Deputy Commissioner of Taxation v Advant Pty Ltd

legal principles 3 The parties are agreed on the principles relevant to the exercise of the discretion of the Court under s 440A(2) of the Act. That subsection provides that: The Court is to adjourn the hearing of an application for an order to wind up a 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. 4 The administrators applying for the adjournment bear the onus to provide persuasive evidence to enable the Court to be satisfied that it is in the interests of creditors that the company continue under administration rather than be wound up: Re First Netcom Pty Ltd; Deputy Commissioner of Taxation v First Netcom Pty Ltd (2000) 35 ACSR 615; [2000] NSWSC 1045. 5 In Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 at 457 (Creevey) McPherson JA, with whom Davies and Pincus JJ agreed, said that the question of whether an administration should continue rather than that there be a winding up was 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. His Honour continued: In order to satisfy the court of the matter referred to in s 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. 6 In Sunstate Orchards Pty Ltd v Citrus Queensland Pty Ltd [2009] FCA 452 Greenwood J, after referring to the observations of McPherson JA in Creevey, said at [28] that: The hope must however be a real and not remote possibility, unclouded by cascading contingencies all of which must fall in before an asset might become available to the creditors as a group. In Creevey, the Court discounted a contended claim as a possible asset available to creditors. In that case the foreshadowed claim had not been formulated in any concrete way. 7 Also relevant to this matter is the decision in Deputy Commissioner of Taxation v Allodium Holdings Pty Ltd [2006] FCA 830. There the Court also considered an application pursuant to s 440A(2) of the Act. The Deputy Commissioner of Taxation was a party to that proceeding and was the primary external creditor. Dowsett J observed at [8] that he should "give significant weight to the Deputy Commissioner's perceptions as to his own best commercial interests" but noted that, in doing so, he should not lose sight of the interests of the other creditors, including, relevantly in that matter, the company known as the Hunt Property Group.

the evidence 8 The Administrators relied on an affidavit sworn by Mr Hewitt which set out in some detail the history of Advant, the course of the voluntary administration and the proposal for a deed of company arrangement (DOCA) which is to be put to a second meeting of creditors. I do not propose to set out that evidence in full but refer below to the critical aspects of Mr Hewitt's evidence. 9 Advant is a non-trading entity that was incorporated in 1984. Its current director is Mr Townsing and its shareholders are Mr Townsing's wife, Gaynor Townsing, and a related entity, Phillips River Pty Ltd, who hold one share each. 10 Advant is under the effective control of Mr Townsing. The company's principal purpose is the holding of an investment property in the suburb of Elwood in Melbourne. That property is currently valued at $2.3 million to $2.4 million and is the only asset of any significance held by Advant. 11 Advant has also received payments of money from various related entities of Mr Townsing over time. Advant's major unsecured debt is owed to the Commissioner. The current amount owing to the Commissioner is $1,157,853. Advant does not employ any staff and has not traded. 12 The Administrators have formed the view that there are no significant voidable transactions. Their report dated 18 September 2017 provides a summary of their analysis of potential voidable transactions and sets out their findings based on their preliminary investigations. To that end, the Administrators have: (1) identified three lump sum payments totalling $75,500 made in the month prior to their appointment, two of which were made to related parties; (2) not identified any uncommercial transactions; (3) identified that the loans from Normandy Nominees Ltd (Normandy Nominees) and Normandy Finance & Investments Limited (Normandy Finance), which were the subject of the litigation between Advant and the Commissioner, were not loans and that, therefore, those companies do not have an admissible claim in the administration, nor, according to the Administrators, would they in a liquidation; (4) not identified any unreasonable director related transactions; and (5) formed the view that it was unlikely that a court would determine that the company traded whilst insolvent. 13 These conclusions were in some cases expressed to be subject to further investigations being undertaken should the company go into liquidation. 14 According to the Administrators, the financial records of the company show: (1) secured creditors of approximately $4.5 million, all of which are related party claims. Of those claims, the Administrators have rejected $3,290,631, being the claims the subject of the tax litigation made by Normandy Nominees and Normandy Finance; (2) no priority creditors, other than administration costs; (3) unsecured creditors of $1,185,656; and (4) that the company is now cash flow insolvent. 15 The Administrators are of the opinion that the company became insolvent on 18 August 2017 when support was withdrawn by its related entities. 