Deputy Commissioner of Taxation v Bradley Keeling Management Pty Limited

Whether the winding up application should be adjourned

1. Section 440A(2) of the Corporations Act 2001 (Cth) requires the Court to adjourn a hearing of an application for a winding up of 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 scope of that section has been considered in many judgments of this and other courts, including recently Re Bobos Engineering Australia Pty Limited [2015] NSWSC 2027 and my judgment in Re Denham Constructions Pty Limited [2016] NSWSC 1426.
2. In Re Bobos Engineering Australia Pty Limited above, Brereton J noted that courts have frequently expressed a consistent attitude to the appointment of administrators to a company that is opposing or has opposed a winding up petition at the last minute before the hearing. His Honour there referred to Re Reed Constructions Australia Pty Limited [2012] NSWSC 1045 and to his Honour's decision in Re Offshore and Ocean Engineering Pty Limited [2012] NSWSC 1296 at [15], affirmed by the Court of Appeal in Offshore and Ocean Engineering Pty Limited v Greenwich Contractors Pty Limited [2012] NSWCA 371. He also referred to the decision of Gorst Rural Supplies Pty Limited v Glenroy (Lake Bolac) Pty Limited [2012] VSC 60 where the Victorian Supreme Court noted that lateness of an appointment of an administrator, immediately prior to the hearing of a winding up application, and in circumstances of previous adjournments of the application, raised the possibility of an abuse of the processes of Pt 5.3A of the Corporations Act. I referred to some of the same authorities in Re Denham Constructions Pty Limited above, including the observation of Brereton J in Re Bobos Engineering Australia Pty Limited above.
3. I bear in mind that, where an administrator has only recently been appointed, he or she may have limited information as to the companies' affairs, as is the case here, and the extent of proof that can result in the level of persuasion necessary to adjourn the winding up application may be less than would arise if an administrator had been in office for a longer period: Deputy Commissioner of Taxation v Bradley Keeling Management Pty Limited [2003] NSWSC 47; (2003) 44 ACSR 377. As Brereton J noted in Re Bobos Engineering Australia Pty Limited above, the fact that an adjournment of a winding up application may be opposed by significant creditors may be a factor that tends against the adjournment, although there may be little prejudice from an adjournment for a short period, where the only consequence of that adjournment is likely to be that the administrator will incur further costs. In Re Bobos Engineering Australia Pty Limited above, Brereton J was satisfied that notwithstanding the lateness of the appointment of the administrator, the winding up should be adjourned for a short period where evidence had been led before him of a real prospect of a deed of company arrangement proposed by the company's director or by a lessor of the premises occupied by it.
4. There are matters in this case which raise concern as to the circumstances of the appointment of the administrator, and I say that without any criticism of the administrator, and as to the good faith of that appointment. On any view, the appointment came at the last moment, and contrary to the basis on which the matter had previously proceeded before the Court. Orders had been made by a Registrar on 15 February 2017 for the companies to serve the evidence on which they relied by 22 February. That had not occurred and, on 6 March 2017, I made orders, on the application of Counsel then appearing for the companies, permitting them to lead expert accounting evidence as to their solvency, including any issues as to balance sheet classifications, by 27 March 2017. It was implicit in that application that the companies then sought to lead expert accounting evidence to establish the fact of their solvency, not the contrary. Now, without explanation, and immediately before the winding up application was due to be heard, it appears that a person recently appointed, or possibly recently appointed, as the sole director of the companies has formed the view that they are insolvent or likely to become insolvent so as to appoint administrators to them.
5. A second area of concern relates to the identity of the directors of the companies, since there are some inconsistencies as to the question of who was a director of the companies, and when, which may not impugn the validity of the appointment of the administrators but may nonetheless raise questions as to the good faith of that appointment. Ms Beechey, who appears for the Plaintiff, draws attention to company searches which the Plaintiff had undertaken at the time of filing the proceedings, as the Supreme Court (Corporations) Rules 1999 (NSW) required, which disclosed that the companies' then director was Ms Michelle Phillips, who I infer is connected with another person referred to in correspondence, Mr Dan Phillips.
6. The company searches then recorded that Ms Phillips had been appointed as a director of the companies on 25 August 2015 and had held that position until the date of those searches, 10 January 2017. Ms Phillips had herself sworn an affidavit in the proceedings, which is tendered by the Plaintiff as against the companies' interests, which recorded that she was the director of the companies as at 14 February 2017. That affidavit also annexed financial statements for the companies and Ms Beechey draws attention, relevantly, to the financial statements of DPH for the year ended 30 June 2016 which recorded the value of property, plant and equipment, at cost less depreciation, of in the order of $10,364,000. I will return to the significance of that matter below.
7. Ms Beechey draws attention to company searches undertaken today, which record a different position in respect of the directors of the companies, suggesting that Ms Phillips was, contrary to the earlier company searches and contrary to her own affidavit in these proceedings, appointed as director of the companies for one day, on 25 August 2015, and that Mr Richard Pettigrew was then appointed as director of the companies on the same day and held that position until today. It seems to be inconceivable that Ms Phillips would not have known, when swearing an affidavit in these proceedings, if she was not the current director of the companies and had, in fact, only been a director of the companies for one day, the position which the company searches now record. It appears that that position arises from the lodgement of updating information, which changed the companies' names and changed the details of appointment or cessation of the company office holders, today, 3 April 2017. Those matters are relevant, not to the conduct of the administrator, and possibly not to the validity of his appointment, but to the good faith of that appointment, so far as that appointment may be part of a course of conduct which involves the changes to office holders to which I have referred.
