Deputy Commissioner of Taxation v Victory Solutions Pty Ltd

REASONS FOR JUDGMENT 1 A Deputy Commissioner of Taxation has sought the winding up in insolvency, under the Corporations Act 2001 (Cth) (Corporations Act), of Victory Solutions Pty Ltd (Victory Solutions). 2 The evidence read establishes that Victory Solutions has failed to comply with the terms of a statutory demand made of it by the Deputy Commissioner. The debt which underpins the statutory demand is comprised of Pay As You Go (PAYG) instalment liability, Goods and Services Tax (GST) liability, which together comprise a running balance account liability upon which general interest charges accrue and superannuation guarantee charges. Each of these is a debt owed to the Commonwealth and payable to the Commissioner of Taxation. A Deputy Commissioner of Taxation is able to bring a winding-up application in respect of such liabilities. 3 The winding-up application was filed on 24 March 2010. On 16 April 2010, the company appointed Mr Blair Pleash and Mr Richard Albarran as joint and several administrators under Pt 5.3A of the Corporations Act. On 23 April 2010, a Registrar of the Court adjourned the hearing of the winding-up application by consent to today. The purpose of that adjournment was to allow the formulation of a Deed of Company Arrangement (DOCA). 4 The evidence discloses that much work has been done, both by the administrators as well as Mr Irwin John Augustine, the sole director of Victory Solutions, to the end of putting forward a DOCA for consideration by a meeting of creditors. This meeting of creditors is to be held on 25 May 2010. 5 The total present debt to the Commonwealth, which is payable to the Commissioner, is $356,817.60. The information contained in the present draft of the administrators' report makes it clear that that indebtedness to the Commonwealth is far and away the major unsecured debt of Victory Solutions. 6 The question today for resolution is that presented by s 440A(2) of the Corporations Act, namely, whether I am satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up. If I am so satisfied, my reading of s 440A(2) is that I am obliged to adjourn the hearing of the winding-up application. In effect, the period of adjournment would be for some few days after 25 May 2010 so that the creditors have an opportunity that day to consider the course which best commends itself to them of those presented under Pt 5.3A. 7 One of those courses is, of course, a resolution that the company be wound up. Yet another, though, is to agree to a DOCA. 8 I have the benefit of a considered opinion of Mr Pleash in his affidavit that it is in the best interests of the creditors as a whole for the administration to continue rather than for the company to be wound up. I say "considered opinion" because it is apparent from Mr Pleash's affidavit that he has, in conjunction with his fellow administrator, Mr Albarran, not been idle since the adjournment on 23 April 2010. Further, and as I have already observed, neither has Mr Augustine. 9 The proposed DOCA is exhibited to Mr Pleash's affidavit, as is the present draft of the report that he and Mr Albarran propose to furnish to creditors for the purposes of their meeting. In that report, the preliminary view is expressed that no voidable transactions are apparent from a review of the company's books and records. There is no evidence to the contrary before me. 10 A noteworthy feature of this administration is that the administrators have made a considered decision to continue trading the business of the company. In their draft report, they state the following (para 3.0): Upon our appointment as administrators, we chose to continue trading the business operations of the company to allow the Director an opportunity to put forward a proposal to creditors in the form of the Deed of Company Arrangement, thereby increasing the potential return to creditors. They detail by way of an annexure to the draft report the income derived from the trading of the company since administration. 11 In his affidavit, Mr Augustine details key terms of the DOCA. He states: The key terms of the proposal are: a) I agree to pay or cause to be paid $120,000.00 to the Administrators as administrators of the proposed arrangement in one lump sum payment due on the Sale Date; b) Amanda Mary Augustine [Mr Augustine's wife] agrees to be pay or cause to be paid $20,000.00 to the Administrators as administrators to the proposed arrangement in one (1) lump sum payment due on the Sale Date; c) I agree to pay or cause to be paid $45,000.00 to the Administrators as administrators of the proposed arrangement, in 15 consecutive fortnightly instalments in amounts due on [dates which run from 30 June 2010 through to and including 31 January 2011]; and d) Amanda Mary Augustine and I agree to pay interest on the late payment of any of the above. 12 The term "sale date" in the proposal is a reference to the date of settlement of the sale of a property, the present matrimonial home of Mr and Mrs Augustine, situated at Loganholme or, alternatively, the date of settlement of any refinancing of that property. The matrimonial home is owned by Mr Augustine and his wife as joint tenants. Mr Augustine deposes that he and his wife will fund the proposal out of the net proceeds of the sale of the matrimonial home. 13 There is evidence before me of appraisals of the matrimonial home by LJ Hooker and Ray White. The former places a value of between $430,000 and $450,000 on the property; the latter, $450,000 to $460,000. I note that, in the Ray White appraisal, there is reference to the property adjoining the matrimonial home having sold in February this year for $463,000. There is a logical reason given in that particular appraisal for why it is that a more modest sale outcome might be apprehended in respect of the matrimonial home. 14 The submissions made on behalf of the company as to why I should be satisfied that it was in the interests of the company to continue under administration were succinct but certainly none the worse for that. Attention was correctly drawn to the circumstance that it was not necessary for the company to prove to demonstration or as a matter of certainty that it was in the interests of creditors for the administration to continue, but rather that there was some sound basis for being satisfied in that regard. 