Deputy Commissioner of Taxation v Alternative Business Solutions

Supreme Court of NSW|2019-07-23|Before: Rees J

Solicitors: Colin Biggers & Paisley Pty Ltd d (Plaintiff) Bridges Lawyers (Defendant) File Number(s): 2019/178145

Judgment

HER HONOUR: In these proceedings, Mono Constructions Pty Limited seeks to wind up Cresco Opus Fund No 4 Pty Limited on the ground of insolvency. Mono is a builder which undertook work for Cresco, a special purpose company which completed a property development in Turramurra. The two applications before the Court are: (a) An application under section 440A(2) of the Corporations Act 2001 (Cth) by Cresco's voluntary administrator, Adam Farnsworth, to adjourn the winding up application until 7 August 2019, being the day after a second meeting of creditors is proposed to be held or, alternatively, until 30 July 2019, the day after a section 439A report is proposed to be issued to creditors. This application is opposed by Mono. (b) In the event that the application to adjourn the winding up application is unsuccessful, then the administrator accepts that it is appropriate to make the orders sought by Mono in the winding up application.

facts

Ten affidavits were read by the parties and some four folders of documents were tendered. These affidavits and exhibits make plain that there are a series of transactions from about late 2018 which concern Mono; are being investigated by Mr Farnsworth; and, if a liquidator is appointed, may be worthy of further investigation.
Cresco is owned by Tino Carusi. Until recently, Mr Carusi was the sole director of Cresco and Danny Masri was the secretary. Mr Carusi and Mr Masri are no longer in Australia and the administrator understands that they have recently relocated to the Middle East. Cresco is the trustee of The Wonga Wonga Property Trust.
In 2016, Cresco purchased two adjoining properties in Turramurra for some $6.1 million. In February and March 2016, three investors contributed funds to the development by entering into subscription agreements with Cresco. The investors (defined as "Investor" in the subscription agreement) were: (a) Benjalex Pty Limited as trustee for The Casaphin Trust, in the amount of $2.5 million; (b) Dino and Patricia Calvisi as trustee for Calvisi Superannuation Fund, in the amount of $1 million; and (c) Gregory Johnston, in the amount of $200,000. The recitals to the subscription agreements note that The Wonga Wonga Unit Trust was established to acquire and develop the land and, in order to develop the land, Cresco was required to raise additional capital. Under the subscription agreements, the investors were issued with preference units in the trust. The preference units were recorded in the balance sheet of the trust.
In June 2016, Mono entered into a construction contract with Cresco to develop the land by constructing 13 townhouses. By September 2018, the development had been completed and the townhouses began to be sold. The total sale proceeds of the 13 townhouses was some $28 million. Also in September 2018, Haus Building Services rendered an account for $116,210. Haus Building Services remains a creditor today.
On 12 October 2018, Cresco made loans to three related companies totalling $2.4 million. As Mr Farnsworth understands it, the loans were made for options paid by related trusts with respect to the possible acquisition of land. The options were, apparently, not exercised and Mr Farnsworth considers that the loans are irrecoverable but worthy of investigation.
In about December 2018, Cresco entered into loan agreements with the three investors to whom I earlier referred. Under the agreements, the investors were now defined the "Financiers". The recitals to the agreements recorded that: 1. the Financiers held preference units in the Wonga Wonga Property Trust; 2. the preference units had been redeemed and the capital repaid in full; and 3. the accrued dividend payable on redemption was delayed through the provision of a loan facility recorded in the agreement. Mr Farnsworth confirms that his initial investigations have identified the redemption of preference units in the amount of $4 million in December 2018, and he considers this warrants further investigation as to whether it may be a voidable transaction.
Further, on 11 December 2018, $1,414,192 interest was paid to the investors, now "Financiers". Mr Farnsworth's investigation into the payment of this interest, as part of a larger payment of $2.1 million in mezzanine interest, is continuing. On 11 January 2019, according to Mr Farnsworth, Cresco paid a further $522,500 to the Financiers. Mr Farnsworth considers that this payment may have been a preference payment and his investigations in respect of this issue are continuing.
