Civil and Administrative Tribunal New South Wales Medium Neutral Citation: Lynch v Commissioner of Fair Trading [2014] NSWCATAD 105 Hearing dates: 14 July 2014 Decision date: 22 July 2014 Jurisdiction: Administrative and Equal Opportunity Division Before: N Hennessy LCM, Deputy President Decision: 1. The decision of the Director General of Fair Trading to refuse Mr Lynch's application for restoration of his real estate agent's licence is affirmed. 2. The decision of the Director General of Fair Trading to refuse to renew the corporation licence of Paramount Real Estate Services Pty Ltd is affirmed. Catchwords: Occupational licencing - involvement with companies in external administration - whether disqualified person took all reasonable steps to avoid the company becoming an externally-administered body corporate Legislation Cited: Administrative Decisions Review Act 1997 (NSW) Corporations Act 2001(Cth) Property, Stock and Business Agents Act 2002 (NSW) Cases Cited: Deputy Commissioner of Taxation v Saunig (2002) 55 NSWLR 722; [2002] NSWCA 390 Category: Principal judgment Parties: Craig Lynch (Applicant) in 1420109 Paramount Real Estate Services Pty Ltd (Applicant) in 1420110 Commissioner for Fair Trading (Respondent) Representation: C Lynch (Applicant in person) W Maynard (Respondent) File Number(s): 1420109,1420110 reasons for decision Introduction 1These proceedings concern two decisions made by the Commissioner for Fair Trading under the Property, Stock and Business Agents Act 2002 (NSW). The first decision was that Mr Lynch's application for restoration of his real estate agent's licence be refused (File No 1420109). The second decision was that an application by Paramount Real Estate Services Pty Ltd, (PRES) a company of which Mr Lynch is a director, for renewal of its corporation licence be refused (File No 1420110). 2Mr Lynch is a 'disqualified person' under the Property, Stock and Business Agents Act because he was, in the last 3 years, a director of an externally-administered body corporate, Paramount Finance & Investment Services Pty Ltd (PFIS): s 16(1A)(c). The 3 year disqualification period commenced in September 2012. 3The Commissioner may exempt Mr Lynch from being disqualified by certifying that "he is satisfied that (he) . . . took all reasonable steps (while concerned in the management of, or a director of, PFIS) . . . to avoid it becoming an externally-administered body corporate." In determining what reasonable steps could have been taken, the Commissioner is to have regard to "the steps that could have been taken by (Mr Lynch) . . . from the time that the financial difficulties that gave rise to the outcome first arose." Legislative scheme 4The Property, Stock and Business Agents Act provides for the licencing of individuals and corporations to carry on business as an agent, including as a real estate agent. An individual and a corporation may only hold a licence if the Director General is satisfied that the individual and each 'officer' (including a director) of the corporation is not a 'disqualified person': s 14(2) and s 16. 5The disqualification provision relevant to these proceedings is s 16(1A)(c): (1A) A person is also a disqualified person for the purposes of this Act (except for the purposes of eligibility to hold a certificate of registration) if the person: (c) is, or was at any time in the last 3 years, concerned in the management of, or a director of, an externally-administered body corporate (within the meaning of the Corporations Act) except in a case of the voluntary winding up of the body corporate 6An 'externally administered body corporate' is defined in s 9 of the Corporations Act 2001(Cth) as a body corporate: (a) that is being wound up; or (b) in respect of property of which a receiver, or a receiver and manager, has been appointed (whether or not by a court) and is acting; or (c) that is under administration; or (ca) that has executed a deed of company arrangement that has not yet terminated; or (d) that has entered into a compromise or arrangement with another person the administration of which has not been concluded. 7Mr Lynch is a disqualified person. He is not eligible to hold an individual licence and nor is PRES eligible to hold a corporation licence because Mr Lynch is a director of that corporation. 8But under s 16(2B)(c), the Director General may exempt a person from being a disqualified person by: certifying, in the case of exemption from subsection (1A)(c), that the Director-General is satisfied that the person took all reasonable steps (while concerned in the management of, or a director of, the body corporate) to avoid the body corporate becoming an externally-administered body corporate. 