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  • Unreported Judgment

The Licensee v Queensland Building and Construction Commission

 

[2019] QCAT 224

QUEENSLAND CIVIL AND ADMINISTRATIVE TRIBUNAL

CITATION:

The Licensee v Queensland Building and Construction Commission [2019] QCAT 224

PARTIES:

THE LICENSEE

(applicant)

 

v

QUEENSLAND BUILDING AND CONSTRUCTION COMMISSION

(respondent)

APPLICATION NO/S:

GAR029-19

MATTER TYPE:

Occupational regulation matters

DELIVERED ON:

12 August 2019

HEARING DATE:

20 and 21 May 2019

HEARD AT:

Brisbane

DECISION OF:

Member A Fitzpatrick

ORDERS:

  1. The Decision of the Queensland Building and Construction Commission made 8 January 2018 is confirmed.
  2. Leave is granted to both parties for legal representation in the proceeding.

CATCHWORDS:

PROFESSIONS AND TRADES – BUILDERS –LICENCES AND REGISTRATION – where decision made to suspend licence because of failure to meet minimum financial requirements – where applicant filed an application to review – construction of MFR Policy – whether Related Entity loan is a current asset

Queensland Building and Construction Commission Act 1991 (Qld), s 3, s 35(3), s 76

Queensland Building and Construction Commission (Minimum Financial Requirements) Regulation 2018 (Qld), current as at 1 January 2019, current as at 2 April 2019, current as at 31 December 2019, s 12, s 22

Queensland Civil and Administrative Tribunal Act 2009 (Qld), s 20, s 43(2)(b)(ii), s 66

Allina Pty Ltd v FCT (1991) 28 FCR 203

Bridge v Mattis (1953) AR (NSW) 49

Commonwealth v Baume (1905) 2 CLR 405

Metropolitan Gas Co v Federated Gas Employees’ Industrial Union (1924) 35 CLR 449

Re Pacific Film Laboratories Pty Ltd and Collector of Customs (1979) 2 ALD 144

APPEARANCES & REPRESENTATION:

 

Applicant:

BWJ Kidston instructed by Hall Lawyers Pty Ltd

Respondent:

C Hill, in-house Solicitor, Queensland Building and Construction Commission

REASONS FOR DECISION

  1. [1]
    On 1 February 2019 an order was made granting a stay of a decision of the Respondent made 8 January 2019 to suspend the Licensee’s carpentry licence for failure to meet Minimum Financial Requirements necessary to hold that licence.
  2. [2]
    Reasons for the decision to grant the stay were delivered on 7 February 2019.
  3. [3]
    An order pursuant to section 66 of the Queensland Civil and Administrative Tribunal Act 2009 (Qld) (‘QCAT Act’) has been made in the matter. The parties have therefore been de-identified.
  4. [4]
    I note that although both parties have been legally represented throughout in this matter, no leave has been sought. A query in relation to this point was raised with the Tribunal after the hearing by the Respondent. I am of the view that no leave for legal representation is required as this matter falls within s43(2)(b) (ii) of the QCAT Act. In any event, if I am wrong, leave is now granted to both parties for legal representation with respect to all appearances to date and for the balance of this proceeding.

Decision the subject of the review and scope of the review

  1. [5]
    On 20 May 2019 this Tribunal heard the Licensee’s application to review the 8 January 2019 decision.
  2. [6]
    The parties are agreed that the scope of the review is limited to a review of the decision made 8 January 2019 to suspend the Licensee’s licence because, as at 31 December 2018, the Licensee did not meet the relevant Minimum Financial Requirements set out in the Respondent’s Policy effective 9 October 2015 (‘MFR Policy’) (Exhibit 12).[1] The relevant financial requirement is that the Licensee’s ratio of Current Assets to Current Liabilities must be 1:1.
  3. [7]
    The MFR Policy has been the subject of legislative change. Counsel for the Licensee took me through the proposals for change culminating in the Queensland Building and Construction Commission (Minimum Financial Requirements) Regulation 2018 (Qld) which commenced on 1 January 2019 and a further Regulation which commenced on 2 April 2019. I have since noted an amending Regulation commencing on 14 June 2019. The question is do the reforms introduced by the Regulations apply to the Licensee’s financial position prior to 1 January 2019?
  4. [8]
    The Licensee’s submissions, with which the Respondent did not disagree, are that:
    1. (a)
      By s 76 of the Queensland Building and Construction Commission Act 1991 (Qld) current as at 1 January 2019, the MFR Policy continues in force until the matters provided for under the Policy are prescribed by Regulation.
    2. (b)
      By s 12 of the Queensland Building and Construction Commission (Minimum Financial Requirements) Regulation 2018 (Qld) current as at 1 January 2019, Part 4 in relation to Net Tangible Assets of the Licensee applies despite the continued MFR Policy, to the extent of any inconsistency.
    3. (c)
      By transitional provisions set out at s 22 of the Queensland Building and Construction Commission (Minimum Financial Requirements) Regulation 2018 (Qld) current as at 1 January 2019, Part 4 does not apply to the Licensee until the first annual reporting day to occur after the commencement as stated in the notice given to the person under s 21. By s 21, the notice must be given at least 40 days before the annual reporting day stated in the notice.

Section 22(3) provides that the continued MFR policy, Part 2 continues to apply to the person until the first annual reporting day.  Part 2 relates to Net Tangible Assets. As at the date of the decision the annual reporting day had not arrived.

