SM Engineering & Construction (NSW) Pty Ltd and Mehajer v Director General, NSW Fair Trading

The issues

1. The issues arise under the Home Building Act 1989 (NSW) (the Act) and the Home Building Regulation 2004 (NSW) (the Regulations).
2. The first issue concerns Mr Mehajer's fitness and propriety to hold a contractor licence. Section 40(1)(a) of the Act provides that an application for the renewal of an authority under the Act (including a contractor licence) must be refused if Fair Trading (or the Tribunal on review) is not satisfied that the applicant is a fit and proper person to hold the authority. So, unless satisfied that Mr Mehajer is a fit and proper person, I must affirm Fair Trading's decision to refuse to renew Mr Mehajer's individual contractor licence.
3. Furthermore, since Mr Mehajer is a "close associate" of SM NSW (s 3AA(1)(f) of the Act and the definition of "relevant position"), if he fails to satisfy me that he is a fit and proper person, that may lead to my affirming the decision of Fair Trading to refuse SM NSW's application under s 20(6)(c) of the Act.
4. If I am satisfied that Mr Mehajer is indeed a fit and proper person, then additional issues arise under clauses 25 and 26 of the Regulations (in respect of the application of SM NSW) and clause 39A of the Regulations (in respect of the application of Mr Mehajer individually).
5. The provisions are different for the company as opposed to the individual, because the company is a new applicant for a contractor licence whereas Mr Mehajer is applying for renewal of his licence. However, for practical purposes the issues are the same. They centre on Mr Mehajer's status as a director of one, or more than one, "externally-administered body corporate" - either currently (clauses 25(1)(a)(xii) and 39A(1)(c)) or at any time in the last 3 years (clauses 25(1)(a)(xiii) and 39A(1)(d)). The licences can still be issued or renewed, despite those circumstances, but only if certain conditions are satisfied. It is best that I set out the relevant conditions in full (clause 26 applies in respect of the new applicant, SM NSW; clause 39A applies in respect of the applicant for renewal, Mr Mehajer): 26 Additional requirements for obtaining contractor licences (1) … (2) Despite clause 25(1)(a)(xii), the Director-General may issue a contractor licence if: (a) the licence authorises its holder to do residential building work or specialist work of the kind prescribed by clause 46 (clause 46(1)(a) and (b) excepted) but not of any other kind, and (b) the Director-General is of the opinion that: (i) there is no evident risk to the public that the applicant will be unable to complete building contracts entered into in the future for the doing of residential building work or specialist work of that kind, or both, and (ii) the relevant person concerned took all reasonable steps to avoid the bankruptcy, liquidation or appointment of a controller or administrator, and (c) the licence is subject to a condition that the holder not do work: (i) if the contract price exceeds $20,000 (inclusive of GST), or (ii) if the contract price is not known - where the reasonable cost of the labour and materials involved in the work exceeds $20,000 (inclusive of GST). (3) Despite clause 25(1)(a)(xiii), the Director-General may issue a contractor licence if the Director-General is of the opinion that: (a) there is no evident risk to the public that the applicant will be unable to complete building contracts entered into in the future for the doing of residential building work or specialist work of that kind, or both, and (b) the relevant person concerned took all reasonable steps to avoid the bankruptcy, liquidation or appointment of a controller or administrator. (3A) A contractor licence issued under subclause (3) may be issued subject to any of the following conditions: (a) that the licence authorises its holder to do residential building work or specialist work of the kind prescribed by clause 46 (clause 46(1)(a) and (b) excepted) but not of any other kind, (b) that the holder of the licence not do work: (i) if the contract price exceeds $20,000 (inclusive of GST), or (ii) if the contract price is not known - where the reasonable cost of the labour and materials involved in the work exceeds $20,000 (inclusive of GST). 39A General requirements for renewal or restoration of authorities (1) … (1A) Despite subclause (1)(c) and (d), the Director-General may renew or restore a contractor licence if the Director-General is of the opinion that: (a) there is no evident risk to the public that the applicant will be unable to complete building contracts entered into in the future for the doing of residential building work or specialist work of that kind, or both, and (b) the relevant person concerned took all reasonable steps to avoid the bankruptcy, liquidation or appointment of a controller or administrator. (1B) A contractor licence renewed or restored under subclause (1A) may be renewed or restored subject to any of the following conditions: (a) that the licence authorises its holder to do residential building work or specialist work of the kind prescribed by clause 46 (clause 46(1)(a) and (b) excepted) but not of any other kind, (b) that the holder of the licence not do work: (i) if the contract price exceeds $20,000 (inclusive of GST), or (ii) if the contract price is not known - where the reasonable cost of the labour and materials involved in the work exceeds $20,000 (inclusive of GST). (2) For the purposes of this clause, each of the following persons is a relevant person in relation to an application for renewal or restoration of an authority: (a) the applicant, (b) if the applicant is a partnership: (i) every partner of the applicant, and (ii) if a member of the partnership is a corporation - every director of that corporation, (c) if the applicant is a corporation - every director of the corporation.

