Deputy Commissioner of Taxation v Malphus Pty Ltd

O'BRYAN J: 1 By originating process dated 28 February 2019, the plaintiff in this proceeding, the Deputy Commissioner of Taxation (DCT), sought orders under s 459P of the Corporations Act 2001 (Cth) (Act) that the defendant, Malphus Pty Ltd (as trustee for the GSD Business Investment Trust) (Administrators Appointed) (ACN 112 029 106) (Company), be wound up for insolvency. The DCT relies on a failure by the Company to comply with a statutory demand for payment of a sum of $729,896.30. The winding up application has been listed for hearing on 12 April 2019. 2 On 6 March 2019, Timothy James Brace and Peter Gountzos were appointed as joint and several voluntary administrators (Administrators) of the Company pursuant to s 436A(1) of the Act. 3 On 19 March 2019, the first meeting of creditors was held pursuant to s 439A of the Act. 4 By reason of s 439A(5) of the Act, the last day on which to convene the second meeting of creditors is 4 April 2019, and the meeting is required to be held by 11 April 2019. 5 By interlocutory process filed 2 April 2019, the Administrators apply under section 439A(6) of the Act to extend the time for convening the second meeting of creditors, up to and including 5 August 2019. The extension is a period of about four months. 6 The Administrators also seek ancillary orders under section 447A(1) of the Act, that Part 5.3A of the Act operate in relation to the Company so that, notwithstanding s 439A(2), the second meeting of creditors under s 439A may be held at any time during, or within 5 business days after the end of, the convening period as extended by the Court, provided that the Administrators give notice of the meeting in accordance with s 439A(3). This type of order is colloquially known as a 'Daisytek' order named after the decision in Re Daisytek Australia Pty Ltd (2003) 45 ACSR 446; 21 ACLC 1140. It is a commonplace ancillary order made in applications to extend the convening period. 7 The Administrators also seek an order under s 440A(2) of the Act adjourning the hearing of the application by the DCT for the winding up of the Company. 8 The Administrators submit that the orders are in the interests of the creditors of the Company because they will allow the administration to continue to facilitate the progression of a proposed deed of company arrangement (DOCA), and to allow the unsecured creditors (including the DCT) to consider and vote on any such DOCA. 9 In making the application, the Administrators rely on the affidavits of: (a) Timothy James Brace sworn 2 April 2019 (Brace Affidavit) and the exhibits thereto; and (b) Jonathon Paul Darnell sworn 2 April 2019 (Darnell Affidavit) and the exhibits thereto. 10 The DCT does not oppose the application to extend the time for convening the second meeting of creditors and the accompanying Daisytek order. In respect of the order adjourning the hearing of the winding up application, the DCT proposes that it be dealt with by a Registrar of this Court at the hearing scheduled for 12 April 2019, or alternatively that the adjournment be for a period earlier than 5 August 2019. 11 At an interlocutory hearing on 3 April 2019, I made the orders sought by the Administrators with variations to address the concerns of the DCT, as discussed below. These are the reasons for making those orders.

Relevant Background 12 The Company was incorporated on 1 December 2004. Mr Jonathon Paul Darnell is the sole shareholder, director and secretary. 13 The Company is the trustee of the GSD Business Investment Trust (GSD Trust). The primary beneficiary of the GSD Trust is Jonathan Darnell together with his children and remoter issue. 14 It appears that the Company has conducted business solely as trustee of the GSD Trust and does not operate in any other capacity. 15 The GSD Trust is in the business of property development. It has developed apartments at 35 Argyle Street, Fitzroy (Fitzroy Apartments). Unit 6 of the Fitzroy Apartments (Fitzroy Property) is registered to Mr Darnell (as to 2 of a total of 3 equal undivided shares) and his former de facto partner (as to 1 of a total of 3 equal undivided shares). 16 The Company has unsecured creditors of approximately $2.11 million. This comprises in the main approximately $1.33 million owed to Mr Darnell in respect of money that he loaned to the Company to complete the development and construction of the Fitzroy Apartments. The Company also owes the ATO approximately $735,000. Other trade creditors are owed approximately $39,000. 17 Mr Darnell has given evidence that his former de facto partner withdrew without authorisation the total sum of $500,000 from the Company's bank account in or around mid-October 2016. 18 Mr Darnell is currently engaged in family law proceedings against his former de facto partner in the Family Court of Australia. In those proceedings, he seeks a property settlement amounting to a 70:30 per cent split of the total asset pool. This outcome would essentially mean that he retains the Fitzroy Property (and his former de facto partner retains another property in Port Melbourne). It is estimated that there is approximately $1.92 million equity in the Fitzroy Property. The family law proceeding was heard in November and December 2018. The decision is reserved. It is expected that the decision will be handed down in the next few months. 19 Mr Darnell has also given evidence that he intends to present a DOCA proposal to the creditors of the Company. Assuming the expected outcome of the family law proceeding, he will rely upon the refinancing the Fitzroy Property to secure a fund to pay the unsecured creditors of the Company. He expects that the equity in the Fitzroy Property will allow for a relatively substantial fund. He proposes that as part of the DOCA proposal he will not participate in any dividend payment to unsecured creditors, and that this will significantly increase the amount that remaining creditors will receive. This is because he is the largest creditor. The DCT is the next largest. Mr Darnell says that the DOCA proposal is contingent on the outcome of the family law proceeding, and that until final orders are made in that proceeding, he cannot consider the amount to be offered to unsecured creditors and cannot obtain refinance for such an amount. 