  1. (d)
    By the Queensland Building and Construction Commission (Minimum Financial Requirements) Regulation 2018 (Qld) (‘MFR Regulation’) current as at 2 April 2019, the MFR Policy was repealed and the requirements were transferred to the MFR Regulation.
  2. (e)
    It is concluded that the MFR Policy must be complied with by the Licensee as at 31 December 2018 and that is the Policy which I must apply when reviewing the Respondent’s decision of 8 January 2019.
  1. [9]
    I accept those submissions. The further Regulation current as at 14 June 2019 makes amendments intended to clarify the methodology for calculating assets for the purposes of working out a licensee’s Current Ratio. The further Regulation does not affect the application of the MFR Policy as at 31 December 2018.
  2. [10]
    The parties were at pains to point out that although I am to make the decision afresh and I may have regard to new information provided at the hearing, that information must only be relevant to the circumstances that pertained at 31 December 2018. In other words, the review is not an enquiry into whether the Licensee met the Minimum Financial Requirements of the Respondent as at the date of the hearing. The point was properly made that I do not have current details of the Licensee’s financial circumstances as at the date of the hearing in order to make such a decision. I accept that is the scope of this review.
  3. [11]
    The Licensee seeks an order that the decision of the Respondent dated 8 January 2019 to suspend the Licensee’s licence be set aside. The Licensee seeks costs and such other or further relief as the Tribunal considers appropriate.
  4. [12]
    The matter before me is a review governed by Chapter 2, Division 3 of the Queensland Civil and Administrative Tribunal Act 2009 (Qld). Section 20 provides that the purpose of the review of a reviewable decision is to be produce the correct and preferable decision. The Tribunal must hear and decide a review of a reviewable decision by way of a fresh hearing on the merits.

Reasons for the decision

  1. [13]
    The decision to suspend the Licensee’s licence was made by the Respondent because it concluded that the Licensee did not achieve the required Current Ratio of Current Assets to Current Liabilities of 1: 1.
  2. [14]
    The Respondent was not prepared to treat Related Entity loans as Current Assets of the Licensee for the purpose of the calculation of Current Ratio in accordance with the MFR Policy. At the time of the decision, a number of factors fed into the Respondent’s reasoning.
  3. [15]
    By the time of the hearing, the reasons relied upon by the Respondent for the decision had narrowed. The Respondent disputes the categorisation of two Related Entity loans as Current Assets of the Licensee, for the purpose of calculating the Licensee’s Current Ratio.[2] Those loans are:
    1. (a)
      a Related Entity loan from the Licensee to A and B in an amount of $295,718.00; and
    2. (b)
      a Related Entity loan to C in the sum of $63,755.00.

Findings of fact

  1. [16]
    I have referred to all the material filed by the parties in the proceeding and marked as exhibits.
  2. [17]
    The Licensee as trustee for a trust carries out carpentry work, including formwork. The business operates as a family business. Profits are distributed among beneficiaries of the trust. Related Entity loans appearing in the Licensee’s balance sheet in favour of A and B, C, and D and E are said to be current account balances.[3]
  3. [18]
    Key documents I have referred to are:
    1. (a)
      the Licensee’s Balance Sheet as at 31 August 2018;[4]
    2. (b)
      Minimum Financial Requirements Report, dated 21 January 2019 for the period ended 31 December 2018;[5] and
    3. (c)
      Balance Sheet position of the Family Group as at 31 December 2018.[6]
  4. [19]
    I accept that the Licensee’s Balance Sheet and the Family Group Balance Sheet accurately record the amounts set out in those documents. I do not accept the categorisation of the Related Entity loans in those Balance Sheets. That is an issue to be determined by me as part of the review.
  5. [20]
    The Family Group Balance Sheet records another Related Entity loan in favour of D and E. A note on the Balance Sheet for the Family Group records that D and E have sold their home. As a result, their home and the loan have been replaced with cash at bank of just over $650,000.00, which is noted as a Current Asset. The house was listed for sale as at 31 December 2018 and was sold on 5 March 2019.[7] The Respondent now accepts that considering the sale information, the loan to D and E could properly be taken into account in calculating Current Assets of the Licensee. I find that the loan to D and E in the sum of $237,667.00 is a Current Asset for the purpose of calculating the Licensee’s Current Assets as at 31 December 2018.

Differing calculations of the Applicant’s Current Ratio

  1. [21]
    It is not contested that the Licensee’s accountant, Mr Diacos is an Accepted Independent Accountant in the terms of the MFR Policy.
  2. [22]
    Mr Diacos included the Related Entity loans to A and B, and to C, as Current Assets in the Licensee’s Balance Sheet. He has done so because he considers the loans to be collectible as required by the MFR Policy. He considers they are collectible because the Related Entities have positive net asset positions in their own right when one takes into account the value of their homes. Further, in circumstances where the profits of a trust are distributed to the beneficiaries  of the trust as at 30 June each year (recorded against the current account of the beneficiaries) and given the history of profits of the Licensee the current assets pertaining to the beneficiaries could easily be collected in 12 months.[8]  Including the Related Entity loans to A and B and to C as Current Assets brings the proportion of Current Assets as to Current Liabilities into an acceptable ratio of 1.1967:1.
  3. [23]
    The Respondent submits that the Licensee’s Current Ratio as at 31 December 2018 is 0.84:1.[9] The Respondent has taken into account as Current Assets, the Related Entity loan to D and E, but not the Related Entity loans to A and B, and C.

MFR Policy

  1. [24]
    This matter involves the proper construction of the MFR Policy. 
  2. [25]
    It is helpful to set out relevant parts of the MFR Policy. I have marked parts of the extracts in bold to assist in interpretation of the MFR Policy.

2.2 Objectives

The objectives of the Minimum Financial Requirements in this policy are to promote financially viable businesses and foster professional business practices in the Queensland building industry.

To achieve these objectives and minimise the incidence of financial failure in the building industry, this policy requires all applicants and licensees to comply with the Minimum Financial Requirements.

2.3 Applicants and Licensees must comply with this policy

It is also a statutory condition of holding a licence that the Licensee’s financial circumstances must at all times continue to satisfy the relevant Minimum Financial Requirements stated in this policy.  If a Licensee breaches a condition on their licence, their licence may be suspended or cancelled under section 48 of the Act.

4.  Current Ratio

Definitions for Section 4:

In this section:

Current Assets -

means assets:

a)  which are realised, sold or consumed in the normal operating cycle of the business;

b)  which are realised within twelve months after the reporting period;

c)  which are held primarily for the purpose of trading (refer AASB 139);

d)  which are cash or a cash equivalent (as defined in AASB 107) unless the asset is restricted from being exchanged or used to settle a liability.

Related Entity loans and/or investments included as current assets must be collectible and convertible into cash as at balance date.

Current Assets do not include:

a)  Any Related Entity loans or investments assets which are not collectible;

d)  Real property not currently listed on the market for sale;

e)  Disallowed assets

Current Liabilities –

Current Ratio –

Means the ratio calculated by using the following formula:

Current Assets

Current Liabilities

To meet the requirements an Applicant or Licensee’s Current Ratio must be at least 1:1.

