Buckland Products Pty Ltd v Deputy Commissioner of Taxation [2002] VSC 410

Supreme Court of Victoria|2002-09-23|Before: HABERSBERGER J

The application for the winding up was heard by the Senior Master on 10, 11, 17 and 18 October 2001 for limited hearing periods. On 18 October 2001, the Senior Master ordered that Dennis Anthony Turner be appointed provisionally as liquidator of Buckland pending the determination of the proceeding or further order and adjourned the further hearing of the proceeding to 15 November 2001. Liberty to apply was reserved to the Deputy Commissioner, Buckland and the provisional liquidator. It was noted under "Other Matters" in the order that the Court considered that Buckland's prospects of success in the pending appeal from the order of Warren J were "not substantial, but minimal". Further, the interests of the Deputy Commissioner and Buckland's other creditors were said to require immediate protection, having regard to the Deputy Commissioner's success in the proceeding before Warren J and the fact that the debt demanded had not been disputed. It was also ordered that, subject to further order and notwithstanding the appointment of the provisional liquidator, the director of Buckland might (if so advised) and at his own expense pending further order, prosecute in its name the appeal against Warren J's order.

By notice of appeal dated 24 October 2001, Buckland appealed against the order of the Senior Master made on 18 October 2001. The appeal was returnable before the Judge sitting in the Corporations List on 9 November 2001.

In the meantime, on 19 October 2001, a receiver and manager had been appointed to Buckland by a secured creditor, Casualife Furniture International Limited, a company incorporated in Hong Kong. On 25 October 2001, by an oral application pursuant to the liberty to apply reserved, the Deputy Commissioner brought the matter back before the Senior Master. Counsel for the Deputy Commissioner argued that, as a result of the appointment of the receiver and manager, there was a case of presumed insolvency under s.459(2)(c) of the Act. The trial of the proceeding was called on forthwith by the Senior Master. Buckland was represented by counsel, as was the provisional liquidator, Mr Turner, who had also filed an affidavit sworn on 25 October 2001 in which he summarised "the attempts" he and his staff had made to carry out the terms of the court order since his appointment. In his first order made on 25 October 2001, the Senior Master set out the following under the heading "Other Matters":

"After the appointment of the provisional liquidator on 18 October 2001, a secured creditor of the defendant appointed Richard Sell Mansell as receiver and manager of the defendant on 19 October 2001. In consequence, and independently of the issues the subject of the appeal to the Court of Appeal concerning the statutory demand served by the plaintiff, the Court is obliged by section 459(2)(c) of the Act to presume that the defendant is insolvent. Further, the provisional liquidator has this day reported to the Court by affidavit. The Court stood the hearing down so that Counsel for the defendant might obtain instructions as to any response which the director of the defendant would make to the matters concerning the defendant's financial position in the provisional liquidator's report. The instructions which Counsel received confirm that the company sold its business on or about 28 February 2001 for consideration of $100,000 being the sum of an independent valuation of its plant and equipment; and for the value of stock, a valuation of which has not been made. The $100,000 was payable subject to the purchaser's assuming certain (unspecified) liabilities of the defendant and it is not clear what (if any) part of the $100,000 has been paid or is payable by the purchaser to the defendant. The company's only other assets are certain trade debtors (whose debts must have been outstanding since at least February 2001) and one or more choses in action. In the circumstances the Court declined to order an adjournment for the director to make an affidavit to this effect as it only served to confirm the presumption and the provisional liquidator's evidence that the defendant is insolvent, which evidence also demonstrates an insolvency extant before this proceeding commenced and continuing. In the circumstances, the Court has concluded that a winding up order, as sought by the plaintiff, ought to be made."

In his second order made on 25 October 2001, the Senior Master made a number of orders, including amending the name of the defendant in the title of the proceeding by the addition of the expression "(Receiver and Manager Appointed)", and ordering that Buckland be wound up in insolvency.

By notice of appeal dated 30 October 2001, Buckland appealed against the orders of the Senior Master made on 25 October 2001. That appeal was also returnable on 9 November 2001. On that day, both appeals by Buckland against the orders of the Senior Master made on 18 and 25 October 2001 respectively were before me. As a result of late service, I adjourned the hearing of the appeals to 20 November 2001 and gave directions as to the filing of any further material on which the Deputy Commissioner might wish to rely. There was also discussion about any other affidavits being served well in advance of the adjourned hearing date.

