Deputy Commissioner of Taxation v LDT Corp Pty Limited(Administrator Appointed)

REASONS FOR JUDGMENT 1 This is an application to review the decision of District Registrar Wall (the Registrar) refusing the defendant's application for the adjournment of the plaintiff's application for an order that the defendant be wound up. Having refused the adjournment, the Registrar made an order for the winding up of the defendant. Mr Maxwell Donnelly was appointed liquidator. The orders made by the Registrar have not been entered and are also stayed pursuant to orders previously made by me. 2 The application for the adjournment of the hearing of the plaintiff's application for a winding up order was made by William James Hamilton who is the administrator of the defendant. The application was made in reliance upon s 440A(2) of the Corporations Act 2001 (the Act) which provides: The Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and 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. 3 The application seeking an order for the winding up of the defendant was filed by the plaintiff on 4 February 2011. It was made returnable on 11 March 2011. However, on 7 March 2011 Mr David Kavanagh, who is the sole director of the defendant, executed an instrument appointing Mr Hamilton as administrator under s 436A of the Act. The instrument of appointment notes that it is the opinion of Mr Kavanagh that "the company is insolvent or likely to become insolvent at some future time." There is no doubt that the defendant is insolvent. 4 On 11 March 2011 the plaintiff consented to an adjournment to allow the first creditors meeting to be held and to allow the administrator to investigate the defendant's business, property, affairs and financial circumstances. As required by s 438A, the administrator has formed an opinion about each of the following matters: whether it would be in the interests of the company's creditors for the company to execute a deed of company arrangement; whether it would be in the creditors' interests for the administration to end; whether it would be in the creditors' interests for the company to be wound up. The administrator's opinion is that it would be in the interests of the creditors of the defendant for the administration to continue and for the defendant to execute a deed of company arrangement as proposed by Mr Kavanagh. In his opinion, the creditors of the defendant stand to gain nothing from a winding up order (a dividend of zero cents in the dollar) but stand to gain a substantial dividend (18 cents in the dollar) if the defendant enters into the proposed deed of company arrangement. 5 On 8 April 2011 the defendant applied to the Registrar for a further adjournment to enable the defendant's creditors to resolve, in accordance with s 439C of the Act, whether the defendant should execute a proposed deed of company arrangement. The defendant's application for the adjournment was opposed by the plaintiff. The plaintiff is admittedly owed about $1.5 million in unpaid tax. 6 The administrator is a highly experienced official liquidator. His opinion should be given significant weight. Nevertheless, under s 440A(2), the Court is required to adjourn the hearing of an application for an order winding up a company which is under administration only if 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." It is accepted by the defendant that it bears the onus of satisfying the Court that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. 7 The question arising under s 440A(2) is whether I am satisfied that it is in the interests of the creditors that the administration continue at least for so long as is reasonably necessary to enable them to consider whether the defendant should execute the proposed deed of company arrangement. 8 The defendant is a member of what I will refer to as the Kavanagh group. All members of the group appear to be associated in some way with the Kavanagh family. The National Australia Bank Limited (NAB) is the banker to the group. Each company within the group appears to be a trustee of a trust engaged in the business of property development with the exception of a company known as Makerain Pty Ltd (Makerain) which I will say more about shortly. 9 The defendant is the trustee of the Manly Unit Trust and was incorporated in 2007 for the purpose of acquiring and developing real estate at Manly, New South Wales (the Manly project). The Manly project originally consisted of a proposed development of 14 strata title apartments. The defendant established facilities with the NAB in late 2009 totalling $52,020,021 to finance the Manly project. The security provided by the defendant to NAB included fixed and floating securities over its assets including mortgages over its real estate. 10 At the same time as the defendant entered into this facility, a related entity, Lisand Pty Ltd (Lisand) as trustee for the Kavanagh Family Trust, also established facilities with NAB. Lisand, Makerain and the defendant (together with other related entities and persons including Mr Kavanagh) entered into guarantee and indemnity agreements with NAB in relation to the combined facilities of $90,335,990. 11 Makerain is a company which owns a residential development at Teralba. Mr Kavanagh is a director of Makerain and his wife, Lisa Maree Young, appears to be its sole shareholder. Makerain provided security over the Teralba land in support of the guarantee and indemnity given by it to the NAB in relation to the combined facilities. 