Deputy Commissioner of Taxation v Glenleigh Developments Pty Ltd, in the matter of Glenleigh Developments Pty Ltd

Background 6 It is not in dispute that Glenleigh is currently insolvent within the meaning of s 95A of the Corporations Act or that Glenleigh's debt to the Deputy Commissioner currently exceeds $115,000. In the affidavit of Mr Clayton McKinnon sworn 13 February 2014 there is material to support a finding that debts owed to unsecured creditors exceeds $308,000, and further that Glenleigh has incurred legal professional costs in a sum exceeding $110,000 in advancing certain Supreme Court proceedings. These Supreme Court proceedings are particularly important, because the possibility that Glenleigh will be successful in those proceedings and regain solvency is integral to the interlocutory application currently before me. 7 In summary, Glenleigh and two of its directors (Ms Nicole Bourke and Mr Clayton McKinnon) commenced action in the Supreme Court of Queensland against their former solicitors trading as McKays Solicitors. As appears from the Amended Statement of Claim filed on 21 January 2013, in 2008 two directors of Glenleigh met with a solicitor employed by McKays Solicitors to discuss purchase of the rights to operate a franchise in Mackay, Queensland and the prospect that they would retain McKays Solicitors to advise them on the negotiation of the purchase of the franchise and an associated lease. Glenleigh was registered with the intention that it would be the vehicle through which the franchise was acquired and conducted. A franchise agreement was entered on or about 4 June 2009, and a related lease executed on or about 16 December 2009. The plaintiffs incurred significant financial obligations in relation to the franchise agreement and the lease. 8 The plaintiffs claim in the Supreme Court proceedings that the franchisor did not provide them with a disclosure document within the meaning of the Franchising Code of Conduct (being a schedule to the Trade Practices (Industry Codes - Franchising) Regulations 1998 (Cth)) as it was obliged to do. They claim further (inter alia) that McKays Solicitors ought to have known of this obligation, that McKays Solicitors should have advised the plaintiffs of the implications of the failure of the franchisor to comply with its legal obligations, and that McKays Solicitors should have advised the plaintiffs that they should have sought independent accounting and business advice before entering into any of the relevant agreements. Importantly, the plaintiffs claim that shortly after the commencement of the relevant franchise agreement it became apparent to them that the expenses of the franchise far outweighed the income received from the franchise, and the franchise was terminated by mutual agreement on 4 May 2009. Accordingly, the plaintiffs commenced proceedings against McKays Solicitors claiming damages for breach of contract in the amount of $1,811,105.30 or alternatively damages for negligence in the amount of $1,811,105.30, as well as interest and costs. 9 Orders in the Supreme Court proceedings on 1 November 2013 made by Her Honour Atkinson J were tendered as an exhibit in the proceedings before me. They were as follows: 1. The plaintiffs provide any further disclosure by 13 December 2013. 2. The parties shall confer with each other with respect to the appointment of a joint expert and any issues to be addressed by that joint expert by 4.00pm on 24 January 2014. 3. Any application to be made under Rule 429G(2) of the Uniform Civil Procedure Rules 1999 (Qld) for the appointment of a joint expert be filed by 4.00pm on 31 January 2014. 4. Any expert report jointly obtained by the parties or upon order of the court be served by 4.00pm on 4 April 2014. 5. Any expert report obtained by the plaintiffs be served by 4.00pm on 4 April 2014. 6. The plaintiffs file and serve a further amended statement of claim (including properly setting out their claim for loss and damage), by 4.00pm on 2 May 2014 7. Any expert report obtained by the defendants, other than a report by a joint expert, be served by 4.00pm on 11 July 2014. 8. The plaintiffs file and serve any second further amended statement of claim by 4.00pm on 25 July 2014. 9. The defendants file and serve any amended defence by 4.00pm on 8 August 2014. 10. The plaintiffs file and serve any amended reply by 4.00pm on 22 August 2014. 11. The parties execute and file any consent order for mediation by 4.00pm on 5 September 2014 with such mediation to be completed by 3 October 2014. 12. If the mediation is unsuccessful: a. In the event that the parties have obtained separate expert reports, the experts are to: i. So far as practicable having regard to the matters in respect of which they express an opinion, confer with each other to determine areas of agreement and disagreement by no later than 31 October 2014; and ii. Prepare a joint expert report with respect to the points that are agreed or disagreed, including any reasons why the experts disagree, to be filed by no later than 131 [sic] October 2014; b. The parties shall sign and file a request for trial date no later than 4.00pm on 28 November 2014, or the matter will be deemed resolved. 10 The defendant has submitted that if the Court, in the exercise of its discretion, sets aside the Registrars orders winding up Glenleigh and grants an extended adjournment, then Glenleigh intends to forthwith apply to the Supreme Court of Queensland for an order for referral of the dispute in the Supreme Court action to mediation.

