First Strategic Development Corporation Ltd (in liq) v Chan

The affidavit evidence and background

1. Ms Morphett relied on voluminous affidavit evidence in support of the application, namely her affidavit sworn 21 September 2017 and its exhibit AM-1 (Ex A1); part of her affidavit sworn 23 December 2017 and exhibit AM-2 to that affidavit (Ex A2); her affidavit sworn 31 March 2017 and exhibit AM-3 to that affidavit (Ex A3); and her further affidavits sworn 24 April 2017, 1 May 2017, 25 May 2017, 1 August 2017 and 8 August 2017. Ms Morphett also relied on an affidavit of her sister-in-law, Ms Ann Howarth sworn 24 May 2017 and affidavits of her husband, Dr John Harvey sworn 25 May 2017 and 1 August 2017. The number of those affidavits partly reflects the delays in the application and improvements in Ms Morphett's financial circumstances over the period in which it was pending. The liquidator also read his affidavits dated 12 October 2016 and 20 March 2017 in the application.
2. By way of background, Ms Morphett is the sole director and shareholder of the Company (Morphett 21.9.16 [1]). The Company owns several properties, including properties situated in Cessnock and at Bar Point in New South Wales, and also owns all the shares in The Oak Hotel Cessnock Pty Limited ("TOHC") which owns the land and business known as The Oak Hotel in Cessnock. Ms Morphett is also the sole director of TOHC (Ex A1 pp 5-7).
3. From approximately October 1999, the Company provided managerial services for a dental clinic in Cessnock which was and is operated by Dr Harvey (Morphett 21.9.16 [5]). In payment for those services, Dr Harvey remitted 60% of the surgery's income in payment to the Company, prior to and for a period after the Company's liquidation (Morphett 21.9.16 [5]). In May 2011, TOHC was established to purchase The Oak Hotel (Morphett 21.9.16 [7]; Ex A1, p 5). For reasons addressed in Ms Morphett's evidence, the taxation returns of the Company and TOHC were not consolidated and the Company did not lodge income tax returns for the years 2011 to 2014 (Morphett 21.9.16, [7]-[8]). New accountants for the Company lodged tax returns for it and TOHC after February 2014, but those were also not lodged as consolidated returns (Morphett 21.9.16, [9]-[10]). In July 2014, the Company and TOHC applied to the Australian Taxation Office to have the two companies treated as an income tax consolidated group (Morphett 23.12.16 [38]). That application was not allowed and tax owing by the Company and TOHC was assessed in an amount far greater than Ms Morphett and Dr Harvey considered was properly owing on a consolidated basis. The Company was wound up in late 2015 on the application of the Deputy Commissioner of Taxation by reference to a claimed tax debt of $615,913 (Morphett 21.9.16 [11]).
4. For a period after the winding up, Dr Harvey continued to operate the dental surgery from the Cessnock property and, until July 2016, accounted for the surgery's income to the liquidator who paid expenses and remitted a portion of that income to Dr Harvey (Morphett 21.9.16 [28]). From July 2016, Dr Harvey continued to operate the surgery from the Cessnock property but retained the surgery's income and paid its expenses, without paying any percentage of that income or rental or occupancy fee to the Company. Belatedly, and in the course of this application, Dr Harvey has paid the Company rent and outgoings for his occupation of the Company's property (Harvey 1.8.17).
5. A further application to have the Company and TOHC treated as an income tax consolidated group was lodged in March 2016 and ultimately accepted by the Commissioner of Taxation on 15 August 2016 (Morphett 21.9.16 [13]-[18]), substantially reducing the debt due by the Company to the Australian Taxation Office to $80,923.26 (Ex A3), which was discharged from monies held by Ms Morphett's solicitors pursuant to orders that I made in anticipation of the termination of the winding up. By reason of the death of Ms Morphett's elderly mother in February 2017, Ms Morphett is also entitled to a substantial distribution from her mother's estate, a significant part of which has been applied to paying out the Company's debts and the liquidator's remuneration and costs and to recapitalising the Company (Morphett 25.5.17 [17]).
6. On 5 April 2017, in accordance with orders made in connection with this application, Ms Morphett deposited $81,000 in her solicitor's trust account, which amount was to be applied in payment of the Commissioner of Taxation's debt if the Company's winding up was terminated (Morphett 24.4.17 [3]). On 24 April 2017, Dr Harvey also gave an irrevocable undertaking that he would convert all claims that he had against the Company as creditor to ordinary shares in the issued capital of the Company (Morphett 24.4.17, Annexure A).
7. Since orders made by the Court, without admissions, on 26 May 2017, Dr Harvey has paid or caused his and Ms Morphett's solicitors to pay amounts exceeding $105,000 to the liquidator as rent and outgoings for the Cessnock property (Harvey 1.8.17 [7]; Morphett 8.8.17 [24]). Dr Harvey has also caused payments to be made to discharge several unsecured creditors' claims against the Company and deposited further funds into his solicitor's trust account (Harvey 1.8.17 [9], [12]). In August 2017, those solicitors made payments to several of the Company's remaining unsecured creditors, including the Office of State Revenue New South Wales (Morphett 8.8.17 [29]), excluding a debt that is genuinely disputed and the debt owed to the Commissioner of Taxation which was subsequently discharged in connection with this application. I accept that the Company's unsecured creditors, with the exception of the disputed debt, have been paid in full.
8. I made orders on 8 August 2017 providing for several further steps to be taken prior to the winding up, and a further affidavit of Ms Morphett dated 11 August 2017 confirms that the liquidator's remuneration and expenses have now been paid (as the liquidator also confirms), the initial amount due to Westpac Banking Corporation ("Westpac") has been paid and the debt owed to the Commissioner of Taxation has also been paid.