4.1  Financial Requirement – Current Ratio

It is a financial requirement that Applicants and Licensees must meet the Current Ratio requirement at time of Application, and at all times whilst the licence is held.

4.2  Calculating the Current Ratio

The Current Ratio is calculated in accordance with the defined formula.

Current assets included in the calculation of the Current Ratio must be in accordance with the definition of current assets in this policy.

The Commission may require the Applicant, Licensee or Accepted Independent Accountant to provide evidence of the classification of an asset as a current asset.  Where such evidence is not provided the Commission may automatically reclassify such assets as non-current assets without further notice to the Applicant or Licensee.

All current liabilities of an Applicant or Licensee must be included in the calculation of the Current Ratio, including any loans to Related Entities payable by the Applicant or Licensee in the 12 months following the end of the reporting period.

4.3  Determining Current Assets and Current Liabilities based on Licensee Structure

Depending on the structure of the Applicant or Licensee, the Current Ratio may only be met from current assets and current liabilities

  1. Accepted Independent Accountants

Definitions for Section 6

In this section:

Accepted Independent Accountant –

means a person with the qualifications specified in this policy who is permitted to complete MFR Reports regarding the financial position of an Applicant or Licensee.

6.5  Reporting Requirements for Accepted Independent Accountants

The Accepted Independent Accountant providing Reports must make appropriate enquiries of the Applicant or Licensee, and seek independent evidence that is appropriate in the circumstances, in their professional opinion, to justify the information stated in the MFR Report.

MFR Reports or any other reports to the Commission will be deemed incomplete for assessment where they are qualified by disclaimer clauses or emphasis of matter clauses by the Accepted Independent Accountant giving the report.

6.6  Determining Collectability of Related Entity Loans or Investment Assets

The Accepted Independent Accountant must determine collectability of any Related Entity loan or investment assets based on the financial position of the Related Entity as at the same balance date as the MFR Report or other report.

As a minimum the Accepted Independent Accountant is required to view the balance sheet of the Related Entity, for the relevant balance date and ensure the Related Entity loan or investment is shown as a liability for the same amount, and classification, as stated by the Applicant or Licensee.  The Related Entity must then have a positive net asset position in its own right as at the relevant balance date.

Where the Related Entity in question is owed loans by other Related Entities, the Accepted Independent Accountant must also determine those loans are collectible or deduct those amounts form the Related Entities net assets.

Where a Related Entity has a deficiency of assets, any loans owed to the Applicant or Licensee by that Related Entity must be deducted from the Net Tangible Assets and Current Ratio of the Applicant or Licensee.  Evidence of collectability is required to be provided to the Commission upon request.

 

  1. Definitions

Collectible –

Means convertible to cash as at balance sheet date.  For Related Entity Loan or Investment assets it means the Related Entity has net current assets and net tangible assets as at balance sheet date sufficient to repay the loan in full.

Evidence of Mr Diacos

  1. [26]
    Mr Diacos gave evidence as to the following definitions said to be ‘guided by the accounting standards’:[10]

A current asset is an asset that can readily be convertible to cash within a 12-month period.[11]

A non-current asset is an asset that cannot be converted to cash within 12 months’ period [sic].[12]

A tangible asset is something[13] that is tangible, something you can touch, whether it be a – for example, the desk in front of you or a property. Real property? ---Yes

An intangible asset is something that can’t be touched, so, for example, goodwill or intellectual property.[14]

When one speaks of net tangible assets, what does that mean? --- That would be the value of the asset after any liability against that asset is taken away…[15]

So if I had a piece of real property that wasn’t for sale and had no intention of selling it in the next 12 months, it would be both a non-current asset ---? ---Yes. ---and it would be a tangible asset? --- Correct. And if the property was worth, say $1million dollars and I owed $100,000 in relation to it, it would be a net tangible asset with the value of $900,000? --- That’s correct.[16]

  1. [27]
    I accept Mr Diacos’ evidence as to the meaning of the terms he was questioned about.