The answers Mr Mehajer gave on the company application form

1. By way of background, Mr Mehajer accepts that he was a director of a company called SM Engineering & Construction Pty Ltd (SMEC) which has been liquidated, and also of a company called SM Project Developments Pty Ltd (SMPD), which is currently in liquidation.
2. Fair Trading says Mr Mehajer is not a fit and proper person because of the way he, as a director of and on behalf of SM NSW, answered some of the questions in SM NSW's application form.
3. The pre-printed application form identifies itself as an "Application Form - Company or Partnership". Section 1 of the form is headed "Details of Applicant": this is where Mr Mehajer inserted the name, address and contact details for the company SM NSW. Section 2 calls for "Details of Company Directors/Partnership Members". Mr Mehajer put his own name and address in that section. In sections 3, 4 and 5 Mr Mehajer nominated what type of licence was sought and for how long, and what class of work the application was for.
4. In section 6 the form asks "Does the company or partnership hold, or previously held, a licence, certificate, or registration for residential building work?" Mr Mehajer ticked the "No" box.
5. Question 9 contains the questions and answers that Fair Trading is concerned about. The section is headed "Financial and Criminal History" and it contains the following introductory comments: In addition to holding appropriate qualifications, all applicants must demonstrate they are a fit and proper person. Please respond to all questions below by placing an 'X' in the appropriate box. If you respond 'Yes' to any question, please complete an "Additional Details Form" to assist in the prompt assessment of your application.
6. The form then asks the following questions, all of which Mr Mehajer answered "No" by ticking the appropriate box: 1. Have you ever been known by any other name/alias? 2. Have you, or any partnership or company of which you were a member or director, ever been refused or disqualified from holding a licence, authority certificate or registration or had any such instrument cancelled or suspended? (Note: this does not include your Driver's Licence.) 3. Have you, in the last 10 years, had a conviction for a criminal offence recorded, or are you now subject to a bond, or have a criminal charge pending? 4. Have you been declared bankrupt, been discharged from bankruptcy, entered into arrangements with creditors or assigned your property to pay debts within the last 3 years? 5. Have you ever been a director or manager of a company which was subject to a winding up order, placed in receivership or administration, or under official management, had a controller appointed, or entered into other arrangements with creditors due to insolvency? 6. Have you, or any partnership or company of which you were/are a member or director, been subject to any order of a Tribunal/Court that has not been complied with? 7. Have you, or any partnership or company of which you were/are a member or director, had any insurance claims paid or lodged against contracts entered into for residential work? 8. Have you, or any partnership or company of which you were/are a member or director, had any complaints lodged or compliance action commenced arising from your activities in relation to the conduct of residential work? 9. Has any director ever been a director of any other entity that is or was licensed, under the Home Building Act, 1989?
7. Mr Maynard, representing Fair Trading, focused on Mr Mehajer's answers to questions (iii) and (v).
8. Mr Mehajer noted, with respect to question (iii), that he had been charged with failing to provide to the liquidator of SMPD a "Report as to Affairs" (RATA) and the books and records of the company. He explained that his then accountant had all the records, and that he had tried to get them from the accountant but had been unsuccessful. He asked for an extension of time from the liquidator but that had been refused. He attended court and pleaded guilty but explained to the court that his failure to provide the records was out of his control. He was fined $1,000 and placed on a good behaviour bond of either 12 or 18 months (he could not remember which) but he was told that no conviction was recorded. He said, "Hence my understanding of never having a criminal record."
9. In light of a submission made on Mr Mehajer's behalf, to the effect that Mr Mehajer's answers to the questions on the form were all accurate because the questions were being asked about the company's circumstances, not Mr Mehajer's personal circumstances, Mr Maynard asked Mr Mehajer about his understanding of the question - whether it applied to him personally, or to the company. Mr Mehajer replied: Well, it would be relating to the company but even if I was to look at it as a personal matter I would still answer the same thing because my understanding was that I didn't have a criminal charge anyway.
10. I accept that Mr Mehajer probably meant to say that he "didn't have a criminal conviction", rather than "didn't have a criminal charge".
11. Mr Maynard then moved on to question (v), and asked why Mr Mehajer had answered "No" to that question. Mr Mehajer replied: OK - my explanation was that SM Projects - at no point in time did I want to liquidate this company. It happened by, more so, surprise due to the incompetent accountant. SM Projects had enough assets and - to cover any debt that was outstanding. Now, I said "no" because at that time it was still with the courts and I was - well, to an extent, innocent until proven guilty. So even until now it's still in courts and even till now I'm trying to get this company back. So it's not really - in my view it is not even liquidated as yet. We're still in courts trying to justify our position and take all actions to get the company back or show the courts that the accountant was at fault so - it was still more so a matter that was pending rather than actually liquidated and purely because I didn't liquidate it. I still didn't believe that this company was under liquidation …
12. His answer did not mention SMEC. That company had been wound up, according to Mr Mehajer's affidavit, on 5 July 2013, the very day on which Fair Trading received SM NSW's application for a contractor licence, and the day after Mr Mehajer signed a declaration on that application form stating that he was "not the nominated supervisor for any other company/partnership".
13. Although it was not referred to during the departmental internal review of the refusal of SM NSW's contractor licence application, and although as a consequence Mr Maynard did not raise it during the hearing, Mr Mehajer's answer of "No" to question 9(ix) (see [14] of these reasons) is impossible to reconcile with the note at page 13 of the section 58 documents, namely: On 12 July 2013 NSW Fair Trading cancelled Licence 210329C belonging to SM Engineering & Construction Pty Ltd due to Petitioner Court Action and a liquidator being appointed for Court winding up.
14. It is undoubtedly the case that question 9(ix) should have been answered "Yes".

Is Mr Mehajer a fit and proper person?

1. Fair Trading's case is based not on Mr Mehajer's general character but solely on the basis of the answers he gave to the questions on SM NSW's application form.
2. Mr Mehajer's counsel, Mr Chan, submitted that there is no inaccuracy in the answers Mr Mehajer provided because the questions are asked by reference to "all applicants" but the only applicant identified in the form is the company itself, SM NSW. The form does not, in terms, ask questions about the individual who is completing the form or about any "close associate" of the company, but only about the entity identified on page 1 as the "applicant".
3. That observation may be strictly correct but it is a particularly narrow and pedantic way to justify Mr Mehajer's responses. It is also an unhelpful submission in light of my impression that Mr Mehajer did not view the questions that way when he provided his answers. Furthermore, even if the pedantic view were to prevail, it does not support Mr Mehajer's answer of "No" to question 9(ix).
4. Mr Maynard submitted that the questions are plainly directed towards the circumstances of a "human being" - evidently, the individual who is completing the form (who will probably be a "close associate" of the company). He submitted that references to "other names or aliases", and "driver's licences", are not apt except in the context of individuals. To that I would add bankruptcy, a concept incapable of applying to a corporation. Indeed, any fair reading of the questions at section 9 of the form suggests that the word "you", particularly in questions (ii), (v), (vi), (vii) and (viii), is intended to refer to an individual, not the corporation identified as the "applicant". A person completing the form would likely take that view and I find, based in particular on Mr Mehajer's oral evidence extracted at [19] above, that Mr Mehajer held that view when he completed the form. (I note that the answer recorded at [17] above reflects his current view, consistent with the submission made on his behalf, rather than referring to the view that he held at the time.)
5. I conclude, with respect to questions (iii) and (v), that Mr Mehajer's answers were given in relation to his own individual circumstances, in the belief that they accurately reflected his understanding of the facts at the time. He had a reasonably held (and, it seems, correct) view that he had no criminal convictions. To some extent he may have been in denial with respect to the circumstances of SMPD - see [19] above - but what he understood at the time was that the proper answer to question (v) in respect of that company was "No". The position with respect to SMEC is less clear, but given the timing of the winding up order (the day after the making of the declaration) Mr Mehajer's answer could arguably be accurate. He may be open to criticism for failing to notify Fair Trading as the circumstances changed, but that is a different matter. The focus of Fair Trading has been on the answers he gave on the form.
6. Mr Maynard emphasised how important it is for Fair Trading to receive full and frank responses to questions on its application forms. Given the "enormous number" of applications Fair Trading deals with, the licensing system, designed to protect the public, cannot work efficiently without full and frank disclosure. I agree with those observations, although I note that the application forms themselves could be better expressed, and if they were, there may be less doubt about the accuracy of information provided.
7. Ultimately the question for determination here, where the impugned answers could be regarded as accurate although perhaps lacking in elaboration, is whether those answers affect Mr Mehajer's fitness to hold a contractor licence. In my view they do not.
8. In all the circumstances, I am satisfied that Mr Mehajer is a fit and proper person to hold a contractor licence.

The external administration of the two companies

1. Both externally-administered companies had the Australian Taxation Office as a major creditor. Mr Mehajer said that SMPD owed the ATO about $350,000 in GST. It is not clear how much SMEC owed the ATO.
2. Mr Mehajer places much of the blame for the liquidations on his then accountant, whom he describes as incompetent.
3. In cross-examination he told Mr Maynard that he did not know that the ATO was taking steps to wind up SMPD. He thought there was a payment plan in place, and that everything was under control. Then, without warning, he received a call from the liquidator. Apparently even the accountant was not aware that a liquidator had been appointed.
4. Mr Maynard asked him whether a statutory demand had been served on the company. Mr Mehajer explained that the statutory demand had been sent to the registered office of the company. The problem was that the registered office address had not been updated with ASIC; the address still recorded with ASIC was an address where the company had previously operated, but the office building on the site had since been demolished and the site developed into a block of apartments. Mr Mehajer explained the failure to update the registered office address as a failure on the part of the accountant. He said he had expected the accountant to keep the ASIC records up to date. He said he had given the accountant all the relevant information. He thought it was the accountant's duty, one of the things he was being paid for.
5. Mr Maynard then asked Mr Mehajer if he had taken any steps himself to change the registered office address. His answer, while discursive, indicated that he had left things in the hands of the accountant.
6. After the appointment of the liquidator Mr Mehajer had tried to rectify the position but of course by then it was too late.
7. The liquidation of SMEC seems to have proceeded in a similar fashion. Mr Mehajer said he was unaware that the winding up proceedings had commenced. He had terminated his relationship with his previous accountant around the time when SMPD went into liquidation. He then tried to engage new accountants but he could not get access to his files because the old accountant would not release them. He was unable to stop the course of events and the company was wound up on 5 July 2013.

Did Mr Mehajer take all reasonable steps to avoid the liquidation of the two companies?