The applicable legal principles

1. Section 482 of the Corporations Act provides for termination of a winding up, and relevant factors include the attitude and interests of creditors, including future creditors whose interests might be prejudiced if the company were released from the winding up. Other relevant factors include whether the company's debts have been discharged, its trading position and general solvency, and the circumstances leading to the winding up: Re Warbler Pty Ltd (1982) 6 ACLR 526 at 533. In Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797 at [24], Bergin CJ in Eq in turn noted, in a passage that has frequently been cited subsequently, that the most significant matter for consideration in such an application is the company's solvency, and other considerations tend to be taken into account in determining whether the company has returned to, or will be returned to, solvency.
2. In Re Modena Imports Pty Ltd (in liq) [2010] NSWSC 739 at [13], Palmer J identified relevant considerations including that the applicant must make out a positive case for the favourable exercise of the Court's discretion; the applicant must show the nature and extent of the creditors, and whether all debts have been discharged; the attitude of creditors, contributories and the liquidator is a relevant consideration; the applicant must show the current trading position and general solvency of the company; the applicant must provide a full explanation of any non-compliance by the directors with their statutory duties; the applicant must explain the general background and circumstances leading to the winding up order; and the applicant must show the nature of the company's business and whether the conduct of the company was in any way contrary to "commercial morality" or "the public interest".
3. As Mr Newton, who appears for Ms Morphett, points out, in Re Glass Recycling Pty Ltd (ACN 001 332 654) [2014] NSWSC 439 at [15], Brereton J summarised the considerations that inform the exercise of the Court's discretion to terminate a winding up pursuant to s 482 of the Corporations Act as including the attitude and interests of the creditors, including future creditors whose interests might be prejudiced if the company were released from winding up; the liquidator's interests, particularly with regard to remuneration; contributories' interests, so that a winding up will not generally be terminated unless each member either consents to it or is bound not to object to it, or his or her rights are properly secured; the public interest, including matters of commercial morality, and whether all the company's debts have been discharged; the company's trading position and general solvency; and any explanation for any non-compliance with statutory duties and of the circumstances leading to the winding up. His Honour also observed (at [18]-[19]) that: "Essentially, on such an application, the court must be satisfied, first, that the state of affairs that required that the company be wound up no longer exists. Where the winding up was on grounds of insolvency, it will be necessary for the applicant to demonstrate that the company is not, or is no longer, insolvent. This is usually the most significant consideration [Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797, [24]]. Thus it has been said that an order terminating the winding up would usually be made if all the creditors are paid out, the liquidators' costs and expenses are covered, and the members agree [Apostolou v VA Corporation of Australia Pty Ltd [2010] FCA 64; (2010) 77 ACSR 84, [58]; Re Kitchen Dimensions Pty Ltd (in liq) [2012] VSC 280]. However, the factors to which the cases refer demonstrate that more is necessary than merely establishing that the state of affairs that required the company to be wound up no longer exists. This appears from, inter alia, the references to "commercial morality" as a relevant consideration, and also from references to the interests of future as well as extant creditors. These factors illustrate that the second broad consideration that informs the exercise of the court's discretion - once satisfied that the state of affairs that originally required winding up no longer exists - is that it would be reasonable to entrust the affairs of the company, once again, to the directors, under whose management it previously failed."

