The plaintiff, Ms Hilda Elias, is the sole director and sole shareholder of Kele Group Holdings Pty Ltd (the Company), which is being wound up pursuant to orders made by the Federal Court of Australia on 7 February 2018 on the application of the Deputy Commissioner of Taxation.
Messrs Michael Smith and Erwin Alfonso, registered liquidators have been the joint and several liquidators of the Company since 29 September 2020 (the Liquidators), replacing Mr Robert Kite who was appointed as liquidator on the date of the winding up order on 7 February 2018.
By amended originating process filed in court on 19 April 2021, the plaintiff applies for:
1. an order granting her leave pursuant to s 198G of the Corporations Act 2001 (Cth) to take steps to capitalise debts owed by the Company to herself, her son and her son in law, so that those debts of the Company will be discharged by shares in the Company being allotted to those three creditors; and
2. an order terminating the winding up of the Company pursuant to s 482 of the Corporations Act on filing and service of an affidavit demonstrating that those steps have been taken.
The Company is also indebted to the Australian Taxation Office (the ATO) and to the Australian Securities and Investments Commission (ASIC). In addition the Liquidators have not yet been paid remuneration. The plaintiff does not propose to pay the ATO and ASIC debts or the Liquidators' remuneration prior to the proposed order terminating the winding up taking effect. Rather, the plaintiff has deposited $150,000 in her solicitors' trust account and asks the Court to note her irrevocable authority given to the solicitors to pay specified sums from that fund to the ATO, ASIC and the Liquidators within two days of an order being made terminating the winding up.
An affidavit of the plaintiff sworn on or about 7 April 2021 and filed on that date was read in support of the application. The plaintiff also relied on:
1. an affidavit of one of the Liquidators, Mr Smith, sworn on 29 March 2021 and filed on 7 April 2021, together with exhibit MS-1 to that affidavit;
2. affidavits of her son Mr Andrew Elias and her son-in-law Mr Fadi Sabbagh, the creditors whose debts owing to them by the Company are proposed to be capitalised (in addition to the debt owing by the Company to the plaintiff); and
3. an affidavit affirmed by Mr Martin Rosenblatt, a solicitor acting for the plaintiff in these proceedings. Mr Rosenblatt's affidavit establishes that ASIC and the ATO were notified of the plaintiff's application to terminate the winding up, albeit only on 15 April 2021.
The power to order that a winding up be terminated under s 482 of the Corporations Act is discretionary. I respectfully adopt (without repeating) the detailed summary by Black J in Re Spartan Pastoral Company Pty Ltd (in liq) [2020] NSWSC 1218 at [25]-[31] of the considerations established by the authorities as relevant to the exercise of the discretion. The plaintiff, as the applicant for the order, bears the onus of making out a positive case for terminating the winding up.
I accept the plaintiff's submission that, as a contributory and creditor of the Company, she has standing under s 482 of the Corporations Act to apply for an order terminating the winding up. I will make further reference to the plaintiff's status as a creditor below.
The Company was incorporated in 1994. The sole business of the Company was the acquisition of real property which the Company then rented out to tenants.
However, at the time the winding up order was made in February 2018, the Company had not traded at all for the previous year and owned no properties. Its previous property holdings had been sold during the period from 2009 to early 2017. All but one of the properties were sold by 2013, and the Company owned a single property thereafter which it rented out, until that property was sold in February 2017. According to the report to creditors prepared by the Company's former liquidator, Mr Kite, on 2 May 2018, the properties had been sold in circumstances where the mortgagees had sought to repossess the properties. That report was exhibited to Mr Smith's affidavit.
The Company had incurred significant tax losses over several years while it was trading. Its 2018 tax return annexed to the plaintiff's affidavit discloses accumulated tax losses of $1,979,758 to be carried forward to the 2018-2019 income year. Approximately half of those losses had been incurred in the 2013-2014 income year alone, with almost all of the balance of the losses having been incurred in the 2012-2013 and earlier income years.
The plaintiff has been the Company's sole director since 8 October 2009, yet her affidavit did not explain the circumstances in which the Company had incurred these significant trading losses, and sold off its assets to repay secured creditors before ultimately being wound up in February 2018.
There was inconsistent evidence about the Company's lodgement of tax returns. The plaintiff deposed that the Company's lodgement of tax returns was up to date at the time of the winding up. However, Mr Kite's report to creditors dated 2 May 2018 stated that the ATO had advised that the Company's income tax returns had not been lodged since 2009.
The plaintiff's evidence emphasised that the amount of approximately $215,000 claimed by the Deputy Commissioner of Taxation in the winding up petition was disputed by the Company and was subsequently reduced to $61,261.15 by an amended proof of debt filed in the winding up. Mr Smith's evidence confirmed this reduction in the amount claimed by the Deputy Commissioner. Neither the plaintiff's solicitor nor the solicitor who appeared on behalf of the Liquidator were able to refer me to any reasons for judgment published by the Federal Court in relation to the winding up order. It appears that the Court's order for the Company to be wound up in insolvency may have been made without opposition. It was not submitted that the Federal Court erred in making that order, and the fact that the Company may have disputed the precise amount claimed by the Deputy Commissioner of Taxation at the time has no relevance to the present application to terminate the winding up.
The plaintiff also emphasised that, at the time the winding up order was made, the Company had no "non-related creditors" other than the ATO.
The plaintiff gave evidence that the Company is indebted to her in the sum of $623,316, to her son Mr Andrew Elias in the sum of $730,973 and to her son-in-law Fadi Sabbagh in the sum of $23,262.
Mr Smith's evidence confirmed these amounts owing to the three related creditors and an additional amount of $565 owing to ASIC. No further proofs of debt were received after the Liquidators issued a circular to creditors on 21 January 2021 advising of the proposed application to terminate the winding up and calling for proof of any debts not yet admitted in the winding up.
The plaintiff deposed that she and the other two related creditors have agreed to convert the debt owed to them into equity in the Company and that the plaintiff intends to cause the Company to enter into deeds to give effect to that conversion if the Court grants leave for her to do so pursuant to s 198G of the Corporations Act and to instruct the Company's accountant to issue additional shares and distribute them to those creditors in accordance with the deeds, and file a Form 484 with ASIC. A copy of the proposed form of deed is annexed to the plaintiff's affidavit.
Mr Sabbagh and Mr Elias swore affidavits deposing that they are creditors of the Company, they have agreed that the Company's debts owing to them will