Solicitors:
Craddock Murray Neumann Lawyers (Plaintiff)
Henry Davis York (Defendant)
File Number(s): 2014/187260
[2]
Judgment - ex tempore
The Deputy Commissioner of Taxation commenced proceedings to wind up TMTE Group Pty Ltd ("Company") under ss 459A and 459P of the Corporations Act 2001 (Cth) on 24 June 2014. The winding up application relied on a failure to comply with a statutory demand dated 24 March 2014, which in turn related to a tax debt claimed against the Company. There followed several adjournments of the application, including, most recently, an adjournment on 9 October 2014, when argument commenced before the Registrar, and the matter was then referred to the Corporations Judge to 13 October 2014 when it emerged that the Company sought to put affirmative submissions as to its solvency.
Between 9 October 2014, when submissions that the Company was solvent were put before the Registrar and the matter was referred to the Corporations Judge, and 13 October 2014, when it was listed before the Corporations Judge, there appears to have been something of a change in the Company's approach, because administrators were appointed to the Company, the statutory basis for such an appointment being that the Company was insolvent or likely to become insolvent.
Adjournment application
The administrators, Messrs Purchas and Vardy, now seek an adjournment of the winding up application to 14 November 2014, or to after that date, being the date on which the second meeting of creditors is proposed to be held. The application for an adjournment has been heard within a little more than a week after the administrators' appointment, although on the day before the first creditors' meeting which is scheduled to be held on 22 October 2014.
The parties are in a significant degree of agreement as to the applicable legal principles, and I have been assisted by helpful submissions by the representatives of both parties as to those principles. Mr Ipp, who appears for the administrators, properly draws attention to the observations of Brereton J in Re Offshore and Ocean Engineering Pty Ltd [2012] NSWSC 1296 at [15] that, where an insolvent company appoints voluntary administrators following resistance to a creditor's statutory demand and the initiation of winding up proceedings, the Court may properly approach the question whether the appointment is an attempt as a last resort to avoid the consequences of liquidation with a degree of scepticism.
In the present case, the Company had, of course, resisted, or at least caused the adjournment of, the winding up application for a considerable period, and had asserted solvency, and then appointed a voluntary administrator, who has now formed the view that the Company is insolvent and has apparently been insolvent for a considerable period. That seems to me to be cause for a proper degree of scepticism in the approach to the application for an adjournment, although ultimately it does not seem to me that, in this particular application, the assessment in the evidence would depend upon whether one approached it with a degree of scepticism or not.
The application is supported by an affidavit of Mr Purchas dated 17 October 2014 which refers to the history of his appointment, which is short, so far as he was appointed on 12 October 2014, and to his experience as a liquidator, which is plainly amply sufficient for him to express the opinions he expresses in his affidavit. He indicates the investigations which he has undertaken, which are plainly confined by the limited time in which he has been appointed, and that is not a matter for any criticism of Mr Purchas.
He indicates the background to the Company's business, including its relationship with another entity, Senioragency, which will be relevant so far as a proposal for a deed of company arrangement has been made to the administrators, at least in draft form. He sets out information as to the assets and liabilities of the Company, which indicates that the Company has relatively limited assets, and significant debt including a significant secured debt owed to a secured lender. He also refers to the fact that the Company has priority employee creditor claims which relate to outstanding superannuation, leave entitlements and retrenchment entitlements in an amount of nearly $250,000 and unsecured creditors' claims in the amount of $1,137,397, about half of which appears to be amounts owed to the Australian Tax Office.
Mr Purchas then sets out the terms of the draft deed of company arrangement, which contemplate the payment of an amount of approximately $332,000 to a deed fund. The amount $75,000 was paid upon execution of the deed of company arrangement, although correspondence in evidence indicates a proportion of that amount is to be repaid if the Court declines to adjourn the winding up application. A further amount of $20,000 is to be contributed on or by 1 November 2014. It should be noted that the amount that has presently been contributed, together with the additional amount which is to be contributed by 1 November 2014, would exceed by a small amount the administrators' and deed administrators' expected costs and disbursements in carrying out the administration and deed administration. It therefore appears that any payments to creditors under the deed of company arrangement beyond the administrators' and deed administrators' remuneration and costs, would depend upon the further contributions which are proposed to be made.
