Pending Appeal : CITATION: Grant v Commissioner for Fair Trading; John B Grant Real Estate Pty Ltd v Commissioner for Fair Trading [2005] NSWADT 268 DIVISION: General Division FIRST APPLICANT John B Grant FIRST RESPONDENT PARTIES: Commissioner for Fair Trading SECOND APPLICANT John B Grant Real Estate Pty Ltd SECOND RESPONDENT Commissioner for Fair Trading FILE NUMBER: 053008; 053009 HEARING DATES: 19/04/2005 SUBMISSIONS CLOSED: 11/01/2005 DATE OF DECISION: 11/25/2005 BEFORE: Montgomery S - Judicial Member 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 - Real Estate agent - cancellation of licence - Real Estate agent - declaration that agent is disqualified person MATTER FOR DECISION: Principal matter LEGISLATION CITED : Property, Stock and Business Agents Act 2002 Property, Stock and Business Agents Regulation 2003 CASES CITED: FIRST & SECOND APPLICANT REPRESENTATION: M Parasyn, Solicitor FIRST & SECOND RESPONDENT M Painter, Barrister ORDERS: In relation to application number 053008:; 1. The determination that Mr Grant's licence number 123933 be cancelled and that he be declared a disqualified person for a period of 6 months is set aside; 2. In its place, the decision is made that the following conditions are to apply to the licence for a period of six months from the date of these orders: ; a) Mr Grant is not to act as a licensee in charge of any real estate agency; b) Mr Grant is not to be involved in the day-to-day management of any entity operating as a real estate agency; c) Mr Grant is not to act in any supervisory capacity in any real estate agency; d) Mr Grant is to disclose the conditions to which he is subject to any licensee by whom he is employed and such disclosure is to occur prior to the commencement of employment in a real estate agency; and ; e) Mr Grant is to provide the Commissioner with written confirmation from the licensee that he has disclosed the condition to which he is subject prior to the commencement of employment in a real estate agency. ; In relation to application number 053009:; 1. The determination to impose a monetary penalty of 150 penalty units on John B Grant Real Estate Pty Ltd is set aside. The determination under review is otherwise affirmed REASONS FOR DECISION 1 Mr Grant holds a Real Estate Agent's Licence and Business Agent's Licence. Mr Grant is the Managing Director of John B Grant Real Estate Pty Limited ("the Company"), which holds a separate Licence. Each of these has now expired. Mr Grant is the licensed director of the Company. 2 Both Mr Grant and the Company have applied for review of determinations made by the Commissioner pursuant to section 192(l) of the Property Stock and Business Agents Act 2002 ("the Act"). The Commissioner imposed a penalty of 150 penalty units (amounting to $16,500) on the Company and directed that the Company submit to six monthly audit reports and develop a financial management compliance program. The Commissioner also cancelled Mr Grant's licence and declared that Mr Grant be disqualified for a period of 6 months. 3 Both Mr Grant and the Company also sought a stay of the determinations. By consent, the two matters were heard together on 18 January 2005 and each was granted a stay with specific orders as follows: John B Grant Real Estate Pty Ltd v Commissioner for Fair Trading File No 053009 1. The determination to impose a monetary penalty of 150 penalty units on the corporation payable to the Commissioner by 10 February 2005 is stayed pending further determination of the Tribunal. 2. By consent, the direction that the corporation develop, at its expense, a financial management compliance program that fully identifies and explains its obligations in respect of money received by the corporation on behalf of another person is varied so that such a program must be developed by 31 May 2005 and a hard copy provided to the Commissioner by 10 June 2005. 3. The direction that the corporation provide certain audit reports to the Commissioner for Fair Trading is not stayed. John B Grant v Commissioner for Fair Trading File No 053008 1. The determination that Mr Grant's licence number 123933 be cancelled and that he be declared a disqualified person for a period of 6 months is stayed pending further order of the Tribunal on the following conditions: a) that Mr Grant is not to act as a licensee in charge of any real estate agency b) that Mr Grant not be involved in the day to day management of any entity operating as a real estate agency c) that Mr Grant not act in any supervisory capacity in any real estate agency Note: Mr Grant is entitled to perform duties that an employee of a real estate agency is entitled to perform including training sales staff. d) that Mr Grant is to disclose the conditions to which he is subject to any licensee in charge employed by the corporation and such disclosure is to occur prior to the commencement of employment or placement in position of the licensee in charge e) Mr Grant is to provide written confirmation from the appointed licensee in charge or any new licensee in charge of the corporation that he has disclosed the condition to which he is subject prior to the commencement of employment or placement in position of the licensee in charge. Legislation 4 The conduct of participants in the real estate industry is regulated by the Act. Section 8 of the Act requires real estate salespersons and businesses to be licensed. Additionally, section 11 of the Act requires that the licensee supervise all registered salespersons and managers employed by the licensee. The Act is protective legislation, having as its core aim the regulation of the real estate industry for the protection of consumers and the general public. 