Deputy Commissioner of Taxation v Pope Joan Hospitality Pty Ltd

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

1. On 18 November 2013, Made By Marnee Pty Ltd was incorporated. It thereafter conducted a business selling cakes and baked goods and operating a café under the name Sugar & Nice in Inglewood, Western Australia. Marnee Emma Rinaldi has always been the sole director of the company, and she has been the sole shareholder since 5 September 2019.
2. The company faced significant disruptions in its operations due to the mandatory COVID-19 lockdowns. The lockdown restrictions had a substantial impact on its trading activities, resulting in losses in FY22 and FY23. It has subsequently taken steps to address wage costs by implementing measures that involve a reduction in operating hours. It has also pivoted towards prioritising the wholesale segment of the business, motivated by the segment's heightened profitability.
3. On or about 18 December 2023, Ms Rinaldi made a payment of $16,500 to the applicants, namely Anthony Phillip Wright and Mohammed Mirzan Bin Mansoor, insolvency practitioners at Olvera Advisors. The payment was for a "Stage 1" fee encompassing a review of the company's financial situation, preparing a report to creditors and preparing a restructuring plan for the company's consideration.
4. On 8 January 2024, the applicants were appointed by the company as its restructuring practitioners pursuant to s 453B of the Corporations Act 2001 (Cth).
5. The sole creditor of the company is the Australian Taxation Office (ATO) in the amount of $253,651.
6. On 5 February 2024, Ms Rinaldi executed a restructuring plan which had been prepared by the plaintiffs.
7. On 26 February 2024, the ATO as the sole creditor voted in favour of the restructuring plan. The plan relevantly had the following terms:

(1) The director of the company would contribute $50,000 to the plan in three instalments due on 30 April 2024, 31 July 2024 and 30 November 2024.

(2) Of the $50,000, 22%, being $11,000, would go to the remuneration of the applicants.

(3) The balance, being $39,000, would be distributed to the creditors of the company.

1. The following payments were made by Ms Rinaldi towards the plan:

(1) $16,666.67 on 30 April 2024;

(2) $16,667.00 on 26 July 2024; and

(3) $166.00 on 5 December 2024.

1. The final payment of $166.00, rather than $16,666 which was owing, was made on account of a misunderstanding by Ms Rinaldi and an employee of the applicants, Matthew Weston. Ms Rinaldi thought that the initial payment that she had made in respect of Stage 1 was included in the $50,000 to be paid in accordance with the plan, whereas under the arrangement between the company and the applicants that was an initial fee not included in the plan. When Ms Rinaldi sought confirmation from Mr Weston that all that remains to be paid was $166.00, he gave that confirmation as he suffered from the same misunderstanding.
2. Ms Rinaldi has now accepted, and Mr Weston has confirmed, that that was a misunderstanding and that a further $16,500 should have been paid by 30 November 2024.
3. The history and import of the inclusion of Pt 5.3B in the Corporations Act, dealing with "Restructuring of a company", is canvassed in Deputy Commissioner of Taxation v Pope Joan Hospitality Pty Ltd (Restructuring Practitioner Appointed) [2023] FCA 872; 169 ACSR 487 at [16] ff per Sarah C Derrington J and Re Sprys Coating Services Pty Ltd [2024] FCA 1152; 305 FCR 369 at [1] ff per Colvin J. It is unnecessary to go over that ground again.
4. Under reg 5.3B.31(1)(d) of the Corporations Regulations 2001 (Cth), a company's restructuring plan terminates if there has been a contravention of the plan by a person bound by it and the contravention has not been rectified within the period of 30 business days beginning on the day the contravention occurred. The result is that under that provision the restructuring plan terminated some time in about late January 2025.
5. The error in relation to the amount owing was not discerned until 10 April 2025.
6. The applicants now apply for a declaration under reg 5.3B.62(3) that the company's restructuring plan is valid despite the contravention by the late payment.
7. I accept that Ms Rinaldi honestly misread the plan and misunderstood her obligations. Her error was shared and reinforced by Mr Weston. I also accept that Ms Rinaldi is prepared to pay the outstanding balance and that the ATO does not oppose the plan being validated.
8. A declaration under reg 5.3B.62(3) can be made if the Court is satisfied that:

(1) the provision that was contravened was substantially complied with; and

(2) no injustice will result for anyone bound by the plan if the contravention is disregarded.

1. Notably, reg 5.3B.62(5) provides that an order such as that sought by the applicants "must not be made if the plan has terminated because of paragraph 5.3B.31(1)(a)". That paragraph provides that a restructuring plan is terminated when the company's obligations under the plan have been fulfilled, the obligations of any other party to the plan have been fulfilled and all admissible debts or claims have been dealt with in accordance with the plan. That is not the present case.
2. The omission of the other paragraphs of reg 5.3B.31(1) from the prohibition in reg 5.3B.62(5) leaves the Court with a wide discretion to validate a plan that has been terminated under one or other of those paragraphs provided that it is satisfied as to the two matters set out in reg 5.3B.62(3) (and identified above). The discretion should be exercised having regard to the object of Pt 5.3B of the Corporations Act, namely to provide for a restructuring process for eligible companies that allows the companies to retain control of the business, property and affairs while developing a plan to restructure with the assistance of a small business restructuring practitioner, and to enter into a restructuring plan with creditors (s 452A).
3. Dealing with the second requirement first, I am satisfied that no injustice will result for anyone bound by the plan if the contravention constituted by the late payment is disregarded. If the ATO had opposed the declaration that is sought, I may have reached a different conclusion. But since the ATO is content for the plan to be validated, it seems natural to conclude that the ATO will not face any injustice. In any event, if the plan is not validated, the company will likely have to be wound up and the position of the ATO will then be worse. Under the plan, it will receive $39,000 whereas in a liquidation scenario it will receive nothing.
4. Turning now to the first requirement of reg 5.3B.62(3), there was a difficulty with the form in which the declaration was initially sought. It was that the plan is validated. The problem with that is that the outstanding payment has not yet been made, and it should have been made more than a year ago. I could not in those circumstances be satisfied that the plan had been substantially complied with, especially since there would be no knowing when Ms Rinaldi might make the payment, if at all.
5. However, I am satisfied that in the circumstances outlined above, if the payment is made within a short time of orders being made, then the plan would have been substantially complied with. To elaborate, Ms Rinaldi would have advanced the entire sum required under the plan and there would be no obligation on her part outstanding. Other than the misunderstanding regarding the quantum of payment, there has been no other default by Ms Rinaldi. That is substantial compliance in circumstances where the failure to pay the correct amount on time was due to an honest mistake, both on the part of Ms Rinaldi and the restructuring practitioners, and once the mistake was realised Ms Rinaldi was prepared to pay the correct amount.
6. For those reasons, it is appropriate to make an order that if the payment is made within a specified time (taking into account that it is now currently the year-end period), the plan is validated. I am satisfied to exercise the Court's discretion in that regard, including because to do so would further the object of Pt 5.3B in relation to the company.

I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart.