NWEC Pty Ltd v NW & RS Enterprises Pty Ltd

Applicable legal principles

1. Whilst there are no rigid criteria to be applied in the exercise of the discretion, the Court has regard to the interests of existing creditors (and potential future creditors if the winding up is terminated), the interest of the liquidator (particularly with respect to costs), the interests of contributories, and the public interest (including matters of commercial morality). The authorities establishing this approach, and articulating matters affecting these classes of interests that will frequently be relevant to the exercise of the discretion, were helpfully summarised by Black J in Re Spartan Pastoral Company Pty Ltd (in liq) [2020] NSWSC 1218 at [25]-[31]. The relevant matters include: 1. the circumstances that led to the winding up order. Essentially, the Court needs to be satisfied that the circumstances that required the company to be wound up no longer exist. However, even if those circumstances no longer exist, the additional matters below remain relevant; 2. the nature of the business of the company and whether the conduct of the company was contrary to commercial morality or contrary to the public interest in any way; 3. whether notice of the application for termination of the winding up has been served on all creditors and contributories. Service must be proved; 4. the nature and extent of creditors, and whether all debts have been discharged. However, there is no absolute rule that a winding up will not be terminated if one or more debts remain undischarged; 5. the attitude of creditors, contributories and the liquidator to termination of the winding up. Even if all the existing creditors agree, the court may take the view that the proposed termination puts at risk the interests of future creditors. A termination will not usually be granted unless each member of the company either consents or is otherwise bound not to object to it, or their rights are properly secured; 6. the current trading position and general solvency of the company; and 7. whether the reasons for, and circumstances of, any non-compliance by the directors with their statutory obligations as to the giving of information or furnishing a statement of affairs to the liquidator, have been fully explained.
2. In relation to the notion of commercial morality referred to above, I respectfully adopt the following summary by Rees J after a detailed review of relevant authorities in Re Parkway One Pty Ltd (in liq) [2019] NSWSC 1495 at [85]: "While the notion of commercial morality is obviously a broad one, the cases may perhaps be distilled to two key enquiries. First, was the director's behaviour unsatisfactory having regard to their duties as a director under the Corporations Act as well as basic concepts of honesty and competence; do they understand the nature of a corporation and the content of their duties as a director? A recurring theme is the importance of the duty to keep proper books and records, the duty not to trade while insolvent and the duty of cooperation with the liquidator but breaches of laws other than the Corporations Act, especially taxation legislation, are also relevant. Second, if breaches have occurred in the past, has a good explanation been proffered? Does the director understand that the events which occurred were unsatisfactory? What steps have been taken to mitigate or cure the breaches, or, conversely, is it likely that breaches will recur in the future."

