Deputy Commissioner of Taxation v C-Change Cairns Pty Ltd

EX TEMPORE REASONS FOR JUDGMENT 1 This is an application under s 459P of the Corporations Act 2001 (Cth) (the "Corporations Act") for an order that the defendant be wound up in insolvency under the provisions of that Act. The application was filed on 30 September 2011. The application was initially heard on 11 November 2011 and ultimately the matter was adjourned until today. The application for the winding-up order is based upon a failure on the part of the defendant company to comply with or satisfy the terms of a statutory demand under the Act. The statutory demand makes a claim for an amount of $660,253.83 being the amount due and payable in the schedule. The schedule to the statutory demand describes the foundation for the claim as an amount owing on a running balance account deficit debt as at 21 June 2011 in respect of amounts due under the BAS provisions as defined by the Income Tax Assessment Act 1997 (Cth), and those amounts include matters such as goods services tax liabilities, PAYG instalment accounts and other such matters. 2 On 26 October 2011, an administrator was appointed to the defendant company. The administrator is Mr Gavin Charles Morton. Tomorrow, a meeting of creditors convened under s 439A (1) and (2) of the Corporations Act is to occur at which the creditors will consider the question of whether a Deed of Company Arrangement ought to be approved or the other decisions taken as contemplated by s 439C of the Corporations Act. The present application concerns fundamentally an application by the defendant company to adjourn the plaintiff's application for a winding-up order so as to enable the creditors to consider the terms and conditions of the proposed Deed of Company Arrangement at the meeting tomorrow. 3 The principles which govern the question of whether an application for a winding-up order in such circumstances ought to be adjourned are well understood and they are best reflected in the principles identified in Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 at 457 which is a decision of McPherson JA (Pincus and Davies JJA agreeing). In Creevey, McPherson JA observed, apart from the introductory matters, that the question of whether an administration should continue, rather than 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 a payment of their debts from one form of process or administration than from the other. 4 McPherson JA also observed that in order to satisfy the Court of the matter referred to in s 440A(2) the Corporations Act, 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. McMurdo J in Re Octaviar Ltd [2008] QSC 216 at [55] noted that the observations in Creevey, of course, should be understood in the sense that McPherson JA was addressing a matter where there was an absence of evidence of any assets whatsoever. Subsequent authorities have observed that the test to be applied is not in any sense formulaic and the fundamental consideration in all of these matters is where the best interests of the creditors ultimately lie. 5 The proposal in the Deed of Company Arrangement must therefore be considered against that fundamental consideration. Before explaining the proposal in the Deed of Company Arrangement, it is necessary to have regard to aspects of Mr Morton's report. It should be noted, of course, that Mr Morton was appointed as an administrator of the company on the 26 October 2011 and the hearing has come on for determination today. I mention that matter because the report to creditors prepared by Mr Morton is dated 22 November 2011 and Mr Morton has therefore had approximately a month or so to consider the various matters going to the nature of the company's undertaking and the dynamics of its business activities and operations over recent years, leading to the analysis which is ultimately formulated in terms of the Deed of Company Arrangement proposal. 6 As to the report to creditors, a number of things should be noted about it. The report is described as a report concerning C-Change Cairns Pty Ltd as trustee for the Varley Street Unit Trust. The document describes the company operations and on p 2 recognises as a non-priority unsecured creditor the claim by the Australian Taxation Office ("ATO") at $1,032,450. The document thus recognises that C-Change Cairns Pty Ltd in its capacity as trustee of the Varley Street Unit Trust owes the Australian Taxation Office that sum. On p 3 of the document, there is a dictionary and the term "company" is defined to mean C-Change Cairns Pty Ltd as trustee for the Varley Street Unit Trust. 7 The document then describes the nature of the activities of the company and under the heading at 4.5, "History of the Company", the document says that the company was incorporated for the purpose of developing a 52 apartment residential complex situated in Varley Street at Yorkeys Knob north of Cairns. The report observes that construction of the development was undertaken by a company called Bloomer Constructions (Qld) Pty Ltd. However, that matter was later noted in the report as incorrect. In any event, Bloomer is a major creditor of the defendant company. Construction of the development was completed in 2009. The report describes aspects of the financing arrangements in relation to the construction project. The report also says that prior to the appointment date of the administrator the company had completed the sale of all of the units in the development with the final contract being completed a few days prior to the appointment date of the administrator. 