HIS HONOUR: Following the hearing of the plaintiff's application for interlocutory relief on 5 December 2014, I gave judgment on Monday 8 December 2014 and made orders as follows
1. Upon the plaintiffs by their counsel giving to the Court the usual undertaking as to damages, the defendants be restrained from, by themselves, their servants or agents, removing from Australia, disposing of or dealing with the sum of $8,980,362.25 from the proceeds of sale of the Hornsby Project otherwise than by payment of the same into an interest bearing account with a major Australian bank in the name of the solicitors for the defendants provided that:
1. the defendants are at liberty to pay up to $465,382 from that sum to creditors of the first defendant;
2. the defendants are at liberty to pay up to $69,045 to Mr Gu in respect of moneys paid to creditors of the first defendant; and,
3. the defendants are at liberty to pay to themselves or as they may direct the sum of $1,500,000 of the said sum after 15 December 2014, unless by that date the Court has made an order varying this order.
I make the order at paragraph (c) and increased to $8.98 million the amount to be preserved in circumstances where, in the judgment I delivered, I had indicated that only $7.4 million was to be preserved, but after delivery of the judgment counsel for the plaintiff belatedly raised an issue in respect of potential GST on the sale and in circumstances where the defendant had no realistic opportunity to deal with that issue, I increased the sum preserved but provided by order (c) that that would not operate after 15 December 2014, unless by that date the Court had made an order varying this order.
The plaintiff made such an application, which I heard on 12 December. Essentially the plaintiffs now apply to freeze, in addition to the moneys referred to in the previous judgment, an additional $1.55 million on account of a potential GST liability, and an additional $331,692 on account of potential capital gains tax liability.
The plaintiffs do not claim that they would themselves be entitled to those moneys. Rather, they, and in particular the third plaintiff - who, as my previous judgment reveals, is a 25% shareholder in and a director of the first defendant company - contend that there are liabilities to which the first defendant may very well become subject and that if the proceeds of sale of the Hornsby development are not preserved, at least to that additional extent, there is a risk that the companies will have incurred significant taxation liabilities but ultimately may not be able to meet them.
Initially, the plaintiffs contended that there was a risk that the plaintiffs would incur personal liability as a director in respect of any such tax liability. That was not seriously pressed, and the prospect of the plaintiff as a director becoming personally liable for the tax liabilities, although it cannot be excluded, appears at this stage to be remote.
However, while the earlier applications were essentially made by the plaintiff as a creditor of the companies to preserve assets of the company to meet his claim against it, this claim is really advanced on the basis that the plaintiff as a director seeks to have its assets preserved in Australia so as to be available to meet proper liabilities in priority to being disbursed to repay shareholders' and directors' loans or by way of distribution of capital.
As to the GST claim, the sale of property for $15.5 million indicates a profit, after bringing to account costs of acquisition and development, of $1,105,639. Tax at the company rate of 30% on $33`,692; it might be less if losses were incurred in earlier years, but there is at this stage no evidence of that.
It seems to me there is an appreciable risk, amounting to a substantial likelihood, that the company will incur a tax liability in the order of $331,692 on account of capital gains made on the sale of the Hornsby development site. True it is that that is not payable, but prima facie the profit would be income of the company for the tax year 2013/14.
As to GST, the contract for sale of the Hornsby development stated that the sales were a GST-free sale on the basis it was the sale of a going concern. Without descending into the detail and having regard to the judgment to which I was referred of Greenwood J in Aurora Developments v Commissioner of Taxation [2011] FCA 232; (2011) 82 ATR 91; 2011 ATC ¶20-250, in particular at [260]-[261], and to the evidence that work at the development site ceased before completion of the sale, there seems an appreciable risk that the sale will in fact prove not to be one of a going concern, and thus not to be GST free.
Initially, I had thought that the retention moneys equivalent to 10% of the purchase price would provide a fund from which any GST liability could be satisfied, if necessary. However, the receipt of the retention moneys depends on a 100% success rate in obtaining novations in favour of the purchaser of the pre-sales contracts of the development to date and, therefore, seems somewhat precarious. Special condition 32 of the contract for sale provides for the amount of the consideration to increase if GST becomes payable but, unlike a number of other of the special conditions, clause 32 is not one that is expressed not to merge on completion, and while the contrary is arguable, there seems at least a significant risk that clause 32 may merge on completion. There is, therefore, I think, an appreciable risk that the company will find itself liable to pay GST on $1.55 million and, if the proceeds not frozen to date are not preserved, that it will not have in Australia the assets and the ability to pay this.
Again, approaching the matter this way, it does not seem to be to the point that the liability has not yet become due and payable. If the moneys to which I have referred were added to those to be preserved, that would increase the amount to be preserved by $1,881,692. One consequence of that, if those liabilities were to attach, would be that the equity in the company would be reduced, including the 25% attributable to Mr Gu, which forms part of the amount that I have already ordered so far be preserved; as best my mathematics permits me to calculate, his equity would be reduced by 25% of the additional liabilities of $1,881,692; that is, by $470,423.
Essentially, this company is now a cash box; it has no ongoing business. In the sense used in the context of liquidation, its substratum has, if not failed, come to an end. Its shareholders are in dispute. So far as it appears, all that remains to be done is the payment of creditors and the return of capital to shareholders. Prima facie, the directors who have made loans are entitled, like any other creditor, to repayment of their loans, but they would not prudently do so in circumstances where there are potentially other significant liabilities of the company, to the extent that the company's ability to meet those other liabilities would be jeopardised.
It seems to me that, if the loan accounts were to be repaid in full and on top of that the equity distributed, then there would be a real risk that taxation liabilities might not be able to be satisfied. It may well be possible for the directors to have in place mechanisms or assurances that would persuade the Court that they should be entitled to have resort to the proceeds of sale, but at this stage the defendant has not adduced any evidence on the balance of convenience or probative of an urgent leave on their part for the funds.
In those circumstances, as it seems to me, the balance of convenience favours preserving the additional amount to which I have referred, but that will require a reduction in the existing amount by the $470,000 which I have mentioned.
Accordingly, in lieu of order 1 made 8 December 2014, the Court orders that the defendants be restrained from, by themselves, servants or agents, removing from Australia or in any way disposing of or diminishing or otherwise dealing with the proceeds of sale of the Hornsby project, currently held in the trust account of Swaabs Attorneys, to the extent of $10,391,631.25, provided that
1. the defendants are at liberty to pay up to $465,382 of that sum to creditors of the first defendant.
2. The defendants are at liberty to pay up to $69,049 to the third plaintiff in respect of moneys paid by him to creditors of the first defendant.
The other orders, including liberty to apply on 24 hours' notice to vary that order and the undertakings presently noted, will remain in force.
The costs of the interlocutory application until and including Monday 8 December 2014 will be the plaintiffs' costs in the cause. I make no order as to costs in respect of the application of 12 December 2014.
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Decision last updated: 20 March 2015