Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd [2021] NSWSC 1277 | Case summary

Application to adjourn winding up hearing

By his Interlocutory Process filed today, 20 September 2021, Mr McKenna seeks an order under s 440A(2) of the Corporations Act 2001 (Cth) in the Court's inherent jurisdiction adjourning the hearing of the winding up application. Although that order was initially expressed as seeking an adjournment to 11 October 2021, it appears that a shorter adjournment is now sought. That adjournment is opposed by Hume, which seeks to proceed to the winding up today. Mr McKenna has indicated that, if the winding up application is not adjourned, he will not oppose that application.
Mr McKenna relies on his affidavit dated 17 September 2021 and an exhibit which, with respect to him, raises more questions than it answers. Mr McKenna refers to his appointment as voluntary administrator of Trinity on 1 September 2021, about three weeks ago. He refers to the lodgement of a Declaration of Independence, Relevant Relationships and Indemnities dated 2 September 2021 with the Australian Securities and Investments Commission. Mr McDonald, who appears for Hume, draws attention to an aspect of the relationships disclosed by that document, namely that Mr McKenna was previously appointed as administrator of Trinco (NSW) Pty Ltd (subject to deed of company arrangement) ("Trinco") on 3 June 20221, pursuant to a resolution passed at a meeting of the sole director of Trinco, Ms Robin Azazia. Mr McKenna refers to a meeting of creditors of Trinco, where creditors resolved that Trinco execute a Deed of Company Arrangement ("Trinco DOCA") and he was appointed as deed administrator of Trinco and observes that Trinity was a party to the Trinco DOCA and a creditor of Trinco in the amount of $1,978,989.01 and that, pursuant to the Trinco DOCA, Trinity agreed to defer a debt that Trinco owed to it and would not participate in any dividend to the creditors of Trinco.
It emerges from that evidence that, first, Mr McKenna is the deed administrator of a company which at least was a debtor of Trinity prior to the arrangements referred to in the Trinco DOCA; second, some three months or so before this winding up application was brought, and at a time there was an unsatisfied judgment in favour of Hume, Trinity agreed to defer a debt of nearly $2 million owed to it by Trinco and not to accept dividends in the deed administration of Trinco; and, third, as I will note below, there is now a real question in this application as to whether the amount of the debt owed by Trinco to Trinity was correctly stated, or whether it substantially exceeded the amount recognised in the Trinco DOCA, and apparently surrendered by it.
Returning now to Mr McKenna's affidavit, he refers to the circumstances leading to his appointment, although he does not there refer to the multitude of Trinity's trade creditors whose debts have apparently not been paid by Trinity, who now appear as supporting creditors in this application. He refers to the tasks undertaken since his appointment, which appear to involve investigations across a range of matters, although, it will emerge below, those investigations leave some significant matters unresolved. He notes that Trinity ceased trading some time prior to his appointment, although there is a degree of uncertainty in his affidavit and other documents as to when and in what circumstances that occurred. He refers to his intention to hold the second meeting of creditors on or about 7 October 2021 and to issue the report for that meeting on or about 28 September 2021, and I referred above to the fact that the adjournment is now sought for a shorter period to a date between 28 September and 7 October 2021.
Mr McKenna refers to the receipt of a proposal for a deed of company arrangement in respect of Trinity ("Trinity DOCA") on 16 September 2021, that is, the Friday immediately before this application for winding up was listed on a Monday, made by Mr Azazia, who appears to be a director of Trinity, and another entity, Jana Pty Ltd ("Jana") whose relationship with Trinity is not disclosed, but may be a related company. Mr McKenna notes that the Trinity DOCA proposal contemplates a deed fund comprising assets already owned by Trinity, but apparently excluding its plant and equipment, and a contribution fund of at least $1.9 million. He notes that Mr Azazia and Jana will provide a security in respect of the deed fund by way of caveat over a property at Bexley owned by Jana. It will be immediately noted, and Mr Somerville, who appears for Mr McKenna, fairly accepted, that a security in that form would not permit Mr McKenna to realise that property, in the event of a default under the Trinity DOCA. Mr McKenna notes that it is intended that any unsecured creditor would be paid a dividend, subject to his fees and remuneration, of approximately 20 cents in the dollar, but that plainly depends upon the receipt of funds under the Trinity DOCA. He then identifies the contribution which is to be made under the Trinity DOCA, which is an amount of $300,000 on or before 15 December 2021, although his affidavit does not identify who is to pay it or from what source; and an amount of $1.6 million by the later of 12 months following execution of the Trinity DOCA or upon funds becoming available, subject to practical completion of a Bexley Project, as defined.
