Adams v Australian Securities & Investments Commission

Statutory framework and principles 6 In Frigger v Trenfield (No 3) [2023] FCAFC 49, Allsop CJ, Anderson and Feutrill JJ explained the context to, and the objects of, the SIS Act as follows: [206] It is important at the outset to note that the superannuation system in Australia is not purely concerned with private interests: In addition to providing for adequate levels of income in retirement for individuals it is also directed towards meeting the public policy challenges presented by Australia's ageing population. … [207] The prudent and transparent management of superannuation funds is a matter of public concern and is subject to governmental oversight. The SIS Act, together with the Superannuation Industry (Supervision) Consequential Amendments Act 1993 (Cth), was designed to "give effect to measures to substantially increase the level of prudential protection provided to the superannuation industry, and represent a substantial strengthening of the security of superannuation savings and in protecting the rights of superannuation fund members": see, the Parliament of the Commonwealth of Australia, Superannuation Industry (Supervision) Bill 1993, Explanatory Memorandum, 1. [208] These aims are reflected in the objects of the SIS Act, which are relevantly described in s 3 as follows: Supervision of certain superannuation entities (1) The main object of this Act is to make provision for the prudent management of certain superannuation funds, approved deposit funds and pooled superannuation trusts and for their supervision by APRA, ASIC and the Commissioner of Taxation. Basis for supervision (2) The basis for supervision is that those funds and trusts are subject to regulation under the Commonwealth's powers with respect to corporations or pensions (for example, because the trustee is a corporation). In return, the supervised funds and trust may become eligible for concessional taxation treatment. [209] As is evident from this description, favourable taxation treatment is intimately connected with the regulation and operation of superannuation funds. 7 For the purposes of the SIS Act, a superannuation entity includes a regulated superannuation fund: s 10(1). A regulated superannuation fund is defined in s 19 and includes a fund which has a trustee, where the governing rules provide that the sole or primary purpose of the fund is to provide old age pensions, and the trustee has given the Commissioner of Taxation an election that the SIS Act is to apply in relation to the fund. 8 Under s 17A(2) of the SIS Act, a superannuation fund with one member is a self-managed superannuation fund (SMSF) only if it satisfies certain conditions including: (a) if the trustee of the fund is a body corporate, that the member is the sole director of the body corporate or the member is one of only two directors (amongst other requirements); or (b) if the trustees of the fund are individuals, the member is one of only two trustees (amongst other requirements). 9 A fund that ceases to be a SMSF may be subject to a more stringent regulatory regime. In particular, it may then come within the definition of a registrable superannuation entity (as defined s 10(1)) so that the trustee of the fund would need to hold an RSE licence in order to be permitted to act as trustee of the fund: s 29J(1). 10 Part 15 of the SIS Act sets out rules about the eligibility of trustees, custodians and investment managers of superannuation entities: s 119. Relevantly, a person becomes a disqualified person for the purposes of Part 15 if the person is an insolvent under administration: s 120(1)(b). 11 Section 126K(1) of the SIS Act relevantly provides that a person commits an offence if the person is a disqualified person and, knowing that he or she is a disqualified person, "is or acts as a trustee, investment manager or custodian of a superannuation entity". 12 Section 126J provides for the Court to revoke or vary the disqualification, as follows: (1) A disqualified person, or the Regulator, may apply to the Federal Court of Australia for: (a) if an individual is a disqualified person only because he or she was disqualified under section 126H - a variation or a revocation of the order made under that section; or (b) otherwise - an order that the person is not a disqualified person. (2) If the Court revokes an order under paragraph (1)(a) or makes an order under paragraph (1)(b), then, despite section 120, the person is not a disqualified person. (3) At least 21 days before commencing the proceedings, written notice of the application must be lodged: (a) if the disqualified person makes the application - by the person with the Regulator; or (b) if the Regulator makes the application - by the Regulator with the disqualified person. (4) An order under paragraph (1)(b) may be expressed to be subject to exceptions and conditions determined by the Court. 13 In Re Porter, Application under the Superannuation Industry (Supervision) Act 1993 [2012] FCA 1431 at [29], Foster J observed: … I think that s 126J(1)(b) should be interpreted as conferring a broad discretion upon the Court to decide whether to make the order contemplated by the subsection and, if so, on what terms. In considering whether to exercise the discretion and, if so, how, the Court must take into account the purpose or object of the SIS Act and, in particular, the purpose or object of Pt 15 of that Act. The object of the SIS Act is set out in s 3. The object of Pt 15 is specified in s 119. Therefore, in any given case, when the Court's jurisdiction under s 126J(1)(b) is engaged, the Court is obliged to determine the application by paying due regard to the fact that: (a) Part 15 of the SIS Act is intended to set out rules governing the eligibility of persons to take up positions of responsibility with superannuation entities; and (b) The principal object of the SIS Act generally insofar as superannuation entities are concerned is to make provision for the prudent management and supervision of such entities. 14 His Honour held (at [31]) that in applying s 126J the Court was entitled to have regard to the jurisprudence developed in relation to the disqualification and reinstatement of officers of corporations pursuant to the Corporations Act, including in relation to s 206G of that Act. However, as his Honour observed, "the Court must keep in mind as the overarching consideration the purpose and object of the SIS Act and Pt 15 of the SIS Act reflected in s 3 and s 119 respectively". 