Owners - Units Plan No 1753, in the matter of Tien Investments Pty Ltd (in liq) v Tien Investments Pty Ltd - [2016] FCA 861 - FCA 2016 case summary

Federal Court of Australia|2016-08-02|Before: Reeves J

Introduction 1 Mr Le (the first applicant) is the sole director and shareholder of Tien Investments Pty Limited (in liq) ACN 076 536 439 (the second applicant/defendant). 2 Tien Investments is the registered proprietor of three investment properties. Two of those properties are located in Weston in the Australian Capital Territory (ACT) and the third is located in Woodville Gardens in South Australia. Tien Investments' sole revenue is the rent it receives from the lessees of these properties. 3 On 16 September 2015, Tien Investments was placed in liquidation after it failed to respond to a statutory demand and then failed to attend the hearing of the winding up application. 4 Mr Paul Cook of Paul Cook & Associates (the second respondent) was appointed as its liquidator. 5 Mr Le discovered that this winding up order had been made when he was informed of it by his bank, the Australia and New Zealand Banking Group, on 22 September 2015. 6 Upon making this discovery, Mr Le immediately paid the two unpaid strata levy debts owed to The Owners - Units Plan No 1753 (The Owners) (the first respondent/plaintiff). These were the debts upon which the statutory demand was based. 7 Mr Le then sought legal advice and instructed his lawyer to make an application to terminate the winding up order. That application - the present application before the Court - was filed on 22 October 2015.

Some factual background 8 Mr Le is an IT engineer. For the past 25 years, he has worked for the Australian Department of Defence in that capacity. 9 In late 1996, he decided to purchase some investment properties. To that end, he obtained advice from Mr Richard Chong, an accountant practising in Adelaide in South Australia. At that time, Mr Le and his family were living in that city. Mr Chong advised him to incorporate Tien Investments as the holding company for the investment properties he planned to purchase. From its incorporation, the address of the registered office of the company was Mr Chong's office. 10 In 2000, Mr Le and his family moved from Adelaide to Queanbeyan in New South Wales. At about that time, unknown to him, Mr Chong notified the Australian Securities and Investments Commission (ASIC) that the address of the registered office of the company had changed to Mr Le's new residential address in Queanbeyan. 11 In about 2010 or 2011, Mr Le and his family moved from Queanbeyan to an address in Narrabundah in the ACT. Shortly after making that move, Mr Le notified ACT Strata Management Services, the licensed strata managers of The Owners, of his change of address. However, because he was unaware of the change of the company's registered office to his Queanbeyan address, he did not give any such notification to ASIC. As a result, his Queanbeyan address remained the address of the registered office of Tien Investments in ASIC's records. 12 The statutory demand and the documentation relating to the winding up of the company were therefore sent to Mr Le's former residential address in Queanbeyan. It was for these reasons that Mr Le did not become aware of, or respond to, the statutory demand, nor appear at the hearing of the winding up application.

The Court's power to stay or terminate a winding up 13 Section 482(1A)(a) of the Corporations Act 2001 (Cth) (the Corporations Act) permits Mr Le to make his present application. Section 482 relevantly provides: (1) At any time during the winding up of a company, the Court may, on application, make an order staying the winding up either indefinitely or for a limited time or terminating the winding up on a day specified in the order. (1A) An application may be made by: (a) in any case - the liquidator, or a creditor or contributory, of the company; or (b) in the case of a company registered under section 21 of the Life Insurance Act 1995 - APRA; or (c) in the case of a company subject to a deed of company arrangement - the administrator of the deed. 14 The principles relating to such an application are well-established. First, the question whether to terminate a winding up is a matter within the discretion of the Court. That discretion has to be exercised judicially having regard to the particular circumstances of each matter and whether or not the termination is justified in those circumstances: see In the matter of Lorie Najjar & Sons Pty Ltd (in liq) (2013) 94 ACSR 561; [2013] NSWSC 798 at [24] per Black J and Deputy Commissioner of Taxation v Terramyer Pty Ltd (in liq) [2013] FCA 969 (Terramyer) at [12] per Gordon J. Secondly, the solvency of the company is usually a relevant and central consideration: see Double Bay Newspapers Pty Ltd v The Fitness Lounge Pty Ltd [2006] NSWSC 226 at [16]-[17] per White J; In the matter of SNL Group Pty Ltd (in liq): Su v SNL Group Pty Ltd (in liq) [2010] NSWSC 797 at [23]-[24] per Bergin CJ in Eq and Terramyer at [14] per Gordon J. Thirdly, in considering such an application, the Court commonly takes into account the interests of: • [the] creditors of the company (including future creditors); • the liquidator, particularly with respect to costs; • the contributories; • the public, including the public interest in matters of commercial morality, and the public interest that insolvent companies should be wound up. See Vero Workers Compensation (NSW) Ltd v Ferretti Pty Ltd [2006] NSWSC 292 at [17] per Austin J.