12 In late February 2011 the NAB issued demands on the defendant for amounts totalling $55,002,920.82 in respect of the group's total borrowings which were the subject of the guarantee and indemnity agreement and which total included $19,304,321.36 of the defendant's own borrowings. It also appointed receivers and managers to the defendant and other entities in the group which had given guarantees and indemnities in relation to the NAB borrowings. 13 It is now necessary to say more about the proposed deed of company arrangement. There are three key features of the proposed deed of company arrangement. 14 First, it is proposed that Mr Kavanagh will put into a creditors' fund the amount of $15,428.84 which equates to one cent in the dollar for each one dollar of debt owed to the defendant's creditors excluding debt owed to "related entities". The "related entities" for this purpose are Mr Kavanagh and his brothers and eight companies which are presumably associated with Mr Kavanagh or his family. In addition, Mr Kavanagh also proposes to contribute the amount of $12,500 which has or will be paid to the administrator under a retainer agreement. The total contribution proposed by Mr Kavanagh is therefore $27,928.84. 15 Secondly, it is proposed that: There is offered from each of the companies [in the Kavanagh group] whose assets have a surplus and which are members of the interlocking guarantee to NAB, that offer is to collectively advance the sum of $300,000 as a non recourse loan and in support thereof to grant a charge ranking second to NAB over the whole of its assets and undertaking, fixed and floating … 16 Mr Kavanagh's proposal contemplates that there will be a surplus in the group of at least $300,000 which will be advanced to the defendant by those members of the group who are left with the whole or part of any such surplus on a "non recourse basis". 17 Thirdly, it is proposed that various "related entities" - whose debts are said to total $2,079,055.50 - will not be entitled to receive any dividend out of the creditors' fund. 18 It appears that Mr Kavanagh's contribution of $27,928.84 will be wholly consumed by the administrator's costs and expenses if the defendant enters into the proposed deed of company arrangement. I do not say that in any disparaging way. The point is that come what may, Mr Kavanagh's contribution will never find its way into the hands of any of the defendant's creditors. 19 More importantly, however, the proposed payment of $300,000 into the creditors' fund will only occur if there is a surplus available to the group following retirement of the receivers and managers. Hence, it is necessary to examine the evidence which is relied upon in support of the administrator's assessment that it is likely that such a surplus will become available. After all, this underpins his opinion that it would be in the interests of creditors for the administration to continue. 20 There is evidence before me to suggest that in July 2010 the total value of securities provided by the group to the NAB in support of group borrowings had been assessed to have a "prompt sale" value of approximately $75 million compared to group borrowings which then stood at approximately $61 million. This emerges from what is described as an investigative accountants' report (the KordaMentha report) into the Kavanagh group dated 20 July 2010 which was prepared for the NAB. The KordaMentha report also suggests that, as at that date, there was a prospect that following realisation of the NAB securities the group would emerge with surplus assets of approximately $14 million. The receivers and managers are partners of the accounting firm that prepared the KordaMentha report. 21 The central issue is whether it is likely or, putting the issue in less rigid terms, whether there is sufficient prospect, that there will be such a surplus after the receivers and managers retire. In considering this issue it is necessary to say something concerning two major projects involving the defendant and Makerain upon which the prospect of there being any surplus would appear to hinge. These two projects constitute the most valuable assets available for realisation by the receivers and managers. 22 The first of these projects is the defendant's residential development at Manly. This development consists of 14 luxury apartments at Manly which were completed in March 2010. Eight of those apartments have been sold. Six of these were sold in April 2010 and two others were sold in August and October 2010. The KordaMentha report suggested that those apartments which had not been sold as at July 2010 would all be sold by March 2011. That has not happened. The last sale occurred more than six months ago. There is no other evidence before me to suggest that any of the remaining apartments are likely to be sold in the short term at or near valuation or even at the "prompt sale" value shown in the KordaMentha report. 