1. This is the question raised by clauses 26(2)(b)(ii) and 39A(1A)(b) of the Regulations.
2. The two most significant events that led to the liquidation of each company were the building up of the liability to the ATO and the failure to respond in a timely fashion to the statutory demand.
3. Mr Mehajer provided an explanation for SMPD's liability to the ATO but I confess I found it difficult to understand. He said that the liability related to GST on the sale of apartments in a property development. He agreed that the GST liability would arise on the sale of each apartment, and that the GST to be paid to the ATO should have been sourced from the proceeds of sale. But he also said that the ATO had audited his companies' activities and I understood him to say that the liability was established as a result of the audit. Penalties and interest had also been assessed, which suggests that the liability had not been declared on the companies' Business Activity Statements (BASs) on an ongoing basis, or, if it had, that it had been understated.
4. He said that his then accountant had indicated to him that SMPD's liability of around $350,000 was offset by input tax credits that were available to SMEC. He could not explain why those input tax credits, if they were available, had not been claimed by SMEC on a progressive basis as the apartments were being built. It seems that the accountant had chosen - in a display of remarkable generosity to the Commissioner of Taxation - to delay the claiming of input tax credits until the sale of the apartments took place. If that is truly what the accountant did, then I would agree with Mr Mehajer's assessment of him as incompetent.
5. That explanation sits uncomfortably with the fact that SMEC itself had a liability to the ATO which led to its winding up. If, as Mr Mehajer said the accountant had told him, SMEC had significant input tax credit entitlements, then it is difficult to understand why the ATO moved to wind up the company.
6. The picture painted by Mr Mehajer is in some respects unsatisfactory. He is a businessman who was involved in a major property development. It may be accepted that he left the lodgement of the companies' BASs up to the accountant, but he was surely arming the accountant with the information from which those BASs would be prepared. If there was underreporting of the GST liability, why did Mr Mehajer not know about it?
7. Nevertheless, and despite the unsatisfactory nature of the explanation, it is evident that Mr Mehajer did take steps to try to rectify the position. He said, and I accept, that he thought there was a payment plan in place. He tried to talk to the ATO but they would only deal with the liquidator. He had been placed in a very difficult position as a direct result of the failure to keep ASIC informed of the registered office address. He blames the accountant for that shortcoming, but he is ultimately responsible for it.
8. At one stage Mr Mehajer instructed his accountant to offer payment of the entire outstanding amount to the ATO, excluding penalty and interest. It seems that the accountant made that offer, but there is no evidence of a reply from the ATO. It is possible that it was sent to the registered office. In any event, no payment was made, and the ATO moved to wind up the company.
9. It is clear to me that the way the events unfolded made it impossible for Mr Mehajer to avoid the appointment of the liquidator in each case. Then, once the liquidator was in place, Mr Mehajer's options were limited but he did try to stop the inevitable. In the circumstances I am of the opinion that Mr Mehajer took "all reasonable steps" to avoid the liquidation of the companies.

Is there a risk to the public that future contracts will not be able to be completed?

1. The question posed by clauses 26(2)(b)(i) and 39A(1A)(a) of the Regulations is whether I am of the opinion that there is "no evident risk to the public that the applicant will be unable to complete building contracts entered into in the future for the doing of residential building work …".
2. In Avila v Director-General, Department of Finance & Services, NSW Fair Trading [2014] NSWCATOD 53, I said at [27]: The question is not whether I am of the opinion that there is no risk at all; it is whether there is no evident risk.
3. In Avila's case I went on to accept the parties' submission that evident risk is equivalent to obvious risk. Another way of expressing it is plain, clear or apparent risk.
4. Possible indicators of evident risk would be (a) Mr Mehajer's financial circumstances and (b) past instances of a failure by Mr Mehajer or one of his entities to complete building contracts.
5. There is no evidence of either of these indicators and I have not been directed to any other indicators which might dispose me to be concerned about an evident risk to the public.
6. On the material before me I am of the opinion that there is no evident risk to the public that either Mr Mehajer or SM NSW will be unable to complete future building contracts. On that basis the discretion to approve the renewal of his licence is enlivened.
7. The next question is whether, consistently with the purpose, scope and object of the relevant legislation, the discretion should be exercised. Given the opinions I have reached, I think the discretion should be exercised, but that is not the end of the enquiry.
8. The language of the relevant provisions differs, as between the application by SM NSW for a new licence, and the application by Mr Mehajer for a renewal. As I have already indicated, SM NSW's application is governed by clauses 25 and 26 of the Regulations; Mr Mehajer's is governed by clause 39A. I will deal with SM NSW's application first.
9. The starting point is that both subparagraphs (xii) and (xiii) of clause 25(1)(a) apply. That is because SMPD is still in liquidation (subparagraph (xii)) while SMEC has been liquidated (subparagraph (xiii)). Subpara (xii) leads to a consideration of clause 26(2) while subpara (xiii) leads to a consideration of clause 26(3).
10. The structure of clause 26(2) is such that Fair Trading (or the Tribunal on review) may issue a licence if all of paragraphs (a), (b) and (c) apply but, in my view, not otherwise. In other words, paragraphs (a), (b) and (c) operate conjunctively as the enablers of the exercise of the clause 26(2) discretion. Therefore, if the discretion is to be exercised, it is mandatory to impose restrictions of a kind specified in paragraph (a) (either residential building work, or specialist work prescribed by clause 46 other than that in clause 46(1)(a) or 46(1)(b)) and the condition set out in paragraph (c) (maximum $20,000 contract price). I take the restrictions in paragraph (a) and the condition in paragraph (c) to be mandatory requirements.
11. The structure of clause 26(3) is quite different. Here, the enablers of the exercise of the discretion are paragraphs (a) and (b) - which are the equivalents of (b)(i) and (b)(ii) of clause 26(2). Once those circumstances exist, the Tribunal has the discretion to issue the licence. Only then, after the discretion has been exercised, is the Tribunal invited to consider, under clause 26(3A), whether to restrict the categories of building work that are authorised, and consequently, to limit the size of the work to contracts below $20,000. But the question relating to the restrictions and condition is not a gateway consideration for the issue of the licence; it is purely discretionary once the decision has been made to issue the licence because of the satisfaction of paragraphs (a) and (b) of clause 26(3).
