In the matter of Pax In Bello Pty Limited [2019] NSWSC 889

Background and affidavit evidence

1. By way of background, the Company is the trustee of a trust, the Pax In Bello Trust ("Trust"), which conducts a farming operation in partnership with Mr Osborne, trading as the Currandooley Pastoral Co. The Company is also a one-fifth unit holder in the HPG Osborne Family Unit Trust, of which another company, Grantham Park Holdings Pty Limited ("GPH") is trustee. The Company receives, in its capacity as trustee of the Trust, income from the pastoral operations, and also royalties in respect of mining operations conducted by a third party on land occupied by GPH. I will refer to the circumstances in which the Company was wound up below.
2. The application is supported by several affidavits. First, Mr Osborne's affidavit dated 2 May 2019 refers to his background; to his taking over operations of the relevant properties, after his father began transferring assets to him and his siblings about ten years ago; and the circumstances in which the Company, the Trust and the partnership, and the unit trust of which GPH is trustee were established.
3. Mr Osborne refers to several difficulties which have arisen, in circumstances that he had previously engaged a farm manager and bookkeeper, both of which have ceased employment and have not satisfactorily been replaced. He refers to the circumstances in which a debt was owing to the Workers Compensation Nominal Insurer, arising from dealings with its representative, iCare, which was ultimately the subject of a creditor's statutory demand and a winding up application in which the winding up orders were made. It appears that there was a question, during the relevant period, as to the extent of premium that was payable by the Company. That question was ultimately not addressed in any application to set aside the creditor's statutory demand or in the winding up, by reason of other matters to which I refer below. Mr Osborne also refers to health issues, which I accept have affected these events.
4. Mr Osborne sets out the circumstances in which, it appears, the Workers Compensation Nominal Insurer initially obtained a default judgment against the Company; then issued a creditor's statutory demand against the Company in the amount of $13,673.06 referable to that default judgment; and ultimately obtained a winding up order against the Company. The Company did not appear in respect of any of those proceedings. It appears that at least the creditor's statutory demand had been served at the registered office of the Company, at the address of its accountants, and had come into Mr Osborne's possession, but neither its urgency nor its significance had been recognised. The position is not so clearly addressed in respect of the evidence in relation to other matters, but no submissions were made that were adverse to the regularity of the winding up proceedings.
5. Mr Osborne also referred to the circumstances in which he became aware of the winding up order, when he was advised by his bank manager at Rural Bank Limited that the Company's bank accounts had been closed because the Company had been placed in liquidation. Shortly thereafter a meeting was held with the liquidator at which either Mr Osborne or the liquidator raised the possibility of terminating the winding up and steps were promptly taken to bring an application to do so.
6. Mr Osborne also refers to the financial statements of the Trust which, for present purposes, would likely reflect the financial position of the Company as trustee, since its only business is to act as trustee of the Trust. He also refers to the financial position of the partnership, and addresses the fact that there had been a delay in lodgement of Trust and partnership income tax returns and other returns, which it appears has now been remedied. Mr Osborne refers to the fact that a new farm manager has now been engaged and he also refers to steps which are to be taken to provide adequate bookkeeping services to the Company, provided by the Company's accountant, and to steps which Mr Osborne is also taking to seek to address his health issues.
7. Mr Osborne refers to steps which have been taken to make payments to some creditors, with the result that amounts are now outstanding in respect of the debt claimed by iCare; an amount payable to the Australian Taxation Office ("ATO") and liquidator's fees, which is less than the total of monies that have been deposited by Mr Osborne with his solicitor to be applied to payment of those amounts and monies that are held by the liquidator in the Trust's bank accounts.
8. Mr Osborne refers also to communications with creditors as to their attitude to this application. Notice was given to the ATO of the application. I will refer to the ATO's position below. iCare does not oppose the application to terminate the winding up and its position is significant, where it was the petitioning creditor. The Company's primary bank, Rural Bank Limited, has also indicated that it does not oppose the application and continues to support the Company.
9. An affidavit of Mr Allen, the Company's accountant, also refers to financial statements for the partnership and the Trust and states that: "Due to my knowledge, skills and experience as a chartered accountant, including my experience as the chartered accountant for the Trust since 2010, I am of the opinion that the Trust is solvent and has been solvent since I became its accountant in 2010."
