Deputy Commissioner of Taxation v KJ Consulting Pty Ltd

FACTS

1. Victor Sports was a supplier of sports, medical and rehabilitation equipment. The company was initially run by the plaintiff's father, Peter Frankenstein. Since 1994, companies and a trust associated with the plaintiff's family - being Peter Holdings Pty Limited, a business trading as "Barrere Surgical Co" and the Franks Family Trust - extended various loans to Victor Sports. In 2014, the company began repaying these loans by a 'global' repayment of $20,000 a month.
2. In 2015, the plaintiff's employment at Victor Sports was terminated, as was his email access and access to the company office. Although he endeavoured to arrange for his shares in the company to be purchased by the remaining shareholders, he was unable to come to terms on a share buyout. A draft share purchase agreement was prepared in 2015, but not finalised. Since then, the plaintiff has made numerous requests to the second and third defendants for updated financials for the company, but does not appear to have had a satisfactory reply. In May 2016, the plaintiff ceased to be a director of Victor Sports, as he wished to distance himself from the company as much as possible.
3. In October 2018, the plaintiff became aware that Victor Sports was no longer attending to its monthly loan repayment of $20,000. It appears that loan repayments since then have been sporadic. Some $880,000 remains outstanding. The company last prepared financial statements and filed a tax return for the year ended 30 June 2018. In evidence are a large number of emails between the plaintiff and the second and third defendants, endeavouring to obtain financial information or to ensure that loan repayments were made in a timely manner. This correspondence appears to have achieved little progress on either front.

Sale of business

1. In February 2021, Victor Sports placed an unusually large order with Barrere Surgical Co, being four times the usual order. The purchase order was not paid.
2. Less than a month later, the second and third defendants contacted the administrators. At their first meeting on 3 March 2021, the administrators were informed that the second and third defendants "[t]otally disputes existence of any loan accounts … may have difficulty with 40% shareholder former owner", being the plaintiff.
3. Unbeknownst to the plaintiff, on 24 March 2021, the second and third defendants entered into an agreement to sell the assets of the company. Conversations with the administrators also continued, but no significant progress was made.
4. On 24 May 2021, the plaintiff received an email - forwarded by a colleague - to the effect that the company had ceased business. This was the first notice he had that the company's assets had been sold. He sought information from the second and third defendants. Some information was supplied, from which the plaintiff observed that the loans made by his family's companies and trust were no longer recorded in the accounts. Further, Victor Sports appeared to have sold the items purchased on the unpaid purchase order from Barrere Surgical Co, referred to at [9].

These proceedings

1. On 21 July 2021, the plaintiff commenced these proceedings, which had been stood over twice until the hearing today. In an affidavit in support of the application to appoint a liquidator, the plaintiff said that he was willing to fund examinations or further inquiries carried out by a liquidator to the extent necessary to see that the affairs of the company are properly brought to account.

Administrators appointed

1. The administrators were appointed on 11 August 2021. To be fair to the administrators, they had endeavoured for some time to extract a decision from the second or third defendants as to how they wished to proceed. The administrators appear to have had great difficulty in getting instructions.
2. On the appointment of administrators, the plaintiff's solicitors promptly expressed concerns about the futility of the administration given a number of concerning transactions. The plaintiff's solicitor also expressed concern that the instructions given to the administrators since March 2021 incorrectly suggested that his client would not have consented to the appointment of a liquidator to the company when, in fact, that was what the plaintiff wanted.
3. On 19 August 2021, Mr Kokkinos swore an affidavit in support of the application for an adjournment today, noting that further time was needed to investigate the affairs of the company and report to creditors. Mr Kokkinos advised that the directors were considering putting forward a deed of company arrangement (DOCA). He considered that it was in the best interests of creditors to adjourn the winding up application. Based on the information then available, the company had some $4 million in creditors.
4. On 20 August 2021, the first meeting of creditors took place. According to Mr Sperber, who attended, the second and third defendants did not attend the meeting but appointed the chair, Mr Kokkinos, as their proxy. Mr Kokkinos informed the meeting that the company had not kept proper books and records. An example was that the company appeared to owe the Australian Taxation Office some $1.4 million in unpaid superannuation, but this was not recorded in the accounts of the company. Mr Kokkinos also informed creditors that there was no proposal for a DOCA at that point in time.
5. It remains the position today that there is presently no proposal by the directors for a DOCA. Peter Frankenstein, who is the director of Peter Holdings Pty Limited and a creditor of the company, strongly opposes the adjournment today.

