Settlement Agents Supervisory Board and Strand Settlements Pty Ltd [2005] WASAT 350 (5 May 2005)

Settlement Agents Supervisory Board and Strand Settlements Pty Ltd [2005] WASAT 350 (5 May 2005) - WASAT 2005 case summary — Zoe

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1 Strand Settlements Pty Ltd, a licensed settlement agent, operated within the Roy Weston Real Estate Group. The franchisees of that Group owned units in the unit trust through which distributions of Strand's profits were made on an equal basis amongst unit holders. On 25 February 1999, the Strand board resolved to restructure the unit trust.

2 Once the restructure of the trust had taken place, a different system of allocation of units in the trust was implemented. The new annual unit distribution method included consideration of how much business the unit holder would be likely to bring to Strand Settlements Pty Ltd. This involved financial forecasting based on a number of factors to predict the unit holder's likely future rate of referral of business to Strand.

3 The question for the Tribunal to decide was whether this method of distribution constituted the giving of a reward for the referral of business contrary to s 44(8) of the Settlement Agents Act 1981 (WA); what is commonly referred to as a "kickback".

4 The Tribunal found as a question of fact that Strand's distribution to three unit holders, Elmont, GRQ and Maranatha, was based partly on historical data including what settlement agent business had been referred by each of those unit holders to Strand in the previous year. The Tribunal noted that this applied to distributions to all unit holders; the three named were merely representative.

5 As the distribution of Strand's profits during the relevant years was based in part on reference to a unit holder's previous referrals of business to Strand, the Tribunal found that it amounted to a reward for referral of settlement agent business (or a kickback) and was therefore in breach of s 44(8) of the Settlement Agents Act 1981.

6 As there was a breach of s 44(8), the Tribunal found that there was proper cause for disciplinary action against the respondent under s 84 of the Settlement Agents Act 1981. The Tribunal imposed a fine of $8250 and ordered the respondent to pay the applicant's costs of $10 350.

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33 In its oral submissions, the applicant explained that there are no allegations pertaining to the 2000-2001 financial year as the conduct in question is related to the distribution of profit and in that financial year Strand suffered a loss. Consequently there was no profit to distribute.

34 The applicant alleges six breaches of s 44(8) of the Act by Strand spread over the three companies, Elmont, GRQ and Maranatha in two relevant financial years. If any of these allegations are found to be proved, the applicant contends that there will be proper cause for disciplinary action under s 84 of the Act.

35 Mr O'Sullivan, counsel for the applicant, explained that the object and purpose of the Act is to prevent settlement agents' work being offered or sought for reward. The applicant contends that when this is prevented, there will be no interference with the open and free competitive market for settlement services so that clients are protected from backdoor payments which may distort the system and create conflicts of interest.

36 The applicant argues that Strand sought to put in place a scheme to encourage the Unit Holders to refer business to Strand. This aim was implemented by the Restructure. The purpose of the Restructure was purely commercial. Profit for Strand was down and this, argued Mr O'Sullivan, is evident from the general manager's reports and financials which include the directors' opinions. Mr O'Sullivan maintained that the evidence of the applicant's witness, Mr McGrade, also supports this view.

37 The general manager's reports and financials act as a record of the financial situation of Strand at the relevant time and make several references to conversion ratios. Mr O'Sullivan pointed out that past minutes of Strand's board meetings also make references to these conversion ratios. According to Mr O'Sullivan's oral explanation, a conversion ratio works in the following way: a franchisee (who is a Unit Holder) completes 100 sales transactions within a month and 90 of those transactions are referred to Strand for settlement. As a result of those referrals, Strand completes the settlements so that the conversion ratio is 90% because 90 out of the 100 possible settlements have gone to Strand. The conversion ratio acts as the carrot to get those extra referrals to Strand (T7: 4.5.05).

38 Mr O'Sullivan argued in his oral submissions that at Strand's board meeting held on 25 February 1999, there was a motion by Mr Pilling, the managing director of Strand, that the unit distributions of the Trust to Unit Holders be based on the level of discounts given to clients. It was suggested at this meeting that the levels of discount should then be adjusted in accordance with the Group's budgeted projections for the ensuing year.

