CITATION: PB v Commissioner for Fair Trading [2005] NSWADT 41 DIVISION: General Division APPLICANT PARTIES: PB RESPONDENT Commissioner for Fair Trading FILE NUMBER: 043309 HEARING DATES: 3 December 2004, 4 February 2005 SUBMISSIONS CLOSED: 02/04/2005 DATE OF DECISION: 02/25/2005 BEFORE: Montgomery S - Judicial Member APPLICATION: Property, Stock and Business Agents Act - Strata managing agent - declaration that agent is disqualified person - Strata managing agent - declaration that agent is disqualified person - Property, Stock and Business Agent's Act - Strata managing agent - grant of authority - Strata managing agent - grant of authority MATTER FOR DECISION: Principal matter LEGISLATION CITED : Property Stock and Business Agents Act 2002 Clarke v Commissioner for Fair Trading [2004] NSW ADT 273. Davidson v Commissioner for Fair Trading [2004] NSW ADT 200 CASES CITED: McDonald v Commissioner for Fair Trading [2004] NSW ADT 124 Smart v Commissioner for Fair Trading [2005] NSWADT 33Smith v Commissioner for Fair Trading [2004] NSW ADT 182. APPLICANT REPRESENTATION: In person RESPONDENT K Grant, solicitor ORDERS: 1.The decision under review is set aside; 2.In substitution for that decision, I find that PB is not a disqualified person pursuant to section 16(1)(d) of the Property, Stock and Business Agents Act 2002 because he took all reasonable steps to avoid the bankruptcy. REASONS FOR DECISION 1 PB has in the past held a strata managing agent's licence under the Property Stock and Business Agents Act 2002 ("the Act"). PB's licence expired on 26 May 2004 and he applied to the Commissioner for restoration of his licence. The Commissioner's delegate refused the application on the ground that PB is a disqualified person and as such is ineligible to hold a licence. 2 Section 8 of the Act prohibits persons from carrying on the business of real estate agent, stock and station agent, business agent or strata managing agent without being the holder of the relevant licence. 3 Section 14 of the Act provides that a person is eligible to hold a licence only if the Commissioner is satisfied that the person is not a disqualified person. PB became bankrupt in June 2000 and was discharged in July 2003. Section 16 of the Act provides that a person is a disqualified person if the person was an undischarged bankrupt at any time in the 3 years preceding the application for the licence unless the Commissioner has certified that he is satisfied that the person took all reasonable steps to avoid the bankruptcy. The Commissioner's delegate refused to certify to this satisfaction. 4 PB has applied to the Tribunal for a review of that determination. The factual background 5 PB became bankrupt in June 2000 on the petition of the State Bank of New South Wales ("the State Bank"). He identified this bankruptcy in his application for the restoration of his licence. In response to a request from the Commissioner following receipt of his application PB set out some details relating to his bankruptcy. The Commissioner was not satisfied with the material provided and refused to grant PB a restoration of his licence. PB subsequently forwarded further details and documents relating to his bankruptcy however the refusal was affirmed on internal review. 6 It seems that a business operated by PB and his wife went through a difficult period resulting in the demise of their property portfolio and their home. A single property that they retained was subject to two mortgages. The first mortgagee was Newcastle Permanent Building Society with a debt of $75,000. The State Bank was the second mortgagee and forced the sale of the property. The balance of the debt to the State Bank became the subject of a bitter Supreme Court battle that spanned almost three years. 7 The State Bank succeeded in that matter and moved to bankrupt PB shortly after it was finalised. The State Bank refused various offers of settlement by PB. Throughout this period PB contended that he should have the benefit of a State Government guarantee by which the State Bank was indemnified in respect of third party debts. The State Bank insisted that the question of the Government indemnifying its losses was completely irrelevant to the issues in dispute between it and PB and that it was entitled to pursue its rights against PB regardless of any arrangement it may have with the State Government. 8 PB contends that he relied on legal advice in defending the State Bank claim and that he had always anticipated winning the case. He was legally represented throughout those proceedings and followed the advice that he was given. Issues 9 There is no dispute that PB has been bankrupt. 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 PB took all reasonable steps to avoid the bankruptcy. Can the Commissioner be satisfied that PB took all reasonable steps to avoid the bankruptcy? 10 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. 