Deputy Commissioner of Taxation v T.D. Preece Pty Ltd

Summary of background facts 3 The defendant is a family company which has operated for more than fifty years. Its sole director and shareholder is Mr Glenn Preece. The company manufactures a wide range of specialist products, including high-pressure valves and submersible breathing apparatus which it supplies to clients such as the Australian Defence Force (the ADF), all state fire departments and underground coalmining enterprises. The company currently holds the contract to supply underwater breathing apparatus to the Special Forces Division of the ADF. The company has supplied the ADF for the last fifteen years. The ADF is a major client of the defendant. It supplies the ADF with custom made high-pressure products and submersible breathing apparatus. The ADF submits monthly requisitions to the defendant for the supply of specified underwater breathing apparatus, life support equipment and regular essential components for in service testing certification. I accept Mr Preece's evidence that the company's life support products are rigorously tested and evaluated prior to contracts being issued, a process which can take more than 6 months for certification and acceptance. The company's current contract with the ADF was executed in 1998. Unexpected discontinuance of supply would cause significant disruption to the ADF. 4 Mr Preece was not cross-examined. He gave evidence, which I accept, that the defendant was in a good financial state prior to the commencement of Supreme Court proceedings in 2008. The plaintiff in those proceedings is Mr Preece's former partner (Ms Aletta Sutton), who is the mother of his three children (whose current approximate ages are 13, 15 and 17). Mr Preece is the defendant. The proceedings are brought under the Property (Relationships) Act 1984 (NSW). Ms Sutton seeks relief in those proceedings which, if granted, would result in her being awarded 55% of Mr Preece's net assets, which are alleged by her to amount to approximately $3.5 million. All of Mr Preece's personal assets are included in that figure. Significantly, the figure includes an alleged value for the company and business of between $1.5 - 2 million. It also includes the family home in which Ms Sutton and the three children currently live, which she says is valued at $1.825 million. Ms Sutton claims in the Supreme Court proceedings that her financial contributions enabled the home to be purchased even though it is registered only in Mr Preece's name. In those proceedings Ms Sutton also claims that she made substantial non-financial contributions of homemaking and parenting, as well as working for Mr Preece in his various companies for little or no wages, including the defendant company here. 5 I accept Mr Preece's evidence that he has received legal advice that he cannot refinance or sell any property or utilise any of his assets until the Supreme Court proceedings are concluded. He is also obliged to service a mortgage in the amount of approximately $1 million on the family home. 6 Mr Preece gave evidence, which I accept, that it was his understanding that the Supreme Court proceedings had been settled by the parties around 5 May 2009. But in November 2011, the proceedings were reopened by consent (Mr Preece says that he took this course on legal advice). There was a hearing before Lindsay J on 24 and 25 June 2013 and written addresses were subsequently provided, the last being provided on 16 September 2013 when judgment was reserved. In response to an enquiry made by Mr Preece's solicitor, Lindsay J's associate indicated in an email dated 3 October 2013 that judgment "should be handed down in about 4 weeks' time". No judgment has been delivered to date but it is reasonable to assume that is imminent having regard to the indication given by his Honour's associate. 7 Mr Preece also gave evidence, which I accept, that the Supreme Court proceedings have caused him enormous emotional distress and diverted his attention away from the defendant company and its business. His involvement in the legal proceedings and the loan service costs on the family home have created a significant financial burden for himself and the defendant's business. He says that, upon conclusion of the Supreme Court proceedings, he proposes to sell the family property and to take steps to repay the defendant's tax debt. 8 Mr Preece gave unchallenged evidence that the defendant company has no other creditors apart from the plaintiff and that the company is otherwise paying its employees' wages and business overheads and expenses. 9 On 7 March 2013, the plaintiff served the defendant with a creditor's statutory demand in respect of a taxation debt owed to the plaintiff in the amount of $156,617.53. That figure represents a deficit debt as at 6 March 2013 in respect of amounts due under various provisions of taxation legislation. It is common ground that the defendant has failed to pay that amount and that it still remains due and payable by the defendant. The defendant also failed to submit numerous business and instalment activity statements. Furthermore, the statutory demand was served after the defendant failed to comply with a payment arrangement it had entered into with the plaintiff on 17 October 2012 in respect of the taxation debt. Under that arrangement, the defendant was to pay an amount of $15,000 on 14 November 2012 and monthly payments generally in the amount of $6,500 thereafter over a period of two years.

