Bohan v Queensland Building Services Authority [2010] QCAT 404

CITATION: Bohan v Queensland Building Services Authority [2010] QCAT 404 PARTIES: KENNETH PATRICK BOHAN V QUEENSLAND BUILDING SERVICES AUTHORITY APPLICATION NUMBER: QR 182-09 MATTER TYPE: General administrative review matters HEARING DATE: 9 March 2010 HEARD AT: Brisbane DECISION OF: S W Sheaffe DELIVERED ON: 14 May 2010 DELIVERED AT: Brisbane ORDERS MADE: 1. The decision of the respondent made on the 3 August 2009 refusing to categorise the applicant as a permitted individual is set aside. 2. The applicant is categorised as a permitted individual. CATCHWORDS: Review of a decision refusing to categorise the applicant as a permitted individual; Anthony Younan v QBSA [2008] QDC 158; Section 56 AC & AD of the Queensland Building Services Authority Act 1991. APPEARANCES and REPRESENTATION: The applicant is self represented Solicitor, Mr Robinson for the respondent -- 1 of 10 -- REASONS FOR DECISION Introduction 1. Kenneth Patrick Bohan (“the applicant”) seeks an order to set aside the decision of the Queensland Building Services Authority (“the respondent”) refusing to categorise him as a permitted individual. 2. This application is made pursuant to section 56 AD of the Queensland Building Services Authority Act (“the Act”) and Chapter 2, Part 1, Division 3 of the Queensland Civil and Administrative Tribunal Act 2009 (“the QCAT Act”). The Tribunal may make the orders provided for in section 24 of the QCAT Act. Background 3. The applicant is a former director of Professional Climate Solutions Pty Ltd (“PCS”). On 27 June 2008 Gavin Charles Morton and Gerald Thomas Collins were appointed administrators of PCS. 4. On 7 July 2008 the respondent issued a notice advising the applicant that they considered him to be an excluded individual pursuant to section 56AC of the Act on the ground that administrators were appointed to PCS. On the 5 August 2008 the respondent withdrew the notice dated 7 July 2008 and issued a new notice of that same date and to the same effect. Then on 4 September 2008 the applicant applied to the respondent to be categorised as a permitted individual. 5. On the 3 August 2009 the respondent issued a notice stating that they refused to categorise the applicant as a permitted individual under the Act. The applicant filed a review application on 4 August 2009. Facts 6. The applicant and Mr Jason Currie, in partnership, operated a business of supplying and installing air-conditioners (“the partnership”). The partnership was known as Aair Pro. In the course of this partnership they provided labour hire services to Chilli Air Services Pty Ltd (“Chilli”). 7. Chilli was incorporated in January 2006 with Peter Kelly, Evans and David Jacobs the directors. Chilli was also in the business of supplying and installing air conditioners for commercial contracts and had a significantly higher turnover and larger contracts in terms of value than did the partnership. 8. PCS was incorporated on the 10 July 2007, and operated the business of supplying and installing air conditioning systems for commercial customers during the period October 2007 and June 2008. The applicant and Jason Currie were the directors. 9. Between June 2007 and October 2007 discussions were held between Evans and Kelly on behalf of Chilli and the applicant and Currie on behalf of the partnership and PCS to consider the merger of the two businesses into an integrated business. -- 2 of 10 -- 10. On 3 October 2007 a due diligence assessment of Chilli was conducted by Mr Rod Murphy. On 9 October 2007 ABR were engaged to undertake a credit assessment, on the 10 October 2007 a draft merger document was received and legal advice was obtained from Beston and Co. On the 15 October 2007 a merger deed was entered into between PCS, Chilli and the directors. 11. As part of the merger arrangement Kelly’s other business entity IHMS was contracted to provide accounting, bookkeeping, payroll, human resources and other services. 12. On 6 December 2007 Kelly resigned due to personal issues with RAV Projects Pty Ltd. 13. In February/March 2008 the applicant and Currie undertook an analysis of the accounts and identified that IHMS was shifting significant money around without their knowledge. In late February a decision was made to close the Redcliffe Office as it was unprofitable becuase it had engaged too many staff. Then on 13 March 2008 Currie resigned and was paid a significant amount of money for outstanding wages. 14. On 17 March 2008, consultant Oracle and Delphi were engaged to consider the operating and cash flow difficulties and the services provided by IHMS. 15. On 28 March 2008 Chilli went into Administration. 16. On the 24 April 2008 Kelly and Evans claimed a consultancy fee of $480,000 plus GST from PCS, though this allegation is disputed. 