9Section 16(2D) sets out the circumstances to which the Director General must have regard when determining the steps that could have been taken: In determining for the purposes of subsection (2B) or (2C) what reasonable steps could have been taken by a person to avoid a particular outcome, the Director-General is to have regard to the steps that could have been taken by the person from the time that the financial difficulties that gave rise to the outcome first arose. 10The Act was amended in 2006 to include these provisions: Property, Stock and Business Agents Amendment Bill 2006. The amendments commenced on 1 March 2007. In the Second Reading Speech, the then Minister for Fair Trading, the Hon Diane Beamer, spoke of the 'intended purpose of the disqualification provisions' (NSW Legislative Assembly Hansard, Tuesday 8 November 2005). Because of the significance of property transactions to consumers, and the handling of large amounts of trust money, it is imperative that high standards of probity apply to property agents. One way of addressing this is through regulating who can obtain a licence or certificate under the Property, Stock and Business Agents Act, and specifying the grounds upon which those licences can and should be cancelled or suspended. . . . The intended purpose of the disqualification provision is to ensure that people who have demonstrated an inability to adequately manage their business, and who may put their financial needs before those on whose behalf they act, should be excluded from holding a licence. 11When explaining the provisions allowing the Commissioner to exempt a person from being a disqualified person, the then Minister said: A person should not be granted the discretion based solely on their actions after they have been served with a bankruptcy notice, because this would ignore the financially irresponsible behaviour which led to the serving of the notice 12The same reasoning applies to companies which are served with a statutory demand or winding up application. 13The test of "reasonable steps" is an objective one. Those steps must be determined having regard to the existing circumstances of which the person, acting reasonably, knows, or ought to know: Deputy Commissioner of Taxation v Saunig (2002) 55 NSWLR 722; [2002] NSWCA 390. 14When hearing an application for administrative review, the Tribunal's role is to determine what the 'correct and preferable decision is having regard to the material then before it': Administrative Decisions Review Act 1997 (NSW), s 63. 15In determining whether Mr Lynch should be exempt from the disqualification provisions, the Director-General, and the Tribunal on review, must address the following factual and legal questions: (1)When did the financial difficulties that gave rise to the outcome first arise? (2)What reasonable steps could have been taken from that time (but only during the period the applicant was concerned in the management of, or a director of the body corporate) to avoid the body corporate becoming an externally-administered body corporate. (When determining this issue the decision maker must have regard to the existing circumstances of which the person knows, or ought to know.) (3)Did the person take those reasonable steps? Evidence and findings 16Mr Lynch has been in the business of financial services and the marketing of real estate in Queensland and New South Wales since 1996. ASIC records show that since then, he has been the Director of 19 corporations. 17In 2006 Paramount Financial Services Pty Ltd (PFS), of which Mr Lynch was a director, entered into an agreement with a home building company, Choice Homes (Qld) Pty Ltd (Choice Homes). That agreement was not in evidence but the terms were said to include that PFS would introduce property owners to Choice Homes in anticipation that they would sign a contract with Choice Homes for the construction of a new home. Choice Homes paid advances on the fees that PFS was entitled to receive. Mr Troy Knight, a Director and Chief Executive Officer of Choice Homes, was a close business associate of Mr Lynch. 18By 2011, PFS owed Choice Homes more than $800,000. PFS went into voluntary liquidation on 7 November 2011. Four months earlier, on 30 June 2011, another company of which Mr Lynch was a director, Paramount Finance & Investment Services Pty Ltd (PFIS) entered into a Deed with Choice Homes. The Deed noted that: Choice has agreed to pay Paramount a fee for the introduction of Owners. From time to time Choice has paid (and will continue to do so in the future) advances on the fees that paramount is entitled to receive. 