Carringbush Corporation Pty Ltd v ASIC

Background facts 4 The application is supported primarily by an affidavit of Mr John Michael Denoon sworn 19 November 2007. The background facts are these. 5 Mr Denoon is a director of CCPL and CPL. He has been a director of each company continuously since 1 May 1987 and 6 February 1984 respectively. 6 In or about 1987 or 1988, Mr Denoon was contacted by persons associated with a merchant bank called Wardleys Securities Limited ('Wardleys Securities') who were seeking investments to be made in Rothwells. Mr Denoon was told that Wardleys Securities was seeking to aggregate a group of investors who would invest approximately $5 million to support Rothwells by buying shares in the company. Mr Denoon was told that such an investment would be 'safe'. In or about 1987/1988, Mr Denoon caused CPL to pay approximately $2.5 million to acquire the shares described at [1]. CPL became registered on the Share Register of Rothwells as the shareholder for those shares. At the time of the acquisition of the Rothwells shares, CPL was acting as trustee for the Carringbush Unit Trust (the 'Carringbush Trust'). Mr Denoon was also a director of a company called Gembridge Pty Ltd. That company owned all of the 10 issued units in the Carringbush Trust. 7 Mr Denoon's investment in Rothwells proved not to be safe as that company was placed in provisional liquidation on 3 November 1988 and official liquidation on 22 September 1989. The company was hopelessly insolvent. Mr Denoon says that it was his view that the investment in Rothwells by CPL as trustee of the Carringbush Trust was rendered worthless. Mr Denoon says that all of the $2.5 million invested in the Rothwells shares was lost. As a result, the investment was recorded in the accounts of the Carringbush Trust as worthless from that time. 8 Mr Denoon says that by reason of the loss of this investment, it was not until 1993 that he was in a position to consider further profit‑making opportunities. Mr Denoon believed that for capital gains tax purposes the Carringbush Trust's unrealised losses on the Rothwell shares could only be offset against future capital gains in the Trust if those losses were realised and that those losses might be realised by a sale or disposition of the Rothwells shares for their market value by CPL to CCPL. Mr Denoon instructed his accountants to document an agreement between CPL and CCPL for the sale of all of the Rothwells shares for $1.00. Mr Denoon believed that amount to be the true value of the total parcel of shares. 9 On 26 May 1993, Mr Denoon executed a document entitled 'Agreement between Carringbush Pty Limited (as Trustee for the Carringbush Unit Trust) and Carringbush Corporation Pty Limited' to effect a sale by CPL as trustee of the Carringbush Trust of all of the shares for a consideration of $1.00. Mr Denoon says that he also instructed his accountants to 'do all things necessary' to record the transfer of the shares from CPL to CCPL. The consideration of $1.00 was paid by way of a set‑off against a liability owed by CPL and recorded in the books of account. 10 Mr Denoon says that the sale of 26 May 1993 was intended to effect a crystallisation of a capital loss on the investment in the Rothwells shares which to that date, had not been realised by a disposal. Mr Denoon says that he was not aware at the time and only recently became aware that s 468(1) of the Corporations Act rendered any transfer of shares in Rothwells void unless the Court otherwise ordered. 11 On 16 August 1994, the liquidator of Rothwells issued a certificate in these terms: 1. I, Ian Douglas Ferrier, of Ferrier Hodgson & Co, Chartered Accountants, of …, was appointed Official Liquidator of Rothwells Limited by an order of the Supreme Court of Queensland on 22 September 1989. I have reasonable grounds to believe that there is no likelihood that ordinary shareholders, nor any other class of shareholders, in the company will receive any distributions in the course of winding up the company. 12 Mr Denoon says that there is no prejudice to the company or its former liquidators arising out of the disposition as the shares were fully paid. CPL as a contributory had no further amount to contribute by way of unpaid calls on the shares in the liquidation of Rothwells. The transaction therefore did not have the effect of avoiding any liability on the part of CPL, as the entity recorded in the Share Register of Rothwells, to contribute to a liquidation. Thus, no prejudice to creditors arose. 