Summary of relevant evidence

1. The Company was registered on 2 August 2007 as the corporate vehicle for a property development joint venture between RSE and NWEC on certain land in Dundas Valley, New South Wales (the Land).
2. Each of RSE and NWEC owned 50% of the shares in the Company at all material times.
3. The directors of the Company at all material times were (and remain) Mr Raphael Shin (appointed by RSE) and Mr Soo Wung Kang (appointed by NWEC).
4. From about 2011, disputes arose between RSE and NWEC about the management and operations of the Company.
5. In October 2013, NWEC commenced proceedings in this Court against the Company, RSE, and Mr Shin seeking orders for the taking of an account of the all dealings and transactions and an inquiry into the parties' assets and liabilities in relation to the acquisition and development of the Land, and an order that RSE and Mr Shin pay to NWEC or the Company any amounts found due and owing on the taking of the account and the holding of the inquiry (the 2013 proceedings) Space Con Pty Ltd (Space Con) was joined as a defendant to the 2013 proceedings in 20 July 2015. Space Con is a wholly owned subsidiary of RSE and Mr Shin is its sole director. The Company had entered into a construction contract with Space Con for the construction of the proposed development on the Land.
6. In reasons for judgment published in the 2013 proceedings on 25 February 2019, Lindsay J observed that it was common ground between the parties that management of the Company's affairs had been deadlocked for some time. [1] His Honour found that the deadlock commenced in October 2011, and that the Company effectively ceased to carry on business in or about April 2012: NWEC Pty Ltd v NW & RS Enterprises Pty Ltd, supra, [2019] NSWSC 149 at [9]-[11], [14].
7. The parties took various steps in the context of the 2013 proceedings to endeavour to settle and account between themselves. These steps were unsuccessful, although the issues in dispute may have been narrowed.
8. On 13 October 2017, the Court made orders in the 2013 proceedings appointing Mr Dragan Ljubic of Tribeca Advisory Pty Ltd as receiver and manager of the Company's property with directions for the Land to be sold (the Receiver).
9. The Receiver sold the Land on 7 December 2017. On settlement of the sale, the net proceeds of sale after discharging a mortgage secured over the Land were paid into Court in the sum of $3,997,213.60. That sum was subsequently paid out of Court to the parties' solicitors jointly to be held on trust pending the determination of the 2013 proceedings: NWEC Pty Ltd v NW & RS Enterprises Pty Ltd, supra, at [23]-[27]. It is convenient to refer to this as the Trust Fund.
10. On 25 February 2019, the judgment of Lindsay J in the 2013 proceedings was published. His Honour made certain findings about the construction of the Shareholders Deed executed by NWEC, RSE and the Company on 7 April 2008 and its application to the evidence adduced in the 2013 proceedings: NWEC Pty Ltd v NW & RS Enterprises Pty Ltd, supra, especially at [95]-[120]. His Honour concluded (at [121]-[123]): "121. The ultimate financial outcome of these proceedings requires the parties to give further attention to their 'accounts' in light of the Court's determination of questions about the proper construction and operation of the Shareholders Deed and the construction contract. 122. Leaving aside vexed questions about the costs of the proceedings, I anticipate that the rights and obligations of each party will be able to be accommodated within the parameters of the net proceeds of sale of the Dundas Land. 123. In summary, the plaintiff [NWEC] is entitled, as a priority, to recover its capital ($2.18 million) plus interest at court rates for the time it was deprived of its money. The second defendant [RSE] will be entitled to a reasonable allowance for bank charges, stamp duty and interest associated with the period before the joint venture's abandonment, although it is not entitled to burden the plaintiff [NWEC] with amounts paid to the fourth defendant [Space Con] for work not done."
11. On 30 April 2019, the sum of $2,180,000 was paid to NWEC out of the Trust Fund in accordance with paragraph [123] of the judgment of Lindsay J referred to above and an order made by his Honour on 8 March 2019. The remaining balance in the Trust Fund at that time was $1,890,923.07 (including interest accrued since the Trust Fund was established).
12. On 6 November 2019, Lindsay made the following orders in the 2013 proceedings, including: 1. orders requiring each of RSE and Space Con to pay certain sums to the Company, and the Company to pay to Space Con an amount to be assessed as reasonable remuneration for work undertaken by Space Con on the Land during the period up to 1 May 2012 (orders 5 to 8); and 2. an order that the solicitors for NWEC and RSE apply the Trust Fund by paying the sum of $790,465 to NWEC and paying the balance to the liquidator appointed pursuant to order 14 (orders 4 and 12); 3. an order winding up the Company pursuant to s 461(1)(k) of the Corporations Act (order 13); and 4. an order appointing Mr Ljubic as liquidator of the Company (order 14).