11 The Tribunal has adopted a consistent approach in more recent decisions. Its approach has been to assess what steps the applicant had taken to avoid bankruptcy after he knew or ought to have known that the bankruptcy was a possibility. As Rice JM observed in Smart v Commissioner for Fair Trading [2005] NSWADT 33, the issue of bankruptcy does not arise in the abstract. The focus must be on the steps the person in question took to avoid the bankruptcy in question, not bankruptcy at large, because bankruptcy is always the theoretical end point of any debt. 12 The test of "reasonable steps" is that of what a reasonable person endowed with the knowledge and experience of the applicant would do. I must consider two issues: (i) when did PB know, or ought he to have known, that the bankruptcy in question was a possibility? and (ii) what steps did he take to avoid that bankruptcy? 13 PB points to his efforts in selling assets and attempting to negotiate a settlement with the State Bank. The Commissioner was not satisfied that PB took all reasonable steps to avoid bankruptcy. He contends that rather than taking all reasonable steps to avoid the bankruptcy, PB's conduct compounded the problem and hastened the bankruptcy. When did PB know or ought he to have known that the bankruptcy was a possibility? 14 The Commissioner submits that PB ought to have realised that bankruptcy was a possibility many years before October 1999 however the lack of evidence about his overall financial position makes it difficult to ascertain precisely when this should have been the case. Nevertheless, it is the Commissioner's contention that any reasonable person would have seen that PB was courting bankruptcy in 1996 when the State Bank commenced legal proceedings against him. By then he had sold all his other assets and he was unable to meet the payments on the two mortgages on the Pymble property. The Commissioner contends that PB then compounded the problem and contributed to the size of the debt by engaging in a futile Supreme Court battle. 15 PB contends that he had always anticipated winning the case, but that his barrister had to withdraw following the death of his wife. He says that the period where he knew that there was a possibility of the bankruptcy was therefore quite short as judgment in the Supreme Court action was delivered on 12 October 1999 and a bankruptcy notice was served on him on 10 February 2000 with bankruptcy taking effect from 13 June 2000. He had always thought that in the event of his losing the case the State Bank would consider any reasonable offer of settlement. 16 The Commissioner has adopted a broader view of the level of awareness of the possibility of bankruptcy required than that suggested by the decided matters before the Tribunal. Rice JM specifically addressed this issue in Smart. In applying Smith he expressed the view that a narrower approach was to be preferred because the possibility of bankruptcy exists at all times in business, and to require a person to take reasonable steps to avoid it at all times would be an unreasonably onerous test. I agree with this view. 17 PB's evidence is that the State Bank was the petitioner for his bankruptcy. I have no evidence to the contrary. Other creditors were included as part of the bankruptcy process. It is clear from the evidence that PB was legally represented in the Supreme Court action. In my view he was entitled to rely on the advice given to him by his legal representatives even if that advice proved to be erroneous. I am satisfied that PB was advised that he had a reasonable chance of winning the case, and that he was entitled to proceed on that basis. There can be no doubt that there was always the general possibility of bankruptcy from the time those proceedings were commenced. However, in my view it was not until PB's loss in those proceedings that he should have turned his mind to the possibility of the bankruptcy in question. That was in October 1999. What steps did PB take to avoid the bankruptcy? 18 The second issue for the Tribunal to decide is whether or not PB took all reasonable steps to avoid the bankruptcy. The Tribunal's Deputy President Hennessy in Smith at [16] distinguished the need to have taken reasonable steps to avoid the bankruptcy 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. 19 It is therefore necessary to consider what steps PB took once he was aware of the possibility of the bankruptcy. The Tribunal authorities have consistently 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 20 It is not suggested that PB took any steps to shelter his assets. PB has given evidence of having disposed of his assets to furnish his debts. While there is no evidence to corroborate this statement I am satisfied that at the time the State Bank matter was finalised he had no assets of any significance that he could have used to pay debts. Offers of settlement 21 It seems that the debt to the State Bank was in excess of $200,000. The evidence shows that PB made offers of settlement to the State Bank. There is no evidence of any offers to the other creditors and it is probable that there were no such offers. 22 PB's initial offer to the State Bank was to pay $30,000 over 5 years. His final offer, one week before he was declared bankrupt, was to pay a total of $120,000 over a period of 15 years. These offers of settlement were rejected. 23 The Commissioner contends that an offer of $30,000 over five years to a creditor who is owed in excess of $200,000 is not a serious attempt at settlement. He further contends that PB accepts that such an offer was not realistic as can be seen from the fact that he subsequently made higher offers. The Commissioner submitted that the PB's conduct in relation to the payment of the debt was not only inappropriate, but also hastened rather than avoided his bankruptcy. 