The two main areas of contention 15 Mr Cook opposed Mr Le's application. In doing so, he raised two main areas of contention pertinent to the principles outlined above. They were: (a) that the company's solvency had not been clearly established; (b) that there was a risk to future creditors posed by Mr Le's past inability as the sole director of the company to ensure it complied with its taxation obligations and to maintain proper books of account and records. 16 I will address these two areas of contention in turn.

The solvency of Tien Investments 17 At the hearing of this application, the company's solvency primarily revolved around its current unpaid liabilities to the Australian Taxation Office (ATO) for unpaid goods and services tax (GST) instalments and to Mr Cook, the liquidator, for his fees and disbursements. Mr Le tendered a letter from Mr Cook's lawyers, Church & Grace Solicitors and Attorneys, dated 8 June 2016 which set out the known current liabilities of Tien Investments, as follows: ATO core GST liability $262,900.00 (excluding penalties & interest) ATO income tax estimate $11,790.00 (excluding penalties & interest) Liquidator's remuneration $95,000.00 Provision for legal fees $20,000.00 Provision for unknown costs $25,000.00 Less: Cash on hand $63,395.37 Estimate of funds requires $351,294.00

18 To meet these current liabilities, at the hearing of this application, Mr Le informed me, through his counsel, that he proposed to sell his former family home in Adelaide and from the proceeds of that sale he intended "to inject equity capital of … $352,000" into the company. Accordingly, he stated that he would be willing to give an undertaking to the Court to make this injection of equity capital to the company within a period of four months. This period was proposed to allow a reasonable period of time for the former family home to be sold and for that sale to be settled. 19 As I interpreted his counsel's response, provided that no other outstanding issues emerged, Mr Cook was satisfied with this proposal, albeit with reservations. Those reservations are addressed below. 20 One of those reservations related to the possibility of the ATO filing an amended proof of debt. On this question, the letter from Mr Cook's lawyers referred to above went on to state: The ATO have lodged a proof of debt for GST based on the core debt estimated by the liquidator. You should note that the ATO may still amend its claim to include interest and penalties on the core debt. Any such claim could result in a material change to the estimate of funds required. 21 As well, Mr Cook said in an affidavit filed in connection with this application that: 10. In respect of the proof of debt, in my opinion it is not unreasonable to assume that the claim is a preliminary claim which does not include any claim for interest and penalties. 22 This concern was said to arise from the terms of the letter from the ATO which attached the proof of debt. That letter relevantly stated: The above named company is indebted to this office for Goods and Services Tax. Payment of the amount of $262,900.00 particulars of which are set out in the enclosed Proof of Debt is claimed from you as liquidator. This advice should not be taken as notification pursuant to section 260-45 of Schedule 1 of the Taxation Administration Act 1953. To enable us to identify any portion of our debt which may be uncollectable, please complete the attached dividend expectation advice. We would appreciate your response within 30 days, by returning the completed attachment. 23 The proof of debt which was attached to this letter described the particulars of the debt as: Consideration Amount $

GOODS AND SERVICES TAX Goods and services tax Reported as to Affairs provided by Liquidators, Paul Cook & Associates, to 16 September 2015 262,900.00