I pointed out to Mr Guss, on 9 November 2001, that I would not be sitting on appeal, as it were, from Warren J's judgment. Indeed, I invited him to apply as soon as possible to the Court of Appeal for a stay of the appeal before me, if any part of his argument was going to involve a challenge to any of her Honour's findings or be based in any way on the existence of that appeal. No such application was made.

Pursuant to r.77.05(7) of the Supreme Court Rules, the appeal from the orders of the Senior Master made on 25 October 2001 is a re-hearing de novo.

At the hearing on 20 November 2001, Mr Arthur, the solicitor for the provisional liquidator, sought leave to appear initially in respect of both appeals, but subsequently only on the appeal from the winding up order made on 25 October 2001. Although Mr Guss, the solicitor for Buckland, opposed the application, I granted Mr Arthur leave to appear.

On the application of the Deputy Commissioner, and again over the opposition of Mr Guss, I ordered that the appeal from the orders made on 25 October 2001 be heard first.

Further, I granted the Deputy Commissioner special leave, pursuant to r.77.05(7)(b) of the Supreme Court Rules, to rely on an affidavit of Mr Turner sworn on 14 November 2001. Mr Guss opposed the granting of special leave on the basis that the Deputy Commissioner was relying now on s.459(2)(c) of the Act and that such reliance was impermissible because there had been no amendment to the originating process, and there was no mention in the originating process of that particular provision of presumed insolvency. For reasons which I will return to below, I did not accept Mr Guss' submission about the invalidity of the procedure which had been adopted by the Deputy Commissioner.

Mr Guss then sought an adjournment to enable an affidavit to be filed in an attempt to rebut the statutory presumption of insolvency under s.459C(2)(c). Although I considered that Mr Guss should have understood from the hearing on 9 November 2001, that any affidavits on which he wanted to rely should have been filed and served before 20 November 2001, I reluctantly adjourned the hearing to 11 December 2001 and directed that any further affidavit to be relied on by Buckland be filed and served by 4 December 2001.

On 11 December 2001, Ms Richards QC, who appeared with Mr Nolan, for the Deputy Commissioner, submitted that the appeal should be dismissed because Buckland was clearly insolvent. She submitted that the Deputy Commissioner was entitled to rely on four different ways of establishing Buckland's insolvency. They were:

(a) the presumed insolvency as a result of the appointment of the receiver and manager to Buckland (s.459C(2)(c)); (b) the presumed insolvency as a result of Buckland's failure to comply with the statutory demand (s.459C(2)(a)); (c) the evidence of the insolvency of Buckland to be found in the Report as to the Affairs of Buckland dated 13 November 2001 (the "RATA"); and (d) the evidence of the insolvency of Buckland to be found in the affidavits of the provisional liquidator.

Ms Richards also submitted that this was a case where the debt was not disputed by Buckland, and referred me to the observation of Warren J, in her judgment on the appeal from the dismissal of the application to set aside the statutory demand, that:

"the debt is not disputed by the company bearing in mind that the debt is based upon a self-assessing liability for group tax and sales tax."[4]

Mr Guss strongly disagreed with the suggestion that the debt was not disputed. However, there was no denial of the indebtedness in any affidavit filed on behalf of Buckland. The RATA included the Deputy Commissioner as a creditor, although the "amount admitted as owing" was said to be "unascertained." It was never satisfactorily explained to me why it was said that there was any argument about Buckland's indebtedness to the Deputy Commissioner. In the letter from the director of Buckland, Mr Anthony Guss, to the provisional liquidator dated 27 November 2001, for example, it is simply said that "the amount owing to the Australian Tax Office is unascertained because the same is subject to a dispute." As I understood his argument, Mr Guss explained that this issue had not been the subject of further evidence because of my earlier indication that I would not allow him to trespass into areas previously dealt with in the judgment of Warren J, given that I was not sitting on appeal from her Honour's decision. Nevertheless, this did not stop Mr Guss from raising in his Outline of Submissions the question of whether the Deputy Commissioner was a "creditor" for the purpose of s.459P and from orally submitting that the Deputy Commissioner's claim was "hotly disputed." However, in accordance with my earlier indication, I am dealing with this appeal on the basis that Warren J correctly decided that the Deputy Commissioner's statutory demand should not be set aside.

In respect of the Deputy Commissioner's first way of establishing Buckland's insolvency, Mr Guss repeated his earlier submission to me that the Deputy Commissioner could not rely on s.459C(2)(c) of the Act because there had been no amendment to the originating process and, accordingly, there was no mention in the originating process of that particular provision of presumed insolvency.

