Deputy Commissioner of Taxation v Melbourne Kids Pty Ltd

REASONS FOR JUDGMENT 1 A Deputy Commissioner of Taxation (the Commissioner) has sought the winding up of Melbourne Kids Pty Ltd, ACN 117439835 (Melbourne Kids). The basis of the winding up application lies in a failure on the part of Melbourne Kids to comply with the terms of a statutory demand served on it by the Commissioner. Regard to the statutory demand discloses that the underlying debt is comprised of outstanding goods and service tax and Pay As You Go (PAYG) instalments which, together, comprise a running balance account debt and superannuation guarantee charge, together with an applicable general interest charge. The evidence is that at present Melbourne Kids is indebted to the Commonwealth in respect of these debts payable to the Commissioner in the sum of $726,423.22. 2 On 11 May 2010 Messrs Nick Combis and Peter Dinoris, of the firm Vincents' Chartered Accountants, were appointed joint and several administrators of Melbourne Kids. I should indicate in that regard that the affidavit of Mr Combis refers to the company under the name ACN 117439835 Pty Ltd ACN 117 439 835 and to the fact that it was formerly known as Melbourne Kids Pty Ltd. The change is not otherwise attested to in the material read before me. I infer from this apparent late change of corporate name and style an interest on the part of those in control of the company at least to try to preserve something of the name "Melbourne Kids". It is not necessary further to consider that intriguing development. 3 What it is necessary to consider is whether, in terms of s 440A(2) of the Corporations Act 2001 (Cth) (Corporations Act), I am satisfied that it is in the interests of the company's creditors for Melbourne Kids to continue under administration rather than be wound up. If I am so satisfied, then my reading of s 440A(2) of the Corporations Act is that I am obliged to adjourn the hearing of the application for the winding up order for such time as I think fit in relation to the continuance of the company under administration. Melbourne Kids has sought to satisfy me in terms of s 440A(2) of the Corporations Act. 4 The Commissioner wishes to proceed with the winding up application. In that regard he enjoys the support of two of the company's creditors, Bamfa Pty Ltd and LR and EC Enterprises Pty Ltd, each of which appeared today by their legal representative, Mr FM Forde. That Melbourne Kids is indebted to Bamfa and LR and EC Enterprises is acknowledged in the report as to affairs, which has been executed by a Mr Lomas on behalf of the company. It is there disclosed that the company is indebted to Bamfa and LR and EC Enterprises in the sum of $353,363. 5 Not all creditors of the company are disposed to oppose an outcome that would see the winding up application adjourned. There is evidence that a Mr Paul Scott, a chartered accountant to whom Melbourne Kidsowes the sum of $3300, a Ms Julia Gilbody, to whom Melbourne Kids owes the sum of $1,000, and a Mr Graeme Dwyer, a creditor to whom Melbourne Kids owes the sum of $5,500, wish the company to proceed under administration rather than be wound up. 6 The intent of the major unsecured creditor listed in the report as to affairs, CCP Pty Ltd, to whom Melbourne Kids acknowledges a debt of $5,069,053 is unknown. Also unknown, materially, is whether CCP Pty Ltd is in any way an entity related to Melbourne Kids. 7 Apart from the creditors I have mentioned, the report as to affairs discloses an indebtedness in the sum of $36,611 to Work Cover and an indebtedness to the State of Queensland, payable to its Commissioner of State Revenue in the sum of $64,449. An indebtedness to another accounting firm, KPMG, in the sum of $5000 is also acknowledged in the report as to affairs. Somewhat curiously, given that the report as to affairs was executed necessarily after the service of the statutory demand on the company, the indebtedness to the Commissioner is specified by Mr Lomason behalf of the company as only $158,495. 8 Even allowing for that somewhat curious underestimation, the overall indebtedness of the company to unsecured creditors is stated in the report as to affairs to be $5,891,857. The only assetlisted in the report as to affairs is a total amount owed by sundry debtors to the company which in net terms is $136,729. 9 There is not as yet a draft of a deed of company arrangement available. Mr Lomas, though, has provided in his affidavit an outline of the proposed deed of company arrangement. It is as follows: The director of the company makes the following proposal for the company to enter into a Deed of Company Arrangement based on the following terms: s Within 3 months of the Deed of Company Arrangement being executed by the company, the director will cause the sum of $80,000 to be received by the deed administrators. s Within 7 days of the Deed of Company Arrangement being approved by creditors, the Director will cause the sum of $5500 to be received by the Deed Administrators to be used to meet the costs of the Deed Administrators of preparing the Deed of Company Arrangement. s The director and any related parties will not prove for a dividend as a creditor under the deed of company arrangement. s The distribution made to creditors will be in full and final satisfaction of their claims against the company. s The Deed shall terminate upon the final distribution being made to creditors of the company. 10 It was acknowledged by Mr Harley, who appeared on behalf of Melbourne Kids, that the company was hopelessly insolvent. 11 There was some controversy as to whether or not as at 6 May 2010, Mr Lomas was indeed a director of Melbourne Kids. He has certainly purported to act as such in executing the report as to affairs and in the appointment of the administrators by participating in the meeting by which it was resolved to execute a letter appointing Messrs Combis and Dinoris as administrators. 12 The result of a search of the records of the Australian Securities and Investments Commission is in evidence. That search, which was undertaken on 13 May 2010, discloses that Mr Lomas was once a director of Melbourne Kids but, according to the ASIC record, ceased to hold that office on 29 January 2010. The ASIC record further discloses that one David Moriarty is a current director, having been appointed on 28 January 2010. It appears that this apparent irregularity may be due to inattention on the part of Melbourne Kids in notifying ASIC of the prevailing position in respect of directorships in the company. Also in evidence are ASIC forms signed, apparently, on 10 May 2010, which would place Mr Lomas in the position of director on, materially, 6 May 2010, if not earlier. In any event, he has certainly acted de facto as a director. Ultimately, I consider the resolution of his position something of a side wind. 13 The main question is whether in terms of s 440A(2), I am satisfied that it's in the interests of the company's creditors for the company to continue under administration rather than be wound up. As to this, I had occasion in Deputy Commissioner of Taxation v WPS Motor Sport Pty Ltd (2009) 71 ACSR 640 (WPS Motorsport) to reflect upon authorities pertinent to the meaning and application of s 440A(2). What I said at [20] - [23] was as follows: 20 In Creevey and Another v Deputy Commissioner of Taxation (1996) 19 ACSR 456 at 457 (hereafter "Creevey's case"), McPherson JA, with whom Pincus and Davies JJA agreed, observed of s 440A(2): It is evident from the terms of that subsection that before it applies the court must be satisfied not only that there is an administration but also as the subsection says, that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. The Judge in the present case was not satisfied that it was in the creditor's interests for the administration to continue and it is his decision to that effect that is challenged here. The question of whether an administration should continue, rather than that there be a winding up, is obviously closely related to the further question of whether the creditors could hope to get more by way of payment of their debts from one form of process or administration than from the other. In order to satisfy the court of the matter referred to in s 440A(2) of the Corporations Law, one would expect that there would have to be some persuasive evidence to enable it to be seen that there were assets which, if realised under one form of administration rather than the other, would produce a larger dividend, or at least an accelerated dividend for the creditors. 21 It is important to recall that the observations made by McPherson JA in Creevey's case were not made in a vacuum. Justice Philip McMurdo made just such a point, in my opinion, in Re Octaviar Limited (formerly MFS Limited) [2008] QSC 216 at [55]: There are two matters to be noted about that passage from Creevey. The first is that read in context, it is referring to the absence of evidence of any assets whatsoever. Secondly, it is not possible to read this passage as a statement of some principle that in every case, for a court to be satisfied in terms of s 440A(2), there must be some detailed comparison of the dividends from one regime or the other. It will often be the case where not enough is known about what is likely to come from one or both regimes for that comparison to be made at this stage. As McDougall J said in SGB Raffia v Gammacon (No 2) [2007] NSWSC 1510, McPherson JA in Creevey "was not purporting to reframe the statutory test but, rather, to state its application firstly in the case before the court and secondly by reference to more general considerations." McDougall J there referred to what was said by Campbell J in Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd (2003) 44 ACSR 377 at 380 in a passage which I respectfully adopt: "[18] Ultimately what the court needs to do is to be persuaded. The amount of proof which can result in persuasion differs with the circumstances in which litigation comes before the court. It is common enough, in applications under s 440A, for an administrator to need to seek an adjournment very soon after his or her appointment, at a time when he or she knows very little about the affairs of the company. In that sort of situation, comparatively little material might be needed to justify a short adjournment. As time goes on, however, and the occasion that there has been for the collecting of evidence increases, so the amount of material which might need to be put before the court before it is persuaded, will increase." 