Deputy Commissioner of Taxation v Helico Pty Ltd

Background 5 The defendant is a corporation which conducts a business of supplying and trading helicopter spare parts at Kingston in Queensland. The sole director and shareholder of the company is Mr Murray Bolton. 6 On 12 October 2012 the administrator presented a Report to Creditors Pursuant to s 439A of the Corporations Act. In that report the administrator made, inter alia, the following important observations: The defendant may not have maintained adequate books and records as required by s 286 of the Corporations Act, as the director was unable to produce the defendant's profit and loss statement and balance sheet when requested (para 5c). Mr Bolton had submitted a Report as to Affairs to the administrator, with the following information: Book Value Est Realisable Value Assets not subject to specific charges $ $ Sundry debtors 37,386 - Cash at bank 3 - Stock 87,800 - Plant & equipment 14,000 - Total 139,192 -

Assets subject to specific charges Motor vehicle 12,000 - Less: Amount owing under charge (450) - Total 11,550 - Total Assets 150,682 -

Book Value Est Realisable Value Liabilities Employee claims 182,000 - Unsecured Creditors 420,764 - Total Liabilities 602,764 - Estimated Deficiency 452,082 -

The only employee of the defendant is Mr Bolton, who is owed $182,000 in unpaid wages with respect to his last four years of service with the defendant. Mr Bolton had also claimed that he had provided loans to the defendant totalling $132,000, although at the time of the report the administrator had not been provided with any loan documents or financial accounts to verify those loans (para 7b). As a result of his investigations and inquiries into the affairs of the defendant, the administrator had prepared an estimated Report as to Affairs for the defendant, summarised as follows: Book Value Est Realisable Value Assets not subject to specific charges $ $ Cash at bank 3 3 Sundry debtors 37,386 18,693 Stock 68,000 6,800 Office equipment 2,000 0 Total 107,389 25,496

Assets subject to specific charges Motor vehicle 12,000 7,600 Less: Amount owing under charge (454) (454) Total 11,546 7,146 Total Assets 118,935 32,642

Book Value Est Realisable Value Liabilities Employee claims 182,000 182,000 Ordinary Unsecured creditors 456,534 456,534 Director Loans 132,000 132,000 Total Liabilities 770,534 770,534 Estimated Deficiency* 651,599 737,892

*Subject to costs of Administration/Liquidation The administrator identified three transactions totalling $12,000 that he considered might constitute an unfair preferences, however considerable further investigation would be required in order to establish whether the payments to the creditors in question met the criteria that would categorise them as unfair preferences (para 8c). The administrator had formed the preliminary view that there were indicia that Mr Bolton might have allowed the defendant to trade whilst insolvent, but indicated that further investigations were required in order to establish the date of insolvency (para 8d). The administrator noted that he presently held no funds to either commence legal proceedings against Mr Bolton for insolvent trading or to pursue asset recoveries and voidable transactions if he were appointed as liquidator, and that he intended to raise the issue of funding at the second meeting of creditors (para 8f). A formal proposal for a DOCA had been formally put by Mr Bolton, with the following features: o Mr Wily to be appointed Deed Administrator; o Mr Bolton to take ownership of the company's assets; o a total of $70,000 to be contributed into the Deed Fund in three instalments, namely: ▪ a first payment of $30,000 upon execution of the DOCA; ▪ a further payment of $20,000 on or before three months from the date of execution of the DOCA; and ▪ a final payment of $20,000 to be paid on or before six months from the date of execution of the DOCA; and o Mr Bolton to subordinate his claims against the defendant (para 9). The administrator noted that Mr Bolton had not provided him with any information to enable him to establish that the contributions to be paid would be guaranteed, and that, accordingly, there was a degree of uncertainty which creditors would need to factor into their assessment of the DOCA proposal (para 9). The administrator provided an estimate of the return the creditors could expect should the company enter liquidation as compared with the anticipated return available under the proposed DOCA. In summary, while liquidation would be unlikely to result in a return to creditors, a DOCA could yield a dividend of approximately four (4) cents in the dollar. The comparison was as follows: ESTIMATED RETURN TO CREDITORS Liquidation DOCA $ $ Deed Contribution 0 70,000 Debtors 18,693 0 Stock 6,800 0 Motor vehicle (net amount) 7,146 0 Total 32,639 70,000