The Respondent’s position

  1. [28]
    Ms Dennis-Weller gave evidence on behalf of the Respondent.
  2. [29]
    Ms Dennis-Weller’s evidence is that documents provided by the Licensee do not demonstrate compliance with the MFR Policy. In particular:
    1. (a)
      the Current Assets of the Licensee include Related Entity loans;
    2. (b)
      the Family Group Balance Sheet shows that the Related Entities do not have sufficient current assets to repay the current Related Entity asset loans to the Licensee in full; and
    3. (c)
      the Related Entity loans should be correctly recorded as non-current assets.
  3. [30]
    Ms Dennis-Weller gave evidence in cross-examination that:
    1. (a)
      because the principal assets of the Related Entities being a home at Camp Hill belonging to A’s wife B and one at Highgate Hill belonging to C, were not listed for sale, they were not current assets for the purpose of working out whether the debts are collectible;[17]
    2. (b)
      the Related Entities do not have sufficient net current assets in their own right to repay the loan;[18]
    3. (c)
      she had excluded the real property of the Related Entities where it was not listed for sale and confined the examination to net current assets of the Related Entity;[19]
    4. (d)
      for a licensee to rely on a Related Entity loan as a current asset, the Related Entity needs to have sufficient current assets of its own to repay that loan;[20]
    5. (e)
      Current Assets are defined in section 4 of the MFR Policy at (b) to be realised within twelve months after the reporting period. A non-current asset is not generally realised within a 12-month period;[21]
    6. (f)
      it is not a proper construction of whether Related Entity loans are collectible to have regard to the net current assets and net tangible assets;[22] and
    7. (g)
      it is accepted that by reference to the Family Group Balance Sheet, net tangible assets are worked out by deducting liabilities listed from the total value attributed to those assets and the difference is the net tangible asset.[23]
  4. [31]
    Ms Dennis-Weller said that in order for the three loans to be repaid to the Licensee, the current assets, or liquidity, of the three specific directors is $90,500.00, so they don’t have any more liquid assets to draw upon if the company was to demand the repayment of  $600,000 worth of Related Entity loans in order for it to pay its own liabilities within a12 month period. The liquidity of $90,500 appears as the total current assets in the Family Group Balance Sheet.[24]
  5. [32]
    Later, in further questions allowed to be put by the Licensee’s counsel, Ms Dennis-Weller reiterated that if the Related Entity loans were not repayable in 12 months then they should be recorded as a non-current asset.[25]
  6. [33]
    Counsel for the Licensee put it to Ms Dennis-Weller that this is a gloss on the Policy and that for a Related Entity loan to be included as a Current Asset of the Licensee it must be collectible and convertible into cash as at the balance date. It was put that does not have anything to do with the loan being called up or repayable within 12 months. Ms Dennis-Weller responded that it did not.
  7. [34]
    The solicitor appearing for the Respondent submitted that:
    1. (a)
      the only issue is that the Related Entity loans were not properly calculated with respect to the Current Ratio.
    2. (b)
      Loans to A and B, and to C are not considered collectible as Current Assets, because neither of the Related Entity parties have sufficient net current assets to repay the loan in full or have sufficient current assets able to be convertible to cash as at balance date.
    3. (c)
      That submission is based on the Current Ratio section of the MFR Policy which provides that Related Entity loans included as Current Ratios must be collectible and convertible into cash as at the balance date. The definition of collectible was referred to which is that the Related Entity has net current assets and net tangible assets as at balance sheet date sufficient to pay the loan in full.
    4. (d)
      The Respondent was not satisfied on the evidence before it at the time it made its decision on 8 January 2019 that the Related Entities could repay those loans in full in compliance with the MFR Policy.
    5. (e)
      The MFR Regulation in large part picks up the MFR Policy and gives some weight to the Commission’s interpretation of the MFR Policy, in particular, the requirement on the part of the Related Entity to have a Current Ratio of at least one. The Respondent does not maintain that the MFR Regulation applies to the current circumstances.
    6. (f)
      The Commission asked repeatedly for materials and they were not provided. Clause 4.2 of the MFR Policy entitles the Commission to reclassify assets as non-current if evidence is not provided. The effect of the application of s4.2 is that assets are reclassified as non-current and therefore cannot be calculated in the ratio. Although the Commission may not have expressly reclassified, the Tribunal can exercise that power and re-classify the Related Entity’s assets as non-current. Evidence of the Respondent requesting information is found at page 116 of Ms Dennis-Weller’s affidavit in the Statement of Reasons.
    7. (g)
      Mr Diacos in his affidavit of 19 March 2019 at paragraph 34 refers to a notation to the Family Group Balance Sheet that: ‘Assets provided are not an exhaustive list but enough to prove collectability as per the QBCC policy documentation for the Related Party Loans’. The notation suggests that Mr Diacos did not carry out an exhaustive check of the assets relied upon in the balance sheet which is a requirement under the MFR Policy. At the outset, I do not accept this submission. The notation simply records that an exhaustive list of assets was not provided. I do not consider that to be evidence no exhaustive check was made. Nor was this put to Mr Diacos in cross-examination.
    8. (h)
      A and B, and C’s current liabilities to the trust cannot be covered by D’s current assets. The loans by A and B, and C should not be and were incapable of being included in the calculations of the Current Ratio. The definitions are not a term of art. They are clearly set out in the MFR Policy which is a statutory instrument.