16 The Administrators have received a DOCA proposal from Mr Townsing. Mr Hewitt describes the proposal in his affidavit. In summary, it involves the payment of the sum of $775,000 by Stockriver Pty Ltd (Stockriver) in its capacity as trustee for the North Peak Trust to be made available to participating creditors on a pro rata basis. The whole of that amount will comprise a deed fund available to pay the creditors of Advant and will be paid in four instalments, with the fourth and final instalment due to be paid on 15 June 2018. No related entities of the company will participate in the deed fund. On the Administrators' analysis, the proposed DOCA will provide a return of 60 cents in the dollar to unsecured creditors, including the Commissioner. 17 In the Administrators' view, the proposed DOCA is in the best interests of the creditors of Advant and provides a better return than liquidation. The Administrators estimate that liquidation is likely to produce a return to creditors of 45 cents in the dollar. The Administrators have provided calculations of the likely returns under a liquidation scenario and the DOCA scenario. I should note here that the Administrators provide for two potential outcomes on liquidation, a high scenario and a low scenario. It is the low scenario that would yield a 45 cents in the dollar return to creditors. The high scenario would yield an 80 cents in the dollar return to creditors. However, the Administrators are of the view that it is unlikely that the high scenario would be achieved and that the likely outcome is the low scenario. 18 The Administrators also note that they have been informed by Mr Townsing that if Advant goes into liquidation then the related parties, Normandy Nominees and Normandy Finance, will initiate legal action against Advant in the liquidation arising from their claimed loans or contesting the rejection of any proof of debt that they might lodge. Mr Hewitt observes that, even though the Administrators believe that the debts are not valid, Advant would be exposed to the legal costs of defending that position in liquidation, which he says would be substantial. If that were to occur and Advant incurred those costs in the liquidation then, in Mr Hewitt's view, there could be a significant reduction in the return to creditors in a liquidation. 19 Mr Hewitt is of the opinion that the proposed DOCA is simple, with the provision of a lump sum of $775,000 over four instalments and those payments not being subject to the future performance of Advant. The performance of the DOCA would also be secured by a second ranking mortgage over the Elwood property and the Administrators are comfortable that there is sufficient equity in the property so that in the event of default under the terms of the proposed DOCA the deed administrators would be able to recover any outstanding contributions.

consideration 20 As I have already noted, the Commissioner opposes the application for an adjournment. He gives 12 reasons for doing so which I address below. 21 First, the Commissioner submitted that, because he is the primary external creditor of Advant, significant weight is to be placed on his views and his perception of his own commercial interest. That may be so. However, the Commissioner is not the only creditor and, other than his objection to the adjournment on the basis that he is the only significant unrelated creditor, he has not provided any evidence of that commercial interest. 22 The Commissioner contended that, first, under the proposed DOCA he will receive approximately $700,000 in return for his debt of approximately $1.15 million, that is, he will compromise the amount owed by approximately $500,000; and, secondly, that the other related creditors of Advant disclosed in the Administrators' report, leaving aside the claims of Normandy Finance and Normandy Nominees, ought to be investigated and that the Commissioner would not accept that the claims by those creditors, who are related parties, were valid. 23 However, it is evident from the Administrators' report that those claims have been considered in the time available. In their report, the Administrators note that they have conducted a review of all loan documentation in relation to each of the related party loans and engaged their own legal advisors to conduct a review of the loan agreements and advise on the validity of the loans and the security held by each of the lenders. In addition, the Administrators have reviewed the company's management accounts and supporting bank statements to confirm and account for each of the cash advances made under the respective loans. I would infer that it is as a result of that investigation that the Administrators have determined that the amounts claimed by Normandy Finance and Normandy Nominees would not be admitted. 24 Secondly, the Commissioner submitted that the Administrators estimate that the return to creditors under a liquidation scenario could range between 45 and 80 cents in the dollar, whereas the estimated return under the proposed DOCA was merely 60 cents in the dollar. The Commissioner submitted that this did not satisfy the threshold "persuasive evidence" test for the Court to be satisfied that it is in the interest of creditors that the company continue under administration rather than be wound up. I do not accept that submission. 25 The evidence given by the Administrators satisfies me that it is in the interests of creditors that the company continue under administration rather than be wound up. Quite properly, the Administrators provided a high and low scenario for the outcome on a liquidation, but expressed an opinion that the low scenario was the more likely and gave reasons for expressing that opinion. In those circumstances, I am satisfied that it is in the interests of creditors that the company continue under administration where, if the proposed DOCA is accepted by creditors, they will receive 60 cents in the dollar. 