Ms Morphett's submissions in support of the application

1. Broadly Ms Morphett submits that, in connection with a termination of the winding up, the Company's unsecured creditors (with one exception where I am satisfied a debt is genuinely disputed) have been paid in full or will be paid in full before the order to terminate the winding up is made; sufficient funds are held by Ms Morphett's solicitors in trust to pay the amount of the liquidator's reasonable remuneration and expenses as approved by the Court to date, which have now been paid, and further remuneration for the period until the liquidator ceases to hold office has been agreed; sufficient funds are available to pay Westpac an amount of $1 million dollars, as agreed with it, and Ms Morphett and her husband, Dr Harvey, have the capacity to pay a further amount due to Westpac by 6 November 2017, through a refinance, assets sales or money that she and Dr Harvey have recently inherited. Ms Morphett contends that, after the winding up of the Company is terminated, the Company will be able to operate profitably as it did prior to being placed into liquidation.
2. Mr Newton submits, and I accept, that the reason the Company was wound up was because of the tax debt to the Commissioner of Taxation, and I recognise that there was an issue as to the consolidation of the Company's and TOHC's position for tax purposes at that time. The amount owed to the Commissioner of Taxation, on the consolidated basis that it now accepts, was held in trust by Ms Morphett's solicitors when this application was heard and has now been paid. There is force in Mr Newton's submissions that the Company was otherwise able to pay its debts as and when they fell due, and was profitable, at the time it was wound up (Ex A1, p 82). The liquidator also observed, in his first report to creditors, that the dental practice operated profitably before the Company was placed in liquidation (Ex A1, p 25) and the Company subsequently traded on a cash flow positive basis (Ex A1, pp 28 and 43) and also noted the profitability of the dental practice, on an earnings before interest, tax, depreciation and amortisation basis, in his report to creditors dated 7 October 2016 (Ex A3).
3. Mr Newton submits, and I accept, that it appears that the Company's sole business after termination of the winding up will be the provision of services to Dr Harvey's dental practice under a service agreement (Morphett 1.5.17 [10]-[14], Annexure "D"; Harvey 1.8.17) by which it will receive 60% of the income of that dental practice, which should enable the Company to operate profitably as it had in the past. I give some weight to Dr Harvey's estimates of the revenue to the Company on that basis (Morphett 1.5.17 [14], Annexure E) and his cash flow projecting the Company's profit to February 2018 (Harvey 1.8.17 [4], Annexure B) and the evidence of the profit and loss for the dental practice from 1 July 2016 to 28 March 2017 (Morphett 8.8.17).
4. Mr Newton points out that arrangements have been made to pay the Company's creditors, other than for part of the debt due to Westpac in November 2017 by agreement with it, and the liquidator's remuneration and expenses. As Mr Newton points out, Westpac was and is a secured creditor of the Company and TOHC which was owed $2,272,496.61 (Morphett 8.8.17) and had security over property that substantially exceeds that debt in value, including the Cessnock and Bar Point properties owned by the Company, The Oak Hotel in Cessnock, and another property owned by Ms Morphett. Westpac, TOHC, Ms Morphett and Dr Harvey have now entered into a deed of forbearance, which has been executed by the Company with the Court's leave under s 471A of the Corporations Act. The amount of $1 million initially due to Westpac under that agreement has been paid and the balance of approximately $1,272,496.61 is due in early November 2017. Ms Morphett's evidence is that she expects that amount will be paid by a refinance of the Company's and TOHC's debt, or a sale of The Oaks Hotel, or further funds to be received by Ms Morphett and Dr Harvey as inheritances. While I have had regard to the fact that that substantial additional amount will be payable to Westpac under the terms of the deed of forbearance, and to the fact that payment is due in about two months, I am satisfied that the Company and those interested in it together have sufficient assets, including real property assets that are presently encumbered only to Westpac, that it is likely that they could raise the funds necessary to repay Westpac within that period or could otherwise refinance the debt owed to Westpac in that period.
5. I have also had regard to the fact that, where Ms Morphett and Dr Harvey have made substantial financial contributions to the capital of the Company and incurred substantial costs, in order to bring about the termination of the winding up, then it is highly unlikely that they would permit events to reach a position where the Company was again placed in winding up. For these reasons, it seems to me highly unlikely that any question of inability of the Company to meet the further payment due to Westpac will arise, where Ms Morphett, Dr Harvey and TOHC are each jointly liable with the Company in respect of Westpac's debt and there are other assets which are available to be realised to meet that debt. As Mr Newton points out, and I have noted above, Ms Morphett has otherwise caused all of the unsecured creditors other than a disputed debt to be paid and the debt owed to the Commissioner of Taxation has now been discharged from monies held by her solicitors on trust.
6. Mr Newton also refers to the matters relevant to a determination of the Company's solvency and submits, and I accept, that the Court may have regard to the likelihood that the Company will have funds available to it from sources with which it has no formalised agreement or understanding, including loans from its directors or from third parties, if they are not repayable in the short term: First Strategic Development Corporation Ltd (in liq) v Chan [2014] QSC 60 at [67]-[69]; Re Swan Services Pty Limited (in liquidation) [2016] NSWSC 1724 at [139]. Mr Newton submits, and I also accept, that the Company's solvency is established, as a matter of commercial reality, by its entitlement to 60% of the dental practice's income; the fact that its debt to Westpac will be owed jointly with TOHC, Ms Morphett and Dr Harvey and will not become due until early November 2017; the fact that amount is secured by real property of a value that substantially exceeds the amount due; it is likely that the one or more of the Company, TOHC, Ms Morphett, or Dr Harvey would be able to refinance that debt on commercial terms; and Dr Harvey and Ms Morphett can reasonably expect to receive an amount in the order of $900,000 from their inheritances in the near future, which they would likely make available to the Company if required.
7. Mr Newton submits that considerations of public interest and commercial morality strongly favour the termination of the winding up and the ongoing operation of the Company. While I do not go that far, I do accept that the circumstances in which the Company was wound up, by reason of the unfortunate circumstances surrounding the absence of its and TOHC's consolidation for tax purposes, mitigate the public interest issues that may otherwise arise from its previous failure to meet its tax obligations. Although Dr Harvey's failure to pay rent or outgoings on the Cessnock property to the Company's liquidator over an extended period are also significant matters, I do not consider they warrant a refusal to terminate the winding up where the rent and outgoings have now been paid to the Company and the liquidator consents to the termination of the winding up.
8. I am otherwise satisfied that, having regard to the case law to which I referred above, there is no reason why the winding up should not be terminated on public policy grounds. It is plainly in the interests of those interested in the winding up, including the Commissioner of Taxation as a creditor, other creditors, the contributories of the Company, and indeed the liquidator appointed by the Court, that the creditors should be paid in full, with the exception of one creditor where I am satisfied that there is, at the least, a genuine dispute as to the debt, and the Company's liabilities in respect of the liquidator's remuneration, costs and expenses also be discharged, where this is unlikely to occur in full on a liquidation.

Further order for liquidator's remuneration

1. I also make a further order under s 473(3)(b)(ii) of the Corporations Act, with the consent of the contributory and the majority claiming unsecured creditor, Ms Morphett and Dr Harvey respectively, that Mr Kerr as liquidator of the Company should have additional remuneration from the period 6 May 2017 to the conclusion of the liquidation as determined in a specified amount. Section 473(3)(b)(ii) of the Corporations Act provides for the liquidator to receive remuneration determined, inter alia, by the Court, if, relevantly, the committee of inspection and the liquidator fail to agree by resolution of creditors the amount of that remuneration. In this case, no such agreement has been reached, although that failure reflects, not a lack of consensus so far as the majority creditor is concerned, but the practical difficulties in convening a meeting of creditors in circumstances that all parties' interests will be served by the termination of the winding up occurring promptly, so that further costs of the liquidator are avoided.
2. Although the Court will ordinarily require evidence to support the remuneration claimed in order to approve remuneration on an application to the Court, so as to satisfy itself that the remuneration claimed is reasonably claimed and is proportionate, a somewhat different position arises here. All of the Company's creditors have been paid out in connection with the termination of the winding up, other than the one disputed debt to which I have referred. Those creditors that have been paid out, including the Commissioner of Taxation, have no present interest in the amount of the liquidator's remuneration. Those who will have a continuing interest are Ms Morphett and Dr Harvey as a substantial creditor who has converted his claim to equity in the Company. They have consented to the remuneration claimed; they are those with the greatest economic interest in the Company, and have every reason to seek to protect their own interests in that respect. Where those with the economic interest in the assets from which the remuneration claimed will be paid consent to it, and it could have been approved at a meeting of creditors, albeit with delay and additional costs, then it seems to me the Court may readily approve the amount of remuneration in the amount that has been agreed.

Orders

1. For these reasons, on 8 August 2017, I made orders in respect of the liquidator's remuneration under s 473 of the Corporations Act, and granted leave under s 471A of the Corporations Act to Ms Morphett, to the extent necessary, to allow her to take specified steps. Those steps were directed to her executing the deed of forbearance on behalf of the Company and arranging for its execution by Westpac; capitalising her contributions to and claims against the Company by subscribing for capital in the Company equivalent to the amount of that contribution on the basis that her contribution and claims were discharged by the shares allotted to her; capitalising Dr Harvey's contributions to and claims against the Company by causing the Company to issue share capital to Dr Harvey equivalent to the amount of his contribution and claims on the basis that his contribution and claims were discharged by the shares allotted to him; and causing her solicitors to pay the liquidator's remuneration, costs and disbursements and the amount due to the Commissioner of Taxation.
2. On confirmation that those steps had been completed, given by Ms Morphett's affidavit dated 11 August 2017, I made an order under s 482 of the Corporations Act that the winding up of the Company be terminated.

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. Decision last updated: 01 September 2017