8 The document describes the discharge of certain facilities and then says at p 6 this: On 21 June 2011 the company was issued with a Creditor's Statutory Demand for Payment ("the Demand") issued by the ATO in the sum of $660,253.83 which relates to unpaid goods and services tax. The Demand was not complied with and the ATO filed a winding up application in the Federal Court of Australia on 30 September 2011. With insufficient funds and assets to pay the debt, the Director sought advice in relation to the appointment of an administrator to the company to be affected after completion of the sale contract referred to above as appointment of an administrator prior to the completion of the contract would likely cause the contract to fail. 9 I mention that paragraph in some detail because it firstly refers expressly to the amount the subject of a statutory demand and it represents a statement derived presumably from some analysis by the administrator of a reconciliation between that amount and the debt to the Commission in the company's capacity as the trustee of the Varley Trust. The report goes on to deal with the ATO debt in this respect. It says at p 8: The ATO have lodged a proof of debt in the amount of $412,585.50 comprising unpaid income tax for the financial year end of 30 June 2011, for the period 1 July 2011 to the Appointment Date and Activity statements for the months August 2011 to October 2011. I note that at the time of lodging that proof of debt, the activity statements for the months of August, September and October 2011 had not yet been lodged by the company. These have now been lodged with the ATO and I approximate the total debt to the ATO after lodgement of these returns to be $1,032,450. 10 That amount, of course, reflects the amount referred to in the early part of the report by which the administrator accepts that the company as trustee of the Varley Street Unit Trust owes the ATO $1,032,450. That sum also bears a relationship to the amount the subject of the statutory demand. It therefore seems to me that there can be no serious doubt that the debt claimed by the plaintiff represents a debt payable by the company in its trustee capacity. 11 The second feature of the administrator's report concerns a discussion of related entities and in that discussion the administrator observes that proofs of debt have been received from the following related entities. The first is C-Change Investments Pty Ltd as trustee of the Catalyst Securities Trust in a particular amount (which for present purposes is not immediately relevant) relating to unpaid project management fees, and a payment made by that entity, in that capacity on behalf of the company to the ATO in the sum of $200,000. 12 That seems to be a description possibly of a third party payment to the Commissioner or it may be that C-Change Investments Pty Ltd as trustee of the Catalyst Securities Trust advanced moneys to the defendant company and the defendant company used those resources to pay the Commissioner. That matter, however, is far from clear in what is the analytical examination of relevant matters for the consideration of the creditors. The further entities are these: C-Change Cairns Developments Pty Ltd, C-Change Burpengary Pty Ltd, C-Change Investments Pty Ltd as trustee of the Varley Street Unit Trust Number 2, and C-Change Investments Pty Ltd as trustee of the Whitsundays Walters Trust Number 2. The sole director of the defendant company is the sole director of these related companies. 13 The further matter arising out of the administrator's report concerns a discussion of voidable transactions in which the administrator says that his examinations have revealed a possible preferential payment made to the ATO on 26 July 2011 of $200,000. This discussion proceeds on the footing that the defendant company made a payment on that day which was made in circumstances where the ATO might reasonably be understood to recognise that the company was in some financial difficulty. Part of the difficulty with that discussion is that it seems to be possibly inconsistent with the observation that C-Change Investments Pty Ltd as trustee of the Catalyst Securities Trust made a payment to the ATO on behalf of the defendant company of $200,000. The question of that payment and the precise and accurate focus of it does not seem to have attracted great discussion or attention in the report. 14 The next matter which rationally arises from an examination of the report is the observation of the administrator that as a result of his preliminary investigations, it appeared to him, that the defendant company was insolvent prior to his appointment on 26 October 2011 and that based on his preliminary investigation, it appeared to him that the company was insolvent at least six months prior to that date which means that the company was insolvent from 26 April 2011. The report observes that a series of issues are relevant to the question of when the company became insolvent and the quantum of any possible insolvent trading claim. The four relevant factors are identified on p 11 of the report. One aspect of that matter concerns whether "debts due to related parties were in fact due and payable". 15 I shall shortly turn to the proposal for a Deed of Company Arrangement in the report but before dealing with that matter it is important to note some further matters. In support of the application to adjourn the winding-up application, the defendant company seeks to demonstrate that there is a misconception inherent in the material in support of the Commissioner's application for a winding-up order, and that goes to the nature of the assets of the defendant company. In the affidavit of Lachlan Cloak filed 28 November 2011, the annexure at pp 45 and 46 sets out the results of property searches which reveal that C-Change Cairns Pty Ltd, the defendant company, is the registered proprietor of 28 lots. That search was conducted on 24 November 2011. 