Farnsworth v ASIC

Supreme Court of NSW|2007-08-27|Before: Hammerschlag J

Background 1 HIS HONOUR: The plaintiff, Mr Adam Farnsworth, is a registered liquidator. On 26 September 2005 he was appointed voluntary administrator of Aust Event Resources Pty Limited, ACN 106 544 996, ("the Company"). The Company provided staff to a related entity which operated in the hospitality industry organising one off events.

2 On 13 October 2005, Mr Farnsworth issued his report to creditors pursuant to s 439A of the Corporations Act 2001 (Cth) ("the Act"). 3 There were, relevantly, three unsecured creditors whose claims totalled $2,472,281. The largest of these was the Australian Taxation Office ("ATO") with a claim of $1,891,099, not including penalties or interest. Next in line was the New South Wales Office of State Revenue ("OSR"), with a claim of $227,541, and finally the Employers Mutual NSW insurance company with a claim of $70,000. 4 A second meeting of creditors of the Company was held on 21 October 2005. Mr Farnsworth had in his report recommended that a Deed of Company Arrangement be entered into. Mr Farnsworth had recommended such a course because his investigations had revealed that it would result in a higher return to creditors than upon a liquidation. The creditors voted that the Company execute a deed of company arrangement ("the Deed"). 5 The Deed was executed on 9 November 2005. 6 Mr Farnsworth was appointed administrator of it. It provided for the establishment of a Deed Fund to be paid to him, being $307,228, together with any amount payable for his trading expenses and priority creditors' claims, less the amount (if any) contained in the administration account as at the date of the execution of the Deed. 7 Administration account was defined in the Deed as "such bank or other accounts opened up by the Administrator for the purpose of administration of the Company or the Deed". 8 The Deed made provision for Mr Farnsworth's remuneration. 9 Clause 4.5(a) of the Deed provided that the Administrator would hold the Deed Fund for the benefit of the Administrator and "for those creditors who become participating creditors in accordance with the terms of this Deed". 10 On 9 October 2006 Mr Farnsworth advertised in the Daily Telegraph his intention to declare a dividend under the Deed, and for formal proofs of debt to be lodged on or before 3 November 2006. 11 Only two proofs of debt were received, one from the ATO and one from the OSR. 12 It appears from Mr Farnsworth's report that the Company had obligations to two related entities. It also may have owed amounts to, and secured by charges in favour of, Hawks Bridge Limited and HET No 1 Pty Limited which, according to Mr Farnsworth were prevented (presumably by dint of contractual arrangements) from making any claims in the administration. 13 On 9 November 2006 Mr Farnsworth declared a first and final dividend in favour of the ATO and the OSR. 14 The ATO received $218,640.91 and the OSR received $26,959.09 being dividends equivalent to 10.74 cents in the dollar. 15 Clause 9.3 of the Deed provided that if all the payments required to be made by the Administrator pursuant to cl 4 of the Deed had been made, and the Administrator had distributed the Deed Fund pursuant to cl 6 of the Deed so that all payments due to be made from the Deed Fund to all parties entitled to receive such payments (including the Administrator for the Administrator's remuneration, Administrator's disbursements and the Administrator's trading expenses) had been paid, the Administrator must certify to that effect in writing and must within 28 days lodge with Australian Securities & Investment Commission ("ASIC") notice of termination of the Deed. He was required to certify that "the Deed has been wholly effectuated". 16 The provision went on to say that execution of the notice terminated the Deed. 17 On 17 November 2006, Mr Farnsworth executed ASIC form 5056 certifying as the Administrator of the Deed, that "the Deed is wholly effectuated". 18 According to Mr Farnsworth, on or about 8 January 2007 the directors of the Company applied to ASIC for its deregistration. 19 Mr A P Coleman of counsel, who appeared for Mr Farnsworth, informed me from the bar table, and I accept, that although deregistration occurred on 30 April 2007, it was not upon the application of the directors. The reason for deregistration is not material to present circumstances. 20 Between 23 and 28 April 2007, despite the ATO having been paid according to the tenor of the proof of debt it had lodged, Mr Farnsworth received a number of amended taxation assessments, the effect of which was that there had in reality been no tax payable by the Company to the ATO which was susceptible to the proof the ATO had lodged and upon which a dividend had been paid to it. 21 On about 15 May 2007 Mr Farnsworth received a letter from the ATO requesting a withdrawal of the proof of debt. It was accompanied by a refund cheque in the amount of $218,640.91 ("the refund monies"). 22 As is apparent from what I have said above, before this letter and receipt of the refund monies, the Deed had terminated. Also, about a month earlier the Company had been deregistered. 23 In the interim, Mr Farnsworth has placed the refund monies in an interest bearing account with the National Australia Bank pending the outcome of this application. 24 Mr Farnsworth says that a liquidator has been appointed to the two related entities of the Company which did not prove in the administration. He anticipates that now, given an opportunity to do so, the liquidator of those entities would lodge a proof of debt under the Deed. 25 The position of the insurance company which had a claim but which did not prove is not referred to in the affidavit evidence.

26 The unusual circumstances of this matter do not end there. 27 Notwithstanding termination of the Deed, on or about 24 June 2007 Mr Farnsworth received "a running balance account statement" from the ATO for the period 29 April 2007 to 23 June 2007, in the sum of $527,982.80. 28 Solicitors for Mr Farnsworth have attempted to ascertain the ATO's position with respect to the possible lodgement of a proof of debt, but as at 16 July 2007 no response had been received. That is the present state of affairs.

a. the Deed has been fully administered; b. the ATO mistakenly lodged a proof of debt; c. its claim was paid out but it has refunded the money to Mr Farnsworth who no longer holds office as deed administrator; d. the Company has been deregistered; e. Mr Farnsworth holds the refund monies but he has no, and claims no, beneficial interest in them; f. the ATO may have a claim for outstanding taxes but it is not clear whether it intends to seek to recover them, and it is also not clear whether the period to which any such liability relates post-dates the effective operation of the Deed or, indeed, post-dates deregistration of the Company; g. there were creditors who did not prove in the administration but who may if given an opportunity now, seek to prove in the light of these events; h. if the refund monies form part of the Deed Fund, there may, depending on who and who does not prove, be further monies available to meet the claim of the OSR which only received 10.74 cents in the dollar. The relief sought 30 Against this background Mr Farnsworth moves the Court for orders that the Company be reinstated, and for orders in effect revoking the termination of the Deed so that it stays on foot, and then pursuant to s 447A (1) for orders that the refund monies be dealt with under the Deed as if they had been part of the Deed Fund in the first place, and as if the ATO had not incorrectly lodged its proof of debt. In the alternative, he seeks directions under s 63 of the Trustee Act 1925 (NSW) as to how he should distribute those monies, after deduction of his reasonable remuneration and costs and expenses. 31 Notice of these proceedings has been given to the directors of the Company, to OSR and to ASIC, to ascertain their stance. No response has been received from the directors. Not surprisingly, OSR consents to the orders sought. 32 After correspondence between Mr Farnsworth's solicitors and ASIC, the position ultimately reached is that ASIC does not appear to oppose the relief sought. The affidavit evidence indicates that its indication of non-opposition is based on Mr Farnsworth meeting certain conditions which appear to be no hurdle to the success of the application for reinstatement. Reinstatement 33 Section 601AD(1) of the Act provides that a company ceases to exist on deregistration. 34 Section 601AD(2) of the Act, provides that on deregistration all property of a company vests in ASIC. If company property is vested in a liquidator immediately before deregistration, that property also vests in ASIC. 35 Section 601AH(5) provides that if a company is reinstated it is taken to have continued in existence as if it had not been deregistered. Any property of the company vested in ASIC revests in the company. 36 There is room for debate on whether the refund monies are property of the Company. Although it is not necessary for me finally to determine that matter, it does not seem to me that s 601AD(2) applies in the present case because receipt of the refund monies occurred after deregistration and Mr Farnsworth is not, nor has he ever been, its liquidator. 37 Under cl 4.5 of the Deed the Administrator was to hold the Deed Fund for the benefit of the Administrator and for those creditors who become participating creditors in accordance with the terms of the Deed. 38 It seems to me, having regard to the incorrect proof of debt lodged by the ATO, that on orthodox principles, the Administrator would, immediately upon the incorrect payment to the ATO, have had a chose in action for repayment, on restitutionary principles at least. 39 As it has happened, the recipient of the refund monies (ATO) has already paid them back to him. 40 The Company does not exist and neither at this point in time does the Deed Fund. 41 As I have said, it is not necessary to determine whether legal title to the refund monies is now in the hands of the Administrator in his personal capacity with the beneficial title still residing in the ATO (which I think on a preliminary basis is the correct position), or whether as Company property, it is vested in ASIC. If the monies did vest in ASIC they would revest in the Company upon its reinstatement under s 601AH(5) of the Act. 42 Section 601AH(2) of the Act provides that:

"The court may make an order that ASIC reinstate the registration of a company if: (a) an application for reinstatement is made to the court by: (i) a person aggrieved by the deregistration; or (ii) a former liquidator of the company; and (b) the court is satisfied that it is just that the company's registration be reinstated." 43 In my view Mr Farnsworth, as the erstwhile voluntary administrator and deed administrator as well as a person who may have a claim on the refund monies in respect of his costs and remuneration involved in having to deal with them, is a person aggrieved by the deregistration and has standing to bring this application. 44 It is in my view just that the Company's registration be reinstated because good use is to be made of the order, if granted. No-one is likely to be prejudiced by the reinstatement and the public interest, in my view, warrants it (see ACCC v ASIC (2000) 34 ACSR 232). Operation of the terminated Deed 45 Part 5.3A of the Act is entitled "Administration of a company's affairs with a view to executing a deed of company arrangement". 46 All sections of the Act referred to below are unless specified, within that part. 47 Section 445C(c) of the Act provides that a Deed of Company Arrangement terminates if the Deed specifies circumstances in which it is to terminate and those circumstances exist. 48 Section 447A(1) of the Act provides that the Court may make such order as it thinks appropriate about how "this Part is to operate in relation to a particular company". 49 Section 447A(3) of the Act provides that an order may be made subject to conditions. 50 Under s 447A(4) of the Act an order may be made on the application of the Company, a creditor, an administrator, a deed administrator, ASIC or any other interested person. 51 Mr Farnsworth is, in the circumstances of this case, in my view, an interested person. 52 In Sims; Re Huon Corporation Pty Limited (admins apptd) (2006) 58 ACSR 620 at 624 Gyles J said with respect to the operation of s 447A: "Section 447A grants a most unusual power to the court that requires careful consideration before exercise. It is not easy to grasp all of the ramifications of such an order in the absence of a contradictor, notwithstanding the assistance of counsel for the applicant."

See too Ansett v Mentha (2002) 40 ACSR 389 at 401, pars 51 and following and Re Love (as liquidator of ACN 077 368 257 Ltd) (2003) 44 ACSR 367. 53 The section was considered by the High Court in Australasian Memory Pty Ltd v Brien (2000) 200 CLR 270 at 279-282. 54 The authorities make it clear that orders under s 447A have effect only from the time of their making with future effect, but in respect of past matters or events. 55 Such an order in this case would determine how Pt 5.3A is now to operate in relation to the Company with respect to the Deed in relation to the refund monies already received. 56 The section permits substantive alteration to how Pt 5.3A operates. It does not only apply to procedural requirements. 57 The section has been used to vary the terms of deeds of company arrangement. There is, however, some suggestion that it may not be used so as to impact on accrued rights. 58 It seems to me that the unusual circumstances of this case are a good example of where s 447A(1) of the Act may be used with justification and real utility. 59 However it is also appropriate, in my view, to impose conditions so as to ensure as far as possible, firstly, that there be no impact on accrued rights with respect to those creditors who proved but also to protect those who, notwithstanding not having proved in the past, may now wish to do so. 60 Because of the view that I have taken, it seems to me that if the Company is reinstated and the Deed is permitted to operate so as to deal with the refund monies, the question as to who beneficially owns those monies is otiose. 61 The refund monies, if they had not been paid out by Mr Farnsworth in accordance with the incorrect proof of debt from the ATO, would have been part of the Deed Fund and would have been distributed by him pursuant to the terms of the Deed. However, one does not know what the motives may have been of persons who previously proved or desisted from doing so. 62 The OSR might be entitled to the entirety of those monies after the deduction of Mr Farnsworth's costs and expenses, having regard to the fact that they are the only entity which legitimately proved in the administration. 63 However, in the absence of a contradictor, notwithstanding the able assistance I received from Mr Coleman, it would in my view be unwise to proceed without giving the potentially interested parties an opportunity to be heard and to make submissions in that regard. 64 It is not necessary to consider directions under the Trustee Act.