17. In May/June 2008 PCS engaged Bell Legal regarding a statutory demand issued by Currie and to take action against Kelly. On 1 May 2008 the applicant engaged Richard Croaker, a solvency expert. 18. On 27 June 2008 administrators were appointed. Relevant legislation 19. The Act expressly provides, so far as relevant: 20. Section 56 AD of the QBSA Act provides: (1) An individual may apply to the authority, in the form approved by the Board, to be categorised as a permitted individual for a relevant event if the individual has been advised by the authority, or has otherwise been made aware, that the authority considers the individual to be an excluded individual for the relevant event. (8) The authority may categorise the individual as a permitted individual for the relevant event only if the authority is satisfied, on the basis of the application, that the individual took all reasonable steps to avoid the coming into existence of the circumstances that resulted in the happening of the relevant event. (8A) In deciding whether an individual took all reasonable steps to avoid the coming into existence of the circumstances that resulted in the happening of the relevant event, the authority must have regard to the action taken by the individual in relation to the following- (a) keeping proper books of account and financial records; -- 3 of 10 -- (b) seeking appropriate financial or legal advice before entering into financial or business arrangements or conducting business. (c) reporting fraud or theft to the police: (d) ensuring guarantees provided were covered by sufficient assets to cover the liability under the guarantees; (e) putting in place appropriate credit management for amounts owing and taking reasonable steps for recovery of the amounts: (f) making appropriate provisions for Commonwealth and State taxation debts. (8B) Nothing in subsection (8A) prevents the authority from having regard to other matters for deciding whether an individual took all reasonable steps to avoid the coming into existence of the circumstances that resulted in the happening of a relevant event. Applicants’ submissions 21. The applicant submitted that the first circumstance was the entering into of the deed dated 15 October 2007. He submitted they had taken all reasonable steps before the deed was executed as they had engaged an independent accountant, Mr Murphy, to undertake a due diligence report, obtained legal advice from Beston and Co, had a credit risk assessment from ABR and had discussions with the directors and others. 22. The applicant submitted that the due diligence assessment undertaken by Rod Murphy and Associates had supported the merger and they relied on this report. They submitted that the report specified that Chilli made a profit of $158,784 for the three month period from 1 July 07 to the 30 June 07; the cash forecast for Nov 07 to June 08 was $1.3 million dollars and in his final page he says that Mr McKay was very professional and their was no reason to doubt the MYOB data reports. He relied extensively on the report of Mr Murphy to support his submission that reasonable steps were undertaken. 23. The applicant submitted that they received all relevant advices and had scrutinized the business. He also submitted that he must have trust in the new directors and the contracting builders. 24. They relied on the advice that the $340,000 consultancy fee be removed and this advice was accepted and it was reasonable to do so. 25. He submitted that he had taken all reasonable steps prior to the entering into of the deed, including the obtaining of appropriate advice. Respondent’s submissions 26. The respondent submitted that the applicant did not take all reasonable steps and did not reasonably assess the merger and the merger documents. 27. The merger deed was prepared by Mr Kelly the director of Chilli and it was drafted in its favour. The deed did not impose any obligations on Chilli and there was no restraint of trade clause. 28. The respondent invited the tribunal to examine the nature of the merger and the terms of the merger deed. They submitted that what the applicant expected from the merger was inconsistent with the terms of the merger deed. It was submitted that the warnings of Mr Murphy were not heeded -- 4 of 10 -- 29. Further, insufficient control was exercised over in house management. 30. Finally, there was no discussion about the GST and taxation requirements and provisions were not made for taxation. 