Deputy Commissioner of Taxation v Premiercorp Pty Limited

AND: PREMIERCORP PTY LIMITED (ADMINISTRATORS APPOINTED) (ACN 116 197 598)

JUDGE: FARRELL J DATE: 7 August 2013 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 By an interlocutory application filed on 12 July 2013, the plaintiff sought orders that: (a) the resolution of creditors of the defendant at a meeting on 4 July 2013 that the defendant execute a deed of company arrangement (creditors' resolution) be set aside pursuant to s 600A of the Corporations Act 2001 (Cth) (Corporations Act); or (b) alternatively, the defendant be restrained from executing the deed of company arrangement pursuant to s 447A. Unless otherwise indicated, a reference to a provision of a statute in these reasons is a reference to a provision of the Corporations Act. 2 On 22 July 2013, I heard the interlocutory application together with submissions concerning a winding up application filed and served by the plaintiff on 29 May 2013 under s 459P based on the failure by the defendant to comply with a statutory demand for amounts said to be owing at 9 February 2013 to the Australian Taxation Office (ATO) (winding up application). The statutory demand was for $135,832.99 and related to amounts said to be due and payable under the Income Tax Assessment Act 1997 (Cth) (ITAA 1997), the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) and the Taxation Administration Act 1953 (Cth) (TAA); it was dated 9 February 2013 (statutory demand). I granted leave to the plaintiff to proceed with presentation of evidence supporting the winding up application but on the basis that if the interlocutory application is not successful, then the winding up application will not be determined. 3 A representative of the plaintiff and a representative of Messrs Jason Tang (Mr Tang) and Ozem Kassem (Administrators) appeared at the hearing. After a brief adjournment, the representative for the Administrators confirmed that he had spoken with the solicitor for the sole director of the defendant (Mr Bechara) who confirmed that he was aware of the proceedings but had no instructions to appear. Mr Bechara is also the sole director and shareholder of Sharwin Pty Limited (Sharwin), the sole shareholder of the defendant. 4 The plaintiff seeks to impugn the creditors' resolution because a debt owed to Mrs Bechara, the wife of Mr Bechara, was counted in determining whether the creditors' resolution was passed. 5 The Administrators neither consent to nor oppose the interlocutory application. They submitted that if the creditors' resolution is set aside, it is inappropriate that the defendant be returned to the control of Mr Bechara: it should be wound up because of its financial position and the failure to keep adequate books and records. 6 The Administrators have not executed the deed of company arrangement because the plaintiff advised them that it proposed to make the interlocutory application. The Administrators' representative advised the Court that a draft deed of company arrangement was signed by the defendant within the 15 business days period specified by s 444B(2). In order to prevent breach by the Administrators of s 444B(5) pending determination of the interlocutory application and the winding up application, on 22 July 2013, I made orders that, until 48 hours after the plaintiff's application under s 600A is determined, the Administrators' obligation under s 444B(5) is suspended under s 600D, and under s 447A, Part 5.3A has effect as though the Administrators' obligation under s 444B(5) does not operate. The representative of the Administrators confirmed that the defendant is not trading at this time. 7 Affidavits sworn by Mr Tang on 16 July 2013 and Mr Charles Bavin (solicitor to the plaintiff) on 12 July 2013 were read in the proceedings.

Background 8 The first return date for the winding up application was 5 July 2013. The Administrators were appointed as administrators of the defendant pursuant to s 436A on 6 June 2013. It appears that the catalyst for the appointment of the Administrators was the winding up application by the plaintiff: the Administrators' Report which accompanied the notice of the creditors' meeting held on 4 July 2013 discloses that Mr Bechara approached the Administrators as a measure for the defendant to be administered by independent insolvency practitioners to preserve the defendant's assets while considering the options available to the defendant under the Corporations Act. 9 The second meeting of creditors under s 439A was held on 4 July 2013. The deed of company arrangement was proposed by Mr Bechara. The Administrators recommended that creditors vote against the deed of company arrangement and that the defendant be wound up.

S600A 10 Section 600A(2) empowers the Court to set aside the creditors' resolution where the requirements of s 600A(1) are satisfied. I will deal with these requirements, in so far as they are relevant to this case, under the succeeding subheadings.

Is the application from a creditor of a company? 11 This is a requirement of s 600A(1). The defendant is a company; it was incorporated in New South Wales on 12 September 2005. The plaintiff has made the statutory demand and the Administrators have accepted the plaintiff is a creditor as to an amount of at least $149,084.20. Accordingly these requirements are satisfied.

Was the creditors' resolution voted on at a creditors meeting under Part 5.3A? 12 This is a requirement of s 600A(1)(a)(i). The resolution was passed at a meeting of creditors held under s 439A which is in Division 5 of Part 5.3A. The minutes of the creditors' meeting held on 4 July 2013 comprise annexure C to Mr Bavin's affidavit.