MONDAY 6 AUGUST 2007 65 I am satisfied that the orders which have been prepared by counsel properly and correctly reflect the outcome contemplated by these reasons. 66 They make provision for known creditors to have an opportunity to be heard on the future course to be taken. 67 They also make provision, for the possible convening of a further meeting of creditors to approve any further Administrator's Remuneration. The orders 68 I make the following Orders:

The Australian Securities & Investments Commission is to reinstate the registration of Aust Event Resources Pty Limited, ACN 106 544 996 ("the Company").

Pursuant to s 447A(1) and (3) of the Corporations Act 2001 (Cth ) ("the Act") Pt 5.3A of the Act is to operate in relation to the Company in the following manner:

a. notwithstanding the plaintiff ("the Administrator") having pursuant to cl 9.2 of the Deed of Company Arrangement dated 9 November 2005 between the Company, the Administrator, Robert Voldemars Rubis and Christopher Simon James ("the Deed") executed and lodged with the Australian Securities and Investments Commission, a notice of termination being form 5056, document number 7E0914918, reference id:74337174, and notwithstanding the provisions of s 445C(c) of the Act, for the limited purposes of and on the conditions specified below, the Deed is not terminated. b. the sum of $218,000 received by the Administrator from the Australian Taxation Office ("the Monies") shall be held by the Administrator by way of Deed Fund (as defined in the Deed) and shall be dealt with as if it were the full extent of the Deed Fund. c. subject to Orders 4 and 5 below, Creditors (as defined in the Deed) shall be dealt with in accordance with cl 3 of the Deed, and the Deed Fund shall be distributed to Participating Creditors (as defined in the Deed) in accordance with cl 6 of the Deed. d. the Administrator is entitled to be indemnified out of those monies in accordance with cl 13 of the Deed. e. the Administrator is entitled to convene meeting of creditors of the Company pursuant to s 445F of the Act to approve any further Administrator's Remuneration (as defined in the Deed) and to approve any variation of the Deed regarding Administrator's Remuneration; f. nothing in these orders shall affect the rights and liabilities of any person in respect of anything done or not done under the Deed on or before 17 November 2006 in particular, nothing shall affect the entitlement of the Office of State Revenue to retain the monies previously received by it pursuant to the Deed, save that the amount so received shall be taken into account with respect to any right of the Office of State Revenue to further participate in the distribution of the said sum of $218,640.91; and g. the Deed shall terminate upon the Administrator certifying that the Deed has been wholly effectuated.

On or before 8 August 2007, the Administrator shall serve a copy of these Orders on the following: i. Australian Taxation Office; ii. Office of State Revenue; iii. Employers Mutual NSW Ltd; iv. Aust Event Staffing Pty Ltd (in liquidation); and v. STR Tourism Pty Ltd (in liquidation) (" the Interested Parties" ) 4. Grant liberty to each of the Interested Parties to apply to the Court on or before 22 August 2007, with notice to be given to the Administrator's solicitors, to make submissions to the Court as to whether the provisions of the Deed should be varied so as to effect an outcome other than that which is proposed in these Orders. MONDAY 27 AUGUST 2007 69 I am satisfied on the further affidavit evidence that service of the orders has been effected on the interested parties. None has sought to avail itself of the opportunity to be heard.

70 The substantive orders will accordingly take effect and the implementation of the course provided in them is now in the hands of Mr Farnsworth.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.

CITATION : Farnsworth v ASIC [2007] NSWSC 866

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