The deed fund is further to be funded by contributions of the amount of $20,000 per month, commencing 1 December 2014, or as determined by the deed administrators in their discretion until the balance is paid in full. The Deputy Commissioner of Taxation points out, of course, that that provision means that, depending upon the deed administrators' exercise of discretion, the period during which payments could be made could be significantly extended. In particular, if the deed administrator exercised a perfectly reasonable discretion to reduce the proposed payments significantly, because the parties who were making them could not afford to make them, then the life of the deed of company arrangement could be extended for a considerable period and the ultimate recoveries for persons under it significantly affected.
The deed fund provides a covenant by the directors of the Company to cause additional funds to be contributed as required by the deed administrator to satisfy the deed, if the amount estimated is insufficient. That covenant has the difficulty that the sources of those funds are unclear. So far as the administrator's and deed administrator's assessment of the directors' personal position is concerned, it appears implicit in his view of recoveries in liquidation that they would not themselves have the capacity to make such contributions, and there is limited evidence as to the capacity of Senioragency to do so.
The proposed deed of company arrangement in turn contemplates an order for distribution which would have the result that unsecured creditors would receive a dividend of approximately 10 cents in a dollar on their admitted claims if the deed of company arrangement was fully performed. There are at least two further uncertainties which arise at this point because, as Mr Ipp properly accepted in the course of submissions, the performance of the deed appears to depend upon a proposed contract between Senioragency and a government department, and there is presently a question as to whether the government department is committed to that contract, as a matter of intention, it being clear that it is not committed as a matter of law. That question has become more complicated because the administrators have, again fairly, today led evidence which indicates that, since at least 1 October 2014, a director of the Company has been aware that, contrary to early advice from that government department, the proposed contract with it had not yet been reviewed by the department's legal team. There is also in evidence an email from the relevant person at that department, dated 21 October 2014, which indicates that the relevant proposal will need to be considered by various persons; that the department will not be able to commit to this for at least a few weeks; and that she is really sorry that the department cannot provide a definitive answer earlier.
It seems to me that this indication, albeit that it may be inconsistent with earlier indications of the department's position, does not provide substantial comfort that the contract with the government department is currently other than in flux, or is likely to come to conclusion in the near future. This is of real significance, because the anticipated earnings from the government department are in part the source of funding for the performance of the deed of company arrangement. The position is further complicated because it appears the earnings that would fund performance for the deed of company arrangement depend upon the entry into sponsorship with eight sponsors, and presently two sponsors have expressed a degree of interest in the relevant proposal, which suggests that the exercise of obtaining sponsorship commitments also has a substantial way to go.
I pause to note these matters because, of course, there is a degree of contingency in any comparison of the returns on liquidation and the returns on a deed of company arrangement. The returns on a liquidation will depend upon, for example, the funding of any recovery action, its prospects, and the assets of those who might be the target of such action. However, the proposed deed of company arrangement equally depends upon contingencies, in this case the contingency of whether the additional earnings of Senioragency would be available, from which the relevant payments are to be made. A reference to "likely recoveries" in a deed of company arrangement has the capacity to mislead, if those likely recoveries are only likely if contingencies are satisfied, and there is no sufficient evidence of the likelihood that those contingencies would be satisfied.
There is also in evidence a detailed special purpose report prepared by the deed administrators, for the purposes of this application, which makes clear that the Company presently has a significant deficiency of assets and confirms the position that it is presently indebted to the Australian Tax Office for an amount in excess of $589,000, comprising a significant proportion of the unsecured creditors' claims.
The administrator, fairly, recognises the possibility that claims may exist in respect of insolvent trading, and also notes the possibility that there may be transactions which are insolvent transactions or related party transactions which would be open for challenge in a liquidation, although expressing a degree of caution as to likely recoveries from such claims.
That report in turn refers to a cash flow forecast for the period 31 October 2014 to August 2015, which the administrator fairly notes has been prepared by the Company's directors, and which is expressly based on the assumption that Senioragency is successful in securing sales through the product to which I have referred above, involving its dealings with the government department and the various sponsors to which I have referred above.
