Deputy Commissioner of Taxation v Project Tiling Group Pty Ltd

1. Mr Ali Reza Shafaie's Interlocutory Process filed on 19 July 2017 (the "Interlocutory Process") for the termination of the winding up of Project Tiling Group Pty Ltd (In Liquidation) (the "Company") is dismissed.
2. As to Mr David Mutton and Mr Peter Marsden's costs of the Interlocutory Process: (a) the Court directs that, in the first instance, such costs form part of the costs, charges and expenses of the winding up of the Company pursuant to section 482(4) of the Corporations Act 2001 (Cth) and be paid from the liquidation; and (b) in the event there are insufficient funds in the liquidation of the Company to meet such costs, Mr Ali Reza Shafaie pay such costs (which are to be as agreed or as taxed in default of agreement). Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

DAVIES J: 1 On 5 July 2016, an order was made that Project Tiling Group Pty Ltd ("the Company") be wound up in insolvency under the provisions of the Corporations Act 2001 (Cth) and David Mutton and Peter Marsden were appointed joint and several liquidators of the Company. The winding up order was made on the application of the Deputy Commissioner of Taxation, a creditor of the Company, relying on the failure of the Company to comply with a statutory demand. The Company did not attend the hearing of the application to wind up and the order was based upon the presumed insolvency of the Company. 2 On 19 July 2016, Ali Reza Shafaie, the sole director and a shareholder of the Company, filed an application for an order that the order for winding up be set aside. Mr Shafaie supported the application with an affidavit sworn by him on 19 July 2016 in which he deposed as to his belief that the Company is able to meet its debts as and when they fall due and his reasons for holding that belief. Mr Shafaie also deposed that the other shareholder, Ali Qadran Shafaie, who is his brother, supported the application. 3 The Court has the power under s 482 of the Corporations Act 2001 (Cth) to make an order staying or terminating the winding up of a company. Pursuant to s 482(2), the Court may, before making an order, direct the liquidator to give a report with respect to a relevant fact or matter. On 31 August 2016, the Court made an order directing the liquidator to file and serve a report concerning the solvency of the Company and other matters that the liquidator considered to be relevant by 10 November 2016. In the report filed by Mr Mutton on behalf of the liquidators pursuant to that order, Mr Mutton gave the qualified opinion that the Company is solvent. 4 Mr Mutton noted in his report that at the time of his appointment as liquidator of the Company, the Company was the trustee of the Project Tiling Group Discretionary Trust ("the Trust"), which operated a commercial tiling business from premises located at Unit 7, 393-399 Princes Highway, Noble Park. By virtue of clause 17.2 of the trust deed, the Company was automatically removed as trustee of the Trust as a result of the appointment of the liquidators and the liquidators became the bare trustees of assets under the control of the Company as the former trustee of the Trust. Following his appointment, Mr Mutton immediately ceased to trade the business and did not provide his consent to the director, Mr Shafaie, or any third party to trade the business of the Trust. Despite this, Mr Mutton's investigations revealed that certain works were undertaken and invoices were issued to debtors without the liquidators' consent. Mr Mutton also reported that on 15 September 2016, Mr Shafaie and his brother, as appointers of the Trust, resolved to appoint another company, Project Tiling Corporate Pty Ltd, as trustee of the Trust. In a supplementary affidavit filed by Mr Shafaie on 14 October 2016, Mr Shafaie deposed that they jointly appointed Project Tiling Corporate Pty Ltd as the new trustee of the Trust in order to protect the business of the Trust by ensuring that it would continue to trade to pay the debts incurred by the Company as former trustee and that since 15 September 2016, Project Tiling Corporate Pty Ltd had been conducting the business of the Trust, including receiving some payments from debtors and performing outstanding work under existing contracts. 5 Mr Mutton reported that key books and records of the Company that were relevant to his analysis as to whether the Company is solvent had not been received as at the date of the report, being: (a) bank statements of the new trustee for the period 9 November 2016 to present, together with an explanation of receipts and payments; (b) a current statement of assets and liabilities of the new trustee; (c) annual GST information for financial year 2015; (d) year to date financial year 2017 management accounts for the period 1 July 2016 to 5 July 2016; and (e) business activity statement for the period 1 July 2016 to 5 July 2016. 6 Mr Mutton stated that the inability of Mr Shafaie to produce accurate and complete financial records, and provide adequate responses to the queries that he raised had impacted on his ability to assess the financial position of the Company. As a result the insolvency analysis was limited to an assessment of the working capital (current assets less current liabilities) and net asset position of the Company as at the date of the report, 15 November 2016. Based on the available books and records, Mr Mutton estimated that the Company's financial position as at 15 November 2016 was as follows: (a) total assets of $251,705; (b) total liabilities of $81,527; (c) liabilities of the liquidation of $122,361; (d) deferred liabilities being beneficiary loans of $215,384; and (e) an overall shortfall of $167,567. 7 Mr Mutton further qualified the financial analysis by stating that he had not received a business activity statement for the period 1 July 2016 to 5 July 2016 and accordingly had been unable to determine the liability owed to the Australian Taxation Office with respect to this period. Mr Mutton also reported that "furthermore" a client of the Company, Future Capital Group, had asserted that it may have a contingent claim against the Company but at the date of the report, Mr Mutton was not able to quantify the amount of the contingent claim and therefore its impact on the Company's solvency position. 