DCT v Bradley Keeling Management

4573/02 DEPUTY COMMISSIONER OF TAXATION v BRADLEY KEELING MANAGEMENT PTY LIMITED JUDGMENT 1 HIS HONOUR: The Deputy Commissioner of Taxation issued a winding up summons against Bradley Keeling Management Pty Limited on 12 September 2002. That winding up summons was one which was based on some assessments of income tax for the 1999 tax year, which had led to the serving of a statutory demand. The summons alleged that the amount owing to the Deputy Commissioner of Taxation was somewhat in excess of $9.41 million. 2 The winding up summons was returnable on 17 October 2002. In the last couple of months of last year that matter was readied for hearing on the basis that it would be defended on the ground that there was a bona fide dispute as to the existence of the debt, and that the company was solvent. For the purpose of that application Mr Bradley Keeling, who is the sole director of the company, swore a total of three affidavits. In the course of December last year the matter was set down for hearing for today. 3 After that had happened, on 24 January 2003, an administrator was appointed to Bradley Keeling Management Pty Limited and also to two other companies, namely, BK Hospitality Pty Limited (ACN 089 772 248) and BKM International Investments Pty Limited (ACN 087 450 011). When the matter was called on today the administrators appeared before me and sought an adjournment of the winding up application. 4 Also appearing today was a solicitor for One-Tel Pty Limited, which claims to be a substantial creditor of the company. One-Tel is in liquidation, and that solicitor was appearing on the instructions of the liquidator of One-Tel. He told the Court that the attitude of the liquidator of One-Tel was that the matter ought be adjourned so that the administration could run its ordinary course. 5 The administrators today sought an adjournment of the order of four weeks, to 10 March 2003. They recognised that if they were to be granted that adjournment, it would be necessary for them also to seek an extension of the convening period of the administration. Counsel informed me that the convening period is due to expire on Friday of this week. The administrators proposed to make an application in the course of this week to extend the convening period, if they succeeded in an application for adjournment of the winding up summons. 6 The administrators who were appointed to the company were Mr Sims and Mr Singleton. As it happens, Mr Sims is the person who has had the main conduct of the administration. He was not in a position to put on evidence in support of the application for adjournment, because he had other significant commitments in South Australia, to attend a meeting connected with the Superannuation Funds Management Corporation of South Australia, which meeting had been set down in or about July 2002. The meeting was an annual strategic board meeting, and Mr Sims' position with the company was such that it was, in his view, crucial that he attend that meeting. 7 The administration is one which has some complexity associated with it. There are a large number of interconnected companies, and the relations between them have not proved easy for the administrators to sort out. The situation of the administrators has also been complicated by a lack of properly written up books. There are accounts which are written up to September 2001, but only primary records after that date. It has been necessary for the administrators to seek to get up to date accounts written up from primary records, and that has not happened as yet. The situation of the administrators is even further complicated by the fact that Mr Keeling has, so far, not given them a statement of affairs concerning the company. 8 There are some matters, however, which seem clear enough about the affairs of the company. One of those is the nature of its assets. Its assets comprise 100 million shares in Koala Corporation Australia Limited and debts owed by various entities which are connected with Mr Keeling. 9 The situation concerning the liabilities of the company is not particularly clear. At a first creditors' meeting, people claiming to be creditors of the company presented proofs of debt totalling a little over $28 million. Of these proofs, an amount of around $11.3 million was submitted by the Australian Taxation Office and an amount a little short of $7 million was submitted by the liquidator of One-Tel Pty Limited. The balance of the proofs were submitted by people and companies which had an association of one kind or another with Mr Keeling. The nature of those associations varied. Some of the claimants to be creditors were entities which Mr Keeling controlled; others were members of his family; others were business associates, and some were professional advisers with whom Mr Keeling had previously dealt. 10 The amount of those claimed liabilities stands in stark contrast to an affidavit which Mr Keeling swore in these proceedings on 20 November 2002, where he said that the liabilities of BKM comprised a contested liability to the Australian Taxation Office in an amount of approximately $10,379,000, other liabilities to external parties totalling $295,000 and liabilities to other entities in the Keeling group of companies totalling approximately $173,000. 11 That statement of the liabilities of BKM was not the only information on the topic of liabilities of that corporation contained in that affidavit of Mr Keeling however. As well, there was, annexed to the same affidavit, a draft of a document in the nature of a balance sheet which suggested that the company had an asset of "internal loans" of the order of $26.42 million and owed "internal loans" of the order of $29.92 million. The vast difference between these two sets of figures is presently not explained. 12 The administrators have done a certain amount of work concerning the administration. Some 134.8 hours of staff time, in total, have been spent between 24 January 2003 and 7 February 2003 investigating the affairs of the three companies which are in administration, and of the Keeling group. Thus, not all of the time which has been so "clocked up" relates to this particular company. 