19The main term of the Deed was that: In consideration of the Parties entering into this Deed, Paramount agrees and acknowledges that the Outstanding Monies are due and payable by Paramount to Choice. 20The Deed also recorded that Paramount acknowledged that the 'Outstanding Monies' ($1,075,250) will include any additional monies due and owing by it to Choice from time to time after the date of the Deed. Like PFS, PFIS had a commercial agreement to provide marketing services to Choice Homes. Neither of those agreements was in evidence. The effect of the Deed was that PFIS took over responsibility for PFS's "debt" to Choice Homes which then exceeded $1,000,000. 21Mr Lynch did not consider the amount to be a loan that had to be re-paid. Rather, he saw it as an acknowledgment of the fact that Choice Homes was 'funding' PFIS's operations by advancing money before potential home owners had signed a contract with Choice Homes. Mr Lynch's understanding was that Choice Homes' auditors recommended that the Deed be executed. Mr Lynch says he sought advice from his solicitors and they did not advise him against executing the Deed. He was comfortable signing the Deed because Mr Knight had supported his businesses in the past. But Mr Lynch agreed that the legal effect of the Deed was that PFIS owed $1,075.250 and that this left PFIS in a situation of having to re-pay that amount if called upon to do so. 22At the beginning of 2012, six months after signing the Deed, PFIS got into serious financial difficulties. According to Mr Lynch these difficulties arose because property owners were relying more heavily on the internet and the Federal Government's "Do Not Call List" dramatically affected PFIS's call centres and business resulting in the retrenchment of about 75 staff. Mr Lynch's evidence was that Choice Homes was unhappy with PFIS's poor performance and no longer wanted to fund the agreement. PFIS was forced to look elsewhere for funding and, on 12 April 2012, entered into a similar agreement with Impact Homes Pty Ltd. 23On 10 July 2012 Choice Homes issued a Creditors Statutory Demand for Payment of Debt to PFIS for the amount of $888,862. The statutory demand advised that if PFIS wished to contest the claim, it must file an appearance in the Supreme Court within 21 days. A note to the statutory demand stated that: A failure to respond to a statutory demand can have very serious consequences for a company. In particular, it may result in the company being placed in liquidation and control of the company passing to the liquidator of the company. 24Soon after he received the statutory demand, Mr Lynch spoke to Mr Knight of Choice Homes. He told Mr Knight that there was no point proceeding because of PFIS's poor financial state and, in any case, Mr Lynch disputed the debt. At that meeting Mr Lynch says that Mr Knight told him that Choice Homes would not be proceeding with the matter. 25Mr Lynch wrote to Choice Homes' solicitor on 25 July 2012 requesting that the statutory demand be withdrawn because there was a genuine dispute about the debt. Mr Lynch added that if the claim was not withdrawn "we will file the court application and seek cost orders against your client." 26On 23 August 2012 Mr Knight told Mr Lynch for the second time that, "We won't be proceeding with the wind-up of the company." He accepted Mr Knight's word that the winding up would not proceed. Mr Lynch did not hear anything further about the matter until he received correspondence from the liquidator that PFIS had been wound up by the Supreme Court of Queensland on 7 September 2012. 27Choice Homes had served the application for the winding up order on PFIS's registered address but Mr Lynch had moved offices in April 2012. Although the mail had been re-directed, he did not receive it. If he had received the application for the winding up order, he says he would have instructed his solicitors to oppose it. 28By way of further explanation for his inaction, Mr Lynch says that he was engaged in 'crisis management' at the time. ASIC was inquiring into his affairs and 6 or 7 unfair dismissal cases had been filed against him. His legal bills were mounting. The statutory demand was merely one matter among many which required his attention. 29Mr Lynch is familiar with the effect of statutory demands. Several have been served on companies of which he has been a director. Previously he has taken action to stop them but this time he says he was 'caught unawares'. 