On 7 May 2019, Mono issued a payment claim to Cresco under the Building and Construction Industry Security of Payment Act 1999 (NSW). On 15 May 2019, Mr Carusi resigned as a director of Cresco and Mr Masri resigned as secretary. Jack Bittar was appointed as the sole officeholder of Cresco. On 12 May 2019, Cresco served a payment schedule under section 14 of the Security of Payment Act, disputing that it owed any money to Mono and, on 22 May 2019, Mono lodged an application for adjudication of its claim under section 17 of that Act. The same day, Mono commenced proceedings in the Technology and Construction List of this Court and sought a freezing order over the proceeds of sale of the last townhouse in the development. Sale of the last townhouse was completed on 29 May 2019 and Cresco undertook not to disburse the proceeds below $850,000 but allowing Cresco to pay its reasonable legal fees and ordinary business expenses.
On 7 June 2019, Mono commenced these proceedings to appoint a liquidator to Cresco. On 17 June 2019, the Financiers registered a security interest on the Personal Property and Securities Register over Cresco. Mr Farnsworth considers, given that the security interest was not registered within 20 business days of the loan agreements, that the loan agreements are void against him pursuant to section 588FL of the Corporations Act
On 27 June 2019, Cresco changed its name to ACN 169 864 000 Pty Limited. On 28 June 2019, draft accounts for the Wonga Wonga Unit Trust were provided to Mono's solicitors. On 30 June 2019, Cresco's bookkeeper submitted an invoice for $19,200, which remains unpaid.
On 2 July 2019, Cresco entered into voluntary administration under section 436A of the Corporations Act, which provides that a director may appoint an administrator where, in the director's opinion, a company is insolvent or is likely to become insolvent. Mr Farnsworth was appointed as administrator. This had the result of staying the proceedings in the Technology and Construction List.
On 3 July 2019, Mr Bittar completed a report on company activities and property (ROCAP). Mr Bittar said in the ROCAP that the Australian Taxation Office (ATO) is owed $1,345,714. Mr Farnsworth expects that the ATO will be owed at least this amount. On 4 July 2019, Mr Farnsworth received a letter from the ATO advising: There is presently no claim in this administration, however As The Trustee For Wonga Wonga Property Trust, there may be a claim when the income tax returns for the years ended 30 June 2018, 30 June 2019, 30 June 2020 and activity statements for April to June 2019 and July to September 2019 quarters have been lodged and issued. As these unlodged tax returns and activity statements cover the period in which some $29 million in new townhouses was sold, it seems likely that a substantial amount of tax and GST may be payable by Cresco.
On 4 July 2019, Mr Farnsworth issued his first report to creditors. On 5 July 2019, an adjudicator determined that Mono was entitled to $744,579.45 under the construction contract. Mono also claims to be entitled to $285,305 in retention monies.
In the period since Mr Farnsworth's appointment, his initial investigations have identified four transactions which he considers require further investigation as to whether they may be voidable transactions under the Corporations Act: (a) The redemption of $4 million preference units in December 2018. (b) Payments to the Financiers of $1,414.192 in interest in December 2018 and a further payment of $522,500 in January 2019. (c) Distributions to two unitholders, being to Telbest in the sum of $574,540 and to DL Trust in the sum of $246,232, in the financial year ended 30 June 2019. (d) Payments of mezzanine interest being, after excluding the interest paid to Financiers, a further $700,000.
In addition to these matters, Mono has at least two further concerns: (a) The loans made in October 2018 to related trusts of $2.4 million, now said to be unrecoverable. (b) A shortfall of some $2 million in recording the sales proceeds of the 13 townhouses in the draft financial statements for the Wonga Wonga Property Trust, said to be revealed by comparing the sale prices recorded in the transfers with the trading income recorded in the draft accounts of the trust.
It is Mono's submission that the facts indicate that Cresco and its directors have progressively stripped the company of assets in order to defraud its creditors and it would be a straightforward proposition to retrieve these funds. During the hearing, Mono undertook to provide $400,000 in funding to a liquidator to pursue these matters.