Case of the defendant 11 The defendant submits that the Court's discretion, upon hearing a winding up application based on s 459P, to grant an extended adjournment, is afforded by s 459A and s 467(1) of the Corporations Act, and that the discretion so conferred is unlimited in terms and may be exercised on any ground that is not extraneous to the scope and purpose of the legislation. The defendant relies on authorities including Bungey v Magnate Projects [2006] NSWSC 734 for this proposition. The Deputy Commissioner does not dispute that the Court has discretion to grant the extended adjournment sought by the defendant. 12 The defendant submits that none of the usual policy considerations militating against allowing an extended adjournment for hearing of the winding up application apply in this case. In particular: The first primary consideration is that the period during which debts may be incurred but not repaid is reduced. In this case however Glenleigh is not trading, and its only activities are to pursue the Supreme Court action and defend the current action. The second consideration is that the period of uncertainty about the validity of transactions with the company which may be open to challenge is reduced. In this case however the only asset of Glenleigh is a contingent asset, namely its cause of action against its former solicitors. The third consideration is that the policy minimises risks that assets which would otherwise be available to creditors being dissipated or otherwise becoming unavailable. Again, the only asset of Glenleigh is the contingent asset relating to the Supreme Court proceedings. 13 Further, and in summary, the defendant submits: An order for winding up will adversely affect the interests of other unsecured creditors. If the company enters liquidation now the remaining assets of the company will be insufficient to cover the costs of the liquidation. Glenleigh shows good prospects of success in the Supreme Court action in that, as is clear from the defence of McKays Solicitors filed in those proceedings: o the solicitors admit the retainer; o the solicitors admit a duty of care; o the solicitors admit that the material contract was a "franchise agreement" within the meaning of the Franchising Code of Conduct; o the solicitors admit four of the five omissions pleaded by Glenleigh as underpinning a finding of breach of duty, and admits that one of those four omissions constituted negligence. Mr Andrew Firth, an expert accountant, has quantified Glenleigh's damages in the Supreme Court action in the sum of $1.068 million, on a "no transaction" basis, which sum is significantly in excess of the amount owing by Glenleigh to its creditors. The Supreme Court proceedings would be disrupted if a winding up order were made which was effective immediately. The application to wind up the company was filed on 12 December 2013 and in accordance with s 459R of the Corporations Act must be determined before 12 June 2014 or such longer period as the Court allows. In that respect an extended adjournment until the end of May 2014 is not unreasonable. Significant costs have already been incurred in the Supreme Court action which would be wasted if the company was wound up before the action was determined. The amount claimed by the Deputy Commissioner is significantly less than the amount recoverable in the Supreme Court proceedings.

Case of the plaintiff 14 The Deputy Commissioner strongly opposes any extended adjournment of the winding up application, and moves for dismissal of the interlocutory application currently before the Court. In summary, the Deputy Commissioner submits: It is significant that the expert report of Mr Firth in respect of the quantification of Glenleigh's damages has not annexed the report to his own affidavit, but rather it is annexed to the affidavit of Ms Nicole Civitarese filed 2 April 2014. The Court ought proceed on the basis that there are no demonstrated assets against which the liability to the Commonwealth and other creditors can be paid. While Mr Firth attempts to provide an independent view, he does not articulate any prospects of success in respect of the defendant's claim in the Supreme Court. No opinion from Counsel or anyone with intimate legal knowledge of court processes supports the assertion that the claim has merit and is likely to succeed. In respect of proper value to be assigned to a contingent asset regard can be had to decisions including Shakespeares Pie Co v Multipye [2006] NSWSC 930 and Gerard Cassegrain & Co Pty Ltd (in liquidation) v Cassegrain (2013) 305 ALR 687; [2013] NSWCA 455. The onus lies on the defendant to persuade the Court that a winding up order ought not be made. Without advice as to the prospects of success in supporting Mr Frith's quantum of damages the Supreme Court claim is speculative. It is not practical to adjourn the winding up application until mediation or conclusion of the Supreme Court proceedings. There is a risk that any claims the liquidator might have in respect of voidable transactions will be time barred under the Act if the Court were to dismiss the application on the basis that the plaintiff can make a fresh application to wind up after determination of the Supreme Court proceedings.