GRAND TOTAL 262,900.00

24 Apart from the reference in this letter to s 260-45 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (the Taxation Administration Act) (to which I will return below), there is no qualification expressed in it, nor in the attached proof of debt, which raises the possibility of interest or penalties being added to the debt. Nor is any such qualification implicit in any of the contents of these two documents. If the ATO wished to claim interest or any penalties in addition to the debt owed by the company for GST instalments, one might have expected that to be stated in clear terms in the proof of debt it lodged with Mr Cook. Instead, the ATO seems to have met this expectation by the obscure reference in its letter to s 260-45 of Schedule 1 of the Taxation Administration Act. 25 That section relevantly provides: 260-45 Liquidator's obligation (1) This Subdivision applies to a person who becomes a liquidator of a company. (2) Within 14 days after becoming a liquidator, the liquidator must give written notice of that fact to the Commissioner. (3) The Commissioner must, as soon as practicable, notify the liquidator of the amount (the notified amount) that the Commissioner considers is enough to discharge any outstanding tax-related liabilities that the company has when the notice is given. (4) The liquidator must not, without the Commissioner's permission, part with any of the company's assets before receiving the Commissioner's notice. (5) However, subsection (4) does not prevent the liquidator from parting with the company's assets to pay debts of the company not covered by either of the following paragraphs: (a) the outstanding tax-related liabilities; (b) any debts of the company which: (i) are unsecured; and (ii) are not required, by an Australian law, to be paid, in priority to some or all of the other debts of the company. (6) After receiving the Commissioner's notice, the liquidator must set aside, out of the assets available for paying amounts covered by paragraph (5)(a) or (b) (the ordinary debts), assets with a value calculated using the following formula: [omitted] (7) The liquidator must, in his or her capacity as liquidator, discharge the outstanding tax-related liabilities, to the extent of the value of the assets that the liquidator is required to set aside. (8) The liquidator is personally liable to discharge the liabilities, to the extent of that value, if the liquidator contravenes this section. (Emphasis in original; footnotes omitted) 26 It was made clear in the ATO's letter above (at [22]) that the proof of debt it was lodging with Mr Cook was not to be treated as a notification pursuant to the above provision. It follows that Mr Cook does not have to comply with the obligations prescribed by s 260-45(3) and (6) above. However, in the interim, he does have to comply with s 260-45(4). That is, subject to s 260-45(5), he cannot part with any of the company's assets without the Commissioner's permission until such time as he receives the notice in question. Once he receives the notice, he is then obligated to comply with s 260-45(6) and (7) in discharging the company's outstanding tax liabilities to the ATO. 27 The matters highlighted above obviously affect the termination of this winding up. Specifically, it cannot be terminated until such time as Mr Cook receives the notice from the Commissioner and complies with his obligations pursuant to it. Furthermore, this could mean Mr Cook is correct in speculating that interest and penalties may be added to the amount of the debt stated in the ATO's proof of debt. That is so because the expression "outstanding tax-related liabilities" which is used in various of the subsections of s 260-45 above is defined in s 255-1 of the Taxation Administration Act as: (1) A tax-related liability is a pecuniary liability to the Commonwealth arising directly under a taxation law (including a liability the amount of which is not yet due and payable). (2) A civil penalty under Division 290 of this Schedule or Part 5 of the Tax Agent Services Act 2009 is not a tax-related liability. (Emphasis in original; footnote omitted; notes omitted). 28 Then, there are provisions under various taxation laws that impose liability for general interest charges and administrative penalties with respect to unpaid GST instalments. In particular, a general interest charge is provided for in the Income Tax Assessment Act 1997 (Cth): see s 5-15. That charge is then applied to unpaid GST instalments by virtue of the combined effect of ss 8AAB(2) and (4) of the Taxation Administration Act and s 162-100 of the A New Tax System (Goods and Services Tax) Act 1999 (Cth) (the GST Act). Further, there is a number of administrative penalties provided for in the Taxation Administration Act that could possibly apply in the circumstances of this case. They include the following: (a) Failing to lodge a GST return electronically under s 288-10 of the Taxation Administration Act: 5 penalty units. (b) Failing to keep or retain records in the manner required by a taxation law under s 288-25 of the Taxation Administration Act: 20 penalty units. (c) Failing to comply with GST registration obligations under s 288-40 of the Taxation Administration Act: 20 penalty units. (d) Failing to issue a taxation invoice as required by s 29-70 of the GST Act under s 288-45 of the Taxation Administration Act: 20 penalty units. 29 However, aside from this complication, it would appear to be in everyone's interest that Mr Le be allowed to make his proposed equity contribution to Tien Investments. If that occurs the ATO will be assured of payment of the $262,900 debt it has claimed in the proof of debt. Further, Mr Cook will be able to discharge his obligations under s 260-45 of the Taxation Administration Act above and recover his fees and disbursements. Finally, Tien Investments' solvency will be enhanced such that it will be in a position where the winding up process can be terminated. This confluence of interests would therefore suggest that the most appropriate course in all the circumstances is that a process be put in place which achieves these outcomes. I will return to the form of the orders necessary to establish that process at the conclusion of these reasons. First, it is necessary to address the other concerns Mr Cook has raised. One of those relates to Tien Investments' solvency more generally. That is, aside from its current unpaid liabilities listed above (at [17]). 30 To address this concern, Mr Le and his current accountant, Mr Nguyen, have filed affidavits in support of this application in which they have attempted to demonstrate that the company is indeed solvent. In particular, Mr Nguyen has expressed that opinion in each of the two affidavits he has filed. However, because those opinions were expressed prior to the quantification of the unpaid liabilities mentioned above, I do not consider they provide much assistance to me in determining whether, as a question of fact, Tien Investments is presently solvent. Nonetheless, I do not consider the rejection of these opinions and the absence of any current opinion about the company's solvency is fatal to Mr Le's application. That is so because this is, in my view, one of those uncommon, if not rare, situations where that kind of expert evidence is unnecessary. Instead, I consider there is sufficient evidence before me relating to the financial circumstances of Tien Investments from which I can determine that fact myself. I am fortified in that view by three features of Tien Investments' history and activities. First, it has been operating as Mr Le's investment company for a relatively long period of time, approximately 20 years. Secondly, its sole area of activity throughout its corporate life has been real property investment. Thirdly, those investments are limited to the three properties described above - two in the ACT and one in South Australia (see at [2]). These three features therefore mean that the company has a relatively well-established pattern of commercial activities and a confined scope of operations. In these circumstances, I consider that I am able to make an assessment of the company's solvency by examining the evidence relating to that established pattern and those confined operations. 31 To that end, Mr Le and Mr Nguyen have, in their affidavits, provided what I consider to be reliable evidence as to the quantum of the company's rental income and outgoings over the past three financial years up to and including 2014/2015. In addition, Mr Le has provided evidence about the company's fixed and secured liabilities to the ANZ Bank and the approximate value of the three investment properties referred to above. In summary, that evidence reveals the following: (a) the company has a business loan facility with the ANZ Bank in the amount of $2,070,000 secured by mortgages over the three properties it owns; (b) based on valuations and updated appraisals, as at November 2015, the approximate value of each of the three properties owned by the company were as follows: 14 Trenerry properties $1,150,000 19 Trenerry property $ 780,000 The Hanson Road properties $1,400,000 Total approximate value $3,330,000; (c) the company's surplus of assets over liabilities is therefore approximately $1,260,000; (d) the total rental income for the company for the past three financial years to 2014/2015 was as follows: 2014/2015 191,268 2013/2014 188,385 2012/2013 185,711; and (e) the company's total outgoings for body corporate fees, counsel rates, insurance, mortgage interest, water rates and repairs and maintenance for the past three financial years to 2014/2015 was as follows: 2014/2015 159,034 2013/2014 177,106 2012/2013 200,303. 32 With respect to the company's rental income, Mr Cook raised some concerns about the long-term security of the various commercial tenancies. In response, Mr Le provided evidence in one of his affidavits, which I accept, that the three lessees whose leases are due to expire later in 2016 have expressed their wish to extend their leases for a further period of five years. The other concerns raised by Mr Cook are, in my view, more matters of details about the tenancy arrangements rather than matters affecting their long-term security. 33 There are two other factors pertinent to the company's solvency that should be mentioned. First, Mr Le has demonstrated that he is willing to support the company from his personal financial resources. He provided a personal guarantee to the ANZ Bank with respect to the business loan facility described above (at [31(a)]. He also used his personal credit card to pay the two strata levy debts that were the subject of the statutory demand (see at [6] above). Finally, he has put forward the proposal to contribute $352,000 in equity capital to the company. Secondly, there is the possibility (I put it no higher than this) that Tien Investments may be able to recover some of the GST instalments from its tenants. Mr Le raised this prospect in one of his affidavits filed in this application, where he said that he has "neither issued any GST included tax invoice to the tenants nor collected any amount of GST on rent from any of the properties owned by [Tien Investments]". 34 Taking into account all of these matters, provided that Mr Le makes the equity capital contribution of $352,000 to the company, I am satisfied, as a matter of fact that, when that occurs, Tien Investments will be solvent.