13 The legal test which must be satisfied in connection with any adjournment, is that set out in s 440A(2) of the Corporations Act 2001. That subsection says: "The Court is to adjourn the hearing of an application for an order to wind up the company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up." 14 The logical structure of that subsection is that there is a positive duty on the Court to adjourn the hearing of the application if the company is under administration and the Court is satisfied it is in the interests of the company's creditors for the company to continue under administration rather than be wound up, but the subsection says nothing about whether the Court should, or should not, adjourn the hearing of the application if the two criteria set out in subs (2) do not apply. 15 The subsection has been construed in Creevey & Anor V Deputy Commissioner of Taxation (1996) 19 ACSR 456. There, McPherson JA, speaking for the Queensland Court of Appeal, said: "The question of whether an administration should continue, rather than that there be a winding up, is obviously closely related to the further question of whether the creditors could hope to get more by way of payment of their debts from one form of process or administration than from the other. In order to satisfy the Court of the matter referred to in section 440A(2) of the Corporations Law, one would expect that there would have to be some persuasive evidence to enable it to be seen that there were assets which, if realised under one form of administration rather than the other, would produce a larger dividend, or at least an accelerated dividend for the creditors." 16 In TCS Management Pty Limited v CTTI Solutions Pty Limited [2001] NSWSC 830, Hamilton J collected the various authorities concerning s 440A and concluded that: "... it is dangerous, as in so many cases, to place any gloss upon the statute. The sole consideration posited as the criterion for the Court's decision in section 440A(2) is the interests of the company's creditors. It is clear that the onus is on the person seeking the adjournment to establish to the satisfaction of the Court that the adjournment is in the interests of those creditors. In general terms, that will be difficult to do unless there is a good case that there will be a greater or more accelerated return from the course contended for. But considerations beyond mere quantum may be relevant to take into account in determining what is in the interests of the creditors and whether it is established that an adjournment may be said to be in the creditors' interests. Where there are advantages in either course, in general terms it may well be the proper course to give such adjournment as will allow the creditors themselves to vote upon the proposal and determine which course they prefer." 17 I propose to consider, in the first instance, whether there is an obligation on the Court to adjourn the hearing of the application under subs (2). The onus is on the party seeking the adjournment to satisfy the test set out in that section. As the application for an adjournment is an interlocutory application, the sort of satisfaction that needs to be achieved, before the test laid down in the section is met, depends, to some extent, on the circumstances in which the litigation comes before the Court. 18 Ultimately what the Court needs to do is to be persuaded. The amount of proof which can result in persuasion, differs with the circumstances in which litigation comes before the Court. It is common enough, in applications under s 440A, for an administrator to need to seek an adjournment very soon after his or her appointment, at a time when he or she knows very little about the affairs of the company. In that sort of situation, comparatively little material might be needed to justify a short adjournment. As time goes on, however, and the occasion that there has been for the collecting of evidence increases, so the amount of material which might need to be put before the Court before it is persuaded, will increase. 19 In the present case, the evidence shows that the 100 million shares in Koala, which the company owns, amount to approximately 62 per cent of the issued share capital. Another approximately 22 per cent of the issued share capital of Koala is held by BK Hospitality Pty Limited, another of the companies associated with Mr Keeling, to which administrators have been appointed. 20 There are audited financial accounts of Koala as at 30 June 2002, which disclose that Koala has net assets of something in excess of $21,246,000. However, those accounts are ones which, while audited, are subject to a qualified audit report. The auditors have expressed the view that it is uncertain that Koala will be able to continue as a going concern. They say that therefore they believe the going concern basis may not be appropriate. 21 The audited accounts also show that Koala has recorded an investment in a controlled entity of $20,250,000, and that that figure includes an amount of some $30-odd million, said to be the fair value attributed to some intellectual property. That valuation, the auditors say, assumes future events which may not occur as anticipated. In the event that the development of the intellectual property does not proceed, the effect on the financial position of the company will result in a decline of a little over $20 million in the accumulated losses of the parent entity, and an increase in the accumulated losses of a little over $19 million of the consolidated entity. If those events were to transpire, the net asset value would, in large part, be wiped out. 22 Koala was, at one stage, listed, but it is no longer listed. Koala is in need of a capital injection of the order of $3 to $4 million. There were proposals last year for capital to be raised for that purpose, but a prospectus offering shares in Koala, which opened on 28 June 2002, was withdrawn at the end of August 2002. 