24 I agree with the Commissioner that PB's conduct probably hastened his bankruptcy. However, this is seen in hindsight. It has been observed in earlier matters that 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. Bankruptcy is, for most people, an unintended outcome of financial dealings. Deals that seem viable and realistic at the time may ultimately give rise to bankruptcy or insolvency for a wide variety of reasons. Catastrophes that could not have been predicted in any way may intervene – health breakdowns, family crises and the like. Financial settings may change significantly as they did in the early 1990s when interest rates became very high. 25 Without the benefit of hindsight PB's conduct does not appear to me to have the unreasonable character attributed to it by the Commissioner. PB clearly believed that the State Bank could have the benefit of a Government indemnity in relation to its losses. While the true situation may have been that the State Bank could only have the benefit of that indemnity after it had used all its best endeavours to recover the debt owed by PB, it is conceivable that PB's initial offer was made in the light of his belief. His commercial experience also coloured his perception. With the benefit of hindsight it is clear that PB's beliefs were unfounded and that the State Bank was not prepared to negotiate. 26 PB was not in a strong position to negotiate. Nevertheless, the initial offer he made was conceivably what he believed he could afford to repay - $6,000 each year for a period of five years. The subsequent offers extended the amount and the time to pay - he ultimately offered a total of $120,000 over a period of fifteen years. 27 In hindsight this may well have been pointless bargaining but it is necessary to assess PB's conduct in light of his knowledge and experience at the time. I do not agree with the Commissioner's view that PB was engaged in a game of cat and mouse. It seems to me that he was making an effort to reach an agreement in relation to his debt. That his efforts were naive or misconceived does not alter that fact. The Act is concerned to ensure that licensees demonstrate financial responsibility, principally because they will be entrusted to hold money on behalf of a client. It is not necessary for that purpose to show prudence and caution in all financial dealings. Taking financial advice 28 The Commissioner submits that it could be implied from the evidence that PB took no financial advice until bankruptcy was imminent and then he only spoke to staff at the Insolvency and Trustee Service Australia. PB referred to seeking legal advice but he provided no evidence that he took any financial advice. He stated however that his mother is an accountant and that before his entry into the real estate industry he too had been an accountant. 29 In my view it is probable that PB did not seek any independent financial advice. In hindsight there can be little doubt that it would have been prudent for him to do so. The introduction of a financial counsellor may have well assisted in overcoming the animosity that had developed between PB and the State Bank's solicitor. However, it does not follow that a reasonable person endowed with PB's knowledge and experience would have sought that advice. 30 It is reasonable to assume that as a qualified accountant PB would have had some knowledge of financial matters. It is conceivable that this would have given him a degree of confidence in approaching the State Bank in an effort to reach a settlement. However it does not follow that he would have had knowledge or skills in bankruptcy negotiations. His approach was misconceived and in hindsight was doomed to failure. However, in my view it was not unreasonable. Conclusion 31 PB was an undischarged bankrupt within the 3 years preceding his application for the restoration of his 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. 32 Given PB's circumstances immediately prior to the bankruptcy, and his relationship with the State Bank, it is unlikely that any other approach that he could have adopted would have altered the outcome. He clearly received advice in relation to the Supreme Court matter and relied on that advice. Even if he had been poorly advised, he was entitled to rely on that advice. He did not seek independent financial advice and his approach was overconfident and naïve. Nevertheless, I am satisfied that he made genuine efforts to negotiate a settlement with the State Bank. In the circumstances I am satisfied that there were no further reasonable steps he could have taken that might have avoided the bankruptcy. 33 That being the case, PB is entitled to a certificate that he took all reasonable steps to avoid the bankruptcy. With that certificate PB is not a disqualified person. Accordingly the decision under review should be set aside. In substitution for that decision I find that PB is not a disqualified person pursuant to section 16(1)(d) of the Property, Stock and Business Agents Act 2002 because he 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.