8. The companies, or their administrators, in turn rely on Mr Vardy's affidavit dated 3 April 2017. Mr Vardy refers to the fact that his firm had undertaken searches of the companies on the administrators' appointment, but those searches appear to have been made, in fact, today and also record Mr Pettigrew as the director of the companies appointed on 25 August 2015, and Ms Phillips as having held her position as a director of the companies for only one day, a matter to which I referred above.
9. Mr Vardy refers to the fact that his partner was contacted in respect of the appointment late Wednesday last week, a further discussion took place on Thursday and a meeting was held on Friday, and that the appointment documents were received yesterday, Sunday, 2 April 2017. Mr Vardy also refers to correspondence between the other administrator, Mr Quinn, and an advisor to a secured creditor of the company, Westpac Banking Corporation ("Westpac"), in which Mr Quinn addressed aspects of the companies' financial position. Mr Quinn there refers to having been appointed on 31 March 2017, a matter which may not have taken into account the date on which consent was given to appointment. He refers to the fact that Mr Dan Phillips, who does not appear to be a director of the companies for a considerable period on either of the versions of the identity of their director, had requested voluntary administration to allow the voluntary administrators to find an alternative to liquidation. Mr Quinn also expresses the view that liquidation would severely damage the reputation of the company group and damage Westpac's security and the ability of the companies to make finance repayments. He there refers to ongoing assignments with large mining contractors who may be averse to enforced restructures and would look to alternate suppliers.
10. Mr Quinn also refers to the value of the plant and equipment held by the companies, with a fair market value of $3,205,000 and a liquidation value of $2,746,000. It is not clear whether that is a reference to DPH or to Biglift Cranes, but that figure is not easy to reconcile with the information contained in the accounts of DPH as at 30 June 2016, some nine months ago, which, as I noted above, recorded fixed assets at a depreciated value in the order of $10 million. Possible explanations may include, as Ms Beechey notes, the disposition of assets or, as Mr Horne, who appears for the administrators, notes, inaccuracies within the accounts at the time they were prepared. Neither of those explanations provides any particular comfort as to the companies' affairs.
11. Mr Quinn there refers to possible options for an administration, including that Westpac might appoint a receiver, or the business could be sold through the administration process, although Mr Quinn there doubts the likelihood that unsecured creditors would receive a dividend from that option, or that a deed of company arrangement could be explored. It is apparent from that observation that, by contrast with the position addressed by Brereton J in Re Bobos Engineering Australia above, what exists here is the mere possibility of a deed of company arrangement, not an existing proposal for a deed of company arrangement. Mr Quinn also refers to a number of other debtors of the company, which suggests that the companies' debts, quite apart from their secured debts to Westpac, are on any view very substantial.
12. Ms Beechey advances the submission, based on questions of construction of amendments made to the Corporations Act by the Insolvency Law Reform Act 2016 (Cth), that the appointment or continuance of an administration would potentially defer the relation back date, depending upon the transitional provisions relating to amendments to provisions which address how the relation back date is determined, where a winding up application is brought prior to the appointment of administrators. I do not consider it necessary to address that submission in the circumstances.
13. As I observed in my judgment in Re Denham Constructions Pty Limited above, s 440A of the Corporations Act has a number of elements. The Court is required to adjourn the winding up proceedings if the relevant precondition is satisfied, namely that 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. That must be determined in the relevant circumstances, and requires a sufficient possibility, and not mere speculation, that creditors' interests will be advantaged by the adjournment of the winding up application. While the threshold for demonstrating such advantage is undoubtedly lower when a newly appointed administrator seeks an adjournment of a winding up, that threshold nonetheless has content, and there must be some plausible basis to identify an advantage from the continuation of the administration rather than a winding up.
14. It seems to me there are factors which cause concern as to the present position, including the circumstances in which the administrators have been appointed on the eve of the winding up application, when an adjournment had been granted to lead evidence of solvency; the circumstances surrounding the identity of the directors of the companies, in the period in which any claim for insolvent transactions would be directed; and the potential differences between the value of the companies' assets recorded in their accounts as at June 2016 and the value of fixed assets now disclosed by the companies to the voluntary administrators, and by the voluntary administrators to Westpac. I do not doubt that the administrators are capable of taking control of the companies' affairs, and would properly administer the companies' affairs in accordance with their duties, and Ms Beechey did not suggest to the contrary. However, notwithstanding that the administrators are in a difficult position because of the lateness of their appointment, this is not a case where a late appointment is accompanied, for example, with some clear proposal for a deed of company arrangement or some identified advantage to the companies which can flow from an administration as distinct from a liquidation. I give little weight to Mr Quinn's reference to reputational issues, both because it appears to be directed to the interest of other members of the corporate group rather than of creditors of the companies, and because the suggestion as to the behaviour of mining customers of the companies (or possibly other companies within the group) seems to me to be speculative in nature. In any event, the other factors to which I have referred above seem to me to outweigh that matter in determining the interests of the companies' creditors.
15. I am not satisfied in the present circumstances that, even to the low threshold that applies where an administrator is recently appointed, it is in the interests of the companies' creditors for the companies to continue under administration, rather than be wound up in a manner that will allow a liquidator to take control of their assets and to proceed to realise or otherwise deal with those assets for the benefit of the companies' creditors. Accordingly, I am not satisfied I should adjourn the winding up application under s 440A(2) of the Corporations Act.

