Corporations Law - Winding up - Liquidators - Other matters - Obligation of directors to submit report to liquidator - Factors to be taken into account in determining what constitutes a "reasonable excuse".

Re Nominee Investment Services Ltd [1976] 1 NZLR 74; Ganke v Corporate Affairs Commission (1990) 8 ACLC 478, referred to.

Respondent: Commonwealth Director of Public Prosecutions

Judgment Number: [2001] TASSC 6

AUSTRALIAN SECURITIES AND INVESTMENT COMMISSION

1 This is an appeal from the conviction of the appellant on a charge of failing to submit a report as to affairs to a liquidator in breach of the Corporations Law ("the Law"), s475(9) in that on 9 March 1999 and continuing, the appellant did, without reasonable excuse, contravene that section in that he failed to submit to the liquidator of D W & I M Tapping Pty Ltd ("the company") a report as to the affairs of the company in the prescribed form no later than 14 days after the making of the winding up order in relation to the company on 23 February 1999.

"(1) There shall be made out and verified by a statement in writing in the prescribed form, and submitted to the liquidator, by the persons who were, at the date of the winding up order or, if the liquidator specifies an earlier date, that earlier date, the directors and secretary of the company a report in the prescribed form as to the affairs of the company as at the date concerned."

"(9) A person shall not, without reasonable excuse, contravene a provision of this section other than subsection (7)."

Subsection (7) is not relevant for present purposes.

3 The appellant and Mr Ian Tapping were directors of the company on the day it was wound up and the liquidator, Mr Wood, appointed. The appellant was physically present in the Federal Court when the order was made. He had been a director for 15 months in 1991 - 1992 and was re-appointed in June 1994. According to the undisputed evidence of the appellant and Mr Tapping, there was a clear division of responsibility between them in respect of the running of the company. In his evidence, the appellant said:

"Well, I would like to start off by saying that I was involved with Mr Tapping's company - start in 1990 or thereabouts. I became involved through my own business, which is that of a finance broker, and around about 1990 I approached Mr Tapping, who was then secretary of the Corporate and Housing Association, for a loan on behalf of a client. Mr Tapping advised me at the time that he had just enough money to satisfy my client's requirement, and at the same time he advised me of the problems that he was having with operating his business. I offered my services to him, to see if I can assist him in getting his business going. And, basically what the problem was (was) that Mr Tapping was obtaining funds with the aid of a government guarantee, and the government at the time imposed a levy or a charge of one and a half per cent in respect of providing that guarantee. I became involved in lobbying the then Treasurer, Mr Ray Groom - I think it was. And, I was successful in having that fee reduced to half a per cent. And during the course of my involvement, Mr Tapping advised me that his business was - his Co-operative Housing Business was going down, and I suggested to him that perhaps he could utilise, or start a private fund because he had clients who were seeking to invest money. And, that's how D W and I M Tapping Fund started. I believe it was in 1991/92, I am not exactly sure. Initially I provided Mr Tapping with people who wished to borrow, and he provided the funding through his clients. As the business grew, it became apparent that Mr Tapping couldn't satisfy the requirements to his clients, from his accounting business, and we placed advertisements in newspapers seeking funding. In 1994, Mr Tapping asked me if I wanted to become a director of his company, and as a consequence of my dealings with Mr Tapping up to that time, I found him to be a impeccable, honest man. Never has a cross word, I saw no reason why I should refuse and I agreed. Our association continued as before. In other words, he conducted the business of assessing borrowers who I introduced, and he simply ran the D W & I M Tapping mortgage fund, as he has run the Co-operative Housing business prior to that time. My involvement with the business was basically to bring in extra funds through advertising. And also to chase people who were late in paying. Mr Tapping ran his business from 150 Collins Street, right up until May - mid May 1997. And the reason why he moved to Chapel Street was that he was accosted by four bandits, who threatened him. It was an extortion attempt, and he was man handled, and I urged him to move his office to 77 Chapel Street at that time. And, as a consequence of that he moved his office to 77 Chapel Street, but he continued to administer the fund as he had done beforehand. I am simply wishing to point out that I - that there a delineation of roles in business. I provided the people who wished to borrow the money, Mr Tapping assessed their suitability and he conducted all the financial affairs of the company."