13 Mr Denoon says that third parties have relied upon the efficacy of the disposition in this way. Mr Denoon was introduced to a property developer, Mr David Clark, who wanted to invest capital in particular projects. Mr Denoon and Mr Clark decided to undertake one or more property development projects together. Since the Carringbush Trust had suffered capital losses, Mr Clark and Mr Denoon elected to undertake the new projects through the vehicle of the Carringbush Trust and off‑set any capital gains realised by the trust, through the use of the realised capital losses. To that end, Mr Clark, as the incoming investor, agreed with Mr Denoon that the following structural arrangements, among others, would be put in place. Mr Clark would invest $1.8 million in the Carringbush Trust. He would acquire five of the 10 units in the Carringbush Trust. Clark Enterprises Pty Ltd would be appointed as the new trustee of the Carringbush Trust. On 24 June 1993, documents were executed to give effect to these arrangements. Mr Denoon says that in putting these arrangements in place, it was never contemplated that the Rothwells shares would be transferred from CPL to Clark Enterprises Pty Ltd as the new trustee of the Carringbush Trust as Mr Denoon and Mr Clark assumed that the disposal by CPL to CCPL meant that CPL was no longer the owner of the Rothwells shares. 14 As part of the arrangements with Mr Clark, Mr Denoon through Gembridge agreed to also contribute an amount of $1.8 million to the Carringbush Trust within an agreed time frame. Mr Denoon was unable to do so and ultimately transferred his 50% interest in the trust to Mr Clark's interests. 15 Mr David Clark and his wife, Helen Clark, are taxpayers who have applied to the Federal Court of Australia (Applications 500/2006 and 501/2006 respectively) in the Court's original jurisdiction conferred by s 14ZZ of the Taxation Administration Act 1953 (Cth) by way of an appeal from a decision of the Commissioner of Taxation made on 27 October 2006 to disallow objections to an amended assessment issued to each taxpayer on 25 November 2005 for the year ending 30 June 2001. Those applications involve a number of questions including whether each taxpayer is entitled to take advantage of capital losses in the Carringbush Trust by reason of the disposal of the Rothwells shares so as to offset capital gains derived by the trust from other projects (Clark v Commissioner of Taxation [2007] FCA 1426). In those proceedings, the Commissioner of Taxation takes the position that s 468(1) of the Corporations Act renders the disposition void (among a range of other arguments) with the result that no capital loss arises in any event. 16 It is not contended by the Commissioner that the value of the shares at the date of sale was anything other than $1.00. 17 On 30 October 2007, the solicitors for the plaintiffs wrote to the Australian Securities Investments Commission ('ASIC') advising of this proposed application for an order under s 468(1) in relation to the Rothwells shares the subject of the 26 May 1993 transaction. ASIC took the position that it would not be necessary, in its view, to secure reinstatement of Rothwells for the purpose of obtaining an order under s 468(1) and that while shares in Rothwells no longer exist by reason of the winding up and subsequent deregistration of the company, the deregistration ought not to prevent the Court making an order to validate the transaction that occurred when the company was in liquidation. On 20 November 2007, the application and supporting material was served upon ASIC and Mr Ian Ferrier, the former liquidator of Rothwells. 18 Since the question of the operation and effect of s 468(1) of the Corporations Act arose out of a contention put by the Commissioner of Taxation in the objection proceedings, notice of this application was given to the Australian Taxation Office ('ATO') on 22 November 2007 and a copy of the application and supporting affidavit was served on the Australian Government Solicitor on behalf of the ATO on 5 December 2007. There has been no appearance by ASIC, Mr Ian Ferrier or the Commissioner of Taxation in response to the present proceeding. 19 The plaintiffs say that as between the vendor and purchaser, the transaction is effective; s 468(1) and its predecessors rendered a 'transfer' of the shares void only so far as the 'interests' of the company are concerned; an investor who has taken up shares in a company in circumstances where the venture or undertaking which is the substratum of the company has failed, has a legitimate interest in being able to quit their shares which is the measure of their interest; and a shareholder in an insolvent company in liquidation who will receive no distribution as creditors can not be paid in full, ought to be able to dispose of the shares and realise a loss as no prejudice or other detriment to the company can be identified, all shares being fully paid. 20 Section 160WA of the Income Tax Assessment Act 1936 (Cth) ('ITAA 1936') (inserted into the ITAA 1936 by amending legislation in 1991) provides for a 'deemed disposal' of shares. If a taxpayer owns a share in a company at a time after 11 November 1991 (the 'test time'); and there is a liquidator of the company; and at or after the test time the liquidator makes a written declaration that the liquidator has