Whether the companies should be wound up

1. As I noted above, by application filed on 11 January 2017 the Plaintiff, Interleasing (Australia) Limited, applies for the winding up of DPH and Biglift Cranes. I have declined an adjournment of the application under s 440A(2) of the Corporations Act in circumstances that administrators were appointed to the companies shortly before the hearing of the winding up application.
2. The application is supported by an affidavit of Mr Bruce Heron dated 10 January 2017, which refers to service of creditors' statutory demands upon DPH and Biglift Cranes. Although those entities have recently changed their names, I will refer to them by their previous names for convenience.
3. The service of a creditor's statutory demand, which is not then complied with, gives rise to a presumption of insolvency which takes effect in a winding up application, unless rebutted by evidence of solvency which has not here been led. There is evidence of service of the Originating Process and other documents by affidavits of Mr Mackay dated 31 January and 1 February 2017. Mr Youssef, a solicitor acting for the Plaintiff, gives evidence of publication of notices of application for the winding up order in respect of each of the companies on the insolvency website maintained by the Australian Securities and Investment Commission ("ASIC"). There is evidence of lodgement of notification of a court action relating to the winding up with ASIC in Ms Zheng's affidavit dated 10 February 2017. An updated affidavit of debt of Mr Heron dated 3 April 2017 indicates the debts owing at the time the proceedings were commenced, which were substantial; notes a costs order was made in the proceedings, on the basis it was payable forthwith, and has not been paid; and observes that no payments have since been made and no credits accrued reducing the amount of the debts owed.
4. Consents to act as liquidator have been given by Mr Ward, a registered liquidator, for his appointment by the Court. Although the administrators appointed to the companies, late on 31 March or possibly on 2 April, indicated that they were prepared to continue as liquidators, the ordinary practice is that the Court will appoint the Plaintiff's nominee as liquidator unless there is reason not to do so. For example, that practice was adopted by Brereton J in a case where an administrator had been appointed and the company nonetheless wound up in Re El Zorro Transport Pty Limited [2013] NSWSC 1082.
5. I am satisfied that the presumption of insolvency has not been rebutted in this case. No real question arises as to that matter where no evidence of solvency has been led, and the appointment of administrators is consistent with the existence of insolvency or at least the likelihood of insolvency. The formal requirements for a winding up order have been satisfied.

Costs

1. The Plaintiff seeks an order for costs quantified by the Court, and the Court will frequently make a gross sum costs order in applications of this kind. In this case, the amount of the costs order sought is larger than would ordinarily be sought. That is not surprising where the matter has been before the Court and adjourned on several occasions, to allow the companies to lead the evidence of their solvency that was ultimately not led. Part of the costs claimed are at scale costs, which would ordinarily be allowed on a simple winding up. Part of the costs claimed are solicitor/client costs, although I propose to discount those costs to 70 per cent of actual solicitor/client costs, consistent with the approach which is ordinarily taken by the Court in lump sum costs orders in the absence of a costs assessor's evidence and reflecting its experience in respect of costs.
2. The Plaintiff seeks an order that these costs be costs in the liquidation of each of the companies. I am satisfied that is a proper course, where essentially the same evidence would have needed to have been led to bring the winding up application in respect of one of the companies as was led to bring the winding up application in respect of both companies. A further order provides that the Plaintiff is not to recover more than the total amount in respect of the two orders, ensuring the costs orders it recovers are not duplicated. Adjusting for the 70 per cent figure in respect of professional costs, beyond scale fees, other than counsel's fees, and rounding up slightly, I will order that costs be fixed in the amount of $21,590. I make orders in accordance with the short minutes of order initialled by me and placed in the file. I make a further order that these orders be entered forthwith.
3. For good order's sake, I make a further order dismissing the application for an adjournment of the winding up application.

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