The administrator fairly points to potential adverse consequences of a winding up order, including the crystallisation of contingent creditor claims, adverse impact upon employees, including a particular employee who is on a temporary work visa, and the impact on Senioragency's relationship with stakeholders. It is perhaps difficult to assess the impact of that last factor, in circumstances that the administrator does not address the comparative question, whether in fact that company within the group was in administration, by reason of substantial unpaid third party debts, including tax debts, might equally have an adverse impact upon Senioragency's relationship with stakeholders, particularly State government entities.
A further affidavit of Mr Purchas dated 20 October 2014 confirms advice from a director of the Company, who is also a director of Senioragency, that it is intended that Senioragency will be bound by the terms of deed of company arrangement, presumably so as to secure contributions from it under that deed. The practical benefit of binding Senioragency depends, however, on its ability to make such contributions given the matters to which I have referred to above.
As I noted, the parties are in broad agreement as to the applicable legal principles. Section 440A(2) of the Corporations Act provides that the Court is to adjourn winding up proceedings when the Court 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. Mr Ipp fairly notes that the threshold for such satisfaction may be lower at an early stage in an administration, and where a relatively short adjournment is sought. I have summarised the relevant principles in such an application in Weriton Finance Pty Ltd v PNR Pty Ltd (in Administration) [2012] NSWSC 1402; (2012) 92 ACSR 88 which has in turn been followed, for example, in Deputy Commissioner of Taxation v Laguna Australia Airport (admin apptd) [2013] FCA 1271. Brereton J has also addressed the question, in Re OffShore & Ocean Engineering Pty Ltd above at [6] to which Mr Ipp refers, which notes that what is required by s 440A(2) of the Corporations Act is satisfaction that it is in the interests of the company's creditor for the company to continue under administration rather than be wound up, as distinct from satisfaction it that "may" be so, and where his Honour noted that a substantial degree of persuasion that administration, rather than liquidation, is in the interests of the company's creditors is required to invoke the section. Leave to appeal from that decision was refused by the Court of Appeal in its decision in Offshore & Ocean Engineering Pty Ltd v Greenwich Contractors Pty Ltd [2012] NSWCA 371.
Mr Ipp, in his submissions on behalf of the administrators, points to the adverse impact of liquidation on the Company, and summarises the reasons why the deed administrators consider it is in the interests of the Company's creditors for the Company to continue under administration. He points, first, to the administrator's assessment that the deed proposal provides a better outcome for all creditors and the Company than the liquidation. I accept that that assessment is properly made, subject to the qualifications which the administrators fairly disclose. Those qualifications are, however, it seems to me, fundamental. Once it is assumed that the Company will recover the entire amount under the deed of company arrangement, notwithstanding the contingencies to which I have referred above, and is assumed that the Company will not make any recoveries under a liquidation, because of issues as to the creditworthiness of those against whom claims may be made, and presumably also questions as to funding of such claims, then the result of the comparison is clear. It is, however, the product of the assumptions upon which the comparison was based.
Mr Ipp points out that a significant amount is being paid into the administrator's bank account at this point, and that is some indication of the commitment to the deed, although I have noted above that that amount paid in to date and to be paid in by 1 November only slightly exceeds the amount that will required for the costs of the administrators and deed administrators in respect of the process, and to that extent may provide greater comfort to them than it may provide to creditors who would depend on other future recoveries under the deed proposal.
Mr Ipp points out that Senioragency's promise to be bound to the deed will provide the contractual mechanism for the transfer of revenue to the Company and for it to be paid into the deed fund, but that depends upon Senioragency having in turn the available resources to make such contributions, and I have pointed to the significant degree of contingency involved in that question above.
Mr Metlej, in submissions for the Deputy Commissioner of Taxation, in turn refers to the relevant case law in terms that are broadly consistent with those which Mr Ipp puts, and to which I have referred above, and submits that the proposal that would be put to creditors under the deed of company arrangement is largely speculative and unlikely to fulfil its promise; that there has been insufficient investigation to conclude that that proposal will see a necessarily larger or more accelerated dividend to creditors; and that the Company's appointment of administrators should properly be seen as a last-ditch effort to stave off winding up proceedings. It will apparent from the observations which I have made above that I largely accept the first two propositions, namely, that the deed of company arrangement proposal has a significantly speculative character, and that the investigations undertaken by the administrators understandably, given the short time for which they have been appointed, provide little comfort as to the assumptions which they have made in respect of their assessment. It is not necessary, it seems to me, to address the third question, as to whether the appointment of administrators was in fact prompted by a wish to stave off winding up proceedings, and this case can properly be approached in the manner to which Brereton J referred, recognising that that is always a possibility, but needing to go no further than that.