23 The other major project is a residential development at Teralba owned by Makerain. It is apparent that the Teralba development is a long term development with high capital requirements. The land is the subject of a development approval for 485 residential lots (with a capacity to increase the number of lots to approximately 593). The KordaMentha report indicates that the site is in its natural "heavily wooded" state, that no onsite work has commenced and there is no near term plan to commence such work. So the "prompt sale" valuation reflects a heavy discount to allow for a forced sale to another property developer. Even so, the evidence before me does not suggest that there is any prospect of the land being sold at or around that valuation in the near term. Indeed, there is no evidence to suggest that the Teralba development is on the market. 24 Since the KordaMentha report was prepared in July 2010, interest has continued to accrue on the group's borrowings. It is common ground that as at February 2011 the total group debt to the NAB stood at approximately $55 million. It is also common ground that interest is presently accruing at the rate of approximately 17% per annum. 25 It is apparent that the fortunes of the group as a whole and, more importantly, the fortunes of the defendant, depend substantially upon the time that it will take the receivers and managers to sell the Manly and Teralba properties. It is not possible for me to say on the material before me how long it is likely to take the receivers and managers to realise the group's assets. However, it is unlikely that the receivership will be of short duration and there are strong signs that it will most likely last for a year or more. Interest at 17% per annum on a debt of $55 million is in the vicinity of $9.5 million over a year. 26 Thus, further delay in selling the Manly apartments and the Teralba land for the purpose of reducing the group's debt will have a serious impact on the group's overall position given the high rate of interest payable under the relevant facilities. There are also other holding costs and the costs and expenses of the receivership to consider. The evidence does not indicate what they might be. Given the level and terms of the relevant borrowings I think it can be inferred that the prospect of there being any surplus will diminish rapidly over time. 27 The Registrar stated that there needed to be more than a mere speculative possibility of a higher return to creditors if the winding up application was to be adjourned. I think his observation is sound. A similar observation was made by Santow J in Waste Recycling and Processing Services of NSW v Local Government Recycling Co-operative Ltd (1999) 32 ACSR 194 at 195. His Honour said that "to grant such an adjournment there must be a sufficient possibility, as distinct from mere optimistic speculation, that such a deferment for the envisaged time is in the interests of creditors." 28 The plaintiff is a substantial creditor of the defendant. It opposed the adjournment on the grounds that the evidence did not establish that creditors of the defendant would be any better off in the event that the adjournment was granted. Its views on the matter should be given some weight. 29 It is true that there are other creditors who have indicated to the administrator that they wish to be given the opportunity to consider and vote upon the proposed deed of company arrangement. Some of those creditors are the related entities whose interests are likely to reflect the interests of shareholders and their associates and who wish to ensure that the defendant continues to carry on business in the future. I am not satisfied that these considerations reflect the interests of the defendant's creditors as creditors: see, for example, Deputy Commissioner of Taxation v Alternative Business Solutions (Aust) Pty Ltd (Administrators Appointed) [2006] FCA 400 at [9] per Lindgren J. So far as the interests of the non-related entities and persons are concerned, their debts are relatively small when compared to what is admittedly owed to the plaintiff. 30 In the result, I regard the possibility of the creditors of the defendant receiving any dividend under the proposed deed of company arrangement as no more than a highly speculative possibility. I am not persuaded that it is in the interests of creditors to adjourn the hearing of the winding up application even for a relatively short period of time. 31 Accordingly, I consider that the Registrar's decision to refuse the adjournment should stand. 32 It would be open to me to set aside the Registrar's decision if I was persuaded that there was some other basis for granting an adjournment of the hearing of the winding up application. But in circumstances where the defendant is plainly insolvent I can see no basis for granting the adjournment apart from that which I have already considered. 33 There are two further matters which I must also consider. 34 First, the administrator has suggested that he be appointed liquidator of the defendant in place of Mr Donnelly. The reason for that is that the administrator has already undertaken considerable work in investigating the affairs of the defendant. The plaintiff does not oppose this. I think that it is appropriate that Mr Hamilton be appointed liquidator of the defendant in place of Mr Donnelly. 35 Secondly, the administrator also sought leave on behalf of the defendant for it to appear in this proceeding other than by a solicitor including at the hearing before me and the hearing before the Registrar. This was not opposed by the plaintiff. I will make an order granting the administrator such leave nunc pro tunc. 36 I will make orders accordingly. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Nicholas.