Corporations - deed of company arrangement - whether inconsistent with s.221P of the Income Tax Assessment Act 1936 - whether the deed complied with s.444A(4) of the Corporations Law - whether the deed should be terminated.

Income Tax - deductions by a group employer - operation of s.221P of the Income Tax Assessment Act 1936.

Income Tax Assessment Act 1936 (Cth) - s.221P

Re Brian Cassidy Electrical Industries Pty Limited (1984) 9 ACLR 140

Commissioner of Taxation v B and G Plant Hire Pty Limited (unreported, 12

Solicitor for the applicant: Australian Government Solicitor

Solicitors for the 1st and 2nd Mr P. Fordyce of

respondents: P.A. Somerset and Co.

1. The Deed of Company Arrangement dated 28 February 1994

entered into by the first respondent, All Suburbs Car

Repairs Pty Ltd, be terminated.

2. The applicant's costs be paid by the respondents out of the

assets of the first respondent.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

DAVIES J This application, brought under s.445D of the Corporations Law, seeks an order terminating a deed of company arrangement entered into with respect to All Suburbs Car Repairs Pty Limited.

2. All Suburbs Car Repairs Pty Limited ("All Suburbs") was incorporated in 1988 to take over the smash repair business formerly conducted by Mr and Mrs Brian Cooke. All Suburbs commenced trading in the second half of 1988. Save in the year of income ended 30 June 1993, the company consistently incurred trading losses. On 18 January 1994, proceedings were commenced in the Equity Division of the Supreme Court of New South Wales seeking an order that the company be wound up. On 1 February 1994, the second respondent, Mr B R Silvia, was appointed administrator of All Suburbs.

3. By that time, substantial debts had been incurred. A sum of $92,316 was due in respect of unremitted group tax for the months of July 1991 to January 1993. There were priority payments due to employees of $14,536. Moneys due to unrelated creditors totalled $328,289. Moneys due on loans from shareholders amounted to $325,580. And a small amount was due under lease liabilities. The company's assets were modest. The total deficiency was estimated at over $650,000.

4. On 21 February 1994, Messrs Gray Eisdell Timms Pty Ltd, auctioneers and valuers, reported to Mr Silvia that the value of the business of All Suburbs was $77,930 if sold as a going concern and $47,300 if sold at auction under forced sale conditions.

5. On 28 February 1994, Mr Silvia sold the business as a going concern to All Suburbs Smash Repairs Pty Ltd, a company associated with the directors and shareholders of All Suburbs. The total consideration was roughly equivalent to the auction value as estimated by Gray Eisdell Timms Pty Ltd. The purchase price was $29,700. The purchaser also assumed all the liability of the vendor for employee entitlements and agreed to pay for work in progress at cost plus estimated profit.

6. On 28 February 1994, Mr Silvia entered into an agreement ("the directors' deed") with the directors and shareholders of All Suburbs under which Mr Silvia was requested to propound a deed of arrangement for All Suburbs. The deed recited:-

"The Related Parties have requested the Administrator to

propound a Deed of Company Arrangement based upon:

(a) the Australian Taxation Office being paid all of the

proceeds of the sale of the Company's assets in

respect of priority unpaid Group Tax; and

(b) the creditors of the Company (excluding all of the Related

Parties of the Company) being paid a first and final

dividend in respect of their debts out of funds to be

advanced by the Related Parties to the Administrator."

The directors and shareholders agreed to advance moneys to Mr Silvia to defray costs of continuing the business and two further sums totalling $30,000, which were to be available for the payment of the administrator's costs and for payment to unsecured creditors under the deed of arrangement. In addition, two of the directors, Mr and Mrs Cooke, agreed to sell their home and to provide to Mr Silvia a maximum of $65,000 and a minimum of $40,000 for distribution to ordinary creditors.

7. On 21 February 1994, Mr Silvia wrote to all creditors. He reported on the affairs of the company and proposed a deed of company arrangement. Relevant terms of the deed were:-

"3. (a) The Company shall make available to the

Administrator all of the assets of the Company

(hereinafter called 'the Liquidation Fund') for

the purposes of this Deed.

(b) The Directors shall make available to the

Administrator the funds specified in the

Directors Deed (hereinafter called 'the

Director's Fund') being an amount of not less

than $70,000 and not more than $95,000.00;

4. The Liquidation Fund shall be paid firstly in respect

of Priority Unpaid Group Tax and then in accordance

with Section 556 of the Corporations Law (except to

the extent that the Administrator's costs and expenses

will not be paid out of this Fund), if any part of the

Liquidation Fund remains it shall be distributed in

accordance with Clause 5 hereof.

5. (a) The Directors' Fund shall be distributed by the

Administrator by way of a first and final

dividend as follows:

- firstly: priority payments pursuant to Section

556 as if the Company was in liquidation

together with such other Administrator's Costs

as are not a priority payment to Section 556.

- secondly: the balance then remaining pro rata

amongst all Participating Creditors whose debts

are to be calculated by the Administrator as if

the Company was being wound up with the winding

up commencing on the date specified in Paragraph

(i) of Schedule B hereto.

(b) No part of the Fund is to be distributed to the

Non-Participating Creditors and this Deed shall

not, apart from Paragraph 7 of Schedule A

hereto, be a bar to the Non-Participating

Creditors recovering or seeking to recover their

debts from the Company after this Deed is

terminated.

6. This Deed shall terminate:

(a) in the circumstances provided for in Sections 445C,

445D and 445F; or

(b) as provided in Paragraphs 3 and 12 of Schedule A

hereto; or

(c) the Administrator determining that there has

been a breach of the Directors' Deed which is

not capable of being remedied within a

reasonable time or at all; or

(d) the Sale Agreement not being completed."

Note the reference in cl 3(a) to "the Liquidation Fund", comprising the existing assets of the company, and the reference in cl 3(b) to "the Directors' Fund", being the sums to be received under the directors' deed. The deed of arrangement also incorporated the provisions of Schedule 8A of the Corporations Regulations which included the following provisions:

"1. In exercising the powers conferred by this deed

and carrying out the duties arising under this deed,

the administrator is taken to act as agent for and on

behalf of the company.

...

4. The administrator must apply the property of the

company coming under his or her control under this deed

in the order of priority specified in section 556 of

the Corporations Law.

5. The creditors must accept their entitlements under

this deed in full satisfaction and complete discharge

of all debts or claims which they have or claim to have

against the company as at the day when the

administration began and each of them will, if called

upon to do so, execute and deliver to the company such

forms of release of any such claim as the administrator

requires."

8. As the shareholders agreed to forego their rights as creditors to participate in the distribution under the deed of arrangement, Mr Silvia reported to the creditors that, in his view, the Liquidation Fund would be used wholly in payment to the Commissioner of Taxation in respect of his priority debt and that the unsecured creditors, including the Commissioner of Taxation in respect of the balance owing to him, would receive a dividend from the Director's Fund of between 12 to 20 cents in the dollar, depending upon the amount ultimately realised from the sale of the Cookes' property.

9. At a meeting of the creditors of All Suburbs held on 28 February 1994, the scheme of arrangement was considered. By majority, the creditors voted that All Suburbs execute a deed of company arrangement. The Commissioner of Taxation was part of the minority voting against the resolution. The deed was executed on the same day.

10. I shall deal first with some particular objections to the deed of arrangement which have been raised by counsel for the Commissioner of Taxation.

11. Section 444A(4) of the Corporations Law provides, inter alia:-

"The instrument must also specify the following:

...

(b) the property of the company (whether or not already

owned by the company when it executes the deed) that

is to be available to pay creditors' claims;

...

(g) the circumstances in which the deed terminates;

..."

12. Counsel for the Commissioner submitted that, when in paragraph 3(a) the deed refers to "all of the assets of the Company", it fails to specify the property of the company that is to be available to pay creditors' claims, as required by s.444A(4)(b) of the Corporations Law. Counsel submitted that that provision requires particularity in the description of the assets that are to be available to pay the creditors' claims. In my opinion, however, a deed of company arrangement may use an expression such as "all of the assets of the Company". A deed of arrangement is not a report to the shareholders on the company's affairs. The present deed sufficiently describes the property that was coming directly from the company's assets, namely all of the assets, and the property coming from the directors and shareholders which, together, would be used to pay the creditors' claims.

13. Counsel for the Commissioner submitted that there was insufficient description of the circumstances in which the deed would terminate, as cl 6(c) refers to the directors' deed and cl 6(d) refers to "the Sale Agreement". Counsel submitted that there was a failure to specify the circumstances in which termination might be effected because the provisions of the directors' deed and those of the Sale Agreement are not set out in the deed of arrangement or in a document annexed to it. In my opinion, a deed of arrangement may refer to another agreement and may stipulate a breach of that agreement as an occasion of the termination of the deed provided that no uncertainty results therefrom. It is obviously desirable to identify clearly any such agreement and the breaches referred to. In this respect the deed of arrangement could have been drafted with more care. However, the creditors would have understood the effect of cl 6(c) and cl 6(d). They were not left in doubt. There is no cause for terminating the deed on this ground.

14. Counsel has submitted that I should act in accordance with the judgment of McClelland J in Re Brian Cassidy Electrical Industries Pty Limited (1984) 9 ACLR 140 in which his Honour refused to approve a scheme of arrangement on the ground that the failure of the company at the expense of outsiders dealing with it called for a thorough investigation in a winding up. The principle which his Honour applied has been given effect on many occasions in the bankruptcy jurisdiction of this Court when schemes of arrangement have been set aside in the public interest.

15. However, there is nothing in the facts before the Court which suggests that All Suburbs failed for any reason other than poor management. There are accounts in evidence which indicate that the proper accounts were kept. Nothing appears in those accounts to show that the losses occurred other than through the carrying on of the ordinary business of the company. There is no suggestion that undue amounts were paid to directors. And the report to the creditors discloses that the shareholders put in substantial funds of their own in an attempt to overcome the trading losses. In these circumstances, there would be no public interest in an investigation into the affairs of the company and its management. Rather the element of public interest to be applied is that set out in s.435A of the Corporations Law which provides:-

"The object of this Part is to provide for the business,

property and affairs of an insolvent company to be

administered in a way that:

(a) maximises the chances of the company, or as much

as possible of its business, continuing in

existence; or

(b) if it is not possible for the company or its

business to continue in existence - results in a

better return for the company's creditors and

members than would result from an immediate

winding up of the company."

16. I now turn to the principal issue in the case. Section 221P of the Income Tax Assessment Act 1936 (Cth), which concerns deductions made by a group employer on or before 31 May 1993, provides inter alia:-

"221P(1) Where an employer makes a deduction for the

purposes of this Division, or purporting to be for those

purposes, from the salary or wages paid to an employee and

refuses or fails to deal with the amount so deducted in the

manner required by this Division, or to affix tax stamps of

a face value equal to the amount of the deduction as

required by this Division, as the case may be, he shall be

liable, and where his property has become vested in, or

where the control of his property has passed to, a trustee,

the trustee shall be liable, to pay that amount to the

Commissioner."

This section is a specific provision of the Commonwealth Parliament which differs from the general provisions as to priority contained in s.556 of the Corporations Law.

17. In Commissioner of Taxation v. B. and G. Plant Hire Pty Limited (unreported, 12 August 1994), Gummow J held that the general provisions of the Corporations Law do not operate on the subject matter of s.221P so as to contradict, by implication, that specific provision. His Honour concluded:-

"The general provision in para. 444A (4) (h) of the

Corporations Law to the effect that the instrument prepared

by the administrators must specify the order of distribution

among creditors bound by the Deed is subject to the

qualification that this order must not derogate from that

mandated by s. 221P of the Tax Act. Further, the liability

to the Commissioner which arises under s.221P is not,

against his will, to be overridden by a provision inserted

pursuant to para. 444A (4) (h). To the extent that such a

contrary provision is inserted, then despite the general

terms of s.444D, the deed of arrangement does not bind the

Commissioner as a creditor, nor may steps taken under the

Deed operate to release the liability to the Commissioner."

18. Counsel for All Suburbs and Mr Silvia have submitted, however, that the facts of the present case are distinguishable from those considered in Commissioner of Taxation v. B. and G. Plant Hire Pty Limited. In that case, the moneys which were to be distributed to the creditors were to come entirely from the assets of the company and not from funds contributed by other parties. Counsel for the respondents submitted that, in the present case, the scheme of arrangement gives to the Commissioner of Taxation the priority to which the Commissioner would be entitled on a winding up. That is because the scheme of arrangement provides that all of those assets which would be assets of the company in a liquidation are to be placed in a fund called "the Liquidation Fund", and this fund is to be paid first in respect of the unpaid group tax. Counsel for the respondents therefore submitted that the Commissioner will obtain under the scheme of arrangement all that he could obtain under a liquidation. Counsel further submitted that the Commissioner will be somewhat better off because, after the Commissioner has received the total of the moneys in the Liquidation Fund, the balance due to him will rank pari passu with other debts for distribution out of the Directors' Fund.

19. This submission fails when the matter is analysed as a matter of law, whatever may be the position in fact, as to which I draw no conclusion. The directors' deed was made between the shareholders and Mr Silvia in his capacity as administrator of All Suburbs. Accordingly, the deed provided for the payment of moneys to Mr Silvia in his capacity as administrator of and agent of that company. The deed of arrangement was not inconsistent with this. That deed described Mr Silvia as "the Administrator" and recited that he was appointed administrator of the company on 1 February, 1994. Clause 1 of Schedule 8A, which was incorporated, provided that, in exercising the powers conferred by the deed and in carrying out the duties under the deed, the administrator was taken to act as agent for and on behalf of the company. That is indeed the usual practice, for s.444A(2) of the Corporations Law provides that the administrator of the company is to be the administrator of the deed, unless the creditors resolve to appoint someone else to be the administrator of the deed.

20. It follows, in my opinion, that, when the directors and shareholders agreed to pay sums to Mr Silvia in his capacity as administrator, they agreed to pay those sums to him in his capacity as agent for All Suburbs and, consequently, that the sums when paid would be received by him on behalf of the company. It necessarily follows that the sums when received would be property of All Suburbs. This also accords with the ordinary operation of company schemes of arrangement. Thus, when s.444A(4)(b) provides that the deed must specify "the property of the company (whether or not already owned by the company when it executes the deed) that is to be available to pay creditors' claims", it contemplates that sums may be paid by third parties for distribution to creditors and that those sums will be property of the company available to pay creditors' claims.

21. Thus, the subject deed of arrangement provided for the distribution of the moneys and property held by the company prior to entry into the deed of arrangement and also of moneys of the company constituted by the contributions to be made by the directors and shareholders under the directors' deed. In respect of that total property, the deed of arrangement made a provision for distribution which was inconsistent with s.221P of the Income Tax Assessment Act.

22. For the reasons given by Gummow J, the Commissioner of Taxation is not bound by this provision and the deed should accordingly be set aside. I apply the reasoning of Gummow J, notwithstanding the difference in the facts of Commissioner of Taxation v. B and G Plant Hire Pty Limited and those of the present case.

23. In accordance with reg. 5.3A.07(1), when the Court makes the order under s.445D of the Corporations Law terminating the deed of arrangement, All Suburbs will be taken to have passed a special resolution under s.491 of the Corporations Law that the company be wound up voluntarily.

24. I shall order that the costs of the applicant, the Commissioner of Taxation, be paid out of the assets of the respondent, All Suburbs Car Repairs Pty Limited.