Financial position

Cresco is insolvent. The net proceeds of sale of the last townhouse are now held by Mr Farnsworth, being $748,372.21. So far as Mr Farnsworth has been able to determine, this is the only realisable asset of Cresco. The creditors of Cresco, as best Mr Farnsworth has been able to determine, are as follows: Mono $1,029,884.45 The Financiers $1,010,368.45 Crestmont Treasury Pty Limited $ 700,000.00 Piety Funds Management Pty Limited as trustee for the High Yield Fund $120,000.00 Haus Building Services $166,210.00 The bookkeeper $19,200.00 Titan Partners Pty Limited $253.00 $3,045,915.90

In addition, the ATO may have a claim for unpaid tax of $1,345,714 but the ATO has not lodged a proof of debt. Mr Farnsworth says, based on his investigations, that Crestmont Treasury Pty Limited and Piety Funds Management Pty Limited appear to be related parties.

The proposed DOCA

Mr Bittar proposes that Cresco enter into a Deed of Company Arrangement (DOCA) with Cresco Opus Pty Limited, a related company, under which a deed fund will be established comprising the cash at bank of $748,372.21 and an additional cash contribution by Cresco Opus of $245,278, sufficient to pay Mr Farnsworth's costs to date, Mr Farnsworth's remuneration and disbursements in administering the DOCA, and a distribution to unsecured creditors of 30 cents in the dollar. The proposal includes that the related party creditors will not prove for their debts or otherwise claim any dividend from Cresco and the Financiers will also defer their claims against Cresco and not participate in any DOCA. According to Mr Ryckmans, if Cresco continues pursuing other property development opportunities, then the Financiers' remaining debts will be converted into shares in the company and, if Cresco does not continue after effectuating the DOCA, then the Financiers will enter into debt forgiveness deed polls with Cresco.
The evidence of Mr Ryckmans, the solicitor for Mr Bittar, is that the Financiers and related party creditors consider it to be in their best interests for Cresco to continue in administration rather than be wound up. There is no indication that the ATO will attend a second meeting of creditors or how it would vote if it did.
Mr Farnsworth has compared the distribution to unsecured creditors under the proposed DOCA with the return to unsecured creditors in the event of a liquidation. In a liquidation, Mr Farnsworth estimates a return of 8.49 cents in the dollar to unsecured creditors, assuming that the liquidator conducts public examinations of relevant parties, receives pessimistic legal advice on the investigative issues or evidence that the potential defendants would not be able to pay a judgment. Mr Farnsworth estimates that $175,000 would be incurred in this investigative process and there would be no recoveries.

Section 440A(2)

Section 440A(2) provides: 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.
The principles relevant to an application under section 440A(2) are not controversial. There must be a sufficient possibility, as distinct from a mere optimistic speculation, that the interests of the company's creditors will be accommodated to a greater degree in an administration than in a winding up. The onus is on the administrator to show, by persuasive evidence, that it is in the interests of the company's creditors that the administration continue rather than liquidation ensue. The question of whether an administration should continue is closely related to whether the creditors can hope to get more by way of payment of their debts by administration than from liquidation. Where there is a realistic possibility that a DOCA may be proposed, it will generally be in the interests of creditors for the administration to continue in order to ascertain whether it will be "beneficial for creditors overall", especially where the adjournment is sought for a short period early in the administration: In the matter of Bobos Engineering Australian Pty Ltd [2015] NSWSC 2027 at [9]; In the matter of Denham Constructions Pty Ltd [2016] NSWSC 1426 at [10]; and In the matter of Dan Phillips Holdings Pty Ltd [2017] NSWSC 954 at [5].
Both parties relied on Deputy Commissioner of Taxation v KJ Consulting Pty Ltd (administrators appointed) [2005] FCA 1827, where Gyles J pointed to several factors which may support an adjournment under section 440A(2), including: 1. that the administration process enables the general body of creditors to exercise commercial judgment as to where their best interests lie; 2. where contributions to a deed fund are to be made by related parties which would not be available if the company enters liquidation; and 3. where the administrator supports the adjournment.
His Honour also suggested factors which tell against an adjournment, including: 1. where the company is not trading and is not "liable to be revived or its fortunes revived by trading on as such"; 2. where the company is (as it almost always is) insolvent; and 3. where the majority of creditors oppose the adjournment. See also Weriton Finance Pty Ltd v PNR Pty Ltd (in administration); Australian Residential and Commercial Finance Pty Ltd v PNR Pty Ltd (in administration) (2012) 92 ACSR 88; [2012] NSWSC 1402 at [15] ff where Black J conducted a review of the authorities as to relevant factors in such applications.
Mr Farnsworth does not suggest that Cresco's business will be revived under the DOCA but simply that it will deliver benefits which will not be available to creditors if a liquidator is appointed, being the deferral of the claims of the related party creditors and Financiers, a contribution of $245,000 and the prompt, certain receipt of 30 cents in the dollar by unsecured creditors. This can be compared with the uncertainty attending the investigation and pursuit of potential claims against directors or third parties. Mr Farnsworth suggests that, if the adjournment is granted, creditors can decide for themselves whether they want a "bird in the hand or two in the bush". At the moment, only Mono opposes the adjournment.
Mono submits that the director of Cresco Opus Pty Limited is Mr Masri and, given that he has recently left Australia and is now residing overseas, it is doubtful that he will provide the contribution under the DOCA. Further it is submitted that the only benefit to be obtained by the creditors is to prevent a liquidator taking recovery action under Part 5.7B against, for example, Mr Masri. Mr Farnsworth accepted that if the DOCA was approved then his investigations would cease and that Mono would be bound by the DOCA, under section 444D of the Corporations Act, albeit that Mono could always apply to have it terminated under section 445D in the circumstances specified therein.