15 Consistent with the principles that have developed in relation to s 206G of the Corporations Act, the applicant bears the onus of establishing that the Court should make an exception to the legislative policy underlying the prohibition in the Act: Re Porter at [32]-[33], citing Duffy; Re Westgate Ports Ltd (2010) 79 ACSR 267 at [19] (Gordon J). 16 Before lifting a disqualification, the Court generally has regard to the interests of affected persons. In the Corporations Act context, the Court has regard to those persons who would be affected if the applicant assumes positions on the board or in management and those affected persons will include shareholders, creditors and employees, and the public: Adams v Australian Securities & Investments Commission [2003] FCA 557; (2003) 46 ACSR 68 at [8] (Lindgren J). In the context of a SMSF and the SIS Act, affected persons may include creditors, existing trustees and the members of the fund. 17 The Court will also look to the circumstances in which the debts giving rise to the bankruptcy were not paid, and the extent to which an applicant has cooperated with the trustee in bankruptcy: Frigger, in the matter of an application by Frigger [2019] FCA 1730 at [12] (Jackson J); GRD v BJD [2018] WASC 374 at [12] (Master Sanderson), applying Chye v Australian Securities & Investments Commission [2012] FCA 1405 (Bromberg J).

The evidence 18 Mr Dessmann is self-represented. He provided an affidavit in support of his application. 19 The Fund was established on 20 April 2015 with the Company as the trustee. Mr Dessmann was and remains the sole member of the Fund. Mr Dessmann testified that a company controlled by him (Dessco Pty Ltd) acquired a property in Oak Park as trustee for the Company in its capacity as trustee of the Fund. According to a Property Trust Deed annexed to his affidavit, the property was subject to a mortgage. The evidence relating to the acquisition of the Oak Park property is difficult to follow as according to Mr Dessmann's affidavit the property was acquired by Dessco on 31 March 2015, some weeks prior to the establishment of the Fund. 20 Mr Dessmann testified that the Oak Park property was the sole asset of the Fund outside of limited cash deposits. 21 Mr Dessmann became bankrupt following a judgment against him in Melbourne Magistrates' Court proceedings commenced against him by his former solicitor, Mr Davey, for unpaid legal fees. One month prior to the sequestration order resulting in his bankruptcy, Mr Dessmann resigned as the sole director of the Company and appointed his son. It is not clear how that change in director was in compliance with the requirements of a SMSF as set out in s 17A(2) of the SIS Act. 22 Mr Dessmann has proceedings in the Supreme Court for orders concerning the officeholder statuses of the persons currently registered by ASIC as directors of the Company. 23 Should an order be made that he no longer be treated as disqualified, Mr Dessmann proposes to engage a qualified accountant and auditor to ensure that the Fund is prudently managed and is compliant with the SIS Act. 24 Mr Dessmann testified that should his application be allowed, he will seek to have himself appointed as trustee of the Fund in his personal capacity and to take whatever action he is required to take to ensure that the Fund is compliant. His evidence was that "[o]nce appointed as Trustee, [he] can then consider the funds position with respect to its involvement in the current proceedings". 25 The current director of the Company, Mr Burgess, provided two affidavits to the Court but given financial constraints did not seek to intervene in the proceedings. The current director brought the following matters to the attention of the Court: (a) Several years of statutory audits of the fund (as required by s 35D of the SIS Act) have not been completed; (b) The solicitor previously acting for Mr Dessmann in these proceedings holds security interests (both in his own name and in the name of a company he controls) in the sole asset of the Fund. The basis for those security interests was not readily ascertainable. A trustee of a regulated superannuation fund is prohibited from borrowing money under s 67 except in limited circumstances provided for in ss 67A and 67B of the SIS Act; (c) The only asset of the Fund was subject to a mortgage (pursuant to an arrangement that was intended to comply with s 67A of the SIS Act). The mortgagee has taken possession of that item of real property. Mr Dessmann confirmed to the Court that the property is to be sold; (d) A third party (former tenant) has made a claim against the Fund which is the subject of proceedings; (e) Mr Burgess reported the non-compliance of the Fund to the Australian Taxation Office (ATO). The ATO notified the Trustee that it was reviewing the Fund and expected to complete the audit by 22 July 2023. At the hearing of this application, Mr Dessmann was unable to provide the Court with any information as to the status of that audit. 26 Although informed of the application (as required by s 126J(3) of the SIS Act) the Commissioner did not seek to intervene in the proceedings. By email to the solicitor previously acting for Mr Dessmann in these proceedings, an ATO Client Engagement Officer advised that "the Commissioner would not be providing a letter stating we have no objection to an application". Given that the ATO is engaged in a review of the Fund and was provided with information that indicated to it that there may be breaches of the superannuation rules, the failure by the Commissioner to intervene in these proceedings is difficult to understand and reconcile with the conduct that might be expected of a model regulator. It has left the Court in an unsatisfactory position in proceedings that have no contradictor and in which the applicant is self-represented. Although Mr Redd kindly assisted the Court as amicus curiae, he was unable to provide the Court with information that might have assisted it in understanding the nature and status of the ATO investigation into the Fund. 27 The Court has no evidence that since the sequestration Mr Dessmann has not complied with his obligations to the trustee in bankruptcy. The Court had ordered the trustee in bankruptcy be served with the application and supporting affidavits and submissions, and the trustee has not appeared on the application. The Court has no evidence before it that the trustee in bankruptcy opposes or consents to the application.