39 Mr O'Sullivan argued that under the Restructure when Strand was considering the number of units to be distributed, the method used to calculate the base of the conversion ratio took into account any previous referrals from the Unit Holder to Strand. The applicant submitted that as a result of the use by Strand of this historical data in determining unit distributions, a clear contravention of s 44(8) of the Act arises, as the licensee is paying, or giving, a reward to a person referring to the licensee any business involving the performance of the functions of a settlement agent.

40 The applicant submitted that although Strand says it calculates its conversion ratios on the basis of forward projection, this forward estimation of referrals remains based, in part at least, on past statistics. Forward projections are usually framed on an historical basis. The exception to this would be where a franchisee is in its first year of joining the Group.

41 Mr O'Sullivan explained that letters from Mr Pilling dated 23 March 1999 and 6 April 1999 stated that the number of units to be distributed to current Unit Holders would be affected by three main elements:

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46 Mr Panos, on behalf of the respondent, introduced the respondent's oral submissions with general observations about unit trusts. He stated that unit trusts are quite widely used in the business of settlement agencies; they have proliferated over the years and become commonplace. He submitted that the Tribunal should take into account the recent occurrences and changes of culture in the settlement industry, including the ongoing progression of business strategy and methods.

47 The respondent also pointed out that Strand has been operating for more than 30 years and has not encountered any trouble previously with the Board or the relevant law or rules. Mr Panos stated that Strand has attempted to comply with the Act.

48 Mr Panos submitted that the Restructure was based on Strand providing a fairer system for calculating unit distributions to the Unit Holders. Some Unit Holders were complaining that the bigger agencies did a large amount of real estate business and therefore made most of the settlement referrals to Strand. Similarly, they complained that the smaller agencies did less real estate business and were likely to make proportionately fewer settlement referrals to Strand. Despite this, under the system preceding the Restructure, Unit Holders were getting the same proportion of units distributed to them. The larger agency Unit Holders argued that a change in the method of unit distribution was needed and was only fair. Mr Panos explained that Strand's board had agreed with these Unit Holders, seeing that there was some commercial injustice in every Unit Holder receiving an identical distribution notwithstanding that each added different levels of custom to Strand's business.

49 In order to implement changes that would create a fairer system for Unit Holders, Mr Panos maintains that Strand's board relied on legal advice about the legality of various unit trust structures. That legal advice was set out in a letter dated 12 April 1995 addressed to the Associated Settlement Agents Association of Western Australia Inc. It was tendered by Mr Panos as an exhibit. The letter outlined advice concerning which structures of unit distribution under a trust would, in that firm's opinion, comply with the Act. Referring to this exhibit, Mr Panos argued that Strand relied on legal advice and that if the Restructure did constitute a breach of the Act, then either Strand should not be accountable for the breach or its liability should be mitigated.

50 While considering the nature of the conversion ratio, Mr Panos submitted that the ratio was important to the Strand board in evaluating the business' overall performance. He submitted that the conversion ratio had nothing to do with the number of units distributed to Unit Holders. The respondent maintained the argument that all Unit Holders are rewarded equally within the structure of the Trust without reference to conversion ratios. The conversion ratio acts merely as a statistical tool for Strand to assess business performance; it's a key performance indicator of Strand.

51 Besides the oral submissions already outlined, Mr Panos argued that the word "reward" contained in s 44(8) of the Act refers to a payment, a cash amount, for example a gift of $50 or $100 per settlement being a reward. The respondent contends that distributions from a unit trust cannot constitute a "reward" for the purposes of the Act as "reward" should be restricted in its interpretation to monetary commission or remuneration.

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63 This definition is broad and encompasses remuneration as well as commission, and also direct and indirect payments. We do not accept Mr Panos' submission, on behalf of Strand, that "reward" cannot include distributions to holders of units in a unit trust. Those distributions will be caught if they can fairly be categorised as remuneration resulting or arising from the recipient referring to a settlement agent any settlement agent business.

64 The evidence provided in this matter did not include the precise method of calculations used by Strand's board to determine unit distributions after the Restructure. We could not determine the precise, or concise mathematical figures that were used to reach the equation at the end that gave the monetary amount represented by units allocated. However, the evidence did leave us in no doubt that Mr Pilling, Strand's managing director, took into account what had happened in the past (including conversion ratios) when he was considering what was likely to occur in the future. Correspondence going out under his hand made this quite plain. In addition we accept Mr McGrade's evidence regarding the Restructure and its underlying basis.

65 It is correct that the respondent had available to it legal advice and this legal advice clearly advised that the only trust and corporate structures which comply with the Act are discretionary trusts, fixed trusts where profit distribution is on a pari passu basis solely in accordance with capital contributions and limited liability companies with ordinary shares where dividends are distributed on a pari passu basis.

66 The structure that Strand chose in fact did not fit in with that advice. The advice went on to say that any corporate structure which allows a distribution of profit linked to the number or value of referrals given by a unit holder, shareholder or associated party falls foul of the Act.

67 The Board raised three specific allegations of breach of s 44(8) in relation to three particular real estate agencies, Elmont, GRQ and Marinatha. Mr O'Sullivan, for the Board, indicated that these three examples were not selected for any particular reason other than that documentary evidence was easily available. He advised that they represented a planned pattern of conduct in breach of the Act. It is an agreed fact that the distributions in 1999-2000 were made to 36 real estate agency Unit Holders and in 2001-2002 to 29 agency Unit Holders. That is, there is no difference between the three Unit Holders selected and the other 33 or 26 agencies who were paid a unit entitlement; the same basis of calculation was used for each of them.

68 The Tribunal is asked to make a finding of fact as to whether Strand had reference to the ratio of business previously referred by Unit Holders when making a distribution.

69 Looking at the example of Elmont in respect of the 1999-2000 financial year, it is evident that Elmont received from Strand a distribution of $3878.87, based on its allocation of four units in the trust. In respect of the 2001-2002 financial year, Elmont received a distribution of $4384 based on the same allocation. A number of monthly dealings spreadsheets are included in the agreed bundle of documents which, as described to us by the applicant, set out all transactions by Elmont for the month and whether or not the purchaser and vendor in each particular transaction had been referred to the respondent. It is not entirely clear what the columns on the spreadsheet really do tell us but we were told that they represent an analysis of how many referrals were made allowing unit entitlements to flow. Generally there is at the foot of each spreadsheet a calculation of the conversion ratio; it was not clear to us whether these ratios were calculated correctly or not.

70 Then, there is also an example of a Unit Holder's distribution to Elmont in the agreed bundle. Attached to this distribution is Elmont's discount and conversion ratio figures for the six months preceding the calculation of the distribution amount. We are satisfied that past performance was taken into account in the calculation of Elmont's entitlement as a Unit Holder. We are also satisfied that past performance was taken into account in the calculation of GRQ and Marinatha's Unit Holder entitlements. Indeed it must have been used to calculate all of the unit allocations to other Unit Holders over those periods as well.

71 We accept that Mr Pilling's co-directors on the Strand board may not have been fully aware of the factors that were considered by Mr Pilling in making his unit allocations, despite some of the references in Mr Pilling's letters to Unit Holders underlining the importance he placed on conversion rates. It was suggested to us by Mr Panos that some of the letters had not been seen by him until recently and we have no reason to doubt that. However, it is clear that Mr Pilling was authorised by Strand's board to perform the role he did in connection with the allocation of units and distributions to the Unit Holders. Mr Pilling was therefore at the relevant time clearly acting as the mind and will of the company so that the company cannot now deny liability for the actions of its director.

72 We agree with Mr O'Sullivan's submission, on behalf of the Board, that once it is accepted that there is any reference to or element of past levels of referral in the calculation of unit entitlements, a breach of s 44(8) will be established.

73 We find, as a question of fact that Strand had reference to past referrals when deciding levels of distribution for individual Unit Holders. In light of our agreement with Mr O'Sullivan's submission, we therefore also find that as such a reference constitutes a breach of s 44(8) of the Act, the respondent is in breach of the Act.

74 For these reasons, we find that the allegations in the Notice of Inquiry are proven. Rewards were made in the 1999-2000 and 2001-2002 financial years to Elmont, GRQ and Marinatha. The giving of these rewards constitute a breach of s 44(8) of the Act. On that basis, the Tribunal finds that there is a cause for disciplinary action against the respondent.