Consideration

It is apparent from the list of creditors that the proposed DOCA, if put to a second meeting of creditors, may pass in a vote under rules 75-110 and 75-115 of the Insolvency Practice Rules (Corporations) 2016 (Cth) if a majority of the creditors by number, and a majority of the creditors by value, vote in favour of the resolution. The balance between the competing interests may change if the ATO takes an interest in the matter, attends the meeting and votes against the resolution.
Where two of the creditors of Cresco are related party creditors and the Financiers are only creditors by reason of a series of transactions which may themselves be set aside on the application of a liquidator appointed to Cresco, the question arises whether, in considering an application to adjourn a winding up application under section 440A(2), all creditors must be treated equally or whether all creditors are equal but some are more equal than others: George Orwell, Animal Farm (1945). In this regard, Lindgren J noted in Deputy Commissioner of Taxation v Alternative Business Solutions (Aust) Pty Limited (administrators appointed) (2006) 24 ACLC 425; [2006] FCA 400 at [9]: When s 440A speaks of 'the interests of creditors' it is referring to the creditors' interests as creditors, that is to say, to their interests in recovering what is owed to them, not to 'interests' arising from family relationships, friendship or emotional attachment. For some reason, the seven creditors to whom $932,200 is owed in total, are willing to support the DCA and to forego recovery of the debts owed to them. This may well be due to family or other relationships between them, or members of them, and Mr and Mrs Brickwood. There is nothing untoward in this, but the fact remains that, so far as the evidence reveals, it is not in their financial or commercial interests to forego their debts, and the only creditor whose interests remain to be considered … is the Commissioner, who prefers that the Company be wound up. This is a weighty consideration.
His Honour Justice Brereton followed Alternative Business Solutions in a situation close to the one at hand in In the matter of Sales Express Pty Limited (Administrators Appointed) [2014] NSWSC 460, where a judgment creditor's debt of $1.64 million was going to be swamped at a meeting of creditors by the votes of related creditors totalling some $47 million. The related creditors intended to vote in favour of a proposed DOCA which would deliver six cents in the dollar to the judgment creditor. The administrator recommended entry into the DOCA as it would result in a larger payment to creditors than in the event of a liquidation as, although there were apparent claims which could be made by a liquidator, the prospect of recovering monies in respect of those claims was considered to be low. The judgment creditor sought to bring the administration to an end and appoint a liquidator. His Honour adopted the approach in Alternative Business Solutions, noting that it was significant that the only unrelated creditor was opposed to the administration continuing and, should the meeting of creditors resolve to enter into the DOCA, it would be open to the dissentient creditor to apply to the court for a review of the decision. His Honour noted that it was not in the financial or commercial interests of the related creditors to forego their debts and the only creditor whose interests remained to be considered was the judgment creditor, which preferred that the company be wound up. Further, at [23]: … But whereas in the case to which I have just referred, Lindgren J observed that there was "nothing untoward" in family or other relationships dissuading the related creditors to forego participation in the deed fund, in this case, there are unsatisfactory aspects to the decision of those creditors to support the deed of company arrangement. As I have said, it is not in their financial or commercial interests as creditors to do so. One asks then, why would they do so? Of course, they are controlled by the same persons who controlled the company, Mr Gerard. …