In my opinion, the basis of an application to wind up a company under s.459A of the Act is that the company is insolvent. The provisions of s.459C(2) set out that the Court must presume that the company is insolvent if certain events, referred to in the sub-ss.(a) to (f) of that section, have occurred. So long as a defendant is aware of the plaintiff's reliance on the new presumption of insolvency, and there is material before the Court that would support that application, and the defendant has had an opportunity to meet the new way in which the plaintiff is seeking to establish or prove insolvency, it is not necessary, in my opinion, to amend the originating process.[5] I therefore reject this preliminary submission by Mr Guss.

The next part of Mr Guss' submission was that s.459C(2)(c) was not applicable because the charge under which the receiver and manager had been appointed to Buckland was not "a floating charge." Mr Guss acknowledged that the charge was expressed to be "a fixed charge" as regards certain assets and a "floating charge" as regards all other assets charged. The whole of the undertaking and assets of Buckland were charged so that there would have been a floating charge over assets such as trade debtors. However, Mr Guss drew attention to clause 5(2) of the charge which provided that "the floating charge ... shall become a fixed charge" upon the happening of certain events, including "if an application ... is made ... for the winding-up of the Mortgagor." He therefore submitted that the charge had become a fixed charge on 6 September 2001 when the proceeding was commenced, and that it was not a floating charge when the receiver and manager was appointed on 19 October 2001.

This submission ignored one significant issue which is, in my opinion, fatal to its success. The definition of "floating charge" in s.9 of the Act is that it:

"includes a charge that conferred a floating security at the time of its creation but has since become a fixed or specific charge."

Clearly, the charge in question conferred a floating security at the time of its creation. It is therefore irrelevant that it may have since become a fixed charge. At the time of the appointment of the receiver and manager, it was a floating charge within the meaning of s.459C(2)(c).

Therefore, in my opinion, Buckland's opposition to the Deputy Commissioner's reliance on s.459C(2)(c) is without foundation, and accordingly the Court must presume that Buckland is insolvent, unless the contrary is proven (s.459C(3)). As discussed below, I am satisfied that the contrary has not been proven. There was no affidavit by the director of Buckland suggesting that it was solvent. This conclusion on the presumed insolvency under s.459C(2)(c) would be sufficient to dispose of the appeal, but it seems to me that it is appropriate that I also consider the other ways in which it was said by the Deputy Commissioner that it had been established that Buckland was insolvent.

The second ground was the presumed insolvency as a result of Buckland's failure to comply with the statutory demand. Mr Guss submitted that Buckland had not failed to comply with the statutory demand, within the meaning of s.459F, because its application under s.459G had still not been "finally determined or otherwise disposed of" (s.459F(2)(a)(ii) of the Act) given that its appeal from the decision of Warren J had not yet been heard by the Court of Appeal.

The question of what is meant by the phrase "finally determined" is part of the subject of Warren J's judgment. Her Honour decided that "[t]he application under s.459G remains finally determined unless and until the appeal is allowed."[6] In reaching that conclusion, Warren J followed the decision of Jenkinson J in Livestock Traders International Pty Ltd v Bui[7]. Contrary to Mr Guss' submission, I do not read the decision of the High Court of Australia in Guss v Johnstone[8], a bankruptcy case, as affecting that conclusion.

As previously stated, I am proceeding on the basis that her Honour's decision is correct. It seems to me, therefore, that the Deputy Commissioner is also entitled to a winding up order based on the presumed insolvency under s.459C(2)(a), because Buckland has "failed (as defined by section 459F) to comply with a statutory demand."

Apart from the presumed insolvency arguments, Ms Richards submitted that I could be satisfied on the evidence before me that Buckland was insolvent. She relied on the evidence of insolvency to be found in the RATA and in the affidavits of the provisional liquidator. I granted the Deputy Commissioner special leave to put into evidence the RATA, which had been filed with the Court pursuant to s.475(7)(a) of the Act.

What that material revealed was that, by an agreement dated 28 February 2001, Buckland had sold to Casualife Furniture International Pty Ltd all of its stock for the lower of cost or realisable value as agreed between the parties and all of its plant and equipment for the difference between the "market value for existing use" and the "estimated auction realisable value", provided that the purchase price for the plant and equipment would not be less than $90,000. The value of the stock was yet to be finalised. The agreement further provided that the purchase price would be satisfied in part or in whole by the purchaser assuming an equal liability to Buckland's secured creditor, Casualife Furniture International Limited. In the event of there being any balance of the purchase price owing after any such assumption of liability or payments or set-offs by the purchaser, it was to be paid in five equal annual instalments commencing on 31 March 2002, together with interest at 7 per cent per annum paid annually. Property in the stock, plant and equipment, subject to the consent of the secured creditor, passed to the purchaser on 1 March 2001. All intellectual property in the name "Casualife" was also transferred to the purchaser. Buckland had, therefore, not traded since 28 February 2001.