75 We are uncertain as to whether this arrangement of unit entitlement is continuing at the time of hearing. There were letters submitted at the hearing saying that the arrangement was changing, and letters in response from Unit Holders acknowledging that change. Strand must look at the arrangement immediately and develop a plan of implementing change so that it is not in a continuing breach of the Act. However we will not make an order to that effect.

76 The Tribunal sought oral submissions on penalty and costs.

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77 Mr O'Sullivan, for the Board, explained that the breaches described in detail throughout the hearing were merely examples of a course of conduct which applied to a much larger number of Unit Holders, which we have accepted in our reasons. He explained that the relevance of this to penalty is not that the Tribunal should penalise Strand for a larger number of breaches than the six proven, but that Strand could not rely on any plea in mitigation that these were six isolated instances of breach.

78 Mr O'Sullivan explained that the underlying principle in penalties for vocational disciplinary matters is protection of the public. The penalties are not supposed to be punitive in nature. The object of ordering penalties in these matters should be to show the public that the matters are properly forwarded to the Tribunal and dealt with appropriately.

79 As a breach of s 44(8) of the Act can be dealt with by the court as an offence with a maximum fine of $20 000, Mr O'Sullivan argued that Parliament viewed this sort of breach of the Act as serious. Accordingly the Tribunal should view the breaches as serious.

80 The applicant referred to the sanctions in s 84 of the Act, which range from a reprimand or a caution through to suspension or disqualification. He stated that the more serious sanctions might not be appropriate in the circumstances before the Tribunal. Mr O'Sullivan stated that although breaches are serious, and might in other circumstances attract a more serious sanction such as suspension or disqualification, a distinction between the seriousness of the breaches themselves and the circumstances in which the matter comes before the Tribunal must be drawn. Here, while the matter is serious, suspension or disqualification is not necessarily the only or appropriate disposition. Mr O'Sullivan asserted that this matter is a test case, being the first situation where a licensee has been brought before a disciplinary body for a breach of s 44(8) of the Act. As such, the Tribunal may wish to extend some leniency to Strand, as it did not have the benefit of court or tribunal guidance in the past. He conceded though that the Board had previously warned Strand about this conduct.

81 Mr O'Sullivan submitted that as the purpose of the infringing conduct was commercial, the most appropriate penalty should be in the form of a fine. A fine will be indicative of the seriousness of the matter and would result in reducing the profit derived from the infringing conduct. However, the fine should not be seen by industry or the public as an expense of operation which might be factored into the expense of operating an agency.

82 While referring to the specific figures as to the three companies and their conversion rates, the applicant pointed out that it could not be correct to conclude that the total figures generated in each case were generated solely because of Strand's unit distribution arrangement. It therefore might not be possible to accurately calculate a fine from those figures. Mr O'Sullivan reiterated that additional profit was generated by the incentive being offered to Unit Holders and this unfair profit should be taken away at least in part.

83 While examining whether penalties should be imposed by the Tribunal for each infringement separately or whether a penalty should be imposed for the breaches as one continuing course of conduct, Mr O'Sullivan agreed with the Tribunal that each allegation could give rise to a course of conduct that results in one cause for disciplinary action under the Act. He also mentioned that in the past, on occasion, the Board, when dealing with such a matter within its authority, may have imposed penalties for each separate breach of the prohibition in the Act.

84 If the Tribunal decides to award costs, Mr O'Sullivan stated that the Legal Practitioners (Official Prosecutions)(Defendants' Costs) Report [2004] scale would not be appropriate for the Tribunal to apply in this case. While the Board has relied on this scale in its proceedings under the Act in the past, the scale does not take into account drawing of the Notice of Inquiry and other preparation work done on the matter before it comes to hearing. He mentioned that fines imposed under the Act go into consolidated revenue and are not returned to the Board as they were before the establishment of the State Administrative Tribunal. As the Board no longer has that stream of income, a more realistic cost view is potentially relevant. Mr O'Sullivan suggested that the rates set out in the Legal Practitioners (Supreme Court) (Contentious Business) Determination 2004 is a more appropriate means of calculating costs imposed by the Tribunal in these cases.