15 Principles which govern the question of whether a court should be satisfied have been discussed in a number of cases. In Deputy Commissioner of Taxation v WPS Motorsport Pty Ltd (2009) 71 ACSR 640 at [20] - [23], I gathered together what I considered to be the effect of those cases. I there observed at [23] that: [T]he long and the short of it was that s 440A(2) means what it says. It's for the person seeking the adjournment to satisfy the court that in the circumstances of the particular case, it is in the interests of the company's creditors for it to continue under administration rather than be wound up. 16 The Commissioner adverted particularly to four considerations which it was submitted told against being so satisfied. 17 The first of these was grounded upon the proposal in the proposed DOCA that Mr Augustine and his wife would contribute a total of $140,000 to the company. Reference was made in the Commissioner's submission to page 8 of the present draft of the administrator's report wherein there is reference to an indebtedness by Mr Augustine and Mrs Augustine to the company of $228,606, which, so the Commissioner submitted, would not be repaid under the proposed deed. 18 One has to read that particular part of the report and then take the related submission with some caution. That is so because, elsewhere in the draft report, it is stated (para 5.2.3) with respect to the administrator's review of the accounts of Victory Solutions, that: A review of the transactions that form the balance of these accounts has revealed that the Company was processing all payment entries, except for wages, in its accounting system to the loan accounts. It is understood that the company's external accountant would later allocate these payments to the correct accounts. 19 What I make of this for present purposes is that the administrators are quite aware of what is seemingly indicated and seemingly of concern to the Commissioner on the company's books, but nonetheless are firstly also aware that there is a degree of imprecision in the company's hitherto accounting practices, and further, nonetheless, are of the view that it is in the interests of the company to continue under administration. In short, then, the question as to whether there is truly an indebtedness on the part of Mr Augustine and his wife as is of concern to the Commissioner, is moot. The reference in the administrator's report to the subject of the company's accounting practices is such that I do not consider that this provides a basis for concluding or being satisfied that there is something shadowy about the proposal for $140,000 to be put forward by Mr Augustine and his wife. 20 The Commissioner also made reference in his submissions to an alleged indebtedness on the part of Mr Augustine as a result of proceedings in the District Court. The short point about that reference in submissions is that it lacks an evidentiary foundation. I therefore disregard it. I note, though, that in the event that there is indeed evidence of such indebtedness (which is said to be for personal taxation liabilities), it would have been within the ability of the Commissioner firstly to prove the same today; and, secondly, and in any event, it remains open for him to prove the same at the meeting of creditors for such consideration, if any, as the creditors think fit to take into account in weighing up the merits or otherwise of the proposed DOCA. 21 The next point made on behalf of the Commissioner in submissions was that it would seem that the periodic contributions proposed by Mr Augustine under the deed were to be generated from the ongoing profits of the company and that there was a "fanciful" quality to that proposal, given that the company had been trading whilst insolvent for, it was submitted, almost 12 months. As to this, though, it needs to be repeated, and the submission was made to this end on behalf of the company, that the administrators, who are official liquidators, and by no means the alter ego of Mr Augustine, the director, have made their own considered value judgment to continue trading the business of this company after their appointment. 22 The next point the Commissioner relied upon was that: The extent of any voidable payments in related party loans that may be recovered for the benefit of creditors is unknown, and may produce a better return to creditors via liquidation than that proposed under the deed of company arrangement. Here, though, and as I have already indicated, the preliminary view of the administrators is that there are no obvious voidable payments or transactions. That, of course, is, as the administrators themselves necessarily and correctly acknowledge, but a preliminary view. Nonetheless, there is no evidence which would tend to a contrary conclusion. 23 The Commissioner has also put forward something of a comparative exercise in his submissions as between a "liquidation scenario" and a "proposed DOCA scenario". If one accepts the premises upon which that comparison is based, there is a difference as between nil under a DOCA scenario, and 16 cents in the dollar to ordinary unsecured creditors under a liquidation scenario. The difficulty about that particular comparative exercise is that it assumes, contrary to the present state of the evidence, that there will be no contribution other than $20,000 under the DOCA. The comparative scenario may well be one which can be evidenced rather better at the meeting, but for the present I do not find it persuasive, particularly having regard to the considered value judgment of administrators who has, as I have already observed, not been idle, and have expressed an opinion which has substance behind it, evident from their draft report, that it is in the interests of the company to continue under administration. 24 Having regard to the authorities which I have mentioned, the circumstances of this case are such that I am satisfied that it is in the interests of the creditors for the company to continue under administration. In expressing that, the considerations which tell in favour are particularly the considered view of the administrator, the absence of any evidence of any separate debt owed to the Commissioner or otherwise on the part of Mr Augustine and the real substance which lies behind the proposal for the payment of the sum under the DOCA by Mr Augustine and his wife. That real substance is evident from the appraisals of the property which, even allowing for the presently secured debt to Suncorp of $207,918.42, show real prospect of a surplus of the order to which Mr Augustine refers as available for payment. 25 Further, and at the risk of repetition, it does weigh in favour, in my opinion, insofar as there may be cause for the creditors to make a value judgment as to the worth of the periodic payment proposal, that the administrators themselves had made their own considered value judgment to continue trading the company's business.