Defendant's adjournment application 10 When the hearing commenced on 12 December 2013 Mr Mark Maconachie (who appeared for the defendant), sought to have the hearing of the winding up application adjourned again. The application was opposed by the plaintiff. I refused the adjournment application and said that I would provide reasons later, which are now provided. 11 In refusing the application I took into account various matters set out in an affidavit sworn by Mr Preece on 11 December 2013 which relate primarily to the Supreme Court proceedings but I consider that, for this purpose, they were outweighed by other matters. Those matters include the long procedural history of the proceeding in this Court. The originating process was filed on 25 June 2013. The matter then came before various registrars or deputy registrars of the Court on four separate occasions. On the respondent's application, the proceedings were adjourned on three of those occasions. On 4 October 2013 the proceedings were allocated to my docket. On 15 October 2013 I made orders that the defendant should file and serve any further evidence upon which it intended to rely in respect of the substantive application before close of business on 30 November 2013 and that the matter be set down for hearing on 12 December 2013. 12 In my view, the defendant had ample opportunity to prepare its evidence in response to the application. Absent an order under s 459R of the Act, the application for winding up is required to be determined on or before 24 December 2013. In my view it is in the public interest that that indicative deadline be respected and I was not persuaded that the defendant had made out a case in support of a further adjournment. Accordingly, I refused the defendant's adjournment application.

Plaintiff's submissions summarised 13 Essentially the plaintiff argues that an order winding up the defendant in insolvency should be made because the defendant does not seek to rebut the presumption of insolvency which arises from non-compliance with the statutory demand. Nor does the defendant suggest that the plaintiff's application is deficient in any procedural or formal respect. Furthermore, the plaintiff submits that the only ground identified by the defendant in the notice of grounds of opposition filed by it on 3 October 2013, i.e. that the defendant expects the debt to be repaid in the near future, provides an inadequate basis for not making a winding up order. 14 The plaintiff accepts that the Court has a discretion whether or not to make a winding up order. The plaintiff says, however, that there is "close to an entitlement" for that discretion to be exercised favourably where a creditor has made a statutory demand which has not been met and there is no other effective remedy available. The plaintiff submits that exceptional circumstances must exist for the Court to depart from what the plaintiff describes as this "general rule". The plaintiff relies on the judgment of Blow J in Deputy Commissioner of Taxation v Huon Foam Pty Ltd [2000] TASSC 99, where his Honour said at [8]: As a general rule, a creditor of an insolvent company has a right ex debito justitiae (ie, as a matter of legal right) to have the company wound up: Mercantile Credits Ltd v Foster Clark (Australia) Ltd [1965] ALR 574 at 575; IOC Australia Pty Ltd v Mobil Oil Australia Ltd (1975) 49 ALJR 176 at 182; Re London Suburban Bank (1871) 6 Ch App 641 per Mellish LJ at 643; Re Presha Engineering (Aust) Pty Ltd (1983) 1 ACLC 675. However, there are exceptional cases in which courts will refrain from making winding up orders in such circumstances. 15 The plaintiff submits that the defendant has failed to adduce any evidence to suggest that the debt owing to the Commonwealth can be satisfied by other means, such as by execution against the defendant's assets. Moreover, the plaintiff submits that there is no satisfactory evidence concerning how the defendant came to acquire such a significant taxation liability or any steps it has taken to ensure future profitable trading. Likewise, it claims that the defendant has offered no explanation as to why it has failed to lodge business activity statements and instalment activity statements over an extended period. 16 The plaintiff also made detailed submissions on how the issue of solvency should be determined in such an application, with particular reference to the matters set out by Weinberg J in Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728. 17 The plaintiff further submits that, while a Court has a discretion whether or not to make a winding up order, there is no power for it to make an order which is in the nature of a guillotine order which would involve a winding up order being made but only enlivened in the event that the defendant fails to comply with a Court-imposed payment arrangement. Furthermore, the plaintiff submits that there is no precedent to warrant such a payment arrangement being imposed against its will over a period of approximately 2 years (which is the period which was the subject of the parties' agreed arrangement dated 17 October 2012 which the defendant did not honour). Furthermore, the plaintiff submits that the Supreme Court proceedings are irrelevant to the exercise of the discretion. The plaintiff says that the defendant is not a party to those proceedings and that Mr Preece is a party there in his personal capacity and not as a director of the company. Finally, the plaintiff says that there is strong public interest in making a winding up order which is effective immediately in order to prevent the company from trading when it is insolvent. In the plaintiff's submission, there is not only a presumption of solvency but the Court should find that there is actual insolvency because of the defendant's inability to pay the taxation debt in full.

Defendant's submissions summarised 18 In broad terms, the defendant's submissions are as follows. First, while the company does not challenge the presumption of insolvency it denies that it is in fact insolvent. Secondly, it emphasises the Court's discretion not to make a winding up order, and cites the following passage from McHugh JA's judgment in FAI Insurances Ltd v Goldleaf Interior Decorators Pty Ltd (No 2) (1988) 14 NSWLR 643 at 660 (referring to the earlier provision in the Companies (New South Wales) Code concerning winding up a company in insolvency): The discretion conferred by the Companies (New South Wales) Code, s 364(1), is unlimited in terms. Accordingly, I do not think the Court should follow the view expressed by Bowen LJ in Re Chapel House Colliery Co (1883) 24 Ch D 259 at 270 that "it is not a mere matter of discretion whether the Court will order a company to be wound up or not - it is the duty of the Court to give the creditor that relief which the Legislature intended to give him". I prefer the view expressed by O'Bryan J in Re K L Tractors [1954] VLR 505 at 512. His Honour said that the words of the then equivalent of s 364 suggest "a wide discretionary power, and I find difficulty in supposing that there is any less discretion to grant or refuse a petition whatever the ground of petition may be or however proved". The discretion under s 364 may be exercised, therefore, on any ground that is not extraneous to the scope and purpose of the legislation: R v Australian Broadcasting Tribunal; Ex parte 2HD Pty Ltd (1979) 144 CLR 45 at 49. (Emphasis added). 19 The defendant also relies on the following passage from Austin J's judgment in Bungey v Magnate Projects [2006] NSWSC 734 at [44] concerning the Court's discretion under s 467(1) of the Act: Under s 467(1) of the Corporations Act, on the hearing of a winding up application (including an application for winding up in insolvency) the court has a discretion. It may dismiss the application with or without costs, even if the ground has been proved, or adjourn the hearing conditionally or unconditionally, or make any interim or other order that it thinks fit. The terms of the subsection make it clear that the applicant for winding up is not entitled to an order once the grounds are made out, and the court always has a discretion: Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWSC 699 at [57] per Campbell J. The court's attention will be directed to the public interest, which normally requires that an insolvent company be wound up to prevent it from incurring further debts. Counsel for Magnate referred me to two decisions where a winding up order was refused partly on the basis that the order would not achieve anything for the creditors, as there were insufficient funds even to pay for the costs of liquidation, although there were valuable income-producing assets (Re St Thomas' Dock Company (1876) 2 ChD 115 and Re Chapel House Colliery Company (1883) 24 ChD 259). But the circumstances of those cases were unusual. Normally the court exercises its discretion to wind up a company in insolvency once insolvency is proved or a presumption of insolvency is established and not rebutted - but nevertheless, the discretion remains and is available to be exercised in an appropriate case. (Emphasis added). 20 The defendant emphasises that the Supreme Court proceedings are a major consideration which should weigh heavily with the Court in the exercise of its discretion. It says that those proceedings would be severely disrupted if a winding up order were made which was effective immediately. The defendant also urges the Court to take into account as relevant matters in the exercise of its discretion the interests of Ms Sutton and the three children even though they are not parties to the proceedings here. Those interests include the inevitable delay and additional costs which would arise in the Supreme Court proceedings if the matter is relisted and reopened so as to adduce evidence and hear submissions concerning the significance of any such winding up order. 21 The defendant also indicated that it would be willing to be subject to a guillotine order of the kind described above, including an order which required it to make periodic payments to the plaintiff and to provide all outstanding business activity statements and instalment activity statements by 14 February 2014. In particular it is prepared to commit itself to paying to the plaintiff an amount of $45,000 on or before 3 January 2014 and thereafter to make minimum monthly payments of $6,500 on the 3rd day of each month until the taxation debt is cleared.