reasonable grounds to believe that there is no likelihood that shareholders will receive any distribution; and the taxpayer elects to apply s 160WA to the taxpayer in relation to the share, then, the taxpayer is taken to have disposed of the share(s) at the time the declaration was made, for no consideration and to have immediately re‑acquired the share for no consideration. The taxpayer must make the election by written notice to the Commissioner on or before the date of lodgement of the taxpayer's return of income for the year of income ending, in this case, on 30 June 1995 as the liquidator's declaration was made on 16 August 1994. The Commissioner may extend the time for the making of the election. An application for an extension of time has been made to the Commissioner by the relevant taxpayers but at the date of these proceedings is unresolved. 21 In any event, s 160WA creates a construct of disposal. This proceeding is concerned with the validity of an actual disposal and if rendered void, raises the question of whether the Court, as a matter of discretion, ought to order that a transfer of shares is not void. 22 In this case, the Share Register of Rothwells continued to reflect CPL as the member. No transfer was lodged nor is there any intention to seek reinstatement of the company simply to provide an 'event of transfer' upon which the section might operate. Plainly, CPL is concerned that s 468(1) renders, by the use of the term 'transfer' the underlying disposition, void. 23 There are many authorities that deal with the principles guiding the exercise of the discretion under s 468(1) both as to a disposition of property of the company made after the commencement of the winding up and any transfer of shares made after the commencement of the winding up, although the circumstances of any case or group of cases are not to be treated as prescriptive of the discretion which is conferred in broad terms and is 'at large'. However, ordinarily the discretion will not be exercised in favour of an order unless the Court is satisfied that the order serves either the interests of the company or its creditors. A recent approach to the making of an order under the section can be seen in Australian Securities and Investments Commission v Green Pacific Energy Limited (In Liquidation) [2007] FCA 1552 per Emmett J (26 September 2007). In that case, a transfer of shares was approved under s 468(1) of the Corporations Act as a necessary element of a Deed of Company Arrangement providing for a substantially greater payment to creditors than would occur in a liquidation. 24 The considerations that derive from an assessment of whether a 'disposition of property' of the company ought to be approved are quite different from those immediately relevant to a transfer of shares especially where the shares are fully paid and thus no calls can or will be made upon the shareholder. 25 As to share transfers, the principles seem to be these. 26 As between the parties to a transfer and as regards the liability of one to the other, (that is, the inter-parties position) the transaction is not affected by [the section] (Rudge v Bowman, Law Rep 3 Q.B. 689). The transfer is void 'so far as regards any effect to be given to it by the company' (In Re Onward v Building Society (1891) 2 Q.B. 463 per Lord Esher at p 475). The parties might choose to make a contract and it 'may be good as between themselves, though if either of them desires that any effect should be given to it by the company, the Act does apply' (Onward Building Society, per Lord Esher at p 475). When the question is one of transfer of the shares after the commencement of the winding up, the question is 'would it be beneficial to the company' (Onward Building Society per Bowan LJ at p 481) and would it 'benefit the creditors' (Onward Building Society per Bowan LJ at p 482). The general scheme of the provision is that 'as the tree falls so it must lie, unless the Court chooses to alter the existing state of things' (Onward Building Society per Bowan LJ at p 482). The Court will do so if it 'would be of some benefit to the company or those interested in its assets, and that it (the Court) would not so exercise its discretion unless for very strong reasons' (Onward Building Society per Kay LJ at p 483). Although Kay LJ makes reference to a demonstrated benefit to 'those interested in [the company's] assets', it seems clear that the reference is not one to the interest of an investor/shareholder. Kay LJ clearly had in mind a reference to the creditors of the company when using that phrase (Onward Building Society per Kay LJ at p 484). In that particular case, no benefit arose out of the proposed transfer of shares to a buyer in favour of either the company or its creditors as a result of which the Court refused to exercise the discretion to avoid the transfer being rendered void. 27 The section confers upon the Court a 'wide general discretion which is not to be limited by any attempted classification of those cases which do, and those which do not, fall within them' (Re Atlas Truck Service Pty Ltd 4 ACTR 19 per Fox J at p 20). The discretion is 'entirely at large' (Re Atlas Truck Service Pty Ltd; Tellsa Furniture Pty Ltd (in Liquidation) v Glenave Nominees Pty Ltd (1987) 9 NSWLR per Hope, Mahoney and Priestly JJA; Jardio Holdings Pty Ltd v Dorcon Constructions Pty Ltd (1984) 3 FCR 311 per Woodward, Neaves and Beaumont JJ). 