PRINCIPLES

1. Drawing on my judgment in In the matter of Cresco Opus Fund No 4 Pty Ltd (Administrator Appointed) [2019] NSWSC 941, the principles relevant to an application under section 440A(2) are not controversial. There must be a sufficient possibility, as distinct from mere optimistic speculation, that the interests of the company's creditors will be accommodated to a greater degree in an administration than in a winding up. The onus is on the administrator to show, by persuasive evidence, that it is in the interests of the company's creditors that the administration continue rather than liquidation ensue.
2. The question of whether an administration should continue is closely related to whether the creditors can hope to get more by way of payment of their debts by administration than from liquidation. Where there is a realistic possibility that a DOCA may be proposed, it will generally be in the interests of creditors for the administration to continue in order to ascertain whether it will be "beneficial for creditors overall", especially where the adjournment is sought for a short period early in the administration: In the matter of Bobos Engineering Australian Pty Ltd [2015] NSWSC 2027 at [9]; In the matter of Denham Constructions Pty Ltd [2016] NSWSC 1426 at [10]; and In the matter of Dan Phillips Holdings Pty Ltd [2017] NSWSC 954 at [5].
3. In Deputy Commissioner of Taxation v KJ Consulting Pty Ltd (administrators appointed) [2005] FCA 1827 Gyles J suggested factors which tell against an adjournment, including: 1. where the company is not trading and is not "liable to be revived or its fortunes revived by trading on as such"; 2. where the company is (as it almost always is) insolvent; and 3. where the majority of creditors oppose the adjournment. See also Weriton Finance Pty Ltd v PNR Pty Ltd (in administration) [2012] NSWSC 1402; (2012) 92 ACSR 88 at [15] ff, where Black J conducted a review of the authorities as to relevant factors in such applications.

CONSIDERATION

1. The administrators' solicitor candidly informed the Court that there is presently no proposal by the directors for a DOCA. He submitted that the creditors should be given an opportunity to see whether there is anything forthcoming from the directors; the administrators' investigations are still ongoing.
2. The plaintiff's counsel strongly opposes the adjournment, relying on In the matter of Ming Tian Real Property Pty Ltd [2021] NSWSC 912, where Black J refused an adjournment where the proposition that "a DOCA will be forthcoming seems to me to be no more than speculation": at [11]. The position does appear to be the same here.
3. It is relevant that the company is no longer trading and, indeed, has not been trading for some time. There is no suggestion that the company will resume trading. A substantial creditor opposes the adjournment. There is no evidence from the second or third defendants, which may have provided a basis for thinking that there is a DOCA on the horizon.
4. The second and third defendants have been giving consideration to the appointment of an administrator since March 2021. It is not until an application to appoint a liquidator was filed with the Court, and twice adjourned, that administrators were appointed. Such applications brought at the last minute should be treated with some scepticism: In the matter of Offshore & Ocean Engineering Pty Ltd [2012] NSWSC 1296 at [15] per Brereton J. This is not in any way to criticize the administrators, but simply to note that the second and third defendants appear to be using an administration as a last-ditch effort to stave off proper winding-up proceedings: In the matter of Exalt Group Pty Ltd (Administrator Appointed) [2013] FCA 455.
5. Whilst there may be value in some cases in continuing a voluntary administration to allow further investigations to be made, this will turn on there being a sufficient evidentiary basis for the Court to conclude that the making of those investigations is itself in creditors' interests. A winding-up application will not be adjourned merely because the administrator has only been appointed and knows little or nothing of substance as to the company's affairs: In the matter of Australian Tailings Group Pty Ltd [2020] NSWSC 1543 at [7] per Black J. I am also concerned that the tasks associated with an administration may incur unnecessary costs, as some of those tasks are likely better done by a liquidator. In the matter of i-Prosperity Capital Pty Ltd [2020] NSWSC 1116 at [25] per Rees J.
6. It does appear that there are a number of transactions and events which warrant further investigation. There are apparent irregularities in the manner in which the company's affairs have been conducted. Matters of corporate governance require investigation, such as insolvent trading. It is desirable for such investigation and any consequent action to be undertaken through the machinery of a liquidation. I note that the plaintiff is prepared to fund such investigations. This should commence promptly rather than be delayed by an administration offering no apparent benefit.
7. In summary, there is insufficient evidence to satisfy the Court that it is in the interests of creditors to adjourn the application today. For these reasons, I make the following orders: 1. Dismiss the application by the administrators, Michael Kucianski and Con Kokkinos, under section 440A(2) of the Corporations Act 2001 (Cth) to adjourn the hearing of an application for an order to wind up the first defendant. 2. Pursuant to section 459P(2)(b) of the Corporations Act 2001 (Cth), grant leave to the plaintiff to apply to the Court for the first defendant to be wound up in insolvency. 3. Pursuant to section 459A of the Corporations Act 2001 (Cth), order that the first defendant be wound up in insolvency. 4. Order that Steven Kugel of The Insolvency Experts be appointed as liquidator of first defendant. 5. Order that the plaintiff's costs be costs in the winding up

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 10 September 2021