COnsideration 28 The object of the SIS Act is to make provision for the prudent management and supervision of superannuation entities. The superannuation system is designed to confer concessional taxation treatment on superannuation funds that comply with the regulatory system. Under the statutory scheme, an undischarged bankrupt is a disqualified person unless the Court orders otherwise. 29 The present case concerns a fund with a single member. However, the matter cannot be determined solely based on the wishes of that member. Regard must be had to the interests of third parties and to the purpose of the SIS Act. The discretion of the Court is to be exercised in light of the statutory scheme. 30 It is accepted that Mr Dessmann has not been charged with, indicted or convicted of any offences. It is also accepted that the debt giving rise to Mr Dessmann's bankruptcy was not related to the affairs of the Fund. Those matters do not weigh against the exercise of the discretion. 31 Unlike the facts in Frigger, there are existing and potential creditors of the Fund. There are proceedings by a third party on foot against the Fund. The mortgagee has taken possession of the sole asset of the Fund and the property is to be sold. The interest of the Fund will be in any residual proceeds. At the same time, a solicitor for Mr Dessmann has security interests in that property. It is unclear to the Court what assets will remain in the Fund once the debts of the Fund are discharged. 32 The Commissioner has also notified the trustee of the Fund that the Fund is to be audited. The status of that audit is unknown. Based on the evidence before the Court, the Fund ceased to be a SMSF when Mr Dessmann ceased to be a director in March 2021. This is not a case as in Frigger where allowing the application now might avoid a breach of s 17A of the SIS Act. Given the evidence before the Court, it is also far from clear that if the application is allowed and Mr Dessmann is appointed trustee of the Fund, the Fund would satisfy the requirements for a complying superannuation fund entitled to concessional taxation treatment. 33 Based on the evidence, the Court is not able to be satisfied that the affairs of the Fund have been properly managed and proper efforts made to comply with the regulatory system. 34 There has been a failure (whilst Mr Dessmann was a director of the Company) for the Fund to prepare statutory audited accounts. Correspondence from the ATO records that tax returns have not been lodged for the income years 2019-20, 2020-21 and 2021-22. The reason for these failures have not been explained by Mr Dessmann even though he was the sole director of the Company as trustee of the Fund at least up until March 2021. 35 It appears to the Court that the value of the Fund's investment has largely dissipated. The fact that the sole substantial asset of the Fund has been possessed by the mortgagee and has unexplained security interests held over it does not satisfy the Court that the investments of the Fund have been prudently managed (cf Frigger at [37] referring to Kitay, in the matter of Frigger (No 2) [2018] FCA 1032 at [112]). 36 The Court has also been made aware of the concerns of the current director of the Company. Whilst cognisant of the fact that there are on-going disputes between Mr Dessmann and the Company (and in particular its current director), the facts set out at [25] above are consistent with documents provided to the Court. 37 The best that Mr Dessmann could proffer was that if his application is allowed, he would seek to engage an accountant to ensure the Fund is made compliant and is prudently managed in the future. Given what appears to be the parlous financial state of the Fund, and Mr Dessmann's current state of undischarged bankruptcy, the Court has concerns about the practical ability of Mr Dessmann and the Fund to ensure compliance. 38 The exercise of the discretion under s 126J of the SIS Act involves an assessment of the risk that making the orders sought will undermine the protective purposes of the disqualification regimes. The evidence before the Court does not satisfy it that if the order is made, the Fund will be managed prudently and in compliance with its obligations under the SIS Act. The Court is not satisfied that its concerns are adequately addressed by Mr Dessmann's proposal to engage a qualified accountant and auditor based on a quote for services obtained in June 2023 in circumstances where Mr Dessmann was unaware of the scope of or status of the audit by the ATO and Mr Dessmann and the Fund appear to be in a parlous financial situation. 39 The application for an order under s 126J(1)(b) of the SIS Act that the applicant is not a disqualified person in relation to the Fund is to be refused. I certify that the preceding thirty-nine (39) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Hespe.