12. Therefore, as regards the application of SM NSW for a new licence, I consider it appropriate to exercise the discretion to issue the licence, but also consider that I am bound to impose a restriction of a kind specified in paragraph (a) and the condition in paragraph (c) of clause 26(2). The licence will be issued, but SM NSW will be authorised only to do residential building work, and only up to $20,000 in value.
13. I turn now to Mr Mehajer's application, and the terms of clause 39A. Subclause (1A) is structured in the same way as clause 26(3). There is no distinction drawn between a current liquidation and a former liquidation: paragraphs (c) (current) and (d) (former) are both dealt with in clause 39A(1A) by reference to the same considerations - no evident risk, and all reasonable steps - as in clause 26(3). That leads to the same outcome as would be reached under clause 26(3) (assuming, unlike this case, that clause 26(2) were not also in play).
14. Under clause 39A, the consideration of the restrictions and condition comes after the decision to exercise the discretion to issue the licence. That is when the decision-maker turns her or his mind to the imposition of any restrictions and the monetary value condition - as a separate exercise, under clause 39A(1B), just as it was under clause 26(3A).
15. In Mr Mehajer's case I would exercise the discretion to issue the licence but, all things being equal, I would not have imposed the restrictions or the $20,000 value condition. However, having been compelled to impose those restrictions and condition on SM NSW, I have considered whether it would potentially frustrate the effect of the restrictions on the company if I did not also impose restrictions in the same terms on the individual. I have come to the view that it would not.
16. Mr Mehajer is an individual of considerable standing in the community. He has held a contractor licence for some years. He has now had to face allegations that he is no longer a fit and proper person to hold a contractor licence. He has established to my satisfaction that he is a fit and proper person. I take the view that he would be unlikely to risk similar allegations in the future by artificially structuring his affairs so as to sidestep restrictions imposed on his company that are not also imposed on him as an individual.
17. Mr Maynard noted during the hearing that the restrictions imposed on the company would be eligible to be lifted 3 years after the circumstances described in clause 25(1)(a)(xii) no longer exist. At that time the corporate licence holder may decide to approach the regulator accordingly.

Decision

1. The decisions under review are set aside. In each case the Tribunal decides to issue a contractor licence to the applicant. The licence issued to Mr Mehajer is issued without restriction or conditions. The licence issued to the company is issued subject to a condition that it is authorised only to do residential building work, and subject to the monetary limits specified in paragraph (c) of clause 26(2) of the Regulations. 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: 09 April 2015