22 In another case, TCS Management Pty Ltd v CTTI Solutions Pty Ltd [2001] NSWSC 830, Hamilton J made observations with respect to s 440A(2). He, too, referred to Creevey's case, noting that it was the only intermediate appellant authority. His Honour's judgment contains a valuable critical analysis of later authorities in various original jurisdictions concerning the subsection. At para 18, in following this analysis, his Honour reached this conclusion: 18 What I derive from a consideration of the foregoing authorities, as perhaps appears from my reflections during their recitation, is that it is dangerous, as in so many cases, to place any gloss upon the statute. The sole consideration posited as the criterion for the Court's decision in s 440A(2) is the interests of the company's creditors. It is clear that the onus is on the person seeking the adjournment to establish to the satisfaction of the Court that the adjournment is in the interests of those creditors. In general terms, that will be difficult to do unless there is a good case that there will be a greater or more accelerated return from the course contended for. But considerations beyond mere quantum may be relevant to take into account in determining what is in the interests of the creditors and whether it is established that an adjournment may be said to be in the creditors' interests. Where there are advantages in either course, in general terms it may well be the proper course to give such adjournment as will allow the creditors themselves to vote upon the proposal and determine which course they prefer. 23 In a judgment which I recently delivered in Australian Securities and Investments Commission, in the matter of Storm Financial Limited (Receivers and Managers Appointed) (Administrators Appointed) v Storm Financial Limited (Receivers and Managers Appointed) (Administrators Appointed) [2009] FCA 269, I observed of such a survey of authority that the long and the short of it was that s 440A(2) means what it says. It is for the person seeking the adjournment to satisfy the court that in the circumstances of the particular case, it is in the interests of the company's creditors for it to continue under administration rather than be wound up. 14 Mr Harley for Melbourne Kids described the sum of $80,000 referred to by Mr Lomasin the skeleton description of the deed of company arrangement proposal, somewhat prosaically, as "a slush fund." It certainly appears that this sum is all that might be available to creditors under a deed of company arrangement which would not otherwise be available in a winding up. Quite from where this sum of $80,000, which Mr Lomas foreshadows he will cause to be received by the deed administrators within three months of the execution of the deed, will come is something of a mystery. There is no evidence at all in the material read before me as to how this sum will be provided, from whom and with what assurance of payment. In this sense, there may be rather more than the prosaic in the description of the sum as a slush fund. It is truly opaque on the material as to the degree of confidence one might have in its existence or even in the likelihood of its being available. Further, and as I have already observed, just who are, apart from Mr Lomas himself, the parties who would not prove for a dividend under the deed is equally opaque. 15 The Commissioner also made reference to the position with respect to the superannuation guarantee charge. In the winding up of the company, corporate liabilities in respect of the superannuation guarantee charge are a afforded a priority by virtue of s 556(1)(e) of the Corporations Act. The effect of s 444DA of the Corporations Act is that a deed of company arrangement must contain a provision maintaining ineligible employee creditor's entitlement to a priority equal at least to that which would apply under s 556 of the Corporations Act. The skeleton outline of the deed does not foreshadow the making of such provision. However, I do not assume against Melbourne Kids that it would be without the benefit, in giving formal voice to the skeleton, of appropriate professional advice as to necessary inclusions. In other words, I am prepared to assume that attention would be given to the requirements of s 444DA in relation to employee creditors' entitlement in the terms of the deed itself as presented to a creditors meeting. The Commissioner's submission also, in my view, assumed as much, but rather pointed to the circumstance that having regard to the amount of superannuation guarantee charge ($470,828.30) included in the debt due to the Commonwealth and payable to the Commissioner, other unsecured creditors would receive nothing under the proposed deed of company arrangement. 