5 Section 191 of the Act sets out the grounds for the taking of disciplinary action against a licensee. Disciplinary action under this Part can be taken against a person who is or was the holder of a licence or certificate of registration on any one or more of a number of stated grounds. These grounds include: "(a) the person has contravened a provision of this Act or any other Act administered by the Minister, or the regulations under any such Act, whether or not the person has been prosecuted or convicted of an offence in respect of the contravention, (b) the person has contravened a condition of the licence or certificate of registration, (c) the person has, in the course of carrying on business or exercising functions under the licence or certificate of registration, acted unlawfully, improperly, unfairly or incompetently, (d) the person is a disqualified person or is otherwise not eligible under section 14 to hold a licence or certificate of registration, (e) the person is not a fit and proper person to be involved in the direction, management or conduct of the business of a licensee". 6 The Property Stock and Business Agents Regulation 2003 ("the Regulation") makes specific provision for the receipt of and dealing with trust monies. In particular, clause 27 of the Regulation provides for the process to be followed by a licensee who makes a deposit of money to the licensee's trust account. Clause 28 of the Regulation provides that a licensee must keep a record of daily receipts and payments of money into and out of the licensee's trust account and the nature of the record to be kept. Background 7 The Company operates out of three offices. These are located at Moorebank, Chester Hill and Glenfield. Mr Grant was the licensee in charge of the Glenfield and Chester Hill offices. Mr Grant was licensee in charge of Chester Hill from 31 May 2001 to 16 October 2003 and 29 June 2004 to 10 February 2005, and the licensee in charge of Glenfield between 14 August 1999 to 31 May 2001 and 16 October 2003 to 29 June 2004. Mr Brattoni was the licensee in charge of the Moorebank office. 8 The Company uses the Clark System of trust accounting. Rent is received by a direct deposit system through a facility called "Rent Card". The Rentcard allows rent to be paid by "paybyphone" and through "Australia Post" directly to the trust account of the Company with the Bank. 9 Where the Company receives rents by way of a direct deposit through Rent Card the bank provides a list of tenants depositing through the system and it is then the obligation of the Company to see to it that the internal recording is properly administered by posting the amount received to the appropriate owner and tenant ledger to record the status of the rent for the tenant and the funds received for the landlord. It is common ground that this process was not undertaken promptly. 10 An audit report for the year ending 30 June 2002 noted several breaches in particular the Company's late banking of trust funds. Officers of the Office of Fair Trading inspected each of the Chester Hill, Glenfield and Moorebank offices. Mr John Saminaden, an investigator of the Office of Fair Trading, conducted an inspection of the trust account books and records of the Company. Mr Saminaden produced an investigation report following his inspections. That report ("the Investigator's report") is dated 3 June 2004 and is in evidence. Neither Mr Grant nor the Company take issue with the findings in the Investigator's report. 11 The inspection of the Company's Moorebank Office revealed that between 31 January 2002 to 18 June 2002 there was 24 occasions where the Company did not bank trust creditor funds, leading to a deficiency of $74,846.32. Additionally, nine rental bond payments and two holding deposits (totalling $11,380) were criminally misappropriated. An employee was charged and pleaded guilty to misappropriating the funds. The Commissioner instituted separate proceedings against Mr Brattoni in regard to the conduct of the Moorebank office. 12 Neither Mr Grant nor the Company take issue with the Commissioner's contention that, notwithstanding Mr Brattoni's position as Licensee in charge, Mr Grant was at all material times the managing director of the Company and therefore responsible for the overall affairs of the Company, including the affairs of the Moorebank office. 13 In February 2005, Mr Frank Zappia was appointed as licensee in charge of the Company, licensee in charge of the Chester Hill office and as manager of the Chester Hill, Glenfield and Moorebank offices. He continued in that role until he was dismissed on 12 April 2005. Thereafter, alternative arrangements were made so that the conditions of the stay were met. 14 Investigations in relation to the Chester Hill office also revealed a pattern of irregularities in the Company's trust account records. In particular, the records demonstrated a pattern of aged outstanding deposits and aged unpresented cheques. The trust account records demonstrate that from month to month such irregularities were not corrected nor reconciled. It was also revealed that the Company employed three employees who did not hold a certificate of registration or licence as required by the Act. There is no contest concerning the Commissioner's contention that this was in contravention of section 8(1) or section 11(1) of the Act. Evidence and submissions 15 The Commissioner relies on the Investigator's report. Mr Saminaden provided affidavit and oral evidence and was cross-examined. Neither Mr Grant nor the Company take issue with Mr Saminaden's findings. 16 The Commissioner also relies on the evidence of Mr Zappia who provided written and oral evidence and was cross-examined. Mr Zappia gave evidence of his dealings with Mr Grant and the role that he played during his time of employment with the Company. The Audit Reports 17 The Company's Auditor is Simeoni & Co. Paul Simeoni provided audit reports in relation to the Glenfield and Chester Hill offices. It is common ground that the audit carried out on 21 March 2005 identified remained an apparent $10,510 deficiency in the accounts at Chester Hill. Subsequent audits were carried out with audit reports dated 27 May 2005, 19 September 2005 and 13 October 2005 were provided. 18 The 27 May 2005 audit report was qualified due to the state of the bank reconciliations. It stated in part: "There are many outstanding deposits and adjustments that need to be rectified. Whilst there has been great improvement, there are still issues that require immediate action. The Licensee has been notified that the record keeping of the trust requires immediate rectification. The Licensee has agreed to this, and has begun the process of cleaning the bank reconciliations totally of any discrepancies." 19 The 19 September 2005 audit report was also qualified and it identified several breaches of the Regulation. It stated in part: "The audit report is qualified based on the breaches noted during the year. The Licensee has been instructed during the year to rectify these issues and as at the 30th June 2005 has rectified many of the breaches." 20 The 13 October 2005 audit report was not qualified however it did identify a number of breaches of the Regulation. It stated in part: C 28(5)(6) The Chester Hill old trust account has not yet been closed, a few tenants are still depositing into this account. C 27(1)(b) The trust account is not reconciled on a monthly basis. The Licensee has instructed that he will close the old trust account. The Glenfield and Chester Hill bank deposits are not in duplicate and are omitting the details of the financial institution and name of the drawer. C 28(6) The Glenfield trust account has a number of unpresented cheques greater than 12 months old. The Licensee has been instructed to take appropriate action. C 28(6) Aged unpresented cheques require to be paid to the Department of Fair Trading. 21 Mr Grant's evidence was that he had mistakenly understood that he could employ persons who did not hold a certificate or licence provided an application for a Certificate of Registration was lodged with the Office of Fair Trading. He also explained that the certificate of one of the employees expired and had not been renewed. Mr Grant submits that because of his mistaken belief he erred and that does not or ought not to reflect adversely on his ability to appreciate his responsibilities as the Managing Director of the Company. 22 It is also submitted that the public is adequately protected. It is submitted that the Tribunal can be satisfied that the protection of the public could and would be attended to by Mr Grant and the Company in light of the fact that the Company is not a "one or two man" business but one with around 39 employees and had Mr Grant the tendency of being careless the incidence of this type of breach would have been more prevalent and it was not. 23 The inspection in relation to the Glenfield office revealed that the Company's trust account deposit and cashbooks, receipts and cheque stubs failed to meet the prescribed requirements. Subsequent investigations revealed a pattern of irregularities in the Company's trust account records. In particular, the records demonstrated a series of failures to balance the end of month trust account reconciliations and an apparent deficiency, as at 20 December 2004, of $22,635. 24 Mr Grant and the Company contend that, whilst the money was in the trust account the respective amount received was not posted to ledgers. As a result, the whole or part of the deposited sum of money for the day had to appear in records and this was done by classifying it at "outstanding deposits" or some other identity code. The classification "outstanding deposit" was used to describe the amount held in the bank but not allocated to ledgers. It remained in such status until allocated. Similarly, this was done with some cheques drawn, which were unallocated and held under the code of "unpresented cheques". 25 The Commissioner disputes those contentions. Mr Saminaden's evidence was to the effect that the financial documents do not support the assertion that the references to outstanding deposits could have been occasioned by the tenant's use of rent card, but rather that the notations referred to cash or cheque payments not banked. The Commissioner asserts that the trust accounts were in such a poor state that it was, and remains, unclear whether trust monies are missing. 26 There is no allegation that Mr Grant personally misappropriated money. Mr Grant has, on previous occasions, repaid any deficit to the Trust Account. There were no claims against the Compensation Fund. However, Mr Grant gave evidence that the Company is struggling financially, and that funds are tight. 27 It is the Commissioner's contention that these failures support the determination that Mr Grant is not a fit and proper person to be involved in the direction management or conduct of the business of the Company. The Commissioner also contends that the failures support the determination that the Company pay a monetary penalty of 150 penalty units, develop a financial management compliance program and provide the specified audit reports. In June 2005 Mr Parasyn, solicitor for the applicants, conceded that the audit remained uncompleted and that the status of the trust accounts had not changed since the date of hearing. Further, there remained an apparent $10,000 deficiency in the accounts at Chester Hill. It was not until the September 2005 audit that this position was shown to have been resolved. 28 Further, the Commissioner contends that Mr Grant's evidence demonstrates his lack of understanding of his obligations as the licensee in charge and as the Managing Director of the Company licensee. The Commissioner also refers to the evidence of Mr Zappia. Mr Zappia stated that Mr Grant persistently interfered with his management duties. 29 The Commissioner submits that taking into account the context of the industry, i.e. the supervision of licensed staff receiving large sums of money from the public; the broad object and purpose of the Act; and the stringent regulation of the real estate profession and in particular regulation of the receipt of and dealing with trust monies, there is no evidence capable of supporting the submission that Mr Grant has the requisite knowledge or ability. 30 The Commissioner says that this is particularly evident when one recalls Mr Grant's evidence concerning the operation of the trust account and the litany of difficulties he experienced in coming to grips with the accounts. This difficulty was exacerbated by his admitted failure to act to resolve the difficulties in a timely fashion. The Commissioner contends that Mr Grant's evidence cannot satisfy the Tribunal that matters are now in hand and that there exist systems and procedures to ensure that the trust accounts are transparent and properly managed. 31 The Company and Mr Grant dispute these assertions and ask the Tribunal to note that the business has been operating for over 25 years. They contend the public had not suffered in each instance of the matters identified in the Investigator's Report or was likely to suffer from them. While Mr Grant made it clear that he is not comfortable with computers he nonetheless completed a course in relation to the Clark System of trust accounting and attests that he now has a familiarity with the system and can operate it. 32 Mr Grant denied the evidence of Mr Zappia and the claim that he persistently interfered with the management of the office whilst Mr Zappia was there. Mr Grant outlined certain concerns about Mr Zappia's conduct in the office. The Company and Mr Grant submit that the evidence must place Mr Zappia's credibility in some doubt. 33 The monetary penalty imposed on the Company represents 75% of the maximum amount that can be imposed under section 192(1)(d) of the Act. This the Corporation submits is an excessive sum in view of the costs to be associated with the directions imposed by the Commissioner in respect to the Audit and preparation of the Financial management compliance program. 34 Mr Grant submits that his suspension and in particular the Commissioner's declaration that he is a disqualified person for the purposes of this Act, immediately renders him a person without any rights to be engaged in a real estate business either as an employee or as a officer of a corporation. 35 Mr Grant denies that he is not a fit and proper person to be involved in the management or conduct of the business of the Company. He submits that he has not failed to demonstrate the requisite competence and that to suggest that his acknowledged lack of specific knowledge of the Clark System renders him not holding the requisite competence is wrong. Mr Grant has now completed the course and is possessed of knowledge that he previously did not have and relied on others to obtain and use. His conduct and knowledge in regards to rectifying problems as those arose clearly demonstrates his competence to appreciate his obligations and responsibility in rectifying them. He says that in the circumstances the Commissioner's determination is excessive and should not stand. Findings 36 It is clear from the second reading speech of Mr Aquilina, the then Minister for Fair Trading upon the introduction of the Bill for the Act into the Legislative Assembly on 9 May 2002, that the Act is consumer protection legislation. Mr Aquilina said that the intention of the Act is "to protect consumers and their investments in their homes." In the event of ambiguity, the legislation should be given an interpretation that is consistent with that intention. He explained the Act's focus on competency in the following terms: "By ensuring that those who are granted a licence or certificate of registration demonstrate certain levels of competency, consumers are protected, consumer confidence is boosted, vocational professionalism is increased, and an economically efficient property sector ensues." 