If the votes of a related creditor were disregarded, would the question have been decided on a casting vote? 13 This is a requirement s 600A(1)(b). A "related creditor" is a person who, when the vote was cast, was a related entity, and a creditor, of the company: s 600A(3). A related entity includes a director, relative or spouse of a director of a company: s 9. Accordingly Mr Bechara, his father (Mr Tony Bechara) and Mrs Bechara are related creditors. 14 A debt owed to Mrs Bechara was counted in determining whether the creditors' resolution was passed. The debt arose when Mrs Bechara paid out the defendant's bank overdraft from the sale proceeds of a property which she had owned. The creditors' resolution was passed having achieved a majority in both the value of debts owed to creditors and the number of creditors attending and voting at the meeting on 4 July 2013. If that debt to Mrs Bechara of $153,134.47 is excluded, the resolution would have been approved by two creditors, representing aggregate debts of $70,845.49 and not approved by one creditor, the plaintiff, representing a debt of $149,084.20 owed to the ATO. Accordingly, under r 5.6.21(4) of the Corporations Regulations 2001 (Cth), it would have been open to the chairman to exercise a casting vote. This requirement is therefore satisfied.

Is passing the creditors' resolution either contrary to the interests of the creditors as a whole or reasonably likely to prejudice the interests of creditors who voted against the resolution? 15 The draft deed of company arrangement is annexure A to Mr Tang's affidavit. It provides for a deed fund of $50,000. The deed fund will be contributed by or on behalf of Jada Group Pty Limited (Jada Group); Mr Bechara is the sole shareholder and director of Jada. It will be contributed as to $20,000 at the time the deed of company arrangement is executed, and as to the balance in 3 monthly instalments of $10,000 each. The Administrators have not seen accounts for Jada Group. Its obligations are guaranteed by Mr Bechara's father, who is retired. The Administrators Report sets out Mr Bechara's father's assets. Based on that statement, Mr Bechara's father does not have access to substantial liquid assets but his major asset is his home against which a bank holds a registered mortgage. The Administrators have been provided with evidence that there are no moneys outstanding under the mortgage. 16 The Administrators' Report indicates that the estimated return to participating unsecured creditors under the deed of company arrangement is 1.47 cents in the dollar and the return in a winding up on the optimistic scenario is undetermined and on the pessimistic scenario it is nil. The plaintiff says that after payment of the Administrators' fees and expenses, the amount available out of the deed fund for creditors who attended the meeting of creditors on 4 July 2013 is likely to be $3,318. Of this, the plaintiff will receive $2,191, and the two creditors who voted in favour of the resolution will receive $85.70 and $742.64 respectively and indebtedness to the participating creditors will be extinguished. 17 At the time the Administrators were appointed, the defendant had a contract to construct seven townhouses at Terrigal on the central coast of New South Wales (Building Contract). Work had ceased at the site pending resolution of the defendant's future. The total contract amount is approximately $1.7 million, but the Administrators are not able to confirm this because Mr Bechara had not provided a copy of the Building Contract to the Administrators. It appears that the client paid trade creditors directly due to concerns about the defendant's financial position. It is not clear whether there will be a surplus from this contract. However, all benefits which do result from the Building Contract will, if the deed of company arrangement is executed, accrue to Mr Bechara, Mrs Bechara and Mr Bechara's father. This is because: (a) Mr Bechara is the sole shareholder of Sharwin (the sole shareholder of the defendant); and (b) under the deed of company arrangement, it is open to Mr Bechara, Mrs Bechara and Mr Bechara's father (as non-participating creditors) to convert debts owed to them by the defendant to equity in the defendant; if they elect not to do that, the debts owed to them will be extinguished. 18 The Administrators' Report dated 26 June 2013 indicates (among other things): (a) there is a secured creditor (security provided in relation to a motor vehicle) and based on the red book valuation of the motor vehicle, it appears that there will be a shortfall of about $21,500; (b) the last financial statements of the defendant are dated 30 June 2010, at which time the defendant made a loss of approximately $54,700 (including a trading loss of $10,900) and had net assets of $25,500. No financial statements or management accounts have been prepared since them; (c) as at 30 June 2010, Mr Bechara owed the defendant $238,757. Mr Bechara says that the loan has been repaid, but no documentation has been provided to support this; (d) there appears to be 6 trade creditors with claims of approximately $364,000; (e) based on the investigations of the Administrators to the date of the report; (1) due to the failure to maintain adequate financial records, the defendant may be presumed insolvent under s 588E(4); (2) the return as to affairs provided to the Administrators shows a net asset deficiency of $382,912.50 and it does not disclose any assets which would be available to enable payment; (3) there may be an available claim against Mr Bechara for $220,000 due to insolvent trading; and (4) because Mr Bechara has not substantiated repayment of the loan referred to in the 30 June 2010 financial statements, there may be a claim against him for approximately $240,000; (f) Mr Bechara's statement of personal affairs indicates an estimated deficiency of approximately $20,000, but that statement did not reference any of his shareholdings nor state whether he has given personal guarantees. However, the benefit of claims against Mr Bechara may be limited due to lack of financial resources or because he has available defences; and (g) the Administrators recommend winding up to enable investigation of the possible claims (referred to in (e) above), investigation of the Building Contract and of Mr Bechara's net financial position, and recovery of sufficient records to quantify the total debt owing to the ATO. 19 The creditor who will receive $85.70 (for a debt with a face value of $5,830) is the defendant's accountant. The other creditor (for $65,015.49 face value) who will receive $742.64 appears to be an arms length trade creditor. There was no evidence that there is a basis to impugn the vote of these creditors who voted in favour of the creditors' resolution. This case is therefore different from some of the cases where orders have been made under s 600A because votes of some creditors were bought by former controllers of the company. Although they are only likely to receive $85.70 and $742.64 respectively, and in accordance with the deed of company arrangement, payments will be made over a period of 3 months, it is rationally open to the creditors who voted in favour of the creditors' resolution to decide it was better to receive this than possibly nothing under a winding up scenario. 