20 Mr Brace has given evidence that the Administrators' investigations are continuing in relation to: (a) the purchase and transfer of the Port Melbourne property; (b) the withdrawal of the $500,000 from the Company's bank account; and (c) the lodgement of a caveat over the Port Melbourne property by Mr Darnell. 21 Mr Brace has expressed the opinion that it is in the best interests of the creditors to allow the voluntary administration to continue. The relation back day under a Court appointed liquidator will be 28 February 2019. Despite the appointment of the Administrators, if the creditors resolved to wind up the Company, the relation back day will remain 28 February 2019, being the day on which the winding up application was filed. The further time will allow the Administrators to: (a) complete an analysis of the Company's books, records and external financial accounts (in light of the discrepancies found to date); (a) continue investigations into the alleged withdrawal of $500,000 by Mr Darnell's former de facto partner; (b) continue investigations into potentially voidable transactions and creditor balances including Mr Darnell's loan account; (c) await the outcome of the family law proceeding to enable the Administrators to: (d) make an informed assessment of Mr Darnell's and his former partner's ability to meet any potential voidable transaction claims in a liquidation scenario; and (e) properly consider the terms of a DOCA proposal put forward by Mr Darnell; (f) obtain preliminary legal advice regarding the implications of the outcome of the family law proceeding for the recoverability of any potentially voidable transactions; and (g) consider and prepare a report in relation to the Company's business and financial circumstances. 22 Mr Brace noted that, in accordance with s 439A(4) of the Act, the Administrators are required, ahead of the second meeting of creditors, to make a recommendation and provide reasons for that recommendation to the creditors of the Company in relation to whether it would be in the best interests of creditors for the Company to execute a DOCA, for the administration to end, or for the Company to be wound up. Mr Brace has expressed the opinion that an extension of the convening period would allow the Administrators to explore options that may result in a better return to the creditors of the Company than would be achieved by the immediate winding up of the Company.

Relevant legal principles 23 As noted above, by reason of s 439A(5) of the Act, the last day on which the Administrators are required to convene the second meeting of creditors is 4 April 2019, and the meeting is required to be held by 11 April 2019. 24 Section 439A(6) provides that the Court may extend the convening period on an application made during or after the period referred to in s 439A(5). As the application has been made during the convening period, sections 439A(7) and (8) are not presently relevant. 25 In considering whether to grant an extension of the convening period, the Court should have regard to the general objectives of Part 5.3A of the Act: see, for example, Mann v Abruzzi Sports Club Ltd (1994) 12 ACSR 611; 12 ACLC 137 and Re Allbuild Construction Co Pty Ltd (Administrators Appointed); Ex Parte Featherby [2000] WASC 227. Section 435A provides that the object of Part 5.3A is to provide for the business, property and affairs of an insolvent company to be administered in a way that: (a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or (b) if it is not possible for the company or its business to continue in existence - results in a better return for the company's creditors and members than would result from an immediate winding up of the company. 26 In Re Geraldton Building Co Pty Ltd (admins apptd); ex parte Trevor [2000] WASC 320 at [5]-[6], Owen J said: It was clearly envisaged that the power to extend the convening period should not be a power that is exercised as of course, because of the need for administrations of this nature to proceed speedily… On the other hand, it is also to be noted that the discretion whether or not to extend the time is to be exercised bearing in mind the spirit and the object of Div 6 of Pt 5.3A of the Law, namely, to maximise the chances of the company continuing in existence or, alternatively, terminating its existence in the most appropriate way. 27 Courts have recognised that the interests of creditors can be prejudiced not only by delay but also by the convening of premature meetings, where the administrator has been unable to obtain adequate information for the preparation of the report and statements required by s 439A(4) of the Act in a form which enables creditors to make an informed decision: Re Echuca Insured Housing Loans Pty Ltd (admin apptd), unreported, Supreme Court of Victoria, Harper J, 4 February 1994; Re Brash Holdings Ltd (admins apptd) (1994) 13 ACSR 793; Re Pan Pharmaceuticals Ltd (admins apptd) (2003) 46 ACSR 77; 21 ACLC 1144. 28 Courts have also acknowledged that it may be that the administrator will need to seek an extension of a convening period to enable the completion of its investigations: Re Levi (1996) 19 ACSR 521; 14 ACLC 924; Re Brash Holdings Ltd (admins apptd) (1994) 13 ACSR 793. 29 In Re Diamond Press Australia Pty Ltd [2001] NSWSC 313, Barrett J observed (at [10]) that the function of the Court on an application under s 439A(6) is: … to strike an appropriate balance between, on the one hand, the expectation that administration will be a relatively speedy and summary matter and, on the other, the requirement that undue speed should not be allowed to prejudice sensible and constructive actions directed towards maximising the return for creditors and any return for shareholders. 