The Licensee’s position

  1. [35]
    Counsel for the Licensee submitted:
    1. (a)
      in the event the Licensee enters into insolvency, the question is whether Related Entity loans can be recovered to satisfy creditors. A loan is governed by its terms, including as to when it is to be repaid.  Nothing in this context attempts to interfere with the bargain that has been struck. The question is whether in the event of insolvency the loan will be satisfied when called upon.
    2. (b)
      The changes to the legislation now require a demonstration of sufficient liquidity to repay loans as well as other debts.  It is no longer a question of whether the Related Entity has sufficient assets to repay the loan.
    3. (c)
      At the relevant time the objects of the Queensland Building and Construction Commission Act 1991 (Qld) included: To achieve a reasonable balance between the interests of building contractors and consumers. This is not consumer protection legislation.
    4. (d)
      The definition of the Licensee’s Current Assets in section 4 of the MFR Policy, does not say anything about how quickly a Related Entity loan must be realised to be collectible and convertible into cash. That is consistent with repayment of the loan being in accordance with the terms of the loan agreement.
    5. (e)
      The definition of the Licensee’s Current Assets in section 4 of the MFR Policy refers at (b) to assets: ‘which are realised within twelve months after the reporting period’. However, no timeframe is imposed on Related Entity loans.
    6. (f)
      The statement as to what Current Assets do not include provides, as the alternative to ‘assets realised within twelve months after the reporting period’ a reference to: ‘Real property not currently listed on the market for sale’. The result is that a Licensee’s real property can’t be included as a Current Asset if it is not listed for sale. Section 4 does not deal with the assets of the Related Entity. The relevant inquiry in respect of the Related Entity is merely whether the loan is collectible.
    7. (g)
      There is a difference in how a Related Entity loan is described with respect to a Current Asset: ‘collectible and convertible into cash as at balance date’ and with respect to what Current Asset does not include: ‘Related Entity loans…which are not collectible’. That informs the meaning of ‘convertible into cash’. It means something that’s able to be realised and sold.
    8. (h)
      There is a drafting error in section 4, given the definition of ‘collectible’ as ‘convertible to cash’.  The reference to Related Entity loans and/or investment should read: ‘must be collectible, full stop, because to be collectible, it …means convertible to cash’.
    9. (i)
      For a Related Entity collectible means: ‘the Related Entity has net current assets and net tangible assets as at balance sheet date sufficient to repay the loan in full’.
    10. (j)
      The inquiry is directed at two things - current assets and net tangible assets, which is broader and different to what you would have regard to for the Licensee in determining whether or not the Current Ratio is satisfied.
    11. (k)
      Section 6.6 of the MFR Policy requires the accountant to determine collectability of any Related Entity loan, based on the financial position of the Related Entity. It says nothing about using ‘peculiar and restricted’ definitions of ‘current assets and ‘current liabilities’ as described in section 4, which apply to the Licensee when determining whether it satisfies the Current Ratio.
    12. (l)
      At a minimum the accountant is required to view the balance sheet of the Related Entity and determine if it has a positive net asset position in its own right as at the relevant balance date. Nothing suggests that one disregards net tangible assets and only has regard to current assets.
    13. (m)
      The QBCC in its statement of reasons has emphasised only net current assets in the definition of collectible and ignores net tangible assets.
    14. (n)
      There has been a conflation of the task that’s required to be undertaken in respect of the Licensee and the inquiry that’s to be made in respect of the Related Entity.
    15. (o)
      No explanation is given why net tangible assets for the Related Entity are excluded.
    16. (p)
      A hypothesis is that the QBCC construes the definition of collectible by asserting that one works out if the Related Entity has sufficient net current assets to repay the loan in full and further sufficient net tangible assets to repay the loan in full rather that looking at both sets of assets and then making the enquiry.
    17. (q)
      The enquiry seems to be solely focused on can the loan be repaid out of current assets only. That is not in accordance with the purpose of the section which is to inquire whether the debt that’s owed can be brought back into the company and made available in the event of liquidation.
    18. (r)
      There is no good reason why the debt would need to be paid twice. It ignores the words ‘and net tangible assets’ and gives them no work to do.
    19. (s)
      The interpretation is inconsistent with s 14A of the Acts Interpretation Act 1954 (Qld). One can’t simply ignore words.[26]
    20. (t)
      The new MFR Regulation requires a Related Entity to have net tangible assets of at least $0 and a Current Ratio of at least 1. The reformed position does not support the view adopted by the Commission. The requirement for a Current Ratio with an analysis of current assets is something that applies at April. The current state of play did not provide for it. What’s currently provided for isn’t an inquiry confined to current assets, it is an inquiry directed at current assets and net tangible assets.[27]
    21. (u)
      A later statute can be examined to determine whether it throws any light upon an earlier statute when the words of the earlier statute are ambiguous.[28] In this case the words are not ambiguous.
    22. (v)
      A document must be read as a whole.[29] The meaning of collectability is informed by the balance of the document. The MFR Policy ascribes particular meaning to terms of art used in the document. It does not apply to those parts of the instrument that it isn’t stated to apply to.
    23. (w)
      A further problem with the QBCC’s argument is that it ignores the words which say these are the definitions for section 4, but then applies them to another section contrary to the express words in the regulation.
    24. (x)
      ‘Net tangible assets’ is not defined in respect of the definition for collectible and Related Entities. It bears the meaning given by Mr Diacos – you take a tangible asset and subtract from it the liability.[30]
    25. (y)
      The loan to D and E was collectible. (I will not detail this submission further in view of the concession made by the Respondent).
    26. (z)
      By reference to the Family Group Balance Sheet, when one looks at the non-current assets, which are necessarily net tangible assets, and deduct the joint liabilities of the family group, there is sufficient to repay the loans. That is, the Related Entity loans are collectible.
    27. (aa)
      The loan to A and B is secured by a mortgage over B’s home to secure repayment. It is therefore collectible.
    28. (ab)
      C is the sole registered owner of his property. It is wrong that the loan is uncollectible.
    29. (ac)
      The Current Assets of the Licensee includes the Related Entity loans, because they are collectible. Once current liabilities are deducted, the Licensee has a Current Ratio of 1:1967.
    30. (ad)
      The appropriate decision is that the decision of 8 January 2019 be set aside.
  2. [36]
    In reply to the Respondent’s submissions, the Licensee submitted that:
    1. (a)
      the MFR Regulation does not re-state the relevant part of the MFR Policy.
    2. (b)
      As to the reference to s 4.2 of the MFR Policy in relation to reclassification of assets as non-current where evidence is not provided, that never occurred, and the Respondent has not identified what evidence is apparently missing.
    3. (c)
      In relation to the complaint that Mr Diacos’ note, that ‘Assets provided are not an exhaustive list’, suggests he did not comply with his obligations in determining collectability, that is not the case. Section 6.6 of the MFR Policy does not require an exhaustive check. In any event he did not create an exhaustive list which is different.
    4. (d)
      The Licensee does not rely on the combined position of the family as a whole to repay the loans. Each Related Entity stands alone.
    5. (e)
      No response is made by the Respondent, as to the express words in the definition of collectible, no explanation is given as to why the Tribunal should disregard the words ‘net tangible assets’ or why the Tribunal should adopt a construction of ‘collectible’ to mean that Related Entity loans must be paid out of the Related Entity’s current assets as that definition applies to the Licensee in the policy undertaking some other task.
    6. (f)
      As to whether definitions are a term of art, or clearly set out in the policy. ‘Collectible’ is clearly set out in the policy. ‘Net tangible assets’, in respect of a Related Entity, ought to be given its usual meaning as explained by Mr Diacos.
  3. [37]
    The Respondent responded to a request by me for clarification as to whether it had in fact reclassified the assets of the Related Entities as non-current as a result of a lack of evidence. It was submitted that I am entitled to apply the MFR Policy afresh. I was directed to Ms Dennis-Weller’s statement that the accountant was put on notice that additional evidence was required in support of the Related Entity loans and the submission was made that I could determine if that evidence was sufficient.
  4. [38]
    The Respondent referred to Mr Hall’s statement providing evidence as to the mortgage in favour of the Licensee by B. It was put that on the date the decision was made the information may not have been provided and if it was not, then s 4.2 of the Policy may apply and the assets have been reclassified. That submission raised an objection from the Licensee that this was a new ground. I have treated the comments made by the Solicitor for the Respondent as mere discussion of the issue. I do not treat it as a reason for the decision. I will in any event consider the matter afresh on the merits before me.
  5. [39]
    The Respondent restated its position that reclassification may not have been a decision taken by the Commission, but it is available to me to make that decision.

Discussion

  1. [40]
    My starting point is the object of the MFR Policy to ‘promote financially viable businesses’ through compliance with Minimum Financial Requirements. Licensees who conduct financially viable businesses do not put at risk other participants in the construction industry and are able to meet their legal and contractual obligations. That is consistent with an object of the governing statute, the Queensland Building and Construction Commission Act 1991 (Qld), to achieve a reasonable balance between the interests of building contractors and consumers.
  2. [41]
    I do not accept, as submitted by the Licensee, that the main object of the Policy is to ensure a liquidator can collect a Related Entity loan. The main object of the Policy is to ensure licensees are solvent or ‘financially viable’. That is achieved by a reporting and audit regime and the requirement to meet certain minimum financial requirements which demonstrate liquidity.
  3. [42]
    The MFR Policy does not refer to what should ensue in the event of liquidation of a licensee.  It is not helpful to consider when and whether a liquidator may be able to recover a loan when determining if a licensee meets the required Current Ratio. It is a matter for the parties to a Related Entity loan as to the terms they impose in relation to repayment. However, the fact is that unless the Related Entity loan is a Current Asset of a licensee, it cannot be included in the calculation of the Current Ratio.
  4. [43]
    I do not accept the proposition put by the Licensee that it is immaterial when a Related Entity loan is to be repaid for the purpose of the Current Ratio calculation.  I do not accept that the Related Entity loan must only be collectible, in the sense of the Related Entity having a positive net asset position, to be categorised as a Current Asset for the purpose of the calculation. If a Related Entity loan is to be categorised as a Current Asset it must be realisable within 12 months of the reporting period. I will explore this issue in more detail later in this analysis.
  5. [44]
    There is no debate between the parties that A and B, and C, are Related Entities of the Licensee as defined in the MFR Policy.

MFR Policy

  1. [45]
    Section 4.2 provides:

The Current Ratio is calculated in accordance with the defined formula.

Current assets included in the calculation of the Current Ratio must be in accordance with the definition of current assets in this policy.

The Commission may require the Licensee or Independent Accountant to provide evidence of the classification of an asset as a current asset. Where such evidence is not provided the Commission may automatically reclassify such assets as non-current assets without further notice to the Applicant or Licensee.

  1. [46]
    I interpret that provision to mean that if a Related Entity loan is to be treated as a Current Asset of the Licensee, it must:
    1. (a)
      meet the definition of a Current Asset in the Policy; and
    2. (b)
      be supported, if required, by evidence from the Independent Accountant that the Related Entity loan or investment is a Current Asset in accordance with the definition.
  2. [47]
    Section 4 Definition provides:

Current Asset means assets: which are realised within twelve months after the reporting period.

  1. [48]
    I interpret that provision to mean that if a Related Entity loan is to be treated as a Current Asset, it must be repaid within twelve months after the reporting period. In this case the reporting period disclosed in the MFR Report is 30 June 2018 to 31 December 2018.
  2. [49]
    As this is a prospective timeframe for repayment of a loan, it is implicit that a Related Entity loan must as at the reporting date appear able to be repaid in the following 12 months. That is where the concept of a Related Entity loan being ‘collectible’ comes into play.
  3. [50]
    Returning to section 4.2 of the MFR Policy, the Respondent would in many cases need evidence that the loan is able to be repaid within 12 months of the reporting period, before it could be satisfied the loan is a Current Asset. Evidence was sought by the Commission on this point in its email dated 11 January 2019.[31]The Commission sought, amongst other things:
    1. (a)
      sufficient details of the related parties’ respective financial positions to confirm sufficient net current assets are held by parties sufficient to repay their respective amounts in full to the Trust;
    2. (b)
      confirmation of the parties to the loans owed to the Trust as at 31 August 2018 being used as Current Assets;
    3. (c)
      whether these loans were individual loan amounts or jointly owed;
    4. (d)
      an explanation as to why the loans were described in the 30 June 2018 accounts of the Licensee as negative non-current liabilities to individuals, but were listed as positive Current Assets as at 30 June 2018;
    5. (e)
      further, details of the respective loans and their due dates for payment to confirm these amounts have been classified correctly as Current Assets of the trust.
    6. (f)
      the balance sheet or financial position of any Related Entity who owed an amount to the Trust as at 31 August 2018, in order to show their respective current and non-current financial positions.
    7. (g)
      The balance sheets for all related entities must demonstrate the test prescribed in section 6.6 of the MFR Policy has been performed for any Related Entity loan amount being used by the Trust as a Current Asset, in that the liability to the Trust must be recognised for the same amount, and same classification (Current) as indicated in the Trust financial statements.
  4. [51]
    Mr Diacos responded in his letter dated 23 January 2019. [32]He did not:
    1. (a)
      confirm sufficient net current assets to repay the respective loan amounts in full;
    2. (b)
      confirm the parties agreed to the loans being used as Current Assets;
    3. (c)
      provide an explanation for the different accounting treatment of the loans; or
    4. (d)
      give details of due dates for payment to confirm classification as current assets of the Trust.
  5. [52]
    The position does not change with the further information provided by Mr Diacos in his recent statement filed in the Tribunal.[33]
  6. [53]
    A and B, and C’s homes are their only significant assets. In order for A and B’s Related Entity loan to be repaid within 12 months after the reporting period, the following would need to occur:
    1. (a)
      A and B must agree to repay the loan within 12 months and their Balance Sheet should record the loan as a current liability; and
    2. (b)
      B’s home would need to be placed on the market and sold.
  7. [54]
    In the case of C, in order for his loan to be repaid within 12 months after the reporting period, he must agree to repay the loan within 12 months. Thereafter C’s home would need to be placed on the market and sold.
  8. [55]
    Other than recording the loans from the Licensee as a Current Liability, there is no evidence that A, B and C have agreed to repay the loans within 12 months. Further, they have not placed their homes on the market to achieve repayment of the loans.
  9. [56]
    Section 4 provides:

Related Entity loans and/or investments included as current assets must be collectible and convertible into cash as at balance date.