20 However, I am persuaded that it would not be in the creditors' interest that the creditors' resolution be allowed to stand for the following reasons: 21 First, Mr Bechara appears to have been uncooperative with the Administrators by failing to provide a copy of the Building Contract or details of the value of the shares that he holds in Bechara Holdings Pty Limited, Jada Group Pty Limited, JCJA Investment Pty Limited, Leaseworks Australia Pty Limited and Shawin Pty Limited. Given the clear deficiencies in the disclosure by Mr Bechara in the return as to affairs, it is possible that the director has other assets. It is therefore difficult to assess adequately what assets of Mr Bechara might be available to satisfy the debts of the defendant's creditors, but it is open to have some suspicion that there may be more available than the information provided by Mr Bechara to date. Accordingly, while no creditor has undertaken to fund the Administrators or a liquidator to pursue possible claims for insolvent trading or to investigate and possibly recover amounts in respect of the director's loan, those actions might well result in a greater recovery to creditors as suggested by the Administrators and the plaintiff. 22 Second, Mr Bechara, his father and Mrs Bechara would benefit from any profits which accrue to the defendant from the Building Contract, but the creditors would receive no benefit from this. 23 Third, payments to be made to participating creditors under the deed of company arrangement are small, and they are to be paid over a 3 months period which has the effect both of discounting their value and heightening the risk of default. In saying this I am mindful of Barrett J's comments in Grocon Constructors Pty Ltd v Kimberley Securities Ltd (2009) 72 ACSR 305 at [84]: … No one with an eye to their own financial interests would regard such a return as worth pursuing with any greater vigour than one might expend in picking up a coin found lying on the pavement. 24 Indeed, the amounts provided for under the deed of company arrangement are less than those envisaged in Grocon or in Allied Express Transport Pty Limited v Exalt Group Pty Ltd (Administrator Appointed), in the matter of Exalt Group Pty Ltd (Administrator Appointed) (No 2) [2013] FCA 477. The amounts which the plaintiff and the other creditors will receive under the deed of company arrangement, after payment of the Administrator's fees, cannot be regarded as a real commercial benefit. 25 Fourth, the Administrators recommended that it was in the interests of creditors that the defendant be wound up. This recommendation appears to be well founded. It reflects the rationale adopted by Jacobson J in Exalt in the context of a consideration of s 440A(2) at [44]-[45]: However, in the absence of a DOCA which the Court regards as one that provides a real commercial benefit to creditors rather than to place the company in liquidation, I do not see how it can be said that the DOCA is in the interests of creditors. In my opinion, it is nothing more than an optimistic speculation, rather than a sufficient possibility that the creditors will obtain anything from the DOCA. The Court is not a rubber stamp to make an order which in effect approves an uncommercial DOCA. It is proper and appropriate that an insolvent company be wound up unless, in the present circumstances, a commercial DOCA which provides real benefits to creditors is proposed: see the authorities cited by Barrett J in Grocon at [109]. 26 The plaintiff submitted that in determining this issue it would be relevant to consider whether there would have been grounds under s 445D to terminate the deed of company arrangement had it already been executed by the defendant and the Administrators. Although s 445D (like s 440A) falls within Part 5.3A, and s 600A falls in Part 5.9, each of these provisions is directed at ensuring that administrations are conducted with a fair balancing of the interests of creditors and the integrity of steps taken in administration. 27 In Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510 at [261], Campbell J considered that it was open to a Court under s 445D(1)(g) to terminate a deed of company arrangement to enforce the general policy against permitting a company to trade while insolvent. This has a great deal of force. 28 In this case, control of the defendant will revert to Mr Bechara upon execution of the deed of company arrangement. Mr Bechara has failed to ensure that the defendant has either management accounts or financial statements for any period after 30 June 2010. There is reason to think that the defendant may have been trading while insolvent for some time: I note the apparent failure to meet tax payments over a period and the measures which appear to have been taken by the client to the Building Contract to ensure that tradesmen are not exposed to the financial position of the defendant. While it is open to the Court to be sceptical about Mr Bechara's statement to the Administrators about his assets, if his statement is true, it is not immediately apparent how he would fund the defendant's ongoing liabilities if the defendant is returned to his control. I consider that it would be open to the Court in this case to terminate the deed of company arrangement had it already been executed. 29 I am therefore satisfied that the creditors' resolution is not in the interest of creditors and that I should set aside the creditors' resolution. I do not need to consider the separate ground of prejudice to the creditor who voted against the resolution. 30 For the sake of completeness, I consider that it is also open to me to make an order under s 447A(1) that Part 5.3A has operation as though the creditors' resolution failed to pass at the 4 July 2013 creditors meeting for the same reasons as I consider justify my order in relation to s 600A. Accordingly I propose to make orders under both provisions of the Corporations Act.

winding up 31 The Administrators submitted that it would be inappropriate to return the defendant to the control of Mr Bechara if the creditors' resolution is set aside, because of the solvency issues which they identified. In that circumstance, it would be open to me to order the winding up of the defendant under s 600A(2)(d) and s 447A on the authority of Grocon and the cases cited by Barrett J at [109]. I consider that that is the appropriate course in this case: it is against the public interest and commercial morality to allow a prima facie insolvent company back into the market place: see Deputy Commissioner of Taxation v Woodings (1995) 13 WAR 189. 32 It is also open to me to entertain the winding up application of the plaintiff. The winding up application is dated 29 May 2013 and has attached to it a copy of the statutory demand. The statutory demand relates to running balance account deficit debts for amounts due under the BAS provisions of the ITAA 1997, estimates due under Division 268 in Schedule 1 of the TAA/Division 8 of Part VI of the ITAA 1936, and administrative penalties and interest under the TAA. It was verified by an affidavit of Ms Donna O'Connor (an employee in the debt section of the ATO) dated 9 February 2013. The following affidavits were also read: (a) An affidavit of Donna O'Connor affirmed on 28 February 2013 in relating to service of the statutory demand and verifying affidavit dated 9 February 2013 indicating that they were posted on 9 February 2013, and the mail box was cleared on 11 February 2013. (b) An affidavit of Evelyn Thomson sworn on 28 May 2013, indicating that she inspected the records of the ATO indicating that at that date the defendant remained indebted to the ATO for the amount of the statutory demand and including an ASIC extract in relation to the defendant. (c) An affidavit of Lorraine Jamhour, an employee of the solicitors of the plaintiff, sworn on 11 June 2013 in relation to service on the defendant of the winding up application and supporting affidavit of Ms Thomson dated 28 May 2013, a copy of a consent to act as liquidator by Mr Peter Hilig of Smith Hancock dated 22 May 2013 and the affidavit of service of the statutory demand dated 28 February 2013 and verifying affidavit of Ms O'Connor dated 9 February 2013. (d) Two further affidavits sworn on 11 June 2013 by Lorraine Jamhour verifying publication of a notice of the winding up application on the ASIC website on 5 June 2013 and lodgement with ASIC on 30 May 2013 of Form 519 containing particulars of the winding up application. 33 No application has been made to set aside the statutory demand or to contest the application. 34 For both the reasons advanced by the Administrators and based on the failure of the defendant to meet the statutory demand, I will order that the defendant be wound up.

Identity of liquidator 35 The Administrators provided a consent to act as liquidators. The plaintiff consented to the appointment of the Administrators as liquidators, recognising the value of their accumulated knowledge of the defendant's affairs. 36 I will order that the Administrators be appointed as the liquidators of the defendant.

Costs 37 The plaintiff sought an order for costs of the interlocutory application and the costs of the winding up application. I will order that the plaintiff's costs of the winding up proceeding be fixed in the sum of $4,411 and paid from the assets of the defendant. I will also order that the defendant pay the plaintiff's costs of the interlocutory application to set aside the creditor's resolution, fixed in the sum of $5,465. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Farrell.