23 The Koala balance sheet also shows that subsequent to the balance date there were some events of some significance: there was a resolution to sell the resort which Koala owned, an agreement enabling Koala to purchase a business called Simon Johnson had expired; and another commercially significant agreement, referred to as the Magnetica Precedent Agreement, had also expired. 24 There is no evidence before the Court of any specific proposals to sell the shares in Koala which are owned by the company. There is no evidence of how Koala might raise the capital it needs. There is some evidence, of a very general nature, to the effect that it often happens that there is a significant decline in the value which is realised for an asset when it is sold by a liquidator, by comparison with the value which is realised if that asset is sold in a more orderly course of administration. 25 However, in circumstances where there is no specific proposal at all for the sale or other realisation of the company's interest in Koala, I am not satisfied that liquidation is likely to produce a worse result for the creditors than continuation of the administration. 26 The other asset of the company is the various intercompany debts which are owed. At present the quantum of these debts is quite uncertain. Counsel for the administrators has put to me that a co-operative approach, with other companies in the Keeling group, is likely to lead to a better result than confrontation. That may or may not be so, but if a debt is indeed owing, it will be in the same amount whether there is liquidation or administration. Counsel for the administrators also put to me that there are assets in other companies in the group which may be available. There is evidence of there being a boat and a plane said, together, to be worth $1.73 million by Mr Keeling, and there are various other assets which are clearly realisable. 27 While there are these assets in other companies in the group, the overall picture of other companies in the group is not before the Court at all. Even if these assets in other companies in the group were able to be realised, and able to be realised for substantial sums of money, the Court does not know what the liability position of those other companies in the group is. For all the evidence discloses, the value of those assets of other companies in the group might be completely swallowed up in discharging the liabilities of those companies. 28 Further, it is not known what the position is concerning liabilities of other companies in the group so far as whether they are secured or unsecured. For all the evidence discloses, the amount that is realised by sales of these assets might all go to a secured creditor. 29 Another factor which may be of some relevance in considering what has been proved about the recoverability of the inter-company debts, is that in September 2001 the Commissioner of Taxation served a number of notices under s 260-5 of the Taxation Administration Act 1953 on companies in the group. Those notices sought the payment to the Commissioner of a percentage of amounts which were owing, or were in the future to become owing, by those companies, to Bradley Keeling Management Pty Limited. So far, those notices have not yielded the Commissioner a cent. That must cast some doubt about the recoverability of any intercompany loans that there might be owed to Bradley Keeling Management Pty Limited. 30 A third matter to which the administrators point is that Mr Keeling has written a letter dated 7 February 2003 to Mr Sims. That letter says: "Following your appointment as Administrator of the above three companies, it is now appropriate that I propose to you my thought as to the terms of a Deed of Company Arrangement which creditors may hopefully see as a preferred alternative to liquidation. I suggest that the terms of such a Deed should incorporate the following: 1. A number of other entities associated with me are currently creditors of the above and I am agreeable that they will waive their right to participate in any proceeds available for distribution to creditors. This should ensure that the creditors receive an improved return as a distribution. 2. I am also agreeable to other associated entities making a contribution to funds available for distribution to creditors to a maximum of say $1 million in the event that the companies are not in a position to pay their participating creditors in full. 3. All assets of the companies should be realised over the next 12 to 18 months with proceeds paid to the Administrators (subject to the ATO S264 notices). This should ensure an organised realisation of assets generates more funds for distribution to creditors compared to a forced sale that would occur under a liquidation. Whilst I am sure that there are other issues which need addressing the above will ensure that all creditors will receive a better return than they will otherwise be able to achieve. I will need 4 weeks to formalise this proposal as the groups accountant will be absent on business for the next 2 weeks and it is important to verify accurately the intercompany loan accounts within the group." 31 There have been various proposals put forward by Mr Keeling to the Taxation Office over a period extending back to 2001, for realisation of assets to pay the tax debt of the company, which arose from the 1999 tax year (the same tax year which led to the liability on which the statutory demand in this case is based). All of those proposals came to nothing. 32 The proposal which is put forward by Mr Keeling is one which is vague in the extreme. He does not make any concrete proposal about which entities associated with him might "waive their right to participate in any proceeds available for distribution to creditors". He does not explain which entities associated with him might make "a contribution to funds available for distribution to creditors to a maximum of, say, $1 million". 33 He does not explain how it might be in the interests of any of the companies to engage in this sort of generosity to the creditors of Bradley Keeling Management Pty Limited. He does not explain how it happens that other associated entities would have "a maximum of say $1 million" of money which it is free to make available for this purpose. 34 The absence of the group accountant on business for the two weeks from 7 February 2003 is most unfortunate. It has the effect, though, that information to show that the proposal is one which deserves to be taken seriously, is not available. 35 As I have earlier said, the situation concerning what liabilities are owed by Bradley Keeling Management Pty Limited is quite unclear. When that is the case there is no way in which it is possible to predict what a dividend might be on any liquidation of the company, and compare it with what a dividend might be on any continuation of the administration of the company. 36 However, one can perform the task required by s 440A(2) in a different way, namely, by looking at the assets likely to be available for distribution amongst the creditors on those two scenarios, whoever those creditors might be. Looking just at the assets side of the balance sheet in this way, I am not satisfied that it is in the interests of the company for the company to continue under administration rather than be wound up. 37 The administrator has pointed to there being a lack of prejudice to creditors in the administration continuing, so as to enable the administrator to collect more information, to enable him to assess whether a proposal for a deed can realistically be put to creditors. 38 The administrator says that the company is not trading, and hence the debts are not increasing. He says that there is no suggestion in the evidence that there are preferences or other voidable transactions under which time is running. He points out that the Australian Taxation Office and One-Tel have both been put on the committee of creditors. I accept all of that. 39 However, in carrying out the exercise under s 440A(2), a question of prejudice, or lack of it, to the creditors only becomes relevant if there is some advantage to the creditors which might derive from continuation of the administration. If there is some advantage to the creditors which might derive from the continuation of the administration, the Court's task is to then compare that advantage with any possible prejudice there might be. In the present case, though, I am not satisfied that there has been any advantage to the creditors demonstrated. 40 I mentioned earlier that what is needed for the Court to be persuaded of the matters in s 440A(2) can change with the amount of time that there has been for the preparation of material. It is of some relevance here that Mr Sims' involvement with the company did not commence on the date he was appointed as administrator. The minutes of the first meeting of creditors records a disclosure made to the creditors that on 21 October 2002, Sims Partners were engaged to prepare an assessment of the company's financial position on both a going concern and liquidation basis. 41 Mr Sims subsequently swore a short affidavit on 21 November 2002 for the purpose of the company's opposition to the winding up summons. In that affidavit he gave some evidence, of a fairly general kind, that he had reviewed the information contained in certain schedules prepared by Mr Keeling, and expressed the view that the extent of the estimated devaluation of the values of the various assets referred to in the schedules on a forced sale basis, compared to the estimated realisation on what Mr Keeling had called a "going concern basis", were reasonable. 42 He expressed the view, based on the information contained in the schedules, that if the company, and other entities in the Keeling group of companies, were given the opportunity to realise their assets in an orderly fashion, on a going concern basis, outside of a liquidation, it was likely that all creditors of the company may eventually be paid in full. That opinion, however, is one which was expressed on the basis of the information contained in the schedules, which is information which, until such time as proper accounts are available, will not be able to be relied on with any confidence. 43 When this application comes on on 11 February, after the administrators were appointed on 24 January, the administrators have had a length of time which often suffices to be able to form a view, at least in some broad outline, of the affairs of the company under their administration. In the present case, that has not been able to be done. This is, in part, no doubt due to the fact that the books of the company were not properly written up and that Mr Keeling has not provided his statement of affairs. However, that is not a matter that much weight can be given to in deciding whether the Court is persuaded of the matters in section 440A(2). Were it otherwise, it would be of advantage to a company approaching administration for its affairs to be disorganised and for its principal officers not to fulfil their statutory responsibilities in the administration. 44 In all these circumstances I am not satisfied that s 440A(2) requires the adjournment of the winding up summons. 45 There is, theoretically, a separate discretion to be exercised once that position has been arrived at. However, there are no additional factors which seem to me to be appropriate to take into account in deciding whether I ought, in the exercise of a discretion, rather than under the compulsion of s 440A(2), adjourn the winding up proceedings. The application for adjournment is dismissed. 46 I make order 1 in the originating process. I order that John Lord of Level 20, 1 York Street, be appointed as the liquidator of Bradley Keeling Management Pty Limited. I make order 3 in the originating process. These orders may be entered forthwith. **********

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