31. The respondent submitted that the statement of Gavin Morton, the appointed administrator supports the original decision of the decision maker, Natasha Dennis. The report of the liquidator, Mr Gavin Morton says that: a. The company only traded from Mid October 2007 until the end of March 2008. During this period a deficiency of $500,000 had been accumulated without accounting for any statutory debts such as tax debt and Work cover premiums b. The minutes of the meeting held on the 14 November 2007 recorded that they needed to earn $15,000 per day to cover expenses. c. Also on the 28 November 2007, there were discussions about cash flow concerns, that money was not being chased for overdue accounts and a need to have more small projects to help the cash flow issues. d. The company did not meet the continuing financial requirements for licensing (FRL). Observations and findings 32. On the 4 September 2008 the applicant applied to be categorised as a permitted individual pursuant to section 56AD of the QBSA Act. To be categorised as a permitted individual for the relevant event, the tribunal must be satisfied that the applicant took all reasonable steps to avoid the coming into existence of the circumstances that resulted in the happening of the relevant event. 33. The legal principles that the Tribunal must apply has been stated in a recent decision of Anthony Younan and Queensland Building Services [2010] QDC 158. His Honour noted that the test in s56AD (8) required: a. The identification of the relevant event. b. The identification of the circumstances that resulted in the relevant event c. A consideration of whether the relevant individual took all reasonable steps to avoid the circumstances coming into existence, and if satisfied of that, d. A decision whether to categorise the individual as a permitted individual 34. His honour considered the issue of reasonable steps and on page 9 of the judgment said: What were reasonable steps depended on what was reasonable for the individual concerned in the circumstances in which he found himself, with such information as he then had. It is not a question of whether he did everything possible to prevent these circumstances from arising, or whether they would not have arisen if he had acted differently. The reasonableness of his behaviour must be assessed by reference to what was known by him at the time, without the benefit of hindsight. 35. The relevant company event pursuant to section 56AC (2) of the QBSA Act was the appointment of administrators to PCF on the 27 June 2008. At the time of the appointment of the administrator, the applicant was a director so automatically became an excluded individual pursuant to section 56AC (4) of the QBSA Act. 36. The next step is to identify the circumstances that resulted in the appointment of the administrator. These circumstances must have occurred between the -- 5 of 10 -- incorporation of the company on 10 July 2007 and the appointment of the administrators on 27 June 2008. 37. Originally, the applicant and Jason Currie were in partnership (the partnership) supplying and installing air conditioning systems. This partnership employed staff and engaged subcontractors to carry out the necessary work. Chilli Air Services Pty Ltd (“Chilli”) was in the same business, operated on a larger scale with larger contracts but on occasions could not engage sufficient labour to fulfil their contractual requirements. To resolve this problem, the partnership contracted to provide labour services to Chilli. 38. Chilli was incorporated in January 2006 with Peter Kelly, Mark Evans and David Jacobs as directors and it held a licence issued by the Building Services Authority. 39. In or about June 2007 discussions were entered into between Evans and Kelly on behalf of Chilli and the applicant and Currie on behalf of the partnership concerning a merger of the two businesses into an integrated business. It was agreed that a merger would be conducted through a new legal entity. 40. On 10 July 2007 Professional Climate Solutions Pty Ltd (“PCS”) was incorporated with the applicant and Currie as directors, and the applicant, Currie, Kelly and Evans as shareholders. At this time, the partnership business was transferred to PCS and it continued to operate the business of supplying and installing air- conditioning systems for commercial customers. 41. On the 15 October 2007 a merger deed was executed (“the deed”). By the deed Evans and Kelly became directors of PCS and the four directors each held 25% of the shareholding. The effect of the deed was that: a. The business operated by Chilli would be incorporated into PCS and the business they operated would become an integrated business. b. Evans and Kelly would become shareholders and directors of PCS. c. Consultancy fees in the sum of $240,000 would be paid to Evans and Kelly but they were subject to financial criteria and overall agreement by the parties. d. Management services of the integrated business would be undertaken by In House Management Services Pty Ltd (“IHMS”), a company that performed accounting services. IHMS was to be paid a management fee of a minimum of $330,000 per year and Kelly was the director and secretary of this company. e. The applicant’s licence would be available to the integrated business until the BSA issued a licence to the company. 42. The merger was a failure and the liquidator’s report even stated that the integrated business was never formed. Some of the Chilli contracts on foot at the time were taken over by PCS. Debts were not paid, new contracts were not entered into and allegations of fraud were made against Mr Kelly. 43. During the period between October 2007 and December 2007 Kelly, Evans, Currie and the applicant were involved in the day to day operations of PCS. 44. The administrator was appointed in June 2008 and pursuant to a resolution of creditors, liquidators were appointed on 1 August 2008. The liquidator’s report dated 14 April 2009 was tendered in these proceedings. -- 6 of 10 -- 45. There were a number of primary relevant circumstances listed in the respondent’s statement of reasons and included: the entering into of the deed, the insolvency of chilli, the deception of Kelly and his related entities, the deception and misappropriation by IHMS and the fallout of customers as a result of the failure affecting PCS’s ability to work. The statement of reasons also listed a number of minor causes and they include: the failure prior to 15 October 2008 to identify a need for an audit or accounting review: the failure prior to 15 October 2008 by ABR Corporate and Financial risk to identify Kelly as a person who has been subject to a Part X solvency administration; misrepresentations by Kelly, Reliance by the applicant upon the Independent Review Report that was wrong, operational issues identified by Oracle & Delphi, Incorrect management reports from IHMS and claims and legal actions against PCS. 46. The parties acknowledged that the predominant relevant circumstance was the merger or proposed merger of PCS with Chilli and the consequent failure of this merger. I find that the merger, the circumstances leading to the merger and the subsequent management of the company and the integrated business were the circumstances that resulted in the appointment of the administrators. I accept the evidence that the primary factors listed above were the circumstances that resulted in the appointment of the administrators. I also accept the evidence of the applicant that the administrators were appointed as a result of the insolvency of Chilli and the misconduct of Kelly. The factors described as minor causes were also relevant but were not significant. 47. The next step is to determine whether the applicant took all reasonable steps to avoid the coming into existence of those circumstances. In deciding whether an individual took all reasonable steps to avoid the coming into existence of the circumstances that resulted in the happening of relevant event, regard must be taken of the matters listed in section 56AD (8B). These include: (a) keeping proper books of account and financial records; (b) seeking appropriate financial or legal advice before entering into financial or business arrangements or conducting business. (c) reporting fraud or theft to the police: (d) ensuring guarantees provided were covered by sufficient assets to cover the liability under the guarantees; (e) putting in place appropriate credit management for amounts owing and taking reasonable steps for recovery of the amounts: (f) making appropriate provisions for Commonwealth and State taxation debts. 48. The respondent was extremely critical of the merger deed, including its nature and character. Broadly, it was submitted that the effect of the deed was that it was not in the character of a merger and it was drafted by or on behalf of Kelly for the benefit of Chilli only. The respondent says that on any view of the due diligence report, further enquiries should have been undertaken. The applicant says he had a due diligence assessment undertaken on the company, had credit checks performed on the directors and obtained legal advice from Beston and Company. 49. I accept the submission that there are features of the deed that suggested the arrangement was not strictly a merger, such as: a clause was not inserted providing for the dissolution of Chilli or a restraint of trade clause prohibiting it from continuing to operate or trade. The deed also provided for the engagement of IHMS as the entity that provided the accounting services and they were to be paid a generous fee of $5,769.23 per week. IHMS is an organisation owned and -- 7 of 10 -- controlled by Kelly. Further Kelly and Evans were to be paid a consultancy fee of $480,000. An impression is certainly left that this deed was drafted for the benefit of Kelly and Chilli and the legal effect of the deed is a matter of debate. However, I do not consider this a significant factor. Chilli was a larger organisation and held larger contracts with customers. They came into the negotiations with the applicant expecting to retain a superior position in the new entity. Further, these factors were not suggestive that the