Remuneration & Disbursements Administrator's Fees 25,793 25,793 Administrator's Disbursements 3,000 3,000 Deed Administrator's Fees 0 10,000 Deed Administrator's Disbursements 0 3,000 Liquidator's Fees 50,000 0 Liquidator's Disbursements 5,000 0 Legal fees 3,000 5,000 Petitioning Creditor's costs 5,000 5,000 Total 91,793 51,793 Amount available to unsecured creditors 0 18,207

Employee Director's wages - priority 2,000 2,000 Less: Non-participating director's claim Nil -2,000 Total 2,000 0 Estimated Funds Available for Unsecured Creditors Nil 18,207

Unsecured Creditors Ordinary unsecured creditors 456,534 456,534 Director's wages claim - non-priority 180,000 180,000 Director loans 132,000 132,000 Less: Non-participating creditors Nil -312,000 Total 768,534 456,534 Dividend rate for unsecured creditors Nil 0.040 ESTIMATED DIVIDEND RATE 0 cents in the dollar 4 cents in the dollar

7 In the creditor's statutory demand pursuant to which the winding up application was made under s 459P of the Corporations Act, the Deputy Commissioner claimed the amount of $340,721.04. The amount of this debt, and that it is owing, is not in dispute. If the unpaid wages and loans owed to Mr Bolton are taken into consideration, the debt owed to the Deputy Commissioner constitutes approximately 44% of the defendant's debts. If Mr Bolton's claims are not taken into account, the Deputy Commissioner's debt constitutes approximately 74% of the defendant's debts. 8 I note from the file that the Deputy Commissioner's application is supported by another unsecured creditor of the defendant, Archerfield Airport Corporation Pty Ltd, which claims a debt of $17,010.50. 9 In total, debts of unsecured creditors other than the Deputy Commissioner constitute approximately 16% of the debts of the defendant (if Mr Bolton's claims are taken into account). 10 Mr Bolton's claims in respect of unpaid wages and loans constitute approximately 40% of the debts of the defendant.

Submissions of the parties 11 The Deputy Commissioner submitted that the Court should refuse an adjournment of the winding up application, and make the winding up orders sought, because (in summary): The comparison prepared by the administrator in respect of the anticipated return to creditors from liquidation and acceptance of the DOCA is flawed because the administrator provides no basis upon which he estimates the realisable value of the assets other than his previous experience. An example of the flaws in the administrator's approach is that the administrator estimates recovery of only 50% of outstanding debts owed to the defendant. It follows that if the assets of the defendant are actually realised at book value, the return from liquidation would be considerably higher than suggested by the administrator. The administrator's report is vague and incomplete, being based on very limited information (for example, no loan documents or financial accounts) as is clear from the disclaimer in paragraph 1 of the report. Mr Bolton, in exchange for providing $70,000, would acquire a "clean skin company", free of existing debts, whereas the creditors would receive a dividend of only 4 cents in the dollar. The administrator has not taken into account, in considering assets available in liquidation, the possibility of recovering funds in the sum of $12,000 in a voidable preference claim. The defendant has clearly been a recalcitrant debtor of the Deputy Commissioner, and accordingly there is a public interest factor relevant in considering whether an order for winding up should be made. The defendant has been in receipt of a relatively large income over several years, and a claim for insolvent trading has real potential. The $70,000 offered by Mr Bolton as a contribution to the Deed Fund is not guaranteed, and the administrator acknowledges the uncertainty in relation to whether those funds will actually be forthcoming pursuant to the DOCA. In any event, the method of payment of the $70,000 is staggered over a period of time, and in no way could be regarded as an accelerated dividend. 12 In response, the defendant submitted (in summary): The administrator has concluded the DOCA will achieve a better return than liquidation for the creditors, in that the DOCA would provide a dividend of 4 cents in the dollar compared with nil return to creditors in a liquidation. While the administrator considers there are three transactions totalling $12,000 which possibly constitute unfair preferences, the administrator's investigations have not revealed uncommercial transactions, insolvent transactions for the purpose of defeating creditors, or unfair loans on behalf of the defendant which would be recoverable by a liquidator. The administrator also considers that pursuing unfair preferences would require considerable further investigation and funding. A similar lack of funds would impede a liquidator prosecuting an insolvent trading claim should the defendant enter liquidation. The DOCA contemplates that Mr Bolton would "forgive" the defendant his unpaid wages and loans, while at the same time injecting $70,000 into the defendant. The Deputy Commissioner would not suffer any prejudice from an adjournment of one week of the hearing of its application for winding up. Despite the criticisms by the Deputy Commissioner of the administrator's report, the administrator has complied with the strict time lines for production of a report to the creditors imposed by Pt 5.3A of the Corporations Act.