37 In my view, these issues are at the heart of these applications. The Commissioner's view is that Mr Grant does not possess the requisite degree of competence and that the protection of consumers and the general public requires that he no longer operate within the industry. I agree that the Commissioner's view was justified on the material that was available to the Commissioner at the time of the making of the determination that is under review. However, the Tribunal has material before it that was not available to the Commissioner and that material must be taken into account. 38 There is no doubt that three was a pattern of irregularities in the Company's trust account records. The time that it has taken to unravel these irregularities gives some indication of the extent of the problems. Nevertheless, I am satisfied that the public has not suffered financially as a result of those irregularities. This has been because Mr Grant has personally repaid any deficit to the Trust Account. 39 I do not share Mr Grant's confidence that it was merely a case of money that was in the trust account remaining unallocated. I agree with the Commissioner that the trust accounts were in such a poor state that it was unclear whether trust monies were missing. Mr Grant must bear the responsibility for that position. 40 It seems to me that Mr Grant does not possess the requisite degree of competence to manage an operation of the size conducted by the Company. It is not merely a lack of computer skills or lack of knowledge of the Clark System. There would be real risk that consumers might suffer financially if he were to remain in that role. Nevertheless, I do not agree that he should be prevented from playing any role in the industry. Accordingly, the determination that Mr Grant's licence be cancelled and that he be declared a disqualified person for a period of 6 months should be set aside. The issue then, is one of the appropriate steps to be taken to ensure that adequate consumers protection is in place. 41 Section 20 of the Act provides that a licence may be issued subject to conditions. Section 20(a) refers to "a condition prohibiting the holder from exercising functions under the licence or certificate of registration otherwise than as an employee of a licensee whose licence does not contain such a condition". In my view, it is appropriate in the circumstances that conditions of this kind be applied in Mr Grant's case so that he can be permitted to work as an employee. The conditions imposed on the granting of the stay are appropriate to achieve this purpose. In my view those condition should remain in place for a period of 6 months. As was noted, Mr Grant is entitled to perform duties that an employee of a real estate agency is entitled to perform including training sales staff. 42 With respect to the Company, I am satisfied that the irregularities in the Company's trust account records have been resolved to the stage that the public can have confidence in the operations of the Company provided that it continues to operate under close scrutiny. The objectives of ensuring that consumers are protected and boosting consumer confidence will be achieved through that process. In my view, the imposition of a monetary penalty would be excessive and is unnecessary. Accordingly, the determination insofar as it imposed a monetary penalty of 150 penalty units on the Company should be set aside. 43 It is appropriate that the directions that the Company submits six monthly audit reports and continue to operate a financial management compliance program remain in place. This arrangement should remain in place as originally directed so that Company will be required to submit further audit reports for the period up to and including 31 March 2006 and 30 September 2006. Orders 44 In relation to application number 053008 John B Grant v Commissioner for Fair Trading: 1. The determination that Mr Grant's licence number 123933 be cancelled and that he be declared a disqualified person for a period of 6 months is set aside. In its place, the decision is made that the following conditions are to apply to the licence for a period of six months from the date of these orders: a) Mr Grant is not to act as a licensee in charge of any real estate agency; b) Mr Grant is not to be involved in the day-to-day management of any entity operating as a real estate agency; c) Mr Grant is not to act in any supervisory capacity in any real estate agency; d) Mr Grant is to disclose the conditions to which he is subject to any licensee by whom he is employed and such disclosure is to occur prior to the commencement of employment in a real estate agency; and e) Mr Grant is to provide the Commissioner with written confirmation from the licensee that he has disclosed the condition to which he is subject prior to the commencement of employment in a real estate agency. 45 In relation to application number 053009 John B Grant Real Estate Pty Ltd v Commissioner for Fair Trading: 1. The determination to impose a monetary penalty of 150 penalty units on John B Grant Real Estate Pty Ltd is set aside. The determination under review is otherwise affirmed. 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.