In these circumstances, the question for the Court, as I have noted above, is whether 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. The case law indicates that this requires a sufficient possibility, and more than mere optimistic speculation, that creditor's interests will be accommodated to a greater degree in an administration than a winding up: see the cases to which I referred in Weriton Finance Pty Ltd above at [16]. In Lubavitch Mazal Pty Ltd v Yeshiva Properties No 1 Pty Ltd [2003] NSWSC 535; (2003) 47 ACSR 197 at [77], Austin J noted that where the evidence pointed to nothing more than mere optimistic speculation that a proposal might emerge, a case for adjournment of the winding up application has not been made out. This is not that case, because a proposal has emerged. However, it seems to me that the degree of contingency in the assumptions on which that proposal is based are such that the prospect of that proposal will lead to a better return than a winding up is itself properly characterised as optimistic speculation with a very high degree of contingency attached to it.
In those circumstances, I am not satisfied that it is in the interests of the Company's creditors for the Company to continue under administration rather than be wound up. For that reason, I decline to adjourn the winding up application.
Winding up orders
I have previously declined to adjourn a winding up application in this matter, and the Deputy Commissioner of Taxation now proceeds to seek winding up orders. The application has been served on the Company, which has appeared in it for a considerable period, but administrators have now been appointed to the Company. The administrators appear today, but do not seek to be heard in respect of the winding up application.
There is evidence of service of the originating process upon the Company. The Deputy Commissioner of Taxation relies on an affidavit of Sayeda Islam dated 23 June 2014 which deposes to the indebtedness relied upon in the creditor's statutory demand, being an amount of $369,135.79. Mr Islam also refers to the fact that that amount remained unpaid and that additional amounts have become due and payable since that date. The Deputy Commissioner of Taxation reads an affidavit of Mr David Murray which confirms that the amount remained due and payable by the Company. The Deputy Commissioner of Taxation further reads an affidavit of Ms Estwick-Jackson which establishes service of the relevant documents on the Company. There is also evidence of publication of the application on ASIC's insolvency notices website. A further affidavit of debt of Mr Prateek Das dated 20 October 2014 confirms that the amount of debt remained unpaid as at the date of the affidavit of debt.
In these circumstances, I am satisfied that a presumption of insolvency arises from the failure to comply with the creditor's statutory demand, and there is no evidence of the Company's solvency which would rebut that presumption of insolvency. Indeed, to the extent that the administrator has led evidence in respect of the adjournment application, that evidence would confirm rather than rebut the company's insolvency.
There is a consent to appointment as liquidator of Mr Brett Kaijurina. In the ordinary course, the Court will appoint a liquidator nominated by the petitioning creditor, unless there is a reason to take a contrary course. Administrators have been appointed to the Company for a relatively short period, but their appointment has not continued for such a period as to provide a strong case for them to continue as liquidators, and they did not put any submission that they should continue as liquidators. No question arises as to whether there would have been any difficulty with that course, by reason of any issues of independence arising from their engagement with the proposed deed of company arrangement. I make clear that that observation is in no way critical of the administrators.
The Deputy Commissioner of Taxation seeks costs in a lump sum amount. This Court has repeatedly recognised that there may be considerable benefit in making lump sum costs orders in winding up applications, not least because the costs of assessment are unlikely to be justified where a company is insolvent and costs may not well not be recovered, even if they are treated as costs in the winding up. In the present case, as in many cases of this kind, the Court can draw on its expertise in assessing the claim for professional fees, in the amount of $5,000, which is a relatively modest claim in a matter that has had several adjournments and a contested application this afternoon. The other aspects of the costs claimed by the Deputy Commissioner of Taxation relate to disbursements in respect of the winding up application, which are plainly properly recovered by it. I am satisfied that this is a proper case for a lump sum costs order.
For these reasons, I make orders in accordance with the short minutes of orders initialled by me and placed in the file. My Associate will stamp the notice of liquidator's appointment with the Court's seal.
[3]
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Decision last updated: 05 February 2015