merger would automatically fail. 50. Further, the applicant says he obtained appropriate legal, accounting and credit advice and there is nothing more that he could have done. It is easy in hindsight to make a judgment now, but then he did all that he could have done. I accept the applicant’s evidence and his submissions on this issue 51. However, the applicant can be criticized with respect to the legal advice obtained, as the nature of the legal advice sought and given, and its timing has not been tendered. The applicant has not tendered any written advice from his solicitor where all the issues about the proposed merger were raised and considered. To make a broad assertion that he obtained legal advice on these issues without tendering a copy of the advice or calling the solicitor to give evidence of the advice, if it was oral, is not sufficient. Despite this criticism, he says he showed the draft deed to his solicitor and they discussed and considered its terms. I accept the evidence that he obtained legal advice. 52. Further, the applicant says he engaged Mr Murphy an accountant to undertake due diligence on Chilli as a part of the ANV Global Group prior to the merger. Mr Murphy attended the offices of Chilli for one day and examined Chilli’s books of account, including profit and loss and balance sheets provided by Mr Kelly. The due diligence report contained a disclaimer clause that stated that an audit or review had not been performed and the MYOB information provided was not verified. If the applicant was seeking an opinion from the accountant as to the merits of the merger he certainly was not given one. In his summary, the accountant stated: I cannot make any recommendations on the merger as per the disclaimer above. There are many unknowns in this process. I suggest you tread wearily in negotiations and seek legal advice on any contracts before signing for the merger. 53. The applicant relied on the report of Mr Murphy to say that he obtained independent due diligence advice on the merger. I accept the evidence of the applicant that he engaged Mr Murphy to undertake a due diligence and I accept that the due diligence was performed. I also accept that a disclaimer clause was inserted in the document to give legal protection to the accountant. 54. The applicant placed weight on Mr Murphy’s report that Chilli made a profit of $158,784 for the three month period from 1 July 07 to the 30 June 07; the cash forecast for Nov 07 to June 08 was $1.3 million dollars and in his final page it says that Mr McKay was very professional and their was no reason to doubt the MYOB data reports. The applicant relied extensively on the report of Mr Murphy to support his submission that reasonable steps were undertaken. 55. I accept the submission that an accountant was engaged to undertake a due diligence report, and even though the report can be criticised, the matters noted above in the report enticed the applicant to rely on the report and enter into the deed. Furthermore, I accept that the applicant engaged ABR to undertake a credit assessment of Chilli and the report failed to reveal any major deficits in Chilli’s credit position. -- 8 of 10 -- 56. I accept the submission by the applicant that he took all reasonable steps at the time the deed was entered into. Taking into account the comments of the learned judge in Anthony Younan v QBSA that what were reasonable steps depended on what was reasonable for the individual concerned in the circumstances in which he found himself, with such information as he then had. It is not a question of whether he did everything possible to prevent these circumstances from arising, or whether they would not have arisen if he had acted differently. The reasonableness of his behaviour must be assessed by reference to what was known by him at the time, without the benefit of hindsight. The applicant obtained accounting, legal and credit advice, so he must be said that his behaviour was reasonable at the time. If the applicant had known in advance what was to occur in the future his decision may have been different, however, he did not have the benefit of hindsight. 57. After the deed was executed Kelly and Evans became directors of PCS, and Currie and the applicant continued as directors and shareholders. After the merger Chilli continued to operate on its own account. Some of its contracts were transferred to PCS but the debts, obligations and some contracts were not assigned or transferred. Chilli was placed into liquidation on 6 May 2008, only six months after the deed was executed, with debts outstanding. 58. I accept the evidence that Chilli continued to operate until it went into administration. This is supported by the Oracle and Delphi report that described a lack of distinction between Chilli and PCS regarding income. If there was a proper and complete merger, chilli would not have received any money at all and it would not have performed any contracts. 