16 The defendant company says that when one looks at the schedule, it can be seen that it really relates to 27 search results but more fundamentally than that, the relevant allotments are not assets of the defendant company at all because transactions have occurred which make it plain that those allotments are no longer registered in the name of the defendant company. In the affidavit of Mr Rickards sworn 28 November 2011, that contention is made good by reciting the various transactions which led to the transfer of title to the allotments out of the defendant company. For example, lot 50 in the schedule was sold and the contract settled on 23 August 2011. Lot 48 was sold and the contract settled on 2 September 2011. Lots 65, 66 and 67 were surrendered in favour of another allotment distribution. 17 On 21 October 2011, Mr Rickards says that he personally attended settlement of a transfer of lots 2, 13, 16, 28, 30, 34, 35, 37, 38, 42 and 45 from the defendant company in its trustee capacity to another entity called Waterford Park Holdings Pty Ltd as trustee of the Varley Street Unit Trust Number 3. At para 6, Mr Rickards says that he was personally in attendance at a settlement of the transfer of lots 4, 12, 21, 27, 29, 31, 33, 37, 41, 47 and 52 from the defendant company to C-Change Investments Pty Ltd as trustee of the Varley Street Unit Trust Number 2. Those transfers are in evidence, no doubt, to demonstrate the false assumption reflected in Mr Cloak's affidavit that these allotments are assets of the company and the contention is supported by two transfer instruments which describe the transfers I have just mentioned. 18 To take Annexure TR3, it describes the transfer of the lots in the schedule, of which there are 11 as earlier mentioned, from C-Change Cairns Pty Ltd as trustee to C-Change Cairns as trustee for the Varley Street Unit Trust Number 3, and Annexure TR4 is the transfer instrument for the transfer of relevant lots from the defendant company in its trustee capacity of the Varley Street Unit Trust Number 2 to Waterford Park Holdings Pty Ltd. The transfer instruments are a little elliptical in terms of the consideration recited for those transfers. The consideration described at Annexure TR3, for example, is in these terms: In consideration of the Declaration of Trust and Acknowledgment of Debt dated 4 July 2011, the property is transferred from C-Change Cairns Pty Ltd as trustee under instruments [bearing various numbers] to C-Change Cairns Pty Ltd as trustee for the Varley Street Unit Trust Number 3 and to declare the Trust in accordance with section 109 of the Land Title Act 1994. 19 The reciting of the consideration in Annexure TR4 is in similar terms and it is simply difficult to understand firstly the reasons for the transfer of the allotments which I assume has good commercial reason, and secondly, the consideration flowing to the defendant company for the transfer of those units. Two things emerge about this question of the transfer of these units. The first is that it receives no attention whatsoever in the administrator's report. The question of the transfer of assets in August, September and October of 2011 in circumstances where the administrator was of the view that the company was insolvent apparently from 26 April 2011 is itself a little odd. The second thing is that the administrator's report does not discuss the value flowing to the defendant company in respect of those transfers. 20 There may be, as counsel for the defendant company suggested, a perfectly good explanation in relation to these transfers. However, the administrator's report does not deal with the question. 21 The administrator's report talks about related party transactions and payments made or debts owed to non-related entities. The Deed of Company Arrangement proposal involves the proposition that the related company claims will not be pressed and that non-related company claims by Bloomer will not be pressed in an amount of $1,321,573.26 and nor will a claim by Waterford, which is defined to mean Waterford Park Holdings Pty Ltd, be pressed in the amount of $82,520.18. One further curious aspect of that matter is that the annexures to Mr Rickard's affidavit dealing with the settlement statements for lots 50 and 48, show that upon settlement Bloomer received in each case $40,000. 22 The report of the administrator does not examine the settlement statements either in terms of the two annexed to the affidavit material or any other settlement statement for the various transferred allotments described at [17] or consider, at least on the face of the document, the question of whether Bloomer received any other payments which were made after April 2011, which might be a preference. It may be that the administrator, in not analysing the allotment sales in the report or looking at the question of whether there were payments made after April 2011 to non-related parties, has in fact undertaken the exercise of considering those matters. But, since these transactions are fundamental to the property development business of the company, which in turn, it seems from the report, gave rise to the GST liabilities in an amount precisely in terms of the amount reflected in the statutory demand and the claim, one might have thought that these matters would have attracted some more focused examination in the report. 