These proceedings relate to four entities which appear to function as part of an interrelated group, namely Brandup Pty Limited ("BPL"), Brandup Building Solutions Pty Limited ("BBS"), Green Tomorrow Eco Solutions Pty Limited ("GTES") and Green Tomorrow Pty Limited ("GTPL"). In each proceeding, the Deputy Commissioner of Taxation has the benefit of a presumption of insolvency, arising from a failure to meet a creditor's statutory demand, and applies to wind up each of the companies. Each of the companies has, by oral application, sought an adjournment of the winding up under 440A(2) of the Corporations Act 2001 (Cth), to a date immediately after a second meeting of creditors, which is due to take place this week.
Deputy Commissioner of Taxation v Polcarp Pty Ltd [2015] NSWSC 2000 | Case summary | Zoe
This application follows an earlier occasion, on which the Court granted a brief adjournment of the winding-up applications. A further adjournment of the winding-up applications is now opposed by the Deputy Commissioner of Taxation, such that he seeks to have those applications determined. The result would be, if the applications were successful, and a liquidator were appointed to the companies, the second meeting of creditors would not proceed, and any opportunity for the companies to enter into deeds of company arrangement would not be available.
The application has some unusual features, which include the fact that there are related party creditors of each of the companies, generally being the other companies which are the subject of the application, as well as trade creditors. In the case of several companies, as I will note below, the trade creditors are in relatively small amount, and the substantial creditor is the Deputy Commissioner of Taxation which, as I have noted, opposes the adjournment of the winding-up applications. I have had the benefit of detailed analysis of the companies' positions contained in the administrator's reports to creditors. I have been taken to those reports at some length both by Mr Johnson, who appears for the administrator, and by Mr Metlej, who appears for the Deputy Commissioner of Taxation. There is little dispute as to the content of those reports, although there seems to me a substantial dispute as to their economic consequences, and as to the significance of an express assumption which is made by the administrator in one of those reports, to which I will refer below.
The application is supported by an affidavit of the administrator, Mr Calabretta, sworn 2 September 2015. Mr Calabretta was not cross-examined, and it has not been put to him that any of the views that he sets out in the administrator's reports are not genuinely held. Having said that, there is an issue in this case as to the significance to be attributed to those views, to the extent that they may be qualified by uncertainty in the assumptions on which they are based. It seems to me that there was no need for the Deputy Commissioner of Taxation to cross-examine Mr Calabretta, and no point in his cross-examining Mr Calabretta, as to matters which he has assumed and not verified, because all he could do in respect of such a cross-examination was make clear what his reports already make clear, that those are matters of assumption and not matters as to which he has any independent view.
Mr Calabretta refers to the circumstances of his appointment as administrator of five companies, of which four are the subject of this application. He refers to the investigations which he has undertaken, which are in turn set out at some detail in his reports to creditors. He refers to the balance sheets of the various companies in the group, which, in each case, indicate intercompany borrowings, between the several companies which are the subject of this application. Mr Calabretta notes that a deed proposal has been received, which in turn is conditional upon acceptance of a group DOCA proposal, relating to all five companies, by those companies.
Mr Calabretta places significant weight, in his affidavit, upon the fact that the deed proposal has the consequence that related party creditors will not participate in a dividend under the deed of company arrangement, which he suggests increases the pool of funds available to participating creditors. That proposition is true, in one sense, in that the elimination of a related party creditor will increase the dividend that is available to other creditors. However, the oddity in this case is that the related party creditors are themselves entities which are also the subject of winding-up applications and have third party creditors and, when a related party creditor does not receive a dividend under the deed of company arrangement, the cost of that course so is ultimately borne by its third party creditors. Where the Australian Taxation Office is a substantial, if not predominant, creditor in respect of each of the entities, then it is more difficult to see the benefit of the surrender of the entitlements of related companies, because the party which is said to obtain that benefit as a creditor of one company, in turn, suffers the disadvantage of not receiving a distribution in respect of the other group company which has surrendered that entitlement. To put that proposition another way, in this case, as distinct from a position where related party creditors are shareholders or directors, the surrender of entitlements by related parties is a zero sum exercise, at least, as far as the Australian Taxation Office is a creditor of each of the related parties.
Mr Calabretta, in turn, refers to the deed funds which would be created by the relevant transaction. He refers to cash contributions into the deed fund for another group entity, not the subject of a winding-up application, BBR of $41,500, cash contributions for GTES of $56,500, cash contributions for GTPL of $266,500, cash contributions for BBS of $36,500, and cash contributions for BPL of $41,500. I do not doubt the accuracy of that description, but it, perhaps, does not disclose the substance of the transactions, where the external contribution to be made to the deed fund is, as emerges from the affidavit of Miss Foster, dated 3 September 2015, an amount of $110,000, which, as I will note below, is likely to be used in significant part in payment of the administrator's fees and other expenses of the deed administration, and the balance of the contribution is made up of moneys already held by the companies, which would also be available in a liquidation, and of future earnings of the companies, which depend upon an assumption made by the administrator to which I will refer below.
Mr Calabretta, in turn, sets out the detail of the various deed proposals, and in each case, indicates his view that the deed proposals will, at least if successfully implemented, generate a more favourable, and on occasions definitely more favourable, result than a liquidation, and that he, therefore, proposes, subject to further matters that may come to his attention, to recommend the deed proposals to creditors. There is also evidence that, again, subject to further matters that may come to Mr Calabretta's attention, he is likely to exercise a casting vote in favour of the proposals, if there is a difference in votes as between, for example, the related party creditors, on the one hand, or related party creditors and other trade creditors voting together, and the Australian Taxation Office, which may hold the majority of value as creditor in respect of several companies. So far as the deed administrator's assessment turns upon his estimated outcome of the deed administration, much then turns upon the extent to which that outcome is likely to arise.
Mr Calabretta has, in turn, exhibited relevant documents, including detailed reports prepared under s. 439A of the Corporations Act, to his affidavit, and I have been taken in considerable detail to those documents. That exhibit includes a proposal for a deed of company arrangement for GTPL, which records that $250,000 will be made available for the benefit of GTPL, although, as I have noted above, the cash contribution being made from sources outside the companies is, in fact, limited to $110,000. A further contribution is anticipated by future earnings, involving contributions of $41,666.65 each month, paid from the future trading of the company. I will return to the likelihood of those payments being made below. A further source of funds is an amount of $16,500, which has been paid to the administrator by way of indemnity, and is currently held on trust, but will form part of the deed fund.
There are, in turn, helpful spreadsheets prepared by the administrator, in respect of each company, which, in each case, demonstrate a more favourable outcome from the DOCA to the high and low results in respect of the liquidation. In the case of BBR, the anticipated result is a realisation from the DOCA of 41 cents in the dollar, compared with a high result in the liquidation of 28 cents and a low result of 11 cents in the liquidation. That result turns on a deed contribution of $25,000 to be made to that company, which, as Mr Metlej, who appears for the Deputy Commissioner of Taxation points out, will be a little less than participating priority claims, and will not itself generate a return for unsecured creditors, and other amounts being amounts already held by the company as cash at bank, and related party loans which will, as I note below, turn on the ability of those companies to repay those loans.
In the case of GTES, the estimated return is 39 cents in the dollar from a deed of company arrangement, compared with a high outcome from a liquidation of 19 cents in the dollar and a low outcome from the liquidation of nil. In this case, that outcome is partly funded from a deed contribution of $40,000, although it is to be noted that the external administrator's fees and charges are also estimated as $40,000. In the case of GTPL, Mr Calabretta's analysis is that the outcome from a deed of company arrangement may be 44 cents in the dollar, compared with a high result in the liquidation of 26 cents in the dollar and a low result on a liquidation of one cent in the dollar. Here, the outcome reflects deeds contributions, but the amount of $250,000 attributed to deed contributions does not reflect third party contributions, given that the total contribution made by interests associated with the director is, as I have noted, $110,000 and that must also be applied to the funding of the other deeds of company arrangement. In the case of BBS, the administrator's estimate shows an outcome of ten cents in the dollar, in the deed of company arrangement, compared with nil in both the high and low outcome of a liquidation. In the case of BPL, the scenario shows an estimated distribution of 26 cents in the dollar on a deed of company arrangement, compared with a high result in a liquidation of 15 cents and a low result in a liquidation of 7 cents.
The figures which I have referred to anticipate the submission made by Mr Johnson, who, as I have noted, appears for the administrator, which is consistent with the authorities which indicate the test to be applied in this area. Mr Johnson submits that the outcomes for creditors in a deed administration would be significantly better than those on a liquidation, and that result would seem to follow if it is likely that the outcomes estimated by the administrator will come to pass. I will return to that issue below, once I have referred to the submissions of the Deputy Commissioner of Taxation.
Mr Metlej, who, as I have noted, appears for the Deputy Commissioner of Taxation, in turn, submits, first, that the outcomes that will result from the deeds, if approved by creditors at the second creditors meeting, turn upon the performance of the deed relating to GTPL, and, in particular, upon the outcome of trading by that entity. Mr Metlej submits, at the risk of somewhat over simplifying his submission, that the external contributions to the deed funds are largely going to pay priority creditors, and primarily the costs of the administration, and are unlikely to generate a return for unsecured creditors, unless GTPL is capable of delivering upon the monthly payments contemplated by the deed of company arrangement, once that deed is implemented and it is returned to its director's control. Mr Metlej submits, in effect, that there is little additional benefit to unsecured creditors, because the contribution made to the deed fund will be absorbed by the administrator's costs, unless GTPL is capable of achieving that result.
Mr Metlej in turn draws attention to a matter which is treated, in the administrator's report relating to GTPL, as a matter of assumption. Mr Calabretta notes in that report that he has been provided with cash flows, assumptions in relation to those cash flows and proposed changes to GTPL at an organisational level, involving the engagement of a chief executive officer, which he notes is expected to increase turnover of the stock; the appointment of a new accountant; and that "growth is expected; costs to be cut; profit projected going forward." Mr Calabretta, in turn, notes that, based on those projections and assumptions that he has been provided, he believes that GTPL should be able to meet the deed obligations. The difficulty with that proposition is, as Mr Metlej has pointed out, that once one assumes that growth is expected, costs are to be cut and that profit will be achieved going forward, then the proposition that a company is profitable is the necessary consequence of the assumption one has made. The making of that assumption, and identification of its necessary consequence, does nothing to establish the likelihood that that assumption is correct.
Mr Calabretta does not suggest that he has taken any step, and, in fairness, he would not ordinarily be expected to take any step, to confirm whether that assumption as to the future performance of GTPL will come to pass. Mr Metlej, however, points to some matters which are, it seems to me, cause for significant scepticism in that regard. The first is that the financial statements of GTPL for the year ended 30 June 2015 record an annual profit of $238,121, which is less than the amount to be paid, within six months, by GTPL as a contribution to the deed fund. The second is that the management accounts of GTPL for the period from 1 July 2015 record a loss of $42,553, which provides little comfort as to the ability to generate significant monthly profits going forward. The third difficulty is that, it appears, GTPL has incurred a modest net profit, in the period under which it has been under the administrator's control, but that profit is, in turn, less than would be required to support the contributions to the deed fund. The fourth difficulty is that, it appears, from the administrator's reports, that GTPL's primary client is not third parties, but Green Tomorrow Solutions Pty Ltd, which is the retail sale entity within the group of companies, of which several are the subject of this winding-up application. It seems to me that it would be unrealistic to assume that the steps which are to be taken, by way of assumption, to improve GTPL's profitability will necessarily succeed where its primary client is itself within the group which is the subject of this application, although, I hasten to add, that company is not itself the subject of any winding-up application which is in issue before me.
Mr Metlej, in turn, advances further submissions as to the position in respect of the exercise of the administrator's casting vote, and as to historical behaviours of the company. Mr Metlej points out, in particular, as the administrator's reports fairly acknowledges, that there appears to be a consistent pattern of failure to meet taxation obligations by the companies within the group, which has continued for a considerable period, and which is, in turn, part of the origin of the significant debts now owed to the Deputy Commissioner of Taxation. It seems to me preferable not to determine this application by reason of those matters. They may, no doubt, have been matters of some relevance if an application were later brought to set aside a deed of company arrangement, which was approved at the relevant meetings over the opposition of the Deputy Commissioner of Taxation, but it seems to me preferable not to seek, in effect, in determining an application for an adjournment of the winding-up, to conduct a collateral trial of an application to set aside a deed of company arrangement which has not yet been approved.
Mr Metlej also points to other matters, including indications, also fairly recognised by the administrator, of insolvent trading in the period since 2012, as matters which may tend against an adjournment of a winding-up application. Again, I prefer not to decide this application on that basis, since indicators of insolvent trading may commonly be present in applications of this kind, by definition, since they arise from a winding-up application, and an application of this kind seems to me primarily to be determined by reference to the interests of creditors going forward, not the historical behaviours of the company when under the control of its former directors.
It seems to me that it is possible to determine this application, and preferable to do so, on narrow and well-established grounds. Section 440A(2) of the Corporations Act relevantly 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 interests of the company's creditors for the company to continue under administration rather than be wound up. That section requires the Court to adjourn the proceedings if the relevant precondition is satisfied: Deputy Commissioner of Taxation v Polcarp Pty Ltd [2011] FCA 1142 at [4]. The case law establishes that an adjournment under this section will generally require that the Court is satisfied that it is in the creditors' interests to continue the administration in all the circumstances, and this requires that there be sufficient possibility, as distinct from mere optimistic speculation, that creditors will be accommodated in a greater degree in an administration than in a winding-up: Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456 at 457 and; see the other authorities to which I referred in Weriton Finance Pty Ltd v PNR Pty Ltd (in admin) [2012] NSWSC 1402; (2012) 92 ACSR 88 at [16].