Consideration 15 It is clear from the terms of s 459A of the Corporations Act that the Court has a discretion as to whether to order an insolvent company be wound up in insolvency. In this case I consider a proper exercise of my discretion is to affirm the orders of the Registrar and refuse to make the orders sought, including an extended adjournment of the winding up application, for the following reasons. 16 First, and primarily, the defendant concedes that it is insolvent but for its claim of a contingent asset consisting of its claim in the current Supreme Court proceedings against McKays Solicitors. While Counsel for the defendant has made persuasive submissions to the effect that this asset has a value of at least $1.068 million and has good prospects of success, I am not convinced in circumstances where: Examination of the pleadings in the Supreme Court matter and the orders of Atkinson J of 1 November 2013 reveal that the pleadings in those proceedings have not yet closed. The framing of the defendant's case against its solicitors has not been settled, and under current timetabling orders made by her Honour will not be finalised until 2 May 2014. At present there is no order for mediation to take place in the Supreme Court proceedings. Current timetabling orders envisage a possible consent order for mediation. Any consent order for mediation in the Supreme Court proceedings is not to be filed until 5 September 2014 under current timetabling orders. Although the defendant submitted that it proposed to make an application in the Supreme Court promptly to seek an order that mediation take place, there is no reason for me to be satisfied that the Supreme Court would make such an order, or indeed that any mediation would be successful such that the defendant would recover sufficient monies from McKays Solicitors to discharge its debt to the Deputy Commissioner and its other unsecured creditors. The mere fact that in the current form of their defence McKays Solicitors have made numerous admissions does not equate to a case with "good prospects of success" or more particularly good prospects of success of recovering the amount of $1.068 million (or the amount claimed in the amended statement of claim). At trial the Supreme Court could take the view that the measure of damages for breach of contract, or negligence, is far lower on the facts pleaded than the defendant claims. Indeed I note that one of the orders of her Honour of 1 November 2013 is that the defendant and is co-litigants amend the current version of the statement of claim by "properly setting out their claim for loss and damage". The expert opinion upon which the defendant relies has been provided by Mr Andrew Firth, a chartered accountant. Mr Firth explains that he is an expert in financial matters including accounting, finance, investigations, business valuations and other forensic accounting matters. However it appears that Mr Firth is not, for example, Counsel or anyone with intimate legal knowledge of court processes who could give an expert opinion as to the merits or prospects of success of the Supreme Court claim. In this respect I am prepared to give only little weight to the opinion of Mr Firth. 17 To that extent, I am not satisfied that the claim of the defendant in the Supreme Court proceedings is a contingent asset of the value claimed by the defendant. It follows that I am not satisfied that the creditors of the defendant would be better off in a situation where the defendant continued to pursue the litigation and seek to recover damages claimed. 18 Second, if the Supreme Court is not minded to order mediation of the claim in that Court I am not satisfied on the material before me that that claim will necessarily be resolved imminently, particularly in light of anticipated amendments to the pleadings. Her Honour clearly did not expect the parties to be in a position to request a trial date until the end of November 2014. Indeed even if the Supreme Court did order mediation, there is no guarantee that the mediation would take place before June 2014. I consider that there are a great number of uncertainties associated with this litigation, and a likely risk of an extended adjournment is that the matter will return to this Court for further requests of adjournment by the defendant. In my view this is an undesirable outcome in circumstances where at least one creditor has sought orders for the affairs of the admittedly insolvent defendant to be wound up in insolvency. 19 Third, while the defendant would clearly prefer to retain control of its case in the Supreme Court, there remains a prospect that the liquidator could continue the litigation in the Supreme Court on the defendant's behalf if the liquidator considered that it had good prospects of success. The defendant has submitted that the liquidator will not pursue the litigation in the absence of funding. This may be the case. However I note that there does not appear to be any doubt raised by the defendant that funding will continue to be provided from other sources for the continued prosecution of its claim in the Supreme Court should I grant the extended adjournment sought.

Conclusion 20 The defendant submits that a winding up order will not achieve anything in advance of a negotiated settlement or judgment in the Supreme Court action, as Glenleigh has no assets (other than its contingent claim). This is not true. A winding up order will achieve some level of certainty for creditors and shareholders of the defendant in respect of the defendant's status. There is a public interest in ensuring that insolvent companies are wound up in insolvency in a speedy manner: Emanuele v Australian Securities Commission (1997) 188 CLR 114 per Kirby J at 155; FAI Insurances Ltd v Goldleaf Interior Decorators Pty Ltd (No 2) (1988) 14 NSWLR 643 at 649-650. In my view the orders made by the Deputy Registrar should be affirmed, and the interlocutory application filed 2014 be dismissed with costs of the Deputy Commissioner reimbursed in accordance with s 466(2) of the Corporations Act. I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Collier.