  1. [57]
    This requirement appears as a new paragraph under the definition of Current Asset. I interpret it as an aid in the classification of a Related Entity loan as a Current Asset. It represents a further requirement beyond the definition of Current Asset. The requirement tests the credibility of categorising a Related Entity loan as a Current Asset.
  2. [58]
    I do not accept, as the Licensee submits, that the reference to Related Entity loans is read in isolation from the definition of Current Asset and that no time frame is imposed on repayment of a Related Entity loan.
  3. [59]
    The Licensee suggests that the definition of Current Asset as something realisable within 12 months applies only to the Licensee’s property.  In my view, if the Licensee wishes to include the Related Entity loan as a Current Asset for the purpose of calculating the Current Ratio, then the loan must fall within the definition of Current Asset. That is expressly required by section 4.2 of the MFR Policy.
  4. [60]
    I interpret the paragraph with respect to Related Entity loans to mean - to be included as a Current Asset, Related Entity loans must be collectible (defined to mean that the Related Entity has a net positive asset position as at 31 December 2018 sufficient to repay the loan) and convertible into cash (in the sense that if an asset must be sold to repay the loan, it is capable of being sold or converted into cash) as at 31 December 2018. Of course, upon conversion into cash, the cash becomes a current asset. In all, the Related Entity loan must be capable of being repaid from assets which are able to be converted into cash as a current asset as at the balance date.
  5. [61]
    It is important to note the use of the term ‘balance date’, which I interpret in the context of the MFR Report for a given reporting period, as the date upon which the company’s accounts are balanced. In this case the balance date is 31 December 2018.
  6. [62]
    I do not accept the Licensee’s submission that there is a drafting error in the paragraph because ‘collectible’ means ‘convertible to cash’. Collectible does not mean convertible into cash in the case of a Related Entity loan. The phrasing of the paragraph is deliberate and can be construed to bear the meaning I have set out.
  7. [63]
    On the analysis of the MFR Policy to this point, for the loans by A and B, and C to be included as Current Assets of the Licensee, the loans must be:
    1. (a)
      repaid within 12 months after the reporting period ending 31 December 2018; and
    2. (b)
      collectible and convertible into cash as at 31 December 2018.
  8. [64]
    Section 6.6 provides:

Determining Collectability of Related Entity Loans

As a minimum the Accepted Independent Accountant is required to view the balance sheet of the Related Entity, for the relevant balance date and ensure the Related Entity loan is shown as a liability for the same amount and classification as stated by the Licensee.

The Related Entity must then have a positive net asset position in its own right as at the relevant balance date.

  1. [65]
    In my view collectability goes to the question of whether the loan is capable of being repaid within 12 months of the balance date, consistent with the assertion that the loan is a Current Asset of the Licensee.
  2. [66]
    The first thing the Accepted Independent Accountant must do is ensure the Related Entity loan is shown on the Related Entity’s Balance Sheet as a liability for the same amount and classification as stated by the Licensee. That is A and B, and C must each show their loans as current liabilities. The Group Balance Sheet does record the loans as current liabilities.
  3. [67]
    Next, the Accountant must ensure the Related Entity has a positive net asset position in its own right as at the balance date.
  4. [68]
    The steps are to be taken in the context of the definition of ‘Collectible’ which means in the case of Related Entity loans – ‘the Related Entity has net current assets and net tangible assets as at balance sheet date sufficient to repay the loan in full’.
  5. [69]
    These are mandatory steps under the MFR Policy. They require an acknowledgement that the loan will be repaid within 12 months of the balance date and a capacity in fact to repay the loan in full as at the balance sheet date.
  6. [70]
    The loan in favour of A and B is shown in the accounts as $295,718.00. There is no cash asset sufficient to repay the loan.
  7. [71]
    The terms of the loan are set out in a Loan Facility Agreement between the Licensee and A and B, dated 5 September 2017 with respect to the principal sum of $157,000.00 and a further advance of $72,382.00 totalling $229,382.00.
  8. [72]
    The loan is said to be repayable on the earlier of 120 days after demand by the lender or 25 years from commencement. B’s house secures the loan by way of a third mortgage in favour of the Licensee. The security is insufficient to cover the Related Entity loan of $295,718.00.
  9. [73]
    The Family Group Balance Sheet reveals for A and B:
    1. (a)
      Assets – Current and Non-Current

Cash  $ 3,476.00

Other assets  $25,500.00

Home  $925,000.00  Total  $953,976.00

  1. (b)
    Liabilities – Current and Non-Current

Loan to Trust $295,718.00

Loans   $535,294.00  Total  $831,012.00

  1. (c)
    Net asset position of A and B  $122,964.00
  1. [74]
    The net asset position of A and B is positive but is not sufficient to repay the Related Entity loan. The loan is not collectible in terms of the definition.
  2. [75]
    The loan in favour of C is shown in the accounts as $63,755.00. C has no other asset than his home, which is listed as a non-current asset worth $1,100,000.00. He carries a non-current loan of $75,130.00. There is no evidence of a Loan Facility Agreement in place with the Licensee and no security over the home in favour of the Licensee. The title search[34] reveals that the land is subject to easements, encumbrances or interests reserved to the Crown by three Deeds of Grant and is subject to a mortgage in favour of AFSH Nominees Pty Ltd registered in September 2018.
  3. [76]
    C’s net asset position is $961,115.00. That is sufficient to repay the loan to the Licensee in full, however it is unknown whether C’s home was convertible into cash as at 31 December 2018, given the encumbrances on the title. In any event it was not on the market at that time, so it could not be convertible into cash at that time.
  4. [77]
    By following the requirements of the MFR Policy, it is clear that the Related Entity loan by A and B does not get to first base, as it is not collectible.
  5. [78]
    C is in a different position. The loan appears to be collectible. However, that is not the end of the enquiry, as the Licensee would have it. There are two other relevant steps:
    1. (a)
      the loan, to the extent that it is to be paid from the sale of an asset must be convertible into cash as at 31 December 2018. There is no evidence as to whether, in light of the encumbrances on the title, that is possible. Further the house was not on the market at the time to enable it to be converted to cash.
    2. (b)
      Finally, for the loan to C to be a Current Asset of the Licensee, it must be repaid within 12 months of the balance date. It is at this point that it is relevant to look at the current assets of C, as the Respondent has done and to note that there are no current assets of C sufficient to repay the loan. The principal asset of C is his home and that is a non-current asset. It is not on the market and there is no evidence it can be realised within 12 months.
  6. [79]
    For these reasons the loan to C cannot be classified as a Current Asset of the Licensee.
  7. [80]
    I do not think it is necessary for me to re-classify the Related Entity loans as non-current on the basis of a lack of evidence. The evidence before me is sufficient to demonstrate that the Related Entity loans do not fall within the definition of Current Asset in the MFR Policy.
  8. [81]
    Contrary to the assertion of the Licensee, looking at the current assets of the Related Entity is not a conflation of the task that is required to be undertaken in respect of a licensee and the inquiry that is to be made in respect of the Related Entity. It is a separate step and a necessary step in completing the enquiry as to whether the Related Entity loan falls within the definition of Current Asset. It is not the case as argued by the Licensee that net tangible assets are ignored in ascertaining a positive net asset position. However, in this case, C’s net tangible assets do not assist the Licensee because they are not current assets, which they would need to be in order to be realised within 12 months.
  9. [82]
    Determining a positive net asset position by having regard to all classes of assets is not the end of the enquiry. It is merely the minimum step an Independent Accountant must take along the road to determining collectability and then finally determining if the loan fits the definition of Current Asset.
  10. [83]
    Contrary to the assertion of the Licensee, the Respondent is not applying the definition in section 4 of the MFR policy to a different purpose and a different section of the MFR Policy. Once collectability has been determined in accordance with section 6 of the MFR Policy, the question is asked whether the asset falls within the definition of Current Asset in section 4.
  11. [84]
    The definition of Current Asset for the purpose of calculating Current Ratio is the conventional definition of a Current Asset. It is not peculiar. It is as defined by Mr Diacos. It cannot be given a different definition for certain classes of assets, nor does the MFR Policy purport to do so. A Related Entity loan is either realisable within 12 months or not. A Licensee does not escape that conclusion by suggesting that it is sufficient if Related Entity loans can be clawed back by a Liquidator, at some undefined point in the future. That is not the point of the MFR Policy which aims to hold licensees to account as financially viable businesses. If a licensee describes a Related Entity loan as a Current Asset, then that must be a realistic description. Whether it is realistic can be judged by whether the loan is collectible and assets necessary to repay the loan can be converted into cash. The loan must fit the definition. That is why liquidity or current assets become critical.
  12. [85]
    I note the Licensee has made conflicting submissions in relation to treatment of the Related Entity loans as a group. I understood the Licensee to submit that after deducting liabilities for the family group from the non-current non-tangible assets for the group, there is sufficient to repay the loans. Mr Diacos’ working sheet adopts that methodology.[35]Later it was submitted that the Licensee does not rely on the combined position of the family as a whole to repay the loans and that each Related Entity stands alone. The latter position must be the case. The fact is that A and B cannot repay the loan. C may be able to, but on the evidence is not in a position to do so within 12 months.
  13. [86]
    I have placed no weight on the concession obtained by Counsel for the Licensee in cross-examination of Ms Dennis-Weller that the requirements for a Related Entity loan to be included as a Current Asset of the Licensee in section 4 of the MFR Policy do not have anything to do with the loan being repayable within 12 months. I have determined the matter afresh. I am not bound by the reasoning of the Respondent. Nor in a review of this type is the original decision maker intended to be cross-examined. The role of the decision maker in such a review is to assist the Tribunal by explanation of the decision under review.

Conclusion

  1. [87]
    On the basis of my analysis, I conclude that:
    1. (a)
      the Related Entity loan from the Licensee to A and B in the amount of $295,718.00 cannot be included as a Current Asset of the Licensee because it is not collectible. The borrowers have insufficient collectible assets; and
    2. (b)
      the Related Entity loan from the Licensee to C in the amount of $63,755.00 cannot be included as a Current Asset of the Licensee because C’s home is not on the market to enable it to be converted into cash for the purpose of repaying the loan within 12 months.
  2. [88]
    For these reasons, the Related Entity loans to A and B, and to C, cannot be brought into account in the Current Ratio calculation as a Current Asset. The ratio is therefore not 1: 1 as required. I find that the Current Ratio is as calculated by the QBCC – 0.84:1.
  3. [89]
    On this basis I find that the decision of the QBCC to suspend the Licence of the Licensee is confirmed.

Footnotes

[1]  Section 35(3) Queensland Building and Construction Commission Act 1991 (Qld); Minimum Financial Requirements Policy effective 9 October 2015.

[2]  T2-21 lines 44-47; T2-22 lines 1-7.

[3]  Affidavit of Anthony Diacos filed 14 January 2019 (Exhibit 4) at paragraphs [6], [7].

[4]  Exhibit 10 Affidavit of Anthony Diacos filed 19 March 2019, page 40.

[5]  Ibid pages 3, 4.

[6]  Ibid pages 108-110.

[7]  Historical title search Exhibit 11.

[8]  Exhibit 8 Affidavit of Craig Mitchell Hall filed 24 January 2019, page 7.

[9]  T2-22 lines 31-35.

[10]  T1-22 line 19.

[11]  T1-22 line 45.

[12]  T1-23 line1.

[13]  T1-23 lines 4-7.

[14]  T1-23 lines 10-11.

[15]  T1-23 lines 13-14.

[16]  T1-23 lines 16-23.

[17]  T1-45 lines 40-43.

[18]  T1-46 line 40.

[19]  T1-47 lines 6-8.

[20]  T1-50 lines 15-16.

[21]  T1-51 lines 23 -26.

[22]  T1-51 lines 30-35.

[23]  T1-56 lines 34-36.

[24]  T1-68 lines 39-43.

[25]  T1-71 lines 32-34.

[26]Commonwealth v Baume (1905) 2 CLR 405, 414.

[27]Bridge v Mattis [1953] AR NSW 49, 56-7.

[28]Allina Pty Ltd v FCT (1991) 28 FCR 203, 212.

[29]Metropolitan Gas Co v Federated Gas Employees’ Industrial Union (1924) 35 CLR 449, 455.

[30]Re Pacific Film Laboratories Pty Ltd and Collector of Customs (1979) 2 ALD 144, 155-6.

[31]  Exhibit 8 – Affidavit of Craig Mitchell Hall filed 24 January 2019, page 2.

[32]  Exhibit 8 Affidavit of Craig Mitchell Hall filed 24 January 2019, page 7.

[33]  Exhibit 10 Affidavit of Anthony Diacos filed 19 March 2019.

[34]  Exhibit 8 Affidavit of Craig Mitchell Hall sworn 20 May 2019, page 26.

[35]  Exhibit 10 Affidavit of Anthony Diacos filed 19 March 2019, page 55.

Close

Editorial Notes

  • Published Case Name:

    The Licensee v Queensland Building and Construction Commission

  • Shortened Case Name:

    The Licensee v Queensland Building and Construction Commission

  • MNC:

    [2019] QCAT 224

  • Court:

    QCAT

  • Judge(s):

    Member Fitzpatrick

  • Date:

    12 Aug 2019

Appeal Status

Please note, appeal data is presently unavailable for this judgment. This judgment may have been the subject of an appeal.
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