26 Thirdly, the Commissioner submitted that the Administrators support the proposed DOCA on the basis that, among other things, it will be "achieved with greater certainty" than the liquidation scenario. The Commissioner submitted that this is speculation as to what may transpire should the company be wound up and is insufficient to satisfy the Court that it is in the interests of creditors that the company continue under administration. Again, I do not accept that submission. 27 The Administrators expressed the view that the proposed DOCA is uncomplicated and easy to administer. There is evidence that a part of the first payment due under the proposed DOCA has already been provided and is in the trust account of the solicitors acting for the Administrators. The balance of the moneys due under the DOCA will be secured by a second ranking mortgage over the Elwood property. It does not seem to me that the Administrators have merely speculated as to what may transpire should the company be wound up. The Administrators have properly turned their mind to both scenarios and expressed a view that it is in the interests of creditors to consider and, if thought appropriate, enter into the proposed DOCA. 28 Fourthly, the Commissioner submitted that Advant is hopelessly insolvent and has been for a substantial period of time. There is a difference of opinion between the parties as to when Advant became insolvent. The Commissioner contended that Advant had not paid its tax debt arising by reason of assessments issued in 2014, even though they were due and payable, and failed to comply with a statutory demand dated 16 October 2014, giving rise to a presumption of insolvency. The Administrators noted that Advant had support and funding until 18 August 2017 and that it was only when that support was withdrawn that the company was unable to pay its debts as and when they became due. I do not think that the date of insolvency is an issue that I need to resolve on this application. However, I observe that, to the extent that the Commissioner complains that the amounts owing under the assessments were not paid, that was because Advant disputed those amounts. 29 Fifthly, the Commissioner submitted that if the proposed DOCA were accepted then it would foreclose investigation of at least two matters by a liquidator. Those matters are, first, a number of voidable transactions and, secondly, whether Advant traded whilst it was insolvent. As to the first matter, I note the observations of the Administrators in their report set out at [12] above. As to the second matter, the Administrators considered insolvent trading in their report and provided a conclusion on the cash flow test of insolvency. As I have already observed, included in their preliminary assessment was a view that it was unlikely that a court would determine that Advant traded whilst insolvent. 30 Sixthly, the Commissioner submitted that if the proposed DOCA were accepted then there would be no liquidators' investigation into a number of other matters, which he identified as requiring investigation and potentially giving a significantly greater return to him as the principal external creditor. Those matters include the level and destination of legal and other fees paid by Advant; the guarantees purportedly given by Advant with respect to loans made by Stockriver; the validity of loan agreements entered into with related parties; and whether the financial records correctly record and explain Advant's transactions, financial position and performance. A number of these matters were the subject of preliminary investigation by the Administrators, who have formed preliminary views about them. As to the balance of the matters, I am not satisfied that they are sufficient to persuade me not to exercise my discretion in favour of granting the adjournment. 31 Seventhly, the Commissioner raised the issue of the relation-back day and submitted that if Advant is wound up pursuant to his application then the relation-back day would be the date on which he filed the application for winding up, being 9 January 2015. The Commissioner submitted that it would be in the interests of creditors that this be the relation-back day for the purposes of the winding up of the company rather than a later date should the proposed DOCA not be accepted and the company put into liquidation at the second meeting of creditors. 32 The Administrators recognised that this may be an issue and submitted that it was possible for the Court to make an order to the effect that the third alternative under s 439C of the Act, that the company be wound up, would not be available at the second meeting of creditors. That is, the creditors would only decide one of two things: that the company either execute the proposed DOCA; or that the administration should end. In that event, if the creditors did not accept the proposed DOCA then the company would not be wound up at the meeting. Rather, the effect of such an order would be that the matter would return to the Court for the Court to make an order for the winding up of the company and the relation-back day would be preserved. I accept that submission and I propose to make an order to protect that position. 