10. It may well be that Mr Allen's opinion is well founded, since the accounts of the Trust suggest that it has generally been profitable and there is evidence that substantial liabilities owed to Mr Osborne and his wife, by way of deferred Trust distributions, will not be called upon. However, I should record that evidence in that form would generally not be sufficient to establish solvency in an application of this kind, where an applicant will need to lead the fullest and best evidence of its solvency. That will generally include, at least, evidence of a company's cash flow and, so far as an accounting opinion is expressed, a clear identification of the assumptions made; the documentary sources of that opinion; and the reasoning process which allows a conclusion of solvency to be reached. Mr Allen also addresses other aspects of the application, including confirming that he will in future be providing the relevant bookkeeping services for the Company and the Trust.
11. By his further affidavit dated 22 May 2019, Mr Osborne provided further detail as to these matters and, in particular, confirmed that he and his wife had agreed to defer repayment of amounts due to an associated entity, by the partnership, and of an unsecured loan owed to him. Mr Osborne's wife gives corresponding evidence in respect of an unsecured loan to her. Ultimately that position is to be formalised in the manner to which I will refer to below. Mr Osborne also updates the position as to issue of payments to creditors to which I have referred above. An affidavit of Mrs Osborne is largely consistent with Mr Osborne's affidavit.
12. An affidavit dated 22 May 2019 of the solicitor for Mr Osborne, Ms Hendry, refers to the service of documents upon a number of entities, including Rural Bank Limited, to whose position I have referred above, the ATO, the Australian Securities and Investments Commission ("ASIC"), the liquidator and the Workers Compensation Nominal Insurer. The ATO has confirmed it does not object to the application and ASIC has indicated that it is content for the matter to be left for the Court's determination and does not seek to intervene. The liquidator does not oppose the application and has ultimately given evidence that provides some support for the application. I noted above that the Workers Compensation Nominal Insurer also did not oppose the application.
13. By his affidavit dated 21 May 2019, Mr Gumbleton, who has been appointed as liquidator of the Company, referred to the investigations which had been taken in respect of the Company and to the assets which emerged from that investigation and the identification of creditors of the Company. No matters emerged from that affidavit which were adverse to the conduct of the Company's affairs, although it is fair to note that Mr Gumbleton did not express any fully developed view as to the Company's solvency, beyond such view as might be formed from the affidavits led by Mr Osborne and Mr Allen, the Company's accountant. He confirmed that, on the basis of the information provided by Mr Osborne and Mr Allen, the information that had been obtained during his investigations, and on the assumption that creditors' debts are paid and the liquidator's remuneration and disbursements are paid, he does not object to the termination of the winding up.
14. I should pause to note that one further matter emerged in the course of the hearing, which ultimately had a degree of significance for its result. The Company is, of course, the trustee of a trust. The Deed of Settlement dated 12 August 2010 for that trust is in evidence and cl 8.8 of that Deed contains a common provision that if the trustee, being a company, enters into liquidation, the office of trustee will be determined and vacated. That clause provides for automatic vacation of the office of the trustee in those circumstances, and has the result that the Company likely ceased to be trustee of the Trust when it was placed in liquidation by the winding up order made on 25 March 2019.
15. The Settlement Deed also contains, as might be expected, a power to appoint a new trustee, which is vested, inter alia, in Mr Osborne. In those circumstances a choice was available to Mr Osborne as to whether to reappoint the Company as trustee of the Trust or to appoint another entity as trustee of the Trust. I was informed in the course of the hearing, and there is no reason to doubt, that Mr Osborne intends to appoint a new entity as trustee of the Trust, and that he had not done so in the course of the liquidation or these proceedings, where he thought that it might be inappropriate to give effect to that until after the proceedings were concluded.
16. In these circumstances the application falls to be determined not on the basis that the Company will continue, as trustee of a trust that is conducting a pastoral business, but on the basis that another company will have that role, and the Company will continue as a dormant entity unless and until it is deregistered by ASIC. After that matter emerged in the course of the hearing, Mr Osborne has confirmed that position by undertakings which he proposes to offer to the Court.