59. I accept that the failure to enter into new contracts, and the other problems that arose were caused by the conduct of Kelly and the dissolution of Chilli. The applicant had no control over Chilli. Chilli continued to operate, it failed to pay its debts and eventually it was dissolved. There was also a suggestion that money was improperly transferred between IHMS, Chilli and PCS. Kelly resigned on the 6 December 2007 and Currie resigned on the 28 March 2008. This all had a dramatic effect on PCS. All of a sudden PCS could not engage new clients, its credit rating was adversely affected and it could not raise capital. I accept the submission that these factors arose by reason of the conduct of Kelly and by Chilli. I also accept the submission that the dissolution of Chilli had dire consequences for PCS and the applicant had absolutely no control over these incidents. 60. The liquidators report specified 4 reasons for PCS’s failure including: a lack of working capital to pay for the legal costs in defending actions by the creditors; a difficulty in winning new work as a result of the fallout from the liquidation of Chilli; inefficiency in completing jobs and in some cases poor workmanship in jobs and loss of funds in relation to the merger deed. These are circumstances that occurred after the deed was entered into and were a direct consequence of the conduct of Kelly and the dissolution of Chilli. In fact, the liquidator considered there were possible breaches by Kelly of his director’s duties. He concluded that he should have been aware that Chilli was experiencing financial difficulties at the relevant time. 61. At the time of entering into of the deed, Kelly was a director of IHMS and it was agreed that this company was to be paid $330,000 per year and Kelly and Evans were to be paid $240,000 each as a consultancy fee, subject to agreement and -- 9 of 10 -- capacity to pay. I accept the applicant’s evidence that he insisted that this consultancy fee not be paid and it was not paid. This, he submits, is evidence that he took reasonable steps to avoid the financial problems. I accept this submission. 62. I also accept the evidence in the liquidator’s report that funds were lost by reason of the merger and that after the liquidation of Chilli the new entity had difficulty attracting work. During this difficult time, the applicant did not sit and watch the demise of PCS. He actively tried to solve the pending financial disaster. He closed the Redcliffe office and sought accounting and solvency advice. The effect of the failure of the merger was that not enough income was generated to fund the taxation requirements. 63. I am not satisfied that there were any reasonable steps that the applicant could have carried out that would have obviated these circumstances. 64. I find that the applicant did not fail to adopt prudent management practices. PCS closed the Redcliffe office when it was apparent it was making a loss, undertook an analysis after it was revealed that Kelly may have been shifting money and engaged Oracle and Delphi to consider the cash flow problems. Furthermore, a solicitor was engaged to deal with the claim made by Mr Currie. What else could he have done? 65. I also find that the applicant did not fail to keep proper books of accounts and financial records; he did not fail to seek appropriate financial and legal advice; he set in place appropriate credit management for amounts owing and took reasonable steps to recover money owing. Further, I am satisfied that appropriate provision for taxation was made. 66. It is easy in hindsight to be critical of the applicant on behalf of PCS by entering into the deed because the merger was a failure. But at that time the applicant obtained relevant advice from professional people and relied on this advice. After the merger, things didn’t turnout as he and the other directors had expected, but this was due to the conduct of the representatives of Chilli and Kelly. In these circumstances, I am not satisfied that the applicant failed to take any reasonable steps to avoid the coming into existence of the circumstances that resulted in the happening of the event. It is not a question of whether he did everything possible to prevent these circumstances from arising or whether they would have arisen if he acted differently. It is a question of whether he took all reasonable steps. I am satisfied that he did. 67. In these circumstances, and pursuant to section 24 (1) of the QCAT Act, the Tribunal should set aside the decision of the respondent and substitute its own decision. Orders 68. The decision of the respondent made on the 3 August 2009 refusing to categorise the applicant as a permitted individual is set aside. 69. The applicant is categorised as a permitted individual. -- 10 of 10 --