23 That brings me then to the question of the Deed of Company Arrangement proposal. The proposal is set out fundamentally at pp 12, 13 and 14 of the administrator's report. The elements of it are that the director will contribute an amount of $50,000 to the deed fund. The cash at bank is $44,593. The anticipated proceeds from the sale of furniture amounts to $13,257. The contribution of $50,000 by the director will give rise to a deed fund of $107,850 less the expenses of the liquidator and remuneration fees, which will then produce an amount of $67,350 to be distributed to the creditors. The amount, of course, will not be distributed to all of the creditors. The only creditor participating in the distribution is, in fact, the ATO. 24 The sequence of entities I described earlier which have related party claims will not press those claims nor will Bloomer or Waterford press their claims. The end result of all of that analysis is that the distribution of $67,350 to the ATO rateably across the amount of its claim of $1,032,450 will result in a distribution from the deed fund of 6.6 cents in the dollar. That distribution compares with the scenario emerging upon liquidation. The liquidation scenario does not engage a contribution by the director of $50,000 and thus the amount available of distribution would be $8,350 after payment of the administrator's remuneration and expenses. In addition to that amount, there is the question of the $200,000 which the ATO received which, it is said, is a preference and would have to be disgorged. 25 The liquidation scenario postulates that the ATO will disgorge that sum, and after legal costs associated with that process, an amount of $180,000 would come into the liquidation for distribution. That would result in, for example, $188,350 for distribution rateably across the claims of all creditors. In this case, all of the creditors would participate in the liquidation including related and non-related claimants with the result that the dividend in a liquidation would be 5.4 cents in the dollar. Thus, the distribution under the deed is 1.2 cents in the dollar greater than it would be in a liquidation. Of course, the scenario would alter if the $200,000 was not disgorged in a liquidation which would then result in $8,830 for distribution amongst all the creditors which, for the purpose of the argument, might amount to a zero distribution. 26 The Deed of Company Arrangement proposal is said to be beneficial to the relevant creditor being the ATO as the only participating creditor under the Deed of Company Arrangement because it means that the ATO would retain the preferential payment and would participate in the distribution as discussed. The alternative, of course, is that under the liquidation proposition, the ATO would disgorge the prepayment of $200,000, participate in a distribution and receive a dividend of $66,552, but at the end of the day it would be $133,448 worse off. Thus it is said that it is transparently plain, at least persuasively plain, that the ATO would be better off in the Deed of Company Arrangement scenario. 27 I am not persuaded that this is the correct analysis. It seems to me that there are two factors of importance. 28 The first is that the proposal is a little unusual in the sense that the only participating creditor will be the Australian Taxation Office. The second thing is that the report of the administrator does not comprehensively and thoroughly deal with the issue about the related party transactions, the question of trading after April 2011 and whether or not the administrator's assessment of that matter is correct in all the circumstances. The report does not address distributions or payments made after April 2011 to Bloomer or other parties. This report is in that sense a little different from the report referred to in some of the authorities and particularly the deed considered in Deputy Commissioner of Taxation v Polcarp Pty Ltd [2011] FCA 1142. This report, unlike the Polcarp report, is not comprehensive, clear and decisive in its analysis of those matters and raises logical questions for further consideration. 29 In addition, the administration of the company in liquidation might also give rise to questions about the scope of insolvent trading which might rationally need to be pursued. Certainly, the report of the administrator suggests that there is a basis for examining that matter. The further matter is that although it is of course true that the statutory demand and the Application documents do not identify the defendant as a taxpayer in a trustee capacity, it seems to me that the burden of the administrator's report very clearly demonstrates that the company was, so far as all of these matters are concerned, relevantly acting as the trustee of the Varley Street Unit Trust at all material times. That intersection with the tax liability as claimed by the ATO is made very plain in the report and is, plainly enough, accepted by the administrator. 30 What flows from that, of course, is that a liquidator standing in the shoes of the defendant company would be entitled to assert a right of indemnity out of the trust assets in respect of liabilities to the ATO (Octavo Investments Pty Ltd v Knight (1979) 144 CLR 360), and that is a matter which is not taken into account at all in the formulation of the Deed of Company Arrangement proposal. It follows for all these reasons that I dismiss the application to adjourn the winding-up application as I am not satisfied that it is in the interests of creditors for the company to continue under administration rather than be wound up. I will make orders that the company be wound up in insolvency. The further question concerns the application to appoint the administrator as a liquidator. It seems to me appropriate that the liquidator proposed by the plaintiff ought to be appointed. I mention that partly because the report of the administrator which was prepared with the benefit of approximately a month's opportunity, does not go into matters which it seems to me the liquidator would need to examine and thus it seems to me appropriate that the liquidator proposed by the plaintiff ought to be appointed. 31 Upon pronouncing these orders, the defendant company sought a stay of the winding-up order. The application for a stay was dismissed with leave given to make a further application upon proper material. I certify that the preceding thirty one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Greenwood.