16 The argument was, as I understood it, that it was not, therefore, in the interests of creditors generally for the winding up application to be adjourned. The position, though, would not be any different in the event of a liquidation of the company, assuming, for the moment, that the company's assets and liabilities are as set out in the report as to affairs duly corrected for the true indebtedness to the Commonwealth. In the winding up, the superannuation guarantee charge liability would also enjoy a priority. The expression in s 440A(2) "in the interests of the company's creditors", whilst it does look to the interests of the company's creditors as a whole, necessarily assumes, in my opinion, whatever impact the Act might otherwise have in relation to priorities as between creditors. 17 The position of the supporting creditors, Bamfa and LR and EC Enterprises, was no different to that of the Commissioner. Particular emphasis, though, was placed by these creditors on the hopelessness of insolvency of Melbourne Kids and of the unlikelihood and, for that matter, undesirability of it ever being resurrected. 18 It was acknowledged by Mr Harley, on behalf of Melbourne Kids, that it was unlikely that the company would emerge from the administration in a situation where it would again carry on business. 19 The real question today is whether even to adjourn for a short time or rather, whether I am satisfied, at least to the extent that it is in the interests of creditors, for the company to continue under administration for a short time. In that regard, Mr Combis deposes that he anticipates that the second meeting of creditors will be held on 16 June 2010. Thus, the adjournment, or at least the continuance of the company under administration as a consequence of adjournment, which falls to consideration at present, is one that would result in an adjournment for some few days after 16 June 2010, ie, a little more than a month. 20 It is a matter of concern to me that the position with respect to the so-called "slush fund" is opaque. Particularly in that regard, there seems to me, on the material read, to be an absence of candour on the part of Mr Lomas in what he has disclosed to Mr Combis and Mr Dinoris, each of whom are well-known and experienced administrators and liquidators. The choice, in effect, is as between allowing a month or so for investigation to be undertaken, which would necessarily include investigation as to the provenance and likelihood of payment of the sum of $80,000 or an immediate winding up. 21 Parliament made a value judgment when it inserted Pt 5.3A into the Corporations Act. Part of that value judgment was a regime whereby companies might be placed in voluntary administration and their fate consigned to a meeting of creditors after some initial and necessarily cursory investigation by the administrators and with the creditors having the benefit of the considered opinion of the administrators at the meeting when, for example, a deed fell for consideration. Particularly having regard to the sentiments which I voiced in WPS Motorsport in relation to the paucity of evidence offered by the company in that case as to the particular asset base, I find the question of whether to be satisfied about what is in the interests of creditors a very difficult one indeed. Overall, it seems to me that, even having regard to the early stage of the administration, the absence of apparent candour on the part of Mr Lomas about the sum proposed to the administrators is telling. The long and the short of it is that I am not satisfied that it is in the interests of the creditors for the company to continue under administration. 22 The effect of that conclusion then is that it falls as a matter of general discretion in terms of whether or not to wind up the company. It is not axiomatic that a winding-up order must be made, even though prima facie the Commissioner is entitled to the same on the strength of the presumed inability on the part of the company to pay its debts as they fall due. The presumed inability is dramatically underscored by the report as to affairs. Further, a matter of considerable concern to me, and I regard it as relevant to take into account, is the public interest consideration that Melbourne Kids has debts not only in respect of superannuation guarantee charge, but also WorkCover liabilities, and a liability to the State Revenue. These are matters which, in my opinion, might well benefit from investigation in the context of liquidation, to say nothing of its PAYG indebtedness. Inferentially, in relation to WorkCover, superannuation guarantee charge and PAYG indebtedness, this company has, at least in terms of matters warranting investigation, the flavour of one which has been run deliberately with a view to the non-remission of amounts referable to the employment of labour. 23 Having regard then to wider considerations, as well as the prima facie inability of the company to pay its debts, I see no reason why it ought not to be wound up. I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Logan.

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