Consideration 13 As Gordon J said in Deputy Commissioner of Taxation v Scuttle Clothing Pty Ltd [2011] FCA 496 at [14]: [14] … I turn to consider the application for an adjournment of the application to wind up the company under s 440A(2) of the Corporations Act. To grant the adjournment, the Court must be satisfied that it is in the interests of the company's creditors for the company to continue under administration, rather than be wound up. It is accepted that if I am so satisfied, then I am obliged to adjourn the hearing of the winding up application … 14 As was the case in Scuttle Clothing, the period of adjournment sought by the defendant in this proceeding would be for a period of one week to allow the creditors the opportunity to consider the preferable course when considering the proposed DOCA. 15 I also respectfully note the observation of Logan J in Deputy Commissioner of Taxation v Victory Solutions Pty Ltd [2010] FCA 491 at [14] that it is not necessary for the company the subject of the winding up application to demonstrate as a matter of certainty that it is in the interests of creditors for the administration to continue. Section 440A(2) requires only that there be some sound basis for the Court being satisfied in this regard. 16 In this case I am satisfied that it is in the interests of the creditors of the defendant that the second meeting of the creditors be held on 22 October 2012 in accordance with s 439A of the Corporations Act and that the Deputy Commissioner's application be adjourned for one week, rather than that the Court order the defendant be wound up in insolvency today. I form this view for the following reasons. 17 First, to paraphrase Logan J in Deputy Commissioner of Taxation v WPS Motorsport Pty Ltd [2009] FCA 476 at [27], 4 cents in the dollar is certainly a lot more than nothing, derisory though 4 cents in the dollar may be. 18 Second, the hearing of the winding up application took place last Friday at what was, in effect, "the eleventh hour". The s 439A meeting has been convened, and creditors notified. The meeting is scheduled to be heard on Monday, 22 October 2012. Cancellation of the meeting could not only cause inconvenience and wasted costs to all concerned, but would also deny creditors the opportunity to make a decision about the DOCA or alternative options in respect of the debts owed to them by the defendant. 19 Third, the administrator has drawn to the attention of creditors the apparent uncertainty concerning the $70,000 to be contributed by Mr Bolton. In my view the creditors should be given the opportunity, not only to assess the prospect of that sum being contributed, but the terms upon which it is to be contributed. 20 Fourth, as I have already observed, debts of apparently unrelated creditors of the defendant constitute approximately 16% of the defendant's debts. Should those creditors decide to support the position taken by the Deputy Commissioner, in respect of the apparent uncertainty in respect of the $70,000 or otherwise, those creditors with the Deputy Commissioner would be in a position to reject the DOCA and vote in favour of a winding up should they so choose. 21 Fifth, the defendant seeks an adjournment of only one week to allow the s 439A meeting to take place. This is a short adjournment, and contemplates the matter returning to the Court forthwith. 22 Sixth, I am not satisfied at this stage that the preparation of the administrator's report reflects a poor job as contended by the Deputy Commissioner. The timeframe contemplated by Pt 5.3A of the Corporations Act is notoriously tight, requiring an administrator to complete a large number of tasks in a relatively short period. In paragraphs 6a and 6b of his report the administrator summarises the tasks he had undertaken, including investigations and discussions. I note that this is a long list. I also note the criticism of the Deputy Commissioner of the administrator's evaluation of the estimated return of assets of the company in liquidation, namely being based on the administrator's experience, however in my view this evaluation was not, of itself, unreasonable, and in any event is susceptible to questioning by the creditors at the meeting on 22 October 2012. 23 Seventh, I am not satisfied at this stage that the uncertain prospect of recovery of unfair preferences in the sum of $12,000, in an insolvency where debts of more than $700,000 are outstanding, is a material factor for the purposes of s 440A(2) and in considering the interests of the creditors. 24 Finally, while the prospect of Mr Bolton potentially benefitting from the acceptance of the DOCA by the creditors in the sense of acquiring a "clean skin company" is of some concern, again this is properly an issue for the creditors to consider. 25 It follows that the orders sought by the defendant should be made, in particular that the hearing of the Deputy Commissioner's application be adjourned for one week to allow the meeting of creditors to take place on 22 October 2012. I certify that the preceding twenty-five (25) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Collier.