13. On 14 November 2019, the Trust Fund of $1,910,807.21 (including interest) was transferred to the bank account established by Mr Ljubic for the winding up of the Company (the Liquidator and the Liquidation Account).
14. On 20 November 2019, the Liquidator paid $790,445 from the Liquidation Account to NWEC, substantially in accordance with order 4 made on 6 November 2019. The payments required as between RSE, Space Con and the Company pursuant to orders 5 to 8 were not made. It appears that this is partly attributable to the need to assess the remuneration payable to Space Con and partly due to RSE, Space Con and Mr Shin filing of an appeal on 6 February 2020 against the judgment and orders of Lindsay J. [2] No stay of his Honour's orders was sought or granted, but all parties to the proceedings and the Liquidator appear to have acquiesced in the deferral of those payments pending the outcome of the appeal proceedings.
15. On 15 March 2021, RSE, Space Con and Mr Shin (collectively, the Shin Interests) entered into a Deed of Settlement and Release with NWEC, Mr Kang and H&H Lawyers Pty Ltd.
16. Clause 2 of the deed provides that it does not become binding unless and until the Court makes an order under s 482 of the Corporations Act terminating the winding up of the Company.
17. Clause 3.1 of the deed requires the parties to file consent orders for the dismissal of the appeal on terms that: 1. orders 5 to 8 made by Lindsay J on 6 November 2019, and a costs order made by his Honour on the same date, be set aside; 2. the Company pay NWEC the sum of $300,000 in addition to the monies paid or payable under the orders made on 6 November 2019 (other than the orders to be set aside, as referred to immediately above); and 3. the notice of appeal and amended notice of cross-appeal otherwise be dismissed with no order as to the costs of the appeal proceedings.
18. I assume that the parties are satisfied that they will be able to demonstrate, if and to the extent required by the Court of Appeal, that it is appropriate for orders made by Lindsay J to be set aside by consent.
19. Clauses 3.1 to 3.5 of the deed provide that, upon payment of the $300,000 sum by the Company to NWEC in accordance with the consent orders referred to above, NWEC will transfer its shares in the Company to RSE (or its nominee) and Mr Kang will resign as a director of the Company.
20. Clause 4 of the deed contains mutual releases as between the Shin Interests on the one hand and NWEC and Mr Kang on the other hand in relation to all claims and liabilities, and a promise by the parties to procure or do all things necessary to ensure that the Company releases the Shin Interests, NWEC and Mr Kang from all claims and liabilities.
21. The effect of the deed is that, if an order is made terminating the winding up of the Company, the releases in clause 4 will take effect and the Company will become liable to pay $300,000 to NWEC upon entry of the consent orders disposing of the appeal proceedings, assuming that the Court of Appeal is satisfied that it is appropriate to make those orders.
22. As at the date of the resumed hearing before me on 23 April 2021, the Company had the following liabilities (putting to one side any liabilities that will be released pursuant to clause 4 of the deed if an order is made terminating the winding up): 1. a tax debt of $445,472.59 assessed by the Commissioner of Taxation in March 2021 as owing by the Company for unpaid income tax for the period from 1 July 2017 to 30 June 2018 and the general interest charge that has accrued in respect of that sum in the period up to 5 November 2019; 2. a presently unquantified debt to the Commissioner of Taxation for general interest charge accrued on the $445,472.59 debt from 6 November 2019; 3. an amount potentially owing to the Commissioner of Taxation in respect of Business Activity Statements not lodged by the Company.
23. The Company has approximately $1,089,182 cash at bank to meet those liabilities, being the balance of the Liquidation Account (including interest) after the payment referred to at [23] above.
24. In his affidavit sworn on 18 December 2020, Mr Shin candidly deposed that the Company had outstanding income tax returns for the years ended 30 June 2017, 2018, 2019 and 2020. He did not explain the reasons for the failure to lodge those returns, but I infer that it is connected with the deadlock between the two directors of the Company since 2011 and the fact that the Company had ceased trading in about April 2012. Mr Shin had sought taxation advice and an estimate of the Company's potential tax liabilities in October 2020 and had been advised that those liabilities would be in the order of $490,000.
25. The need for the Company to file the outstanding income tax returns has been overtaken by the default assessment issued by the Commissioner of Taxation in March 2021, as referred to at [31] above. As the Company has not traded since April 2012, I infer that the tax assessed as payable in respect of the financial year ended 30 June 2018 is capital gains tax referable to the sale of the Land in November 2017. On that basis, I note neither RSE nor NWEC has derived any benefit from the Company's failure to lodge those tax returns, as the whole of the net sale proceeds of the Land have been held in the Trust Fund and, subsequently, the Liquidation Account.
26. During the period since the hearing on 22 February 2021, discussions between RSE, the directors of the Company, the Liquidator and the Commissioner of Taxation have resulted in the Commissioner consenting to the winding up order on the basis that: 1. the sum of $495,472.59 is held in the trust account of the solicitor acting for the Company in liquidation for the purpose of discharging the liability to pay the tax debt of $445,472.59 referred to above plus any additional general interest charges and amounts potentially payable in respect of Business Activity Statements not yet lodged (noting that it is unlikely that any amounts will be payable in respect of the Business Activity Statements in circumstances where the Company has not been trading); 2. the order terminating the winding up will include an order requiring the Company to comply with its reporting obligations; and 3. Mr Shin provides a personal guarantee to pay to the Commissioner any part of the Company's taxation liabilities accrued up to the date of the winding up order that remain unpaid within 14 days after written demand.
27. The evidence establishes that the solicitor acting for the Company in liquidation holds the sum of $495,472.59 on trust. That is money of the Company. During the hearing, I inquired why the sum of $445,472.59 had not simply been paid out of those funds of the Company to the Commissioner of Taxation, given that the Commissioner has assessed this amount as a debt due by the Company. No reason was identified, and senior counsel for RSE indicated that any order terminating the winding up of the Company could be made in terms that it take effect only after the $445,472.59 has been paid and the Commissioner of Taxation has filed an affidavit confirming receipt of that payment. The solicitors appearing for the Company and the Commissioner for Taxation indicated that they were content with that course.
28. If the winding up of the Company is terminated after payment of the sum of $445,472.59 to the Commissioner of Taxation, the Company will have cash at bank of approximately $343,710 on termination of the winding up after paying the $300,000 provided for in the consent orders dismissing the appeal proceedings. It will have no liabilities other than the general interest charge in respect of the tax debt that has accrued since 6 November 2019, and any amount (if any) payable in respect of Business Activity Statements yet to be lodged. After payment of the $445,472.59, a sum of $50,000 will remain in the solicitors' trust account referred to above to meet these liabilities.
29. If the winding up is terminated, RSE will become the sole shareholder and Mr Shin will become the sole director of the Company in accordance with the Deed of Settlement and Release. This will bring an end to the shareholder dispute and the deadlock in the management of the Company that ultimately resulted in the winding up under s 461(1)(k) of the Corporations Act. It will also bring an end to proceedings in this Court and the Court of Appeal between Mr Shin, RSE and Space Con on the one hand and NWEC on the other hand.
30. In his affidavit sworn on 18 December 2020, Mr Shin deposed that he intends to cause the Company to re-commence trading as a property development company in the long-term future "if it is commercially viable to do so", although "the exact plan is as yet undetermined". Mr Shin deposed that he did not intend for the Company to engage in any other activities which would involve incurring significant debts.
31. At a creditors' meeting of the Company held on 15 March 2021, a resolution was passed approving the Liquidator's remuneration.
32. The Liquidator neither consents to nor opposes an order being made terminating the winding up of the Company.
33. It remains to mention that the Liquidator expressed the view in his report to creditors on 4 February 2020 that the Company did not appear to have maintained adequate books and records. I accept the submission made by senior counsel for RSE that this statement appears to have been made in the context of the Liquidator's consideration of potential recovery actions and was therefore likely directed to the books and records kept from the start of the relation back period until the date of the winding up order. During that period, and for several years prior to that, the Company had not traded and its directors had been in a state of deadlock over the management of the Company.
34. In his affidavit sworn on 21 April 2021, Mr Shin attributes the failure to keep proper financial records to the deadlock and dispute between the Company's shareholders and directors, and the ensuing litigation in the 2013 proceedings. Mr Shin says that he understands that a director is obliged, amongst other things, to cause the company to keep proper books and records and that the failure to do so on the part of himself and Mr Kang was unsatisfactory. Mr Shin says that he regrets that failure and, if the winding up is terminated, he will ensure that the books and records of the Company are and remain sufficient to meet the requirements of s 286 of the Corporations Act.

Consideration and determination

1. The Company was wound up on the just and equitable ground in circumstances where there had been a long-running deadlock in its management and it had ceased trading.
2. Notwithstanding these difficulties, the Company had significant funds at the time of winding up following the sale of the Land. Its only creditors were its contributories (RSE and NWEC), a related entity of RSE (Space Con) and the Commissioner of Taxation. Arrangements have been made to pay the debt owing to the Commissioner of Taxation, and the termination of the winding up will not proceed if those arrangements are not complied with.
3. The contributories and their related entities have reached an agreement that resolves all of their disputes on the terms of the Deed of Settlement and Release. The deed is conditional on the winding up being terminated. If that occurs, the Company will have surplus funds and no liabilities after payment of the amount due to NWEC under the deed and taking into account that the Company will have already paid the $445,472.59 owed to the Commissioner of Taxation. The Company's only liabilities other than those referred to at [37] above, for which funds have been set aside.
4. Importantly, the terms of the deed also have the effect of resolving the dispute between the shareholders and directors of the Company and removing the deadlock, if the winding up is terminated. RSE will become the sole shareholder and Mr Shin will become the sole director. The parties have agreed to dispose of the appeal proceedings by consent.
5. It is most unsatisfactory that the Company failed to file income tax returns for several years prior to its winding up and incurred a substantial tax liability in the year ending 30 June 2017 which presently remains unpaid. I accept that this state of affairs came about by reason of the deadlock and ongoing litigation between the directors and shareholders of the Company in the 2013 proceedings. I am satisfied that Mr Shin understands that the Company's failure to file tax returns was unacceptable. This is demonstrated by the steps that he has taken since late 2020 to quantify the Company's outstanding tax liabilities and engage with the ATO, including giving a personal guarantee to the Commissioner of Taxation in respect of the outstanding amount. As I have referred to earlier in these reasons, Mr Shin, his co-director of the Company and the shareholders of the Company derived no financial benefit from the Company's failure to file its tax return and failure to pay the tax owing promptly following the end of the 2017 financial year. No tax was owing in respect of the other years for which returns were not filed, as the Company was not trading. In all the circumstances, I do not consider that the failure to file the tax returns involved commercial immorality.
6. Nor do I consider that the directors' failure to maintain proper books and records for the Company constituted commercial immorality. The failure was unsatisfactory, but it occurred in circumstances where the Company was no longer trading, there was a deadlock in its management, and the two shareholders and their associated directors were focussed on the 2013 proceedings. I accept Mr Shin's evidence that he understands the importance of maintaining proper books and records for the Company, that he regrets his past failures in this regard and that he will ensure that the Company complies with its obligations under s 286 of the Corporations Act if the winding up is terminated.
7. The evidence establishes that, by the time of the hearing on 23 April 2021, notice of the application to terminate the winding up had been served on all creditors and contributories.
8. Both contributories consent to the application and have entered into the Deed of Settlement and Release governing the steps to be taken upon termination of the winding up in order to bring the whole of the dispute between them to an end.
9. The Commissioner of Taxation is the Company's sole creditor, putting to one side the contributories' claims that are to be released by the Deed of Settlement and Release. The parties accept that the $445,472.59 amount assessed by the Commissioner must be paid before any order terminating the winding up takes effect. The Commissioner has consented to an order terminating the winding up. The Commissioner has reached that position after discussions with RSE and the Liquidator concerning funds to be held in trust for the payment of additional amounts owing in respect of the Company's liability for additional general interest charges and any amount payable in respect of Business Activity Statements yet to be lodged.
10. The Company will be solvent upon the termination order being made and the Deed of Settlement and Release taking effect. Mr Shin's plans for the future of the Company are tentative and subject to an assessment of relevant commercial conditions. The evidence does not reveal a risk to the interests of future creditors of the Company if it re-enters commercial life. With the deadlock resolved by NWEC's transfer of its shares in the Company to RSE and the resignation of Mr Kang as a director, there is no reason to think that circumstances that gave rise to the winding up will be repeated.
11. The Liquidator's remuneration has been paid and he does not oppose an order being made to terminate the winding up.
12. For all of those reasons, I am satisfied that it is appropriate to exercise the discretion under s 482 of the Corporations Act to terminate the winding up of the Company, provided that the tax debt of $445,472.59 assessed as owing by the Company is paid.
13. As I have referred to above, senior counsel for RSE indicated that any order terminating the winding up of the Company could be made in terms that it take effect only after the $445,472.59 has been paid and the Commissioner of Taxation has filed an affidavit confirming receipt of that payment. The solicitors appearing for the Company and the Commissioner for Taxation indicated that they were content with that course.
14. On reflection after the conclusion of the hearing, it occurred to me that an order in those terms would be likely to create administrative difficulties for the Australian Securities and Investments Commission when the order is lodged, as it would need inquire into whether the Commissioner's affidavit had been provided and the date on which the order took effect.
15. For that reason, the preferable course is for me to indicate that the following orders will be made upon an affidavit being filed in these proceedings on behalf of the Commissioner of Taxation deposing to receipt of the sum of $445,472.59 from the Company (or from the Liquidator on behalf of the Company): 1. Order pursuant to s 482(1) of the Corporations Act 2001 (Cth) that the winding up of NW and RS Enterprises Pty Ltd (ACN 126 857 047) (the Company) be terminated with effect from [the date of the order]. 2. Order pursuant to s 482(3) of the Corporations Act 2001 (Cth) that the Company comply with its reporting obligations, including the lodgement of all outstanding Business Activity Statements, for the period up and including 5 November 2019, within 28 days after the date of this order. 3. No order as to costs.

Conclusion and orders

1. For all of the reasons above, the orders and notation that I make at this stage are: 1. Grant liberty to the plaintiff to apply for the making of orders in chambers in the terms set out in paragraph [58] of these reasons for judgment after the filing and service of the affidavit on behalf of the Commissioner of Taxation referred to in paragraph [58]. 2. Note that such liberty to apply may be exercised by email directed to my Associate and copied to the solicitors for NWEC Pty Limited, the defendant and the Commissioner of Taxation. 3. Stand the matter over for final orders to be made in chambers upon the filing and service of the affidavit referred to in paragraph [58] of these reasons for judgment and the exercise of the liberty to apply in order (1) above.

Endnotes

1. NWEC Pty Ltd v NW & RS Enterprises Pty Ltd [2019] NSWSC 149
2. Proceedings number 2019/379397 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: 29 April 2021