e) In February 2001 Mr Smith approached the firm of Ferrier Hodgson for financial advice. On 6 March 2001 Mr Campbell of that firm attempted to negotiate settlement with the judgement creditor's solicitor. 21 On 21 March 2001 the judgement creditor served Mr Smith with a creditor's petition. The following day Mr Smith again attempted to negotiate a settlement with his creditor. Mr Smith was declared bankrupt on 9 April 2001. Conclusion 22 Mr Smith did not fail to take reasonable steps to avoid bankruptcy after he became aware that it was a possibility. He engaged in several financial transactions in order to reduce his debts. None of those transactions were designed to shield assets from creditors. The positive steps that Mr Smith took to avoid bankruptcy included obtaining financial advice and attempting to negotiate a settlement with the judgement creditor. He was not eligible to enter into a debt agreement under Part 1X of the Bankruptcy Act 1966. He was advised of the possibility of entering into an arrangement with his creditor under Part X but understandably decided against that course given the unwillingness of the creditor to negotiate. A reasonable person endowed with the knowledge and experience of Mr Smith, would not have taken or failed to take any steps which were materially different from those taken, or not taken, by Mr Smith. Orders The disciplinary decisions made in relation to the applicant are set aside. In substitution for those decisions, the Tribunal determines that Mr Smith 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 Smith 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.