30Mr Lynch's correspondence with the Commissioner for Fair Trading was not entirely consistent with his oral evidence and that in his written statement. In his statement Mr Lynch said he told Mr Knight on or about 20 July 2012 that the debt was disputed. He also wrote a letter dated 25 July 2012 to Choice Homes' solicitors stating that the debt was disputed. In his letters to the Commissioner dated 21 May 2013 and 10 December 2013, Mr Lynch did not say that he disputed the debt. In that letter he said, "The funder was not prepared to wait for the funds to be repaid and took action to place the company into administration." In the 10 December 2013 letter Mr Lynch said, "The funder who made the application for winding up was not prepared to negotiate for withdrawal of his application and for me to fight this in the Supreme Court would have been prohibitively expensive for legal representation." He added, "I do not believe at any time I was in a position to prevent an external administrator from being appointed." 31I accept that that was the situation. The Deed that he had signed was unambiguous. Mr Lynch had no grounds for disputing the debt. Conclusion 32There were no 'reasonable steps' that Mr Lynch could have taken after the statutory demand had been issued to avoid PFIS becoming an externally-administered body corporate. It follows that I do not accept the Commissioner's submission that it would have been reasonable for Mr Lynch to have instructed his solicitors to file an appearance in the Supreme Court within 21 days and to contest the statutory demand. 33Any steps that Mr Lynch could have taken to avoid external administration would have to have been taken when PFIS' financial difficulties first arose. Mr Lynch says that they arose at the beginning of 2012, when Choice Homes told Mr Lynch that they no longer wanted to fund the agreement. In my view, they arose before then. Those difficulties arose when Mr Lynch decided to take on the debt of a former company of which he was a director in order to continue his business. The signing of the Deed made PFIS liable for the full amount of that debt on demand. While Mr Lynch assumed that the debt would not be enforced, PFIS did not have the means to repay the debt if called upon to do so. 34When determining the applications from Mr Lynch and PFIS, the Commissioner asked Mr Lynch to provide any relevant documents evidencing the steps he had taken to avoid external administration. The Commissioner requested details of legal and financial advice, any financial or property transactions entered into in order to reduce the debt and the total amount owing to creditors by the body corporate at the time the external administration commenced. 35Mr Lynch did not provide any documentation evidencing the steps he had taken from the time the financial difficulties of FPIS first arose. For that reason, the Commissioner was not satisfied that all reasonable steps had been taken to avoid the external administration. 36The Commissioner submitted that, after signing the Deed, Mr Lynch could have taken steps to protect PFIS against the risk that the debt would be enforced. One suggestion was that Mr Lynch should have obtained an undertaking from Choice Homes that the debt would not be the subject of a statutory demand. He had obtained such an undertaking in relation to a personal guarantee. Another suggestion was that Mr Lynch should have spoken to his bank manager about some form of loan or overdraft. 37It would not have been reasonable for Mr Lynch to have sought an undertaking from Choice Homes not to call on the debt. Choice Homes would not have agreed because the effect of the Deed would have been nullified if such an undertaking had been given. 38But it would have been reasonable for Mr Lynch to have sought financial advice before signing the Deed. Mr Lynch did not provide any evidence of the financial or legal advice he sought or obtained at the time except to say that his solicitors did not advise him against signing the Deed. Significantly, Mr Lynch did not provide any evidence that he consulted either his lawyers or his financial advisors about the financial implications for PFIS before entering into the Deed. In those circumstances I am not satisfied that Mr Lynch took all reasonable steps to avoid external administration of PFIS. He is a disqualified person and is not exempt from the operation of s 16(1A)(c). 39Orders (1)The decision of the Director General of Fair Trading to refuse Mr Lynch's application for restoration of his real estate agent's licence is affirmed. (2)The decision of the Director General of Fair Trading to refuse to renew the corporation licence of Paramount Real Estate Services Pty Ltd is affirmed. ********** I hereby certify that this is a true and accurate record of the reasons for decision of the Civil and Administrative Tribunal of New South Wales. Registrar 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. Decision last updated: 22 July 2014