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89 Although it was propounded by both counsel, we do not see this matter as a test case. A test case is something where the law is set and a question of law is decided, settled on, pronounced on or a statement is made about it. In a true test case, the parties will be likely to agree beforehand that the party that wants to bring the test case will bear the costs of the proceedings.

90 This case is a matter relating to the Board's direction of 1995 stating that licensees using business structures, such as unit trusts, where a benefit or award paid to a person is determined according to the proportional ratio of business referred by that person, will be acting in contravention of s 44(8) of the Act and will therefore be liable to prosecution.

91 With respect to penalty, we agree that there are six different matters for which the respondent is liable. The Notice of Inquiry sets out specific allegations in each of the financial years 1999-2000 and 2001-2002 with respect to each of the three companies.

92 At [33] of the Notice of Inquiry, it is alleged that the allegations are not isolated, but specific examples of a planned pattern of conduct designed and carried out by the respondent to circumvent the provisions of the Act prohibiting the provision of reward for the referral of settlement business. We find that there was such a pattern of conduct which leads to a conclusion of there being a cause for disciplinary action under the Act.

93 Page 2 of the Notice of Inquiry informs the respondent to take notice that pursuant to s 83(1), an inquiry is to be conducted for the purpose of determining whether or not the respondent has breached the provisions of s 44(8) of the Act and whether there is proper cause for disciplinary action to be taken against the respondent under s 84. Section 84 then refers us to a provision that starts "On an inquiry". We have had this one hearing, one inquiry (arguably with a number of allegations), or one allegation within a subset of other allegations, leading to one finding that there is proper cause for disciplinary action. It is that finding of a proper cause of disciplinary action that empowers this Tribunal, under s 84, to then impose a penalty.

94 We are not saying that in all cases it would be one penalty for six allegations, but in this case, the wording of the notice and the fact that there is an overarching pattern that is alleged to constitute a breach giving rise to a cause for disciplinary action, leads us to conclude that we can impose only one penalty under s 84. We have satisfied ourselves that a proper cause for disciplinary action exists.

95 We agree that a breach of s 44(8) gives rise to a serious penalty. We have assessed whether we can mitigate at all in favour of Strand. We do not agree with the argument of the test case as outlined above. Whilst we do not believe that this is a test case, we do believe that this case will set the benchmark.

96 Mr Panos told us that he relied on legal advice and usually this would tend to mitigate. But in our view, the structure adopted by Strand's board was not consistent with that legal advice. It was generic advice not sought by Strand and there was no evidence adduced that Strand went to a legal advisor with its plan for restructuring the trust to seek an opinion of its legality. Therefore the reliance on legal advice cannot operate as a mitigating factor.

97 Mr Panos said that members of Strand's board were not aware of how Mr Pilling, the managing director, was actually applying the unit trust distribution structure. But it was Strand's board's decision to have a unit trust in unequal unit entitlements. Strand's board left how to define that restructure with Mr Pilling. And Strand is liable for the actions of its managing director.

98 We did take into account in mitigation the fact that Strand has been in operation for 33 years without a previous inquiry. Strand, to our knowledge, is well-respected within the industry and is held in high regard. But this is a serious matter and a long-running matter. On that basis, the Tribunal imposes a fine of $8250, payable within 28 days, failing which Strand's licence will be suspended pending full payment.

99 With respect to costs, we agree that firstly, the presumption in s 87(1) is rebutted and that it is appropriate to make an order for costs. Again, we do not believe that this is a test case in the true sense and it is not something that could have gone under the suitors fund as a question of law before the Supreme Court. It really is, as we said, the application of facts to the law. We agree that this particular matter; the nature of it, the length of time taken and the complexity of it are all factors that mean that the Official Prosecutions Defendants Costs scale should not apply in this case.

100 Costs are to be compensation for the actual costs incurred. On that basis we fix costs payable by Strand to the Board at $10 350, payable again within 28 days, failing which Strand's licence will be suspended until those costs are paid in full.

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Settlement Agents Supervisory Board and Strand Settlements Pty Ltd [2005] WASAT 350 (5 May 2005)

Legislation Cited (2)