Consideration 22 In my view this is a most unusual case. That is primarily because of the Supreme Court proceedings, in which judgment is reserved, and the implications of making a winding up order which is effective immediately on those proceedings in the ways outlined above. Absent those proceedings, the Court would have been inclined to order that the defendant be wound up in insolvency effective immediately, largely for the reasons advanced by the plaintiff. 23 It seems to me, however, that this particular case makes it appropriate to make a different order for the following reasons. First, while I am in substantial agreement with the plaintiff's description of the relevant legal principles (which were not materially different from those advanced by the defendant), the particular circumstances of this case are such that it is appropriate not to make an unqualified order which would have the effect of winding up the company immediately. In coming to that view, I have taken into account all the matters raised by the plaintiff but I consider that they are outweighed by other relevant matters, including in particular the considerable weight which I believe should attach to the impact the making of a winding up order which was effective immediately would have on the extant proceedings in the Supreme Court. That event would require the reopening of that proceeding, in which judgment is reserved in order that Lindsay J could take into account such a significant factual development. In circumstances where the value of the defendant company and its business are significant elements in the estimated value of Mr Preece's net assets, an immediate winding up of the company could have a material and significant impact in those proceedings. The need to have those proceedings relisted and probably reopened would necessarily involve delay and additional legal costs, matters which would be of natural concern to the parties who are involved in those proceedings. As noted above, Mr Preece has received legal advice to the effect that he must not deal with any of his personal assets until the Supreme Court proceedings are finalised. 24 Secondly, while it is undisputed that the defendant is unable to pay the taxation debt immediately, the plaintiff did not contest Mr Preece's evidence that the company is able to pay all other creditors as and when their debts fall due and that the business is now doing well after the significant distraction created by the proceedings in the Supreme Court. No other creditor has sought to support the plaintiff's winding up application. As noted above, I accept Mr Preece's evidence (which was unchallenged) that the defendant is currently paying its employees' wages and business overheads and expenses and has no creditors apart from the plaintiff. Accordingly, even if the Court were to accept the plaintiff's submission that the company is in fact insolvent (because of its admitted current inability to pay its taxation debt in full), in the peculiar circumstances of this case I am not inclined to attach the same usual weight to the important public interest consideration of not permitting a technically insolvent company to continue to trade. 25 Thirdly, the defendant conceded that the accounting evidence before the Court was incomplete and insufficient to rebut the presumption of insolvency. That concession was properly made in circumstances where the latest accounting information comprised various extracts from a profit and loss statement and balance sheet of the company as at 30 June 2012. Those extracts indicate that, at that time, the company had net assets of $402,030.82 and had made a profit (after income tax) in that financial year in the amount of $275,423.90. The defendant did not press the proposed tender of a letter dated 10 December 2013 from its accountant which purported to deal with the issue of the company's current solvency. The letter was plainly inadmissible. However, I accept Mr Preece's unchallenged evidence that his accountant has agreed to attend to the preparation of up-to-date accounting records for the company and to prepare and provide the outstanding business and instalment activity statements. I have no reason to doubt the statement made from the bar table that these matters will be attended to within approximately eight weeks. The orders should provide a self-executing sanction if, among other things, the outstanding business and instalment activity statements are not made available to the plaintiff by 14 February 2014. 26 Fourthly, I accept Mr Preece's evidence that the only reason why he has not paid, and currently cannot pay, the taxation debt in full is because of the extant proceedings in the Supreme Court and the related legal advice he has received to the effect that he cannot sell or further encumber his assets, including the family home, while the proceedings are unconcluded. I accept his evidence that it is his intention to sell the family home as soon as he able to after those proceedings are finalised and that the proceeds available to him will be used to defray his taxation debt. 27 Fifthly, the interests of other unsecured creditors is a further relevant consideration in circumstances where the making of a winding up order effective immediately could put at risk a going concern and adversely impact upon the interest of other unsecured creditors, such as the ADF and other enterprises such as state fire departments and coal mining companies who are supplied with specialised equipment by the defendant. The defendant is the only Australian manufacturer of high pressure valves. I accept Mr Preece's evidence that an unexpected discontinuance in the company's supply of specialised underwater breathing apparatus to the ADF would cause significant disruption. 28 Sixthly, as Blow J acknowledged in Huon Pine at [9] in exceptional cases where a company has been found to be insolvent, it may be appropriate to give the company an opportunity to trade out of its problems and adjourn the winding up application for a period. This is illustrated in case such as Re Presha Engineering (Aust) Pty Ltd (1983) 1 ACLC 675; Fire and All Risks Insurance Co Ltd v Southern Cross Exploration NL (1986) 4 ACLC 447; Gareffa Holdings Pty Ltd v Damon Pty Ltd [1998] WASC 147; Ace Contractors and Lechmere Financial Corporation v Aspermont Ltd [2003] FCA 1138. For reasons which I have given above, I do not consider that a further adjournment should be granted. The application should be finalised now so that both parties have certainty. In my view, the preferable course is to make, in effect, a conditional winding up order. The company will not be wound up immediately (or possibly at all) as long as it complies with certain conditions regarding the payment of the taxation debt and also attends by no later than 14 February 2014 to providing the outstanding business and instalment activity statements. If the company does not comply with any of the conditions, the winding up order will be effective instanter. In my view, the Court has the power to make such an order under ss 459A and 467 of the Act. 29 The parties should be given an opportunity to prepare orders which give effect to these reasons. Provision will need to be made for the general interest charge. The defendant should pay the plaintiff's costs. The parties should seek to agree proposed orders by 19 December 2013. If they are unable to do so, they should each file and serve by that date their respective proposed orders and a brief written outline of submissions not exceeding 2 pages in favour of those proposed orders. It is my intention to then finalise the orders on the papers prior to 24 December 2013 which, as noted above, is the relevant date for the purposes of s 459R of the Act. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Griffiths.