The appellant, who conducted his own case, called Mr Tapping and led the following evidence from him:

"Could you explain to the court my role in the fund? ... Yes, your role was a - procuring the home loan applicants and once you had procured them I vetted all the information and a decision was made yeah or nay.

Who had the sole role of making decision as to loan application approvals? ... I did.

Who had the sole role of running the financial accounts of the fund? ... I did."

"Mr Jovanovic did not have any part of the accounting, apart from several times I asked him to follow up collections."

The appellant was not a shareholder of the company. It was common ground that prior to Mr Woods having been appointed provisional liquidator in December 1998 and subsequently liquidator in February 1999, he had in October 1998 reviewed the company's affairs with a view to determining its solvency and had procured information and documentation from Mr Tapping. Mr Woods claimed at first that the appellant had provided files and documents in respect of lendings from the company to clients and when challenged said, "either you provided it or on your instructions they were provided". The appellant put it to Mr Woods that he did not provide him with any files and at no stage instructed anybody to provide him with any files. Unfortunately, the appellant, without waiting for an answer to that suggestion, proceeded to ask two further questions, putting it to Mr Woods that shortly after the initial discussion, he had left the room and Mr Woods carried on the review with the assistance of Mr Tapping. Mr Woods agreed to both of the last two propositions but the first remained unanswered. It was established at the trial that the report was not filled in or provided to the liquidator by the appellant prior to 9 March 1999. In fact, it was not until 9 December 1999, five months after the issue of the complaint herein on 7 July 1999 that a report on the prescribed form was lodged with the liquidator. On that form, the appellant wrote against question 1 words to the effect:

"Whilst I have no direct personal knowledge in respect of this question, I endorse fully statement by Ian Tapping in respect of this matter in accordance with the advice given to the ASIC under oath and endorsed by Ian Tapping."

He wrote similar words in respect of questions 2 - 9 and the schedules. He signed a certificate on the form that the particulars contained in the report were true to the best of his knowledge and belief.

4 The form is a standard form which is required to be completed in varying circumstances including, as here, the appointment of a liquidator by the Court. It is very detailed. It requires information to be set out in schedules as to (question 1) the valuation (whether cost or book value), and estimated realisable value of the following assets - interest in land, debtors, cash on hand or at bank, stock, work in progress, plant and equipment and other assets. Questions 2 - 9 call for similar valuations and estimates in respect of assets subject to specific charges, less amounts owing, amounts payable in advance to secured creditors (including tax instalment deductions), amounts owing on debenture or floating charge, preferential claims, partly secured creditors, unsecured creditors, contingent assets and contingent liabilities, resulting in an estimated deficiency or surplus. Details of share capital issued and paid up is also required by the form. Each of the schedules is quite detailed.

5 When cross-examining Mr Woods, the appellant sought to establish that the liquidator had prior knowledge of the affairs of the company because of his review directed at its solvency, that he had a detailed report from Mr Tapping and that he had access to transcripts of examinations on oath of both Mr Tapping and himself conducted by officers of the respondent Commission in October 1997 concerning the affairs of the company demonstrative of the appellant's lack of detailed knowledge of them. He also sought to establish the amount of knowledge the liquidator had from a report of a previous administrator of the company, Mr Green, who at the time of liquidation was in possession in Sydney of the books of the company and which books the respondent Commission had later taken steps to retrieve. It seems clear on the evidence that prior to the expiration of the 14 days from the winding up order, these books were not available to the appellant but for some time thereafter they were in the possession of the Commission and, by 4 May 1999, in that of the liquidator. The prosecutor objected to this line of questioning and the learned magistrate ruled it irrelevant on the basis that the statutory obligation of providing a report lay on each director and the amount of information available to the liquidator could not relieve the appellant of his obligation to submit the report, nor, in the magistrate's view, was it relevant to any reasonable excuse for his failure to do so.

6 On 14 April 1999, Mr Johnson, an investigator of the respondent Commission, wrote to the appellant drawing attention to the Law, s475(1), and giving notice requiring the report to be delivered to the liquidator within 14 days of receipt of the letter. On 26 April 1999, the appellant addressed a letter to Mr Garrison, the respondent's Regional Commissioner, protesting his non-involvement in the day to day running of the company, its banking or its accounts and his trust and reliance in and upon Mr Tapping. He asserted that he could not contribute anything further to the statement and said inter alia:

"So although I wish to fulfil my statutory obligations, I do not wish to conjure up farcical scenarios which may be the subject of protracted legal posturings.

I advised your Mr Johnson when he served me with correspondence dated 14th April 1999 but he refused to discuss the matter.

It seems rather strange that although the ASIC has been entrusted by Parliament to regulate Corporations, to me, it seems intent only to prosecute."

This drew a response from Mr Garrison on 4 May 1999 that the respondent did not regard the appellant's lack of knowledge of the company's affairs as a reasonable excuse for failing to complete the report. He said:

"As to your access to the books of account of the company, you are entitled to request access to those books, presently held by the liquidator, to facilitate the preparation of a report as to affairs."

He also repudiated the suggestion that the respondent seemed intent only to prosecute.

7 On 5 May 1999, the appellant sent a lengthy and somewhat acrimonious letter to Mr Garrison concerning the respondent Commission's conduct of investigations into the company's affairs and concluding, "I believe that it would be appropriate to meet face to face to deal with your concerns and requests". To this Mr Garrison replied on 10 May 1999, saying inter alia:

"If you wish to adopt the report submitted by Mr Tapping as your own report as to affairs, then you are free to do so. You should understand that you must actually submit the report, and it is a matter for you to be satisfied that Mr Tapping's account of events is appropriate. You assume responsibility for the contents of your report."

He took issue with the balance of the appellant's last letter and concluded, "I do not propose to meet with you." On 7 July 1999, the prosecution was launched. On 9 December 1999, the report, filled in as I have already indicated, was lodged with the liquidator by facsimile. On 10 December 1999, the liquidator wrote to the appellant:

"I am in receipt of your facsimile dated 9 December 1999 (your reference 25 Liquidator 11) which arrived at this office at 5.25pm yesterday.

You have not completed the prescribed Form 507 but have caused to be written on three of the pages of that form, words to the effect that you have no personal knowledge in respect of the information required and that you endorse the statements made by Ian Tapping.

Please note that such a statement is not acceptable to me in that as a director of the company you are deemed to be fully cognisant of the company's financial and other affairs. You cannot baldly assert that even though you are a director of the company, you have no knowledge of its financial position.

Should it be that you are aware of the company's affairs and agree that the Form 507 submitted by Mr Tapping is correct, then you are required to at least advise me to that effect."

"I refer to your correspondence dated 10 December 1999.

I confirm your statement that it is not acceptable to you that as director of the company I am deemed fully cognisant of the company's financial and other affairs.

To the extent that I am aware of the company's affairs, I agree with the Form 507 submitted by Mr Tapping and you are so advised."

He then followed this up with a letter of 22 December 1999 where he said:

"I refer to your correspondence dated 10 December 1999.

In reference to your request, and to the extent of my awareness of the Companies [sic] financial affairs, I agree that the Form 507 submitted by Mr Ian Tapping is correct."

8 The Law clearly provides that a breach of s475(1) is a continuing offence (Leydon v Forest (1980) 23 SASR 364, Ganke v Corporate Affairs Commission (1990) 8 ACLC 478). It "is an offence which continues so long as the non-compliance without reasonable excuse continues" (Leydon v Forest (supra) at 376). Section 475(1) imposes an obligation which is automatic on the making of the winding up order and no requirement of notice is imposed (Ganke v Corporate Affairs Commission (supra) at 482). The onus of establishing the existence of a reasonable excuse lies upon the person charged (Ganke v Corporate Affairs Commission (supra) at 483). As to what constitutes a reasonable excuse, the High Court in Corporate Affairs Commission (NSW) v Yuill [1991] HCA 28; (1991) 172 CLR 319 held that considerations such as the privilege against self-incrimination and legal professional privilege did not constitute a reasonable excuse.

"'Reasonable excuse' more aptly refers to any physical or practical difficulties in complying with a requirement under [s475]" (Per Dawson J at 336).

See also Australian Securities Commission v Ampolex Ltd (1995) 85 A Crim R 240 at 254 - 255. In some circumstances ignorance of matters requisite for the report has been held to excuse the provision of it. In Re Nominee Investment Services Ltd [1976] 1 NZLR 74 where the court was concerned with differently expressed obligations and where provisions existed permitting company officers to be excused by the court from compliance with similar requirements, O'Regan J said at 75 - 76:

"... in the circumstances I would have directed that the applicant be excused from submitting and verifying the statement. In Re Columbian Gold Mines (1894) 42 WR 624 Vaughan Williams J in dealing with an application similar to the present one, pursuant to s7 of the Companies (Winding-up) Act 1890 (which is identical with out s231), said:

' ... the registrar must not in future make such orders unless he first satisfies himself that the person against whom the order is made has the materials for making the statement' (ibid).

Re New Par Consols [1898] 1 QB 573 was also a case having to do with the same section. In that case, Lord Russell of Killowen CJ observed:

'It is clear, upon looking at this section, that the object is to get at the persons who have the information which the Court requires for the purposes of the winding-up.' (ibid, 576).

These observations accord with the view I took on studying the section. The applicant has not the information or the materials for making the statement and accordingly should not be required to do so."

9 Ignorance of this kind does not, however, necessarily constitute a reasonable excuse. In Re Indopal Pty Ltd (1987) 5 ACLC 278, McLelland J said at 281:

"... the mere circumstance that information required for the purposes of a report pursuant to [section 475] is not in the personal possession of the directors or secretary, but is kept by someone else, eg an accountant, would provide no legitimate basis for the exclusion of such information from the required report. It is unnecessary to consider what the position would be if the officers concerned could prove that there was no way in which they could obtain the necessary information: that has not been shown to be the case here."

Consistently with the attitude expressed in Re Nominee Investment Services Ltd (supra), however, I think it is clear that the appellant's failure to complete and lodge the report within the initial 14 days was reasonably excused by his undoubted ignorance of the day to day operations of the company and his inability to access the books of the company which were then in the possession of the earlier administrator of the company, Mr Green. I think it was clearly impossible for the appellant to have provided meaningful answers to the questions posed in the prescribed form given his unchallenged evidence about his involvement with the company and his inability to view the books at that time. The learned magistrate, when finding the complaint proved, said:

"[The appellant] has sought to rely upon the reasonable excuse provision, in as I would understand it, two ways. The first is the way that I suggested to him, that he was ignorant of the affairs sufficient to enable him to provide such a report, and I don't understand him to have disclaimed that proposition, even though he disagreed with my whole prophases [sic] that it was the only one. But he also plainly relies on the proposition that he sought ASIC's assistance in that he tried to talk to Mr Johnson and Mr Garrison in order to get the information that he says that he needed arising out of his ignorance of the material that the report required him to provide. Well, the simple answer is, it was too late. By that time the fourteen days was [sic] up and the defendant hasn't given a jot of evidence other than ignorance itself in relation to why he didn't do what he was obliged to do by the 9th March. Now, I think that the position in relation to what can constitute a reasonable excuse is clear. Mere ignorance can simply not be accepted as a reasonable excuse. In any event, the burden of proving it lies on a defendant, and the defendant has fallen a long way short of satisfying me on the balance of probabilities that he was so ignorant of the affairs of the company that he could not provide a report in the prescribed form within the fourteen day period."

With respect, I think this finding was clearly contrary to the evidence. There was virtually no evidence from which any particular areas of knowledge on the part of the appellant within the 14 day period could be inferred and having regard to the unavailability of the books, he had no means by which he could reasonably comply with the requirements of s475 in any meaningful way.

10 A more difficult question arises in respect of the question whether his failure to lodge the return prior to the commencement of the prosecution in July 1999 was the subject of a reasonable excuse. This question was not addressed by the learned magistrate. On several occasions during the course of the trial when ruling on the admissibility of evidence, the learned magistrate defined the issue as whether the appellant had lodged a report in the prescribed form within 14 days of the date of the winding up order and, if not, whether there was a reasonable excuse for his failure to do so. On one occasion he said "The situation is very plainly on the section, as it currently reads, an obligation that falls on both or all the directors, regardless of their actual knowledge". When asked by the appellant whether or not it was suggested a director must give a report even though he has no knowledge, the learned magistrate replied in the affirmative and when asked "How could that possibly be?", said "Because you are deemed to have knowledge and because the relevant section says that you must". In an affidavit filed on the hearing of the appeal, the appellant deposed to having provided to the administrator, Mr Green, a report in the prescribed form on 11 November 1998 which he had not answered specifically but in which he had asserted "I refer you to Mr I Tapping in respect of the matters required as I have no direct knowledge and to the extent of my knowledge I will accept the information he provides". The fact that such a form had been submitted to Mr Green was reported to Mr Woods by the appellant on 5 January 1999. These documents, together with numerous other documents, were, at the hearing of the complaint, in a file which the appellant sought to place before the learned magistrate but it is clear that the appellant's ignorance of court procedures and his bewilderment at the latter's adverse rulings militated against his using such material to his advantage. It is very unfortunate that the officers of the respondent Commission failed to meet with the appellant with a view to procuring a report in a form which Mr Garrison's letter of 10 May 1999 suggested would be acceptable to the respondent and which appears ultimately to have been accepted by the liquidator, a form which does not differ materially from that provided to the administrator, Mr Green, in November 1998. There appears to have been a breakdown in communication occasioned, perhaps, by the challenging if not intemperate tone of the appellant's correspondence with Mr Garrison. Had such a report been furnished at about that time, it seems unlikely that a prosecution would have ensued. Unfortunately, however, a complaint was laid and little purpose seems to have been served by it. What could constitute a reasonable excuse depended on all the circumstances of the case. The magistrate's rulings, in my view, too narrowly confined the material which was relevant to the issue. Because of them, the unrepresented appellant was unable to place before the Court evidence by which the reasonableness of his excuse could be evaluated and which was certainly relevant to the disposition of the case in the event that the complaint was found proved. In my view, the fact (if it be a fact) that the liquidator had as much information about the company's affairs as the appellant suggested in those questions he managed to put in cross-examination was not irrelevant to the reasonableness of his excuse for not lodging the requisite return and the fact that the books of which the appellant, on the evidence, had no intimate knowledge were already in the hands of either the liquidator or the respondent Commission should also have been taken into account in determining the reasonableness of the excuse. The apparent endeavours of the appellant, adverted to by the learned magistrate when finding the complaint proved, to talk to Mr Johnson and Mr Garrison "in order to get the information that he says he needed arising out of his ignorance of the material that the report required him to provide" were not taken into consideration but dismissed because the initial period of 14 days had expired. They, too, should have been taken into account in determining the reasonableness of the excuse thereafter. At the end of the day, I am left with the distinct impression that the trial miscarried because these factors were not allowed to be canvassed or assessed and that there was further material such as the lodgment of the report with Mr Green which the appellant was effectively prevented from putting before the Court. Accordingly, I propose to allow the appeal and to quash the conviction and sentence. I am unable to say that the appellant did or did not establish, nor could or could not have established, a reasonable excuse for his inaction and that only leaves open the course of remitting the matter for retrial before another magistrate. I invite the complainant to consider carefully the utility in proceeding further. It is unnecessary to deal with the numerous other grounds of appeal raised by the appellant as, even if successful, they would not produce a different result in terms of disposition.