Applicable principles

1. I now turn to the applicable principles. Section 482 of the Corporations Act provides for termination of a winding up. Relevant factors to whether the Court should terminate a winding up include the attitude and interests of creditors, including future creditors whose interests might be prejudiced if a company were released from the winding up. Other relevant factors include whether a company's debts have been discharged, its trading position and general solvency, and the circumstances relating 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 noted that a company's solvency is the most significant matter for consideration in an application of this kind, and other considerations tend to be taken into account in determining whether a company has returned to, or will be returned to, solvency.
2. In Re Glass Recycling Pty Ltd [2014] NSWSC 439 at [15]ff, Brereton J in turn conducted a detailed review of the considerations which informed the exercise of the Court's discretion to terminate a winding up and identified several relevant factors arising from the case law. He noted that, in such an application, the Court must be satisfied that the state of affairs that required that a company be wound up, no longer exists and, where a winding up was on grounds of insolvency, it will be necessary for the applicant to demonstrate that a company is not, or is no longer, insolvent.

Submissions and determination

1. Ms Petch, who appears for Mr Osborne in the application to terminate the winding up, refers, in submissions, to several relevant matters, including Mr Osborne's personal circumstances, which I accept, provide an explanation of the circumstances in which the proceedings that led to the default judgment in the Local Court, the creditor's statutory demand and the winding up, were not defended, combined with the fact that documents served on the Company's registered office appear not to have come to Mr Osborne's attention in a manner that emphasised their significance. Ms Petch also refers to dealings with iCare, as the representative of the Workers Compensation Nominal Insurer. As I noted above, no submissions were made that were adverse to either iCare or the Workers Compensation Nominal Insurer, but it is relevant, by way of context, that the premiums that were the subject of the creditor's statutory demand and which founded the winding up, appear to have been subsequently varied on the basis of a recognition that employees' wages paid by the Company were a lesser amount than on which they had been based.
2. Ms Petch, in turn, refers to the applicable principles in terminating a winding up and recognises the need to establish that the state of affairs, which had brought about the winding up, had ceased. Ms Petch submits, and I accept, that Mr Osborne plainly has standing to bring this application both as a contributory of the Company and as a creditor of the Company. She points to the fact that the termination of the winding up will cause the judgment debt in favour of the Workers Compensation Nominal Insurer to be paid in full and all other liabilities owed by the Company to all other identified creditors and the liquidator's remuneration will also be paid in full from monies that had been deposited by Mr Osborne with his solicitor for that purpose, or are already held by the liquidator in the Company's bank account as trustee for the Trust. Ms Petch points out that the arrangements made between Mr Osborne and his accountant would improve the bookkeeping procedures which the Company has had in place and that steps have also been taken to engage a new farm manager and to address Mr Osborne's health issues. Ms Petch points out that all relevant interested persons have been served and none of them has opposed the application.
3. Ms Petch also advanced submissions as to the solvency of the Company, although I would have had difficulty determining the question of solvency on the evidence as it stood, and without cash flow information, if the Company was continuing as trustee of the Trust. As events have developed, and as I noted above, it appears that the Company has ceased, by the terms of the Settlement Deed, to be trustee of the Trust and Mr Osborne does not intend to reappoint it to that position, and that significantly affects the position in respect of the Company's solvency.
4. Mr Osborne has offered several undertakings to the Court. I should first recognise that courts have, historically, been cautious about accepting undertakings in applications of this kind, and rightly so, where a court will not necessarily have visibility of compliance with such an undertaking over a period into the future. It is nonetheless open to the Court to accept such undertakings in appropriate circumstances and I note that Lindsay J was prepared to do so in Re LJAC Energy Pty Ltd (in liq) [2013] NSWSC 1231. Much will turn on the particular circumstances and the matters which are the subject of the proposed undertakings. No doubt a court would exercise particular caution in, for example, accepting an undertaking that contemplated payment of a substantial amount of money which was not presently under the control of the liquidator or solicitors, at some future time. The undertakings that are offered by Mr Osborne in this matter are not of that character.
5. Mr Osborne has offered an undertaking to the Court, first, confirming his position as to the Company's future role in the Trust; that he will retire the Company as trustee of the Trust to the extent that that has not automatically occurred (as, it seems to me it has occurred, by virtue of cl 8.8 of the Settlement Deed); and the appointment of a new trustee. He also undertakes that he will not, and will procure that Mrs Osborne does not, cause the Company to trade so it will become, in effect, dormant; the newly incorporated trustee ("NewCo") will pay its liabilities until such time as it is wound up or deregistered; and Mr and Mrs Osborne will, as shareholders of NewCo, contribute the sum of $5,000 of start-up capital to NewCo before 1 June 2019. I pause to note that Mr and Mrs Osborne were, of course, under no obligation to contribute any particular amount of capital to NewCo, but it seems to me that the Court can accept that undertaking where it provides support for confidence in the Company's capacity to meet such liabilities as may arise, which are likely to be limited in respect of a dormant company in the period to its deregistration.
6. Importantly, Mr and Mrs Osborne also undertake to execute deed polls which will subordinate their rights, and an associated company's rights, as creditors of both the Company and NewCo as former trustee and trustee of the Trust respectively, to the claims of other unsecured creditors of NewCo and the Company in their capacity as trustees of the Trust. That undertaking will continue until such time as the Company is deregistered. That undertaking is neutral as to the question of whether such liability as to Mr and Mrs Osborne and the associated company remain with the Company, as former trustee of the Trust, subject to a continuing right of indemnity against Trust assets, or are ultimately assumed by NewCo, by novation or otherwise. That is a question of some complexity that need not be addressed today.
7. It seems to me that that undertaking is sufficient to have the result that the Company's solvency is not affected by the substantial liabilities which it owes to Mr and Mrs Osborne in respect of deferred distributions from the Trust, and that undertaking gives effect to the evidence which Mr and Mrs Osborne had already given to that effect. For more abundant caution, Mr Osborne also confirms that he will, and he will procure that Mrs Osborne does, comply with the terms of such a deed poll. Although these undertakings are relatively complex, partly because of the Company's status as trustee and the effect of automatic termination of that position, they do not seem to me to involve controversial steps as to which it would be inappropriate to accept such undertakings.
8. I should note for completeness that there are several other matters, which are ordinarily addressed in dealing with an application to terminate a winding up. I am satisfied that the interests of the liquidator, particularly with regard to remuneration, are sufficiently protected by the matters to which I have referred above, and I noted that the liquidator does not oppose the order that is sought. The interests of contributories are consistent with the termination of the winding up and, of course, the application is brought by Mr Osborne and supported by his wife, the Company's two contributories.
9. Although there was, as I noted above, a delay in the filing of several tax returns of the Trust and the partnership, I am satisfied that no matters of commercial morality have arisen that are contrary to the termination of the winding up. As I have noted, the Company, or Mr Osborne on its behalf, has taken appropriate steps to place the liquidator in funds to discharge the debts to relevant creditors to the extent they have not already been discharged by Mr Osborne.
10. For these reasons, I am satisfied that the order now sought for the termination of the winding up should be made. I note the following matter and make the following orders:
11. The Court notes the undertaking given by Mr Osborne to the Court in the form initialled by Black J and placed in the file.
12. Having regard to the undertaking given by Mr Osborne, pursuant to s 482 of the Corporations Act 2001 (Cth), the winding up of Pax In Bello Pty Limited (in liq) be terminated.
13. Control of Pax In Bello Pty Limited (in liq) be returned to its directors.
14. These orders be entered forthwith.
15. The Court book and exhibits be returned.

Amendments 15 July 2019 - Correcting typographical error in Decision. 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: 15 July 2019