His Honour concluded that it was in the interests of the related creditors that the DOCA be entered into as it would benefit, indirectly if not directly, the controller of the company. It would also prevent a liquidator investigating the suspicious transactions in that case, including a claim against the director for breach of director's duties. At [28]: The provisions of Pt 5.3A were not intended to enable directors, through their control of the majority of creditors, to avoid having their conduct of the affairs of the company scrutinised, at least where the unrelated creditors desire that to happen. That is not to say that the interests of related creditors are necessarily to be disregarded: they may have as valid and proper an interest in the outcome of an insolvency as an unrelated creditor. But as in Alternative Business Solutions and in this case, where they wish to vote in favour of a deed of company arrangement which offers no benefit for them and which the unrelated creditors do not wish to have imposed on them, generally speaking the interests of the unrelated creditors will prevail.
This approach has been followed in In the matter of Evelution Pty Limited [2014] NSWSC 1318 at [21]-[24] per Brereton J; In the matter of Condor Blanco Mines Ltd [2016] NSWSC 1196 at [19] per Barrett AJA; T-S Partners LLC v Paltar Petroleum Limited (Administrators Appointed) (No 1) [2019] FCA 635 at [41] per Stewart J and Deputy Commissioner of Taxation v Fyna Constructions (Hire & Sales) Pty Limited (Administrators Appointed) [2019] FCA 578 at [30] per Griffiths J.
Applying these principles to the facts at hand, I give less weight to the interests of the related party creditors and the Financiers as they do not appear to receive any benefit under the proposed DOCA, give greater weight to the interests of Mono. One might fairly ask, in the circumstances, why the related party creditors and the Financiers are proposing to enter into the DOCA. Given the transactions which I have set out earlier in this judgment, it may be that they wish to enter into the DOCA to bring the investigations being undertaken by Mr Farnsworth to an end and preclude any further investigations being pursued by a liquidator. The controller of the proposed contributor, Mr Carusi, may wish to thereby deflect claims against him. It may also be that the Financiers are prepared to defer any rights they may have against Cresco as they wish to engage in further property investment with Mr Carusi and are content, having regard to the repayment of their capital and substantial interest, to defer any other claims they may have.
The purpose of the second meeting of creditors is to enable the company's general body of creditors to exercise commercial judgment as to where their best interests lie. Putting to one side the related party creditors and the Financiers, the only substantial unrelated creditor likely to attend the meeting is Mono. Mono has already made its commercial decision, balancing the benefit of prompt payment of 30 cents in the dollar on its debts against outlaying further funds in order to potentially recover more. In all of these circumstances, I am not prepared to grant the adjournment. It follows, as the parties have agreed, that a liquidator should be appointed. Mr Farnsworth does not suggest that he should be appointed in favour of Mono's chosen liquidator and thus I will appoint the liquidator selected by Mono.

orders

I make the following orders: 1. Order, pursuant to section 459A of the Corporations Act 2001 (Cth) that Cresco Opus Fund No 4 Pty Limited ACN 169 864 000 be wound up in insolvency. 2. Appoint Glenn Livingstone of Ferrier Hodgson, Level 25, 1 International Towers, Sydney, 100 Barangaroo Avenue, Sydney, 2000 to act as the liquidator of Cresco Opus Fund No 4 Pty Limited ACN 169 864 000. 3. Order that the defendant pay the plaintiff's costs of this application.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 25 July 2019

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