8 Based on the available books and records Mr Mutton concluded that whilst a shortfall of $167,567 would appear to exist, it appeared likely that the Company had sufficient working capital to meet its known immediate commitments, and with the exception of the beneficiary loans, had sufficient assets to meet its liabilities at the date of the report. Mr Mutton also noted that the beneficiaries had agreed to defer repayment of the amounts owing to them until the Company was in a position to repay the loans and therefore it appeared unlikely that the Company would be required to call upon its right of indemnity from the new trustee. On that basis, he had formed the qualified view that the Company was solvent. 9 As the liquidator only gave a qualified view concerning the solvency of the Company, the Court adjourned the application to provide Mr Shafaie with the opportunity to provide the information required by the liquidators to give an unqualified opinion about the Company's solvency. Some additional information was provided by Mr Shafaie but Mr Mutton has since sworn a further affidavit deposing that he still does not have enough information to be able to form an unqualified opinion concerning the Company's solvency. 10 Mr Mutton deposed as follows in his affidavit of 24 February 2017 at paragraphs 11, 12, 13 and 15: Since the matter was last before the Court, the parties have participated in numerous without prejudice discussions and exchanged various pieces of correspondence regarding my request for the books and records of the Company and information in an attempt to narrow the issues in dispute and provide me with sufficient information to assess the Company's solvency and provide an unconditional opinion about the matter. Because of the lack of adequate information, I have been unable to: (a) verify who the current creditors of the Company are or the amounts of their outstanding debts, including the beneficiary loan accounts of the director and his wife; (b) determine the reasons why the beneficiary loan accounts have fluctuated or the intention of the director and his wife's with respect to the beneficiary loans owed by the Company; (c) identify the value of the assets of the Company, in particular the debtors. I have been unable to identify who the debtors are, the value of debts currently owed to the Company, the amounts realised or potentially compromised by Project Tiling Corporate Pty Ltd as current trustee for the Project Tiling Group Discretionary Trust; or (d) understand the means by which Mr Shafaie proposes to pay all creditors and the Liquidators' remuneration, costs and expenses given the fact that the amount held in the liquidation account is insufficient to cover these liabilities. Despite my numerous requests for the books and records of the Company and information, I have not been provided with sufficient documents and information to allow me to: (a) resolve the issues identified in paragraph 12; (b) complete a balance sheet analysis of the solvency of the Company; or (c) provide an unqualified opinion that the Company is solvent. … On 17 February 2017, my solicitors wrote to Mr Shafaie informing him that the Liquidators have insufficient information to determine if the Company is solvent and that if we were unable to determine if the Company was solvent prior to the hearing on 1 March 2017, we would oppose his application for the termination of the winding up of the Company. Now produced and shown to me marked with the letters DM-3 is a true copy of the letter dated 17 February 2017. 11 The principles guiding the Court's exercise of power to set aside a winding up order, made in the absence of the Company, are usefully set out in George Ward Steel Pty Ltd v Kizkot Pty Ltd (1989) 15 ACLR 464. At 465, Hodgson J said that a court will normally set aside a winding up order: …if an order for winding up a company is made in the absence of the defendant company, and an application is brought promptly by the company, with notice being given to the liquidator, to the plaintiff and to any creditor who appeared at the hearing; and if the evidence shows an explanation for the non-appearance at the hearing and indicates solvency of the company; and if there is consent to setting aside, or at least non-opposition; and if the liquidator indicates that nothing in his [or her] investigations to date shows a reason for the company to be stopped from trading, then the court will normally set aside the order. The decision in George Ward Steel Pty Ltd v Kizkot Pty Ltd has been followed or applied on many occasions: see Turner v Stylewise Security & Glass Pty Ltd (in liquidation) [2015] FCA 518 at [12] and the cases cited in that paragraph. 12 In the present case, the application for termination was made in a timely fashion and an explanation for the Company's non-appearance at the winding up application was given. Additionally, the Deputy Commissioner of Taxation, which was the creditor moving for the winding up of the Company, has not appeared to oppose the application by Mr Shafaie. However, I cannot be satisfied on the basis of the material before the Court that the Company is solvent. Mr Shafaie's claim that the Company is solvent has not been able to be verified by the liquidators due to insufficient information provided to the liquidators. Mr Shafaie has had repeated opportunities to give the liquidators the information they require to express an unqualified opinion as to the solvency of the Company but has not done so. It may reasonably be inferred either that the information does not exist or that it does not support the position asserted by Mr Shafaie. Either way, I cannot be satisfied that the Company is solvent and an order terminating the winding up of the Company is therefore not justified. The application for termination must be dismissed. I certify that the preceding twelve (12) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies.