- Deputy Commissioner of Taxation v Pope Joan Hospitality Pty Ltd

Supreme Court of NSW|2024-08-21|Before: Black J, Derrington J

Solicitors: Holman Webb (Plaintiff) Stratos Legal (Defendant) File Number(s): 2024/243981

Judgment - ex tempore (Revised 22 August 2024)

By Originating Process filed on 3 July 2024, the Plaintiff, Southern Steel Supplies Pty Ltd ("Southern Steel"), applies to wind up the Defendant, Redback Engineering & Sales Pty Ltd ("Redback") in insolvency, relying on an unsatisfied creditor's statutory demand in the amount of $51,013.31.
By an oral application made, initially before a registrar and then before me, Redback applies to adjourn the hearing of the winding up application under s 453Q of the Corporations Act 2001 (Cth) ("Act"). That section 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 restructuring and the Court is satisfied that it is in the interest of the company's creditors for the company to continue under restructuring rather than be wound up."

Affidavit evidence

Redback here reads three affidavits in support of the application. First, it reads the affidavit of its director, Mr Clinton McDonald dated 7 August 2024. Mr McDonald notes that Redback was incorporated by his father in early 2005 and operated as an engineering machining business, and that Mr McDonald has since taken over day to day management of the business, and now acquired the business from his father. He refers to steps which had been taken to pay down Redback's debt, prior to COVID 19 occurring in early 2020, and to cashflow difficulties which Redback had experienced during the COVID-19 period , where it was more difficult to source materials and equipment needed to complete orders, and work was taking longer to complete, a difficulty which was no doubt not unique to Redback.
Mr McDonald also points to other difficulties during the period when Redback's major client wound down its underground mining operations, pending approval to expand its mine, but noted that that approval was granted in 2021, and Redback was now beginning to get new orders from that major client as it has started to replace equipment. Mr McDonald frankly acknowledged that, and Mr Collins for Southern Steel, emphasised is evidence that : "I have taken steps to cut costs and improve cash flow but have not been able to get on top of all of [Redback's] debt, even though we are getting a lot more orders and are trading profitably."
Mr McDonald notes that, on 19 July 2024, he appointed Mr Morgan to undertake a small business restructure of the defendant under Pt 5.3B of the Act. I recognise that that step appears to have been taken after the winding up proceedings had been commenced by Southern Steel. Mr McDonald also refers to steps which he has taken for an associated company to borrow $80,000 from a third party lender to distribute to creditors if the small business restructuring is approved. His evidence is that that loan has been approved, subject to creditors approving that restructuring proposal, and will be available to be distributed to creditors shortly after that restructuring proposal is approved by creditors, if that approval is obtained. Mr Evans, for Redback, fairly acknowledges, and Mr Collins also emphasises that the amount of $80,000 is $10,000 less than the amount of $90,000 contemplated by the restructuring proposal put to creditors, although that difference is not necessarily material and may reflect, as Mr Evans points out, the amount of fees payable to the small business restructuring practitioner in the order of $9,000.
By an affidavit dated 6 August 2024, Mr Morgan, who is a registered liquidator and has been appointed as the restructuring practitioner to undertake the small business restructure for Redback identifies creditors of Redback totalling approximately $472,115, of which Southern Steel is a substantial, but not the largest, creditor. He refers to the fact that both Southern Steel and a third party have securities registered on the Personal Property Securities Register. Mr Morgan also points to a claim by the current director's father to be owed approximately $150,000 by Redback. That loan is proposed to be forgiven under the proposal put to creditors. Mr Collins rightly points out that there is limited evidence to establish how that loan came about, or indeed that it exists. That is, to some extent, addressed by Mr Morgan's evidence that he has taken appropriate inquiries, as required by Pt 5.3B of the Act. In any event, it appears that the forgiveness of that loan is primarily relevant to the calculation of the amount payable to creditors under the proposal, which would not be affected by any inquiry as to whether that loan had previously existed, and to the estimate of returns in a liquidation, where the existence of that loan is of marginal relevance, given the limited availability of assets and the size of other creditors' claims.
Mr Morgan there provided a plainly preliminary outline of the steps which were being taken to develop a restructuring proposal to be put to creditors, and referred to his then identification of plant and equipment which "may" be owned by Redback, and its value, which has now been significantly decreased by his evidence in a second affidavit.
By a second affidavit dated 16 August 2024, Mr Morgan exhibits the proposal to creditors dated 16 August 2024, which I infer was provided to creditors about four days ago, and refers to the estimated return to creditors of 16.8 cents on the dollar in under that proposal. He notes that creditors have until 6 September 2024 to vote to accept or reject that proposal, and that underpins Redback's application that the matter should be adjourned to the Corporations Motion List on 16 September 2024, to allow time for Redback to progress the implementation of the proposal if it has been approved by creditors. Mr Morgan expresses the view that it is in the best interest of creditors to accept the plan for the reasons set out on p 16 of the proposal, and that it would also be in creditors' best interests for the winding up application to be adjourned until a date after 6 September 2024 to allow creditors to consider the plan.
The information provided to creditors in turn includes Mr Morgan's summary of the proposal, which refers to the estimated return of 16.8 cents in the dollar from that proposal and to the minimal costs which would be incurred in the restructuring proposal, of approximately $9,000 of restructuring practitioner's fees, by contrast with his estimate of costs in a liquidation of between $73,800 and $129,600.
Mr Morgans also there identifies the creditors known to him, with estimated debts exceeding $479,000. Mr Morgan rightly refers to the object of Pt 5.3B of the Act, namely to provide for a restructuring process for eligible companies that allows them to retain control of the business property interferes while developing a restructuring plan with the assistance of a small business restructuring practitioner and to enter into a restructuring plan with creditors. I must have regard to those objects in dealing with this application. Mr Morgan also refers to steps taken by Redback to ensure its eligibility for the special business restructuring regime, which has apparently included a relatively recent payment to the Australian Taxation Office, which Mr Collins rightly recognises may be recoverable as a preference in the event of a liquidation.
Mr Morgan also refers, without significant detail, to having consented to several transactions that would otherwise fall outside the permitted ordinary course of business requirements in s 453L of the Act, which appear to be in the nature of payments to key suppliers of Redback. I also recognise that those payments may be recoverable as a preference in a liquidation, subject to the consideration which was provided for them in respect of any further supply of goods.
Mr Collins rightly draws attention to Mr Morgan's observation that, on his preliminary solvency review, Redback may have been balance sheet insolvent from June 2022, correlating with a significant increase in overdue statutory debt, although I bear in mind that balance sheet insolvency will not necessarily establish cash flow insolvency for the purposes of the Act. Mr Morgan also notes that he has not identified unfair preference payments to unrelated or related creditors, recoverable by a liquidator, although I have referred to transactions for the purposes of the restructuring which may constitute preferences above. Mr Morgan notes that the possibility that an insolvent trading claim may exist, a matter that plainly reflects his observation as to balance sheet insolvency for a two year period, but also observes that creditors should note that claim is subject to further review, and defences may be available to the director. Mr Collins points out, with force, that there is limited detail as to matters relevant to that claim, including the quantum of that claim, and no real assessment of the strength of any defences that may be available to the director, and no assessment of the assets available to the director to meet such a claim. I appreciate that these are relevant matters, but so too is the availability of funding to pursue such claims, where the total amounts of debts owed by Redback are in the order of $480,000; Southern Steel's claim is in the order of $51,000; and it is not clear that any of the creditors would have a sufficient economic interest, still less that Southern Steel would have a sufficient economic interest, to support the likely significant costs of an insolvent trading claim which, in the case of Southern Steel, would likely be a multiple of the amount of the debt that is owed to it.
Mr Morgan also provides an outline of the elements of the restructuring plan, and points to several potential advantages of the plan, including avoiding the high cost of pursuing avoidable recoveries and the risks associated with such actions, and the reduction in external administrators' costs under the restructuring. It does not seem to me that Mr Morgan's analysis in that respect is irrational. Importantly, both in his report, and in a declaration that is annexed to the report for the purposes of reg 5.3B.18 of the Corporations Regulations, Mr Morgan confirms that he has made reasonable inquiries and taken reasonable steps to verify Redback's business, property, affairs and financial circumstances for the purposes of assessing the accuracy and completeness of the information provided by Redback in the restructuring plan and restructuring proposal statement.