The Trinity DOCA proposal in turn indicates that Jana is the registered proprietor of land at Bexley and that a large residential complex is being constructed on that land and will result in substantial funds available to Jana, which can be utilised for the "contribution fund" under the Trinity DOCA proposal. Three things should be noted about that aspect of the proposal. First, it depends on contingencies, including the successful completion of the Bexley Project; and, second, the ability to implement it also depends on the existence of other creditors of Jana, including any secured creditors of Jana, which are not disclosed and which there is no evidence that Mr McKenna has yet investigated. Third, that proposal states that funds becoming available to Jana from that project "can be" utilised for the "contribution fund" and it is not, in terms, an obligation to provide those funds. The statement as to the "contribution fund" in turn refers to the balance of the funds of $1.6 million being made available upon the later of the two dates, one of which is funds becoming available subject to practical completion of the Bexley Project. It follow that there would be no source of contribution available, for the second tranche, if funds do not become available, either because the project is not practically completed in the relevant time, before an 18-month sunset provision takes effect, or because creditors or secured creditors of Jana intercept the funds before they can be made available for the deed fund under the Trinity DOCA proposal.
Mr McKenna, in turn, refers to the absence of financial statements for Trinity, which were last prepared for it for the financial year ended 30 June 2019. That matter may, on the face of it, give rise to a presumption of insolvency in recovery proceedings. He refers to having been provided access to Trinity's management accounts, which record a loan due by Trinco to Trinity of nearly $10.8 million, well in excess of the amount recognised in the Trinco DOCA as due to Trinity. He also refers to plant and equipment, which has been the subject of a valuation, but which it appears would not be contributed to the deed fund. He identifies numerous secured creditors of Trinity, although it appears that some security interests have since been released; some employee entitlements of Trinity, and the fact that a significant portion of those employee entitlements are owed to Mr Azazia and persons associated with him.
Mr McKenna in turn notes, somewhat tentatively, that the Trinity DOCA, in terms consistent with the proposal, may deliver a better and or more expedient return to creditors than an immediate winding up of Trinity. The difficulty with that proposition, as matters stand, is the uncertainty as to whether the Trinity DOCA will deliver such a better return, which depends upon whether the moneys contemplated as contributions under it will ever arrive, and the lack of a disclosed result of investigation, in the three weeks in which Mr McKenna has been in office, of any claims available in the liquidation. Mr McKenna indicates, in particular, that he has not identified any such claims. That is perhaps surprising, where the surrender of the amount owed by Trinco to Trinity in the Trinco DOCA, where he is the deed administrator of Trinco, would, on the face of it, be a matter that might well amount to an uncommercial or voidable transaction for the purposes of the Corporations Act. The possibility of insolvent transactions is also real, where a number of trade creditors are supporting creditors in the application, and where a presumption of insolvency may arise from Trinity's failure to keep adequate financial records.
I note, for completeness, that Mr McKenna also raised the possibility that he might be appointed as liquidator of Trinity, if the Court does not adjourn the winding up application. That proposition appears to have a degree of difficulty about it, notwithstanding the work which Mr McKenna has done, where Mr McKenna is the deed administrator of Trinco which appears to have benefited from a potentially uncommercial transaction in respect of Trinity, being the surrender of the funds to which Trinity was otherwise entitled from Trinco, to which I referred above.