33 Eighthly, the Commissioner submitted that, on the evidence, the Court could not be satisfied that Advant had engaged the provisions of Pt 5.3A of the Act bona fide. The Commissioner submitted that the activities that had been undertaken recently by Advant would lead to a conclusion that Advant was using the provisions of Pt 5.3A in a way that ought not be permitted and to avoid paying other third party debt. 34 The Commissioner pointed to the refinancing of a bona fide loan from Westpac Banking Corporation, the only other significant external creditor apart from the Commissioner. As submitted by the Administrators, Westpac Banking Corporation was a secured creditor and was paid out by Stockriver which took security over the Elwood property to secure the advance it made for the bank to be paid out. The Commissioner's debt was not secured and his debt was disputed. It seems to me that it is difficult to draw the inference that the pay out of the loan to Westpac was not bona fide and was made to engage the provisions of Pt 5.3A in a way that was not bona fide. 35 The Commissioner also points to the charges taken by purported related party creditors that have been registered since August 2016. While no explanation has been provided for that, the Administrators have satisfied themselves that each of those charges is valid and that moneys have been advanced by the companies that have made the loans to Advant. 36 Finally, the Commissioner points to the purported guarantee of Stockriver's loan to Pilmora Pty Ltd. Administrators were recently appointed to Pilmora. It was the appointment of the administrators that was the event of default that caused those guarantees to be called upon only recently. 37 Ninthly, the Commissioner submitted that it could not be said that the Administrators require further time to assess the financial position of Advant because the report to creditors for the purposes of the second meeting has been circulated and the proposed DOCA put to creditors. That is so. The purpose of the adjournment is to allow the second meeting to be held. 38 Tenthly, the Commissioner submitted that if the DOCA is accepted then it will result in a delay of the total return to creditors to 15 June 2018, whereas proceeds from the sale of Advant's real property could be realised within considerably less than this time. That may well be so. However, if any issues arise in the liquidation, including any challenges or claims by any of the related parties in relation to, for example, a rejection of their proofs of debt, then that would also cause delay in relation to the payment of any dividend to creditors by the liquidators. 39 Eleventhly, the Commissioner submitted that if the proposed DOCA is accepted then it does not deal with distributions to certain creditors on the basis that they are accepted to be related and that it is not in the financial interest of those creditors to forgo their debts potentially indefinitely. The Commissioner relied on the judgment in Deputy Commissioner of Taxation v Alternative Business Solutions (Aust) Pty Ltd (Administrators Appointed) (2006) 24 ACLC 435; [2006] FCA 400. It seems that in that case seven creditors of the company agreed not to participate in any distribution made under a proposed deed of company arrangement, leaving only the Commissioner and one other creditor as beneficiaries of the proposed deed. The Commissioner opposed the adjournment of the winding up application, mainly because there was some uncertainty as to the value of debtors the company had as assets. The Court held that, although there was nothing untoward in the fact that the seven creditors were willing to support the proposed deed and forgo the recovery of any debts owed to them because of any family or other relationships between them, the fact was that it was not in their financial interest to forgo their debts and the Court therefore refused to adjourn the Commissioner's winding up application. 40 In this case the related creditors have agreed to forgo their debts in the proposed DOCA. However, I would not refuse to adjourn the winding up application on that basis. There is nothing untoward in those creditors supporting the proposed deed and forgoing the recovery of their debts. Each of those creditors is a related corporation, seemingly controlled by Mr Townsing or people related to Mr Townsing. They are not individuals and, while their interests need to be considered, they must have also considered their own interests in relation to the proposed DOCA. 41 Lastly, the Commissioner submitted that it is in the public interest to have these matters fully investigated by a liquidator given that Advant failed in separate proceedings in the Full Federal Court to show that some of its claimed loans were not shams. There is no issue as between the Administrators and the Commissioner that those loans which were the subject of proceedings in this Court were shams. The Administrators have not and will not admit those amounts in the administration. However, it cannot be inferred that all transactions entered into by Advant were shams and, in the circumstances of this case, the public interest does not, in my view, outweigh the matters to which I have had regard in coming to the view that I have. 42 In my opinion, the evidence given by the Administrators has satisfied me that it is in the interests of Advant's creditors for the company to continue under administration rather than be wound up. I will accede to the application made by the Administrators and grant the adjournment. I certify that the preceding forty-two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Markovic.