The risk to future creditors 35 Finally, I turn to consider the second main area of contention raised by Mr Cook: the risk posed to future creditors of the company (see at [15(b)] above). The appointment of a liquidator to Tien Investments has certainly uncovered significant deficiencies in the company's accounting records and its compliance with its taxation obligations, particularly its obligation to pay GST. This sorry history has prompted Mr Cook's concerns that "there is no guarantee of the ability of the company to trade in the future without imperiling future creditors". Given the history mentioned above, this concern is well held. The quantum of the company's unpaid GST debt provides some indication of the extent of its failings in the recent past. As the sole director and shareholder of the company, Mr Le, of course, bears the ultimate responsibility for these failings. 36 However, I am satisfied on the evidence before me that Mr Le has learnt a salutary lesson from this winding up process thus far and he is, as a result, unlikely to conduct the affairs of Tien Investments in the same manner in the future. The following matters have led me to this conclusion. First, in the affidavits he has filed in support of this application and in the submissions made on his behalf at the hearing, Mr Le has accepted full responsibility for these failings and expressed remorse that they have occurred. Secondly, he has stated he is "determined to address [Tien Investments'] past breaches and [he] undertake[s] to conduct [Tien Investments] responsibly". 37 Thirdly, to ensure that the company complies with its taxation obligations in the future, he has proposed: 8. If the company could be saved from liquidation (and assuming that this application is (sic - to) set aside the winding up order could succeed), I will ensure that the Company will pay to ATO the amount of GST liabilities that ATO determines. I will engage the assistance of an accountant to comply with the Company's ongoing GST obligations. 9. I have engaged an accountant Mr Andrew Nguyen to prepare outstanding tax returns for the Company and will lodge them with ATO as soon as [Tien Investments] ceased to be in liquidation (assuming this application to set aside the winding up order could succeed). I will engage the assistance of an accountant to comply with the Company's ongoing tax obligations. ... 17. If [Tien Investments] could be saved from liquidation, I will engage an accountant for [Tien Investments] and will keep all source documentation from now on to enable better record keeping and accounting to be done for [Tien Investments]. 38 Finally, to demonstrate support for the statement in [37] above, Mr Nguyen has filed an affidavit in which he stated: I will assist Mr Tuong Le in complying with [Tien Investments'] obligation to lodge quarterly BAS and other obligations in connection with [Tien Investments'] GST registration (if and once the winding up order was set aside). 39 Furthermore, to this end, Mr Nguyen recently wrote to the ATO stating, among other things: Mr Le is determined to rectify past breaches and failures. We would greatly appreciate it if ATO could advise as to what should be done in the circumstances by [Tien Investments] and if any penalty is to be imposed and if so how much. We would be most obliged to provide any further information if necessary. 40 In all the circumstances, I am therefore satisfied that, with the assistance of Mr Nguyen, Mr Le will ensure that Tien Investments will, in future, keep proper books of account and meet all its obligations to its creditors, including to the taxation authorities. I am therefore satisfied that these concerns do not provide a valid reason not to make the order sought by Mr Le.

Conclusion 41 For these reasons, subject to Mr Le meeting his commitment to contribute $352,000 in equity capital to the company, and Mr Cook thereafter being allowed sufficient time to comply with his obligations that I have outlined above, I consider it is appropriate to exercise my discretion to terminate the winding up of Tien Investments. 42 In Glass Recycling Pty Ltd [2014] NSWSC 439, Brereton J confronted a similar situation where the director of a company seeking to have its winding up terminated, offered an undertaking to the Court to contribute $20,000 by way of equity capital. Based on that undertaking, Brereton J terminated the winding up with effect immediately: see at [29]. 43 The position in this matter is more complicated. First, Mr Le has indicated that he requires time to sell his family home in South Australia so that he can make the proposed equity capital contribution to the company. Secondly, as I have mentioned above, Mr Cook must, once that capital contribution is made, be allowed sufficient time to meet his obligations under the Taxation Administration Act. In particular, to pay the debt due to the ATO. Finally, once those obligations are met and Mr Cook's fees and disbursements are paid, the company will then be in a position where the winding up can be terminated. 44 I therefore require the parties to prepare and submit an agreed set of orders consistent with these reasons which provide for this series of steps to occur. Those orders should include an order that Mr Cook's costs of this application be paid by Tien Investments. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Reeves.

Owners - Units Plan No 1753, in the matter of Tien Investments Pty Ltd (in liq) v Tien Investments Pty Ltd

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