Applicable principles

With that background, both parties proceeded, rightly, on the basis that the circumstances in which a Court will adjourn a winding up application are well-established. Section 440A(2) of the Act requires the Court to adjourn the winding up if it 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. I reviewed the relevant authorities in Weriton Finance Pty Ltd v PNR Pty Ltd (in admin) (2012) 92 ACSR 88; [2012] NSWSC 1402, to which Mr McDonald referred in submissions. I there noted, by reference to Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd (2003) 44 ACSR 377; [2003] NSWSC 47 at [18] that the ultimate question was whether the Court was persuaded that the winding up application should be adjourned, and that the amount of proof that was necessary to establish that matter may vary, depending upon whether an application is brought shortly after the administrator is appointed or at a later date. Here, the application is brought several weeks after the administrator was appointed, but only shortly after the proposal was first put in respect of a DOCA. I also referred to the observations of Brereton J in Re Offshore & Ocean Engineering Pty Ltd [2012] NSWSC 1296 at [6], as to which leave to appeal was refused, that what was required by the section was "satisfaction that it is in the interest of the company's creditors for the company to continue under administration, rather than be wound up, as distinct from satisfaction that it may be so". His Honour also there noted that "a substantial degree of persuasion that administration other than liquidation is in the interest of a company's creditors is required to invoke the section."
I again referred to the relevant authorities in my judgments in Re Denham Constructions Pty Ltd [2016] NSWSC 1425 and [2016] NSWSC 1426, where I initially adjourned a winding up application for a short period immediately after a voluntary administrator was appointed, and then declined to adjourn the winding up application for a further period. I again reviewed the relevant authorities in my more recent judgment in Re Ming Tian Real Property Pty Ltd [2012] NSWSC 912.
Mr Somerville recognises that there are uncertainties, as I have noted above, in the position as to the Trinity DOCA proposal, which he submits will be clarified by a report for the second meeting of creditors, and points to the absence of evidence of prejudice to creditors of a short adjournment. I bear in mind, however, that s 440A of the Act requires that the administrator satisfy the Court that it is in the interests of the company's creditors that the company continue under administration rather than it be wound up, and also that, as Mr McDonald points out, a degree of prejudice will necessarily arise from further costs incurred in an administration. It also seems to me that some of the difficulties with the Trinity DOCA proposal, to which I have referred above, are structural in character, including the nature of the security which is to be given, limited to a caveat over the Bexley property, and the lack of information as to the assets available to those who make commitments, which would be performed a considerable period into the future, in respect of payment under the proposed Trinity DOCA. Mr McDonald in turn submits that the onus rests on Mr McKenna to establish the case for an adjournment, points to the prejudice to creditors from further fees and costs in respect of the voluntary administration, and to the extent of investigations which would be required to address the present uncertainties.
Having regard to the case law, and the matters to which I have referred above, I am not satisfied that it is in the interests of the creditors for Trinity to continue under administration rather than be wound up. There are significant uncertainties, to which I have referred above, in the evidence before me, and a lack of evidence, notwithstanding that Mr McKenna has been in office for three weeks, and recognising he only recently received the Trinity DOCA proposal, as to both the benefits which might be obtained from any such proposal, and the recoveries which may be available in a liquidation, bearing in mind, in particular, the dealings between Trinco and Trinity, where Mr McKenna is both the deed administrator of the former and now the voluntary administrator of the latter. Where both aspects of that comparison are uncertain, and bearing in mind the period in which Mr McKenna has been in office, I am not satisfied that even the short adjournment that is sought is presently in the interests of creditors, or preferable to proceeding with a winding up, given the number of claims against the company by trade creditors, who are supporting creditors in respect of a winding up.
For these reasons, the Interlocutory Process dated 17 September 2021 filed by Mr McKenna is dismissed. I note that Mr McKenna does not seek to be heard in respect of a winding up application.

Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd

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