28 In Jardio, the Court in considering an application concerning the granting of an equitable mortgage after the date of presentation of a winding up petition (rather than a transfer of shares) noted that 'special circumstances' may justify the intervention of the Court to approve the transaction 'but only as a means to an end; and that end is the promotion of the interests of the creditors as a whole' (Jardio, per Woodward, Neaves and Beaumont JJ at p 317). The Court regarded the overriding 'inquiry' required by s 227(1) of the Companies Act (NT) (the equivalent of s 468(1) of the Corporations Act), as 'essentially a commercial or economic one, calling for a balancing of the anticipated net gains or losses from the transaction for which approval is sought' (Jardio, per the Court at p 317). Moreover, the 'merits' of the transaction 'should be tested at the date of entry into the transaction sought to be validated' (Jardio, per the Court at p 320). 29 It seems to me that in assessing the merits of the approval of a transfer of shares, the Court should also adopt an inquiry that is 'essentially a commercial or economic one' although the interests affected will not just be the company or the creditors. In assessing the net gains and losses from the perspective of the company and the creditors, there is no prejudice or loss to either, nor any benefit, by reason of the disposal on 26 May 1993. The position is, in that sense, neutral. If the disposal of the shares has occurred with no prejudice to the company or the creditors, why should the vendor of the shares be deprived of the validity of a transfer of shares to a buyer? If the prohibition upon transfer is a prohibition inter‑parties upon a valid disposal, why should a vendor be deprived of a valid disposition when no prejudice is suffered by the company or the creditors? 30 In Backoffice Investments v Campbell 61 ACSR 144, Bergin J was required to consider whether in the context of a finding of oppressive conduct by one shareholder (Campbell) on the part of the company (Healthy Water (NSW) Pty Ltd) against another shareholder (Backoffice), an order ought to be made under s 468(1) (a provisional liquidator having been appointed to the company) validating the transfer of Backoffice's share to Campbell as part of a remedial order that Campbell acquire (pursuant to s 233(1)(d) of the Corporations Act), Backoffice's share at a particular valuation. The Court so ordered as an incident of relieving Backoffice of Campbell's oppressive conduct, not on the footing that the order served only the interests of the company but, principally, on the footing that the interest of the oppressed shareholder would be served by making an order under s 468(1) in connection with the share transfer, as a necessary incident of the remedial orders. 31 In this case, I can see no reason why the vendor of the shares on 26 May 1993 nor the purchaser ought to be deprived of the validity of the disposition by reason of s 468(1) of the Corporations Actif that is what the prohibition upon 'transfer' under s 468(1) effects, as there is no prejudice to the company or its creditors; all shares at the relevant date were fully paid; and although served with the present application, neither ASIC nor the former liquidator of Rothwells nor the Commissioner has appeared before the Court to contradict the orders sought by the plaintiffs. 32 Accordingly, I propose to make order that the transfer by Carringbush Pty Ltd to Carringbush Corporation Pty Ltd on 26 May 1993 of 949,583 12.5% cumulative redeemable convertible preference shares of $1.75 in Rothwells Limited, each fully paid, and 474,791 ordinary shares of $1.75 in Rothwells Limited, each fully paid, is not rendered void by operation of s 468(1) of the Corporations Act 2001 (Cth). 33 I further order that the Plaintiffs and the former liquidators of Rothwells Limited have liberty to apply. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood.

Associate: Dated: 10 April 2008 Counsel for the Applicant: Mr M L Robertson

Solicitor for the Applicant: Damien Bourke & Associates

Counsel for the Respondent: No appearance by any of the Australian Securities and Investments Commission, the Commissioner of Taxation or the former liquidators of Rothwells Limited

Solicitor for the Respondent: No appearance by any of the Australian Securities and Investments Commission, the Commissioner of Taxation or the former liquidators of Rothwells Limited