Determination

This application was conducted well, by both of the legal representatives, and the issues raised are relatively finely balanced. However, it seems to me that, for the purposes of s 453Q of the Act, the Court should be satisfied that it is in the interests of Redback's creditors for Redback to continue under restructuring rather than be wound up, for the relatively short period which Redback seeks the adjournment of the winding up to 16 September 2024. I reach that view, having regard to the summary of the applicable principles in Pope Joan Hospitality and in Fitzgerald Housing, for several reasons. First, it seems to me that there is a real basis to think that, consistent with Mr Morgan's analysis, the result of a restructuring may well be more advantageous to creditors than the result of a liquidation, particularly if the potential recoveries to which Mr Collins refers are frustrated by the fact that no individual creditor has sufficient funds at stake in respect of a liquidation to fund the liquidator, and the amounts involved are too small to attract the interest of a liquidation funder. A potential claim for insolvent trading, or indeed a preference claim, that will not lead to recoveries unless it can attract funding to pursue it to completion. Second, it seems to me that the position here, by contrast with Fitzgerald Housing, is one where the proposal for restructuring is well advanced, and it has a certification by the restructuring practitioner that he has made the necessary inquiries and a clear expression of his view as to the benefit of the restructuring proposal for creditors. Third, it is consistent with creditors' autonomy that they be given the opportunity to vote on this well advanced proposal, whether to approve it or to reject it, rather than that the opportunity to do so be taken out of their hands by proceeding to a winding up shortly before they would exercise their voting power as to the proposal.
For all of these reasons, I am satisfied that the winding up should be adjourned, albeit for a short period. It seems to me that, as Mr Evans fairly conceded, there is a real prospect that, if creditors ultimately vote to reject the restructuring proposal, a winding up may then proceed as an uncontested winding up. Mr Evans is right to point out that, here, the adjournment is a short one, and will not deprive Southern Steel of its opportunity to proceed to a winding up, and potentially to appoint a liquidator of its choice if it is successful in a winding up application, unless the body of creditors are persuaded that it is in their commercial interests to support the restructuring proposal.

Orders and costs

Having regard to these matters, it seems to me that the proper position is that the costs should be reserved. On the one hand, I recognise that, in a sense, it is an indulgence to Redback to adjourn the winding up application, where Southern Steel would otherwise have been entitled to proceed with it today. At the same time, I have concluded that it is in the interest of creditors for that step to be taken. On the other hand, if creditors ultimately reject the restructuring proposal, and a winding up succeeds, then there is every reason that Southern Steel would be entitled to recover its costs of this application, in addition to its costs of the winding up. I will, however, allow the parties a short opportunity to be heard as to costs, if they wish to contend for a different position. Having allowed the parties that opportunity to be heard as to costs, I make the following orders:
Adjourn the winding up application in respect of Redbank Engineering & Sales Pty Ltd to the Corporations' Motions List on 16 September 2024.
Costs be reserved.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 29 August 2024

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