In Re Offshore and Ocean Engineering Pty Ltd [2012] NSWSC 1296 at [6], a decision as to which leave to appeal was later refused, Brereton J noted that the section contemplated a substantial degree of persuasion that administration rather than liquidation is in the interests of the company's creditors. In the application for leave to appeal, in Offshore and Ocean Engineering Pty Ltd v Greenwich Contractors Pty Ltd, [2012] NSWCA 371, Campbell JA in turn referred to the public importance of the winding up jurisdiction, although also noting the importance of a public policy in the Corporations Act that creditors be given the opportunity to consider a deed of company arrangement when it appears that creditors will do better under a deed of company arrangement than under a liquidation. That formulation is consistent with the way in which Mr Johnson put the administrator's application, and indeed with the way in which Mr Metlej opposed it, in each case drawing attention to the question whether there was a possibility, as distinct from mere optimistic speculation, that creditors would in fact do better under a deed of company administration than under a liquidation.
My attention was not drawn to any particular case in which this issue had arisen, as in this case, shortly before a second meeting of creditors. I am conscious that, in the ordinary course, there will be much to be said for the proposition that, where an administration has continued for a period, and a second meeting of creditors is due to take place shortly, then creditors should be allowed an opportunity to consider a deed of company arrangement at that meeting and, if the applicant for winding up is dissatisfied with the result of that meeting, then it should have recourse to the grounds to set aside the outcome of such a meeting that are available under the Corporations Act. It seems to me that that proposition has much less weight in this matter, because, as I have noted, the largest external creditor of several of the companies is the Deputy Commissioner of Taxation, and the conduct of a creditors meeting in turn involve difficult issues as to the circumstances in which, in several companies, the administrator should exercise his vote, in accordance with his recommendation, in a manner that is opposed to the view of the most substantial creditor of those companies.
This is not a case, by contrast with the majority of cases, where the outcome of the second meeting will be determined by third party creditors, or indeed by related party creditors other than the companies within the group, exercising votes, because of the peculiar relationship between the companies as each other's related party creditors. Indeed, it seems likely that the outcome of the meeting might well be determined by the administrator's view, in exercising votes in respect of the particular companies, or in exercising a casting vote. In that case, it seems to me that less weight is to be given to the exercise of the voting right at a second meeting of creditors, than would occur if that right were to be exercised by third party creditors.
In this case, it seems to me clear that the outcome of the deeds of company arrangement depends upon the assumption which has been made by Mr Calabretta as to GTPL's ability to transform its activities so as to pay contributions to the deed fund, which it could not pay by reference to its historical performance, or its recent performance under the administrator's control. That assumption is, as I have noted, one as to which Mr Calabretta expresses no view. The Court must do its best to assess whether that assumption is realistic, without Mr Calabretta's assistance. It seems to me that, for the reasons which Mr Metlej has put, that assumption falls within the category of mere optimistic speculation, not supported by the company's history. In these circumstances, it seems to me very likely that deeds of company administration, if approved at the second meeting of creditors, would not deliver a better result than a liquidation, because those factors which are said to deliver that result would not be achieved.
I have not neglected, in that respect, the fact that Mr Johnson points to the value of the companies' stock, and to the administrator's view that that stock would be depreciated on a liquidation, a proposition that may well be the case. However, Mr Calabretta does not seek to express a view as to the correctness of the current valuation of the companies' stock, and his view that it can be realised in the ordinary course of business, when the companies are in deed administration, in turn depends upon the companies' ability to continue to sell that stock to the related party which has been its primary purchaser. Again, that seems to me to be a matter of speculation, and not a matter as to which Mr Calabretta has sought to make an evaluation on any factual basis.
For these reasons, I am not satisfied that the prospect of a better return from a deed administration is any more than mere optimistic speculation. This does not require that I depart from Mr Calabretta's views, and I have assumed, for the purposes of this judgment, the correctness of the financial analysis contained in his reports. The key step in this judgment is, as I noted, a matter which Mr Calabretta expressly treats as one of assumption, and not one as to which he expresses a view. The matter which Mr Calabretta has assumed does not seem to me to be realistic, given the evidence to which I have referred, and on that basis I am not satisfied that the winding up application should be further adjourned.
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Decision last updated: 02 February 2016