Further, the RATA disclosed that Buckland was said to have no assets apart from possibly some small or unascertained trade debts which were unlikely to be recovered and contingent assets in the form of claims in litigation which were estimated to produce at least $598,000. Apart from the debt owed to the secured creditor which was approximately $504,000, liabilities included employees' claims totalling $77,844.26 and an admitted amount owed to creditors of $22,318.51. The amount claimed by creditors, including the Deputy Commissioner's $148,659, was the sum of $234,405.47. Contingent liabilities, which the creditors claimed totalled $395,578.05, were said by Buckland to rank for an estimated $20,238.69, plus several unascertained amounts. Clearly, this is the picture of a company which was insolvent because it was unable to pay its debts as and when they became due and payable (see the definition in s.95A). The amount owed to creditors (even if one only takes account of the admitted amount of $22,318.51) must by its very nature have been outstanding for over six months. The same could be said about the employees' claims for wages and leave payments which totalled about $15,000, whatever the position might be with respect to the superannuation entitlements. Even assuming that the contingent assets were worth what they were estimated to be, they had not helped Buckland meet its current outstanding debts. On the basis of the above material, I am satisfied that, as a matter of commercial reality[9], Buckland was insolvent.

In addition, there was expert evidence from Mr Turner, the provisional liquidator, that in his opinion Buckland was insolvent. In his first affidavit sworn on 25 October 2001, Mr Turner stated:

"On the basis of the information obtained by me during the last week the company is clearly insolvent. It has no assets and liabilities in excess of $250,000.00."

In his second affidavit sworn on 14 November 2001, Mr Turner said:

"I am still of the view, as expressed in my affidavit sworn 25 October 2001, that Buckland Products is clearly insolvent."

Mr Guss submitted that these statements were simply "bald assertions", which were not substantiated in any way. He submitted that I should take no account of them.

However, I can see no reason why, if this were the only available evidence, the Court could not act upon it, if it were otherwise not open to challenge, particularly as Mr Turner was not cross-examined. But Mr Turner's statement, in his first affidavit, that Buckland had "no assets" has been shown to be incorrect in one important respect. It is now known that Buckland did have an asset in the form of the debt owed by the purchaser of the stock, plant and equipment. What that asset was worth and whether it was sufficient to meet the amount owed to the secured creditor, let alone the debts of the other creditors, is not clear. Nevertheless, the existence of the asset in the form of the debt owed by the purchaser is a significant contradiction of Mr Turner's statement, which apparently was the basis for his opinion that Buckland was insolvent. It suggests to me that, although Mr Turner's opinion may not have been incorrect, possibly it was expressed prematurely. I note that at the time he swore his second affidavit, Mr Turner had yet to receive the RATA and, as he said himself, he had "not yet had access to the complete books and records of Buckland Products."

Therefore, I would not have been prepared to conclude on the basis of Mr Turner's opinion alone, as stated and justified in his two affidavits, that Buckland was insolvent.

The result of the above is that I have found that, in three different ways, the Deputy Commissioner has established that Buckland was insolvent. Pursuant to s.467(1), the Court undoubtedly has broad powers in respect of what orders it can make on the hearing of a winding up application. Mr Guss urged me to follow the course adopted by Jackson CJ in Re Mosbert Finance (Australia) Pty Ltd[10], and adjourn the winding up application until after the hearing and determination of the appeal from the judgment of Warren J. Certainly, I could do this under s.467(1)(b). However, in all the circumstances, I have concluded that the appropriate order is for this insolvent company to be wound up. Therefore, the appeal must be dismissed with costs.

I will hear from the parties as to what should now happen to the appeal from the order of the Senior Master made on 18 October 2001.

[5] See Deputy Commissioner of Taxation v Barroleg Pty Ltd (1997) 25 ACSR 167 at 172-3 per Young J

[8] (2000) 74 ALJR 884 at 893-4; [2000] HCA 26; (2000) 171 ALR 598 at 610-1

[9] Taylor v Australian and New Zealand Banking Group Ltd (1988) 13 ACLR 780 at 784 per McGarvie J

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