30 In Algeri; Re Colorado Group Ltd [2011] VSC 260, Judd J (at [25]) summarised the categories of reasons given for extensions of the convening period as identified by Austin J in Re Riviera Group Pty Ltd (admins apptd) (recs and mgrs apptd) (2009) 72 ACSR 352 at 355; [2009] NSWSC 585 as follows: (a) the size and scope of the business; (b) substantial offshore activities; (c) large number of employees with complex entitlements; (d) complex corporate group structure and intercompany loans; (e) complex transactions entered into by the company; (f) complex prospects of recovery proceedings; (g) lack of access to corporate financial records; (h) the time needed to execute an orderly process of disposal of assets; (i) the time needed for thorough assessment of a proposal for a deed of company arrangement; (j) where the extension will allow sale of the business as a going concern; and (k) more generally, that additional time is likely to enhance the return for unsecured creditors. 31 Section 440A(2) provides that 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 interest of the company's creditors for the company to continue under administration rather than be wound up. Whether or not an administration should continue, rather than the company being wound up, is closely related to the issue of whether the creditors are likely to receive a better outcome through an administration than through a winding up. This will usually require an assessment by the administrators of the likely return to creditors under a DOCA proposal compared with a winding up: see Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 at 457; and Deputy Commissioner of Taxation v Scottsdale Homes No 3 Pty Ltd [2008] FCA 1958. 32 In order for administrators to form opinions and report to creditors concerning DOCA proposals, there must be fully formed proposals capable of proper analysis. Hence, a winding up proceeding may be adjourned and the convening period extended so as to allow an administrator to properly consider a DOCA proposal and to report to creditors on the potential merits and drawbacks.

Disposition 33 I am satisfied on the evidence before me that there is good reason to extend the convening period to allow the development and consideration of a proposed DOCA. 34 The resolution of the family law proceeding may afford Mr Darnell the opportunity to formulate a DOCA proposal through refinancing the Fitzroy Property and creating a fund for distribution to unsecured creditors. The DCT will be the main beneficiary of such a proposal as it is the single largest unsecured creditor. As the equity in the Fitzroy Property is likely to be approximately $1.9 million, there are credible prospects that a substantial fund may be offered to unsecured creditors as part of such a proposal. As Mr Darnell proposes to forgo any contribution from the fund, the benefits will distributed solely to the other unsecured creditors. 35 This has the potential to provide a significantly greater return to creditors than under a winding up. In a winding up scenario, Mr Darnell will not be required to advance his personal funds for the benefit of the creditors of the Company, which would consequently need to rely upon its own assets, including the potential recovery of $500,000 from Mr Darnell's former de facto partner. This may or may not be recoverable. Further, in a winding up, Mr Darnell would be the single largest creditor (by a factor of almost 2:1). Therefore, the unsecured creditors would need to share any distribution with him. Under the proposed DOCA, Mr Darnell will not share in a distribution. 36 The additional time to formulate the DOCA would also allow the Administrators to properly consider any such proposal and to produce a proper report in compliance with s 439A of the Act. 37 There is no evidence to indicate that there will be any substantial prejudice to creditors by the extension of the convening period and the adjournment of the winding up application. Although a recovery action under Part 5.7B of the Act may be open in relation to the withdrawal of the $500,000, the position of unsecured creditors is not disadvantaged. The relation back day will commence from the day on which the DCT issued the winding up proceedings. 38 In my view, the orders sought are in the best interests of the creditors of the Company. 39 The DCT submitted that the application to adjourn the hearing of the winding up application should be made at the hearing scheduled for 12 April 2019. The primary reason for that submission is that the date for the hearing of the winding up application had previously been advertised and the DCT was concerned to ensure that the creditors of the Company are notified of any change to that date. The DCT also raised a concern about the period of any adjournment and the ability of the DCT or another creditor to apply to the Court to reinstate a hearing of that application if circumstances change. 40 In my view, it is preferable for the Court to deal with the applications to extend the convening period and the adjournment of the hearing of the winding up application together. The same facts are relevant to both applications, and it would create inefficiency for the adjournment application to be dealt with on 12 April 2019. For the reasons given, I am satisfied that it is in the interests of the Company's creditors for the Company to continue in administration rather than be wound up. However, to address the concerns raised by the DCT, I have made two changes to the orders proposed by the Administrator. The first is to make the adjournment order subject to further order of the Court, to make plain that a creditor may apply to the Court to reinstate a hearing of the winding up application if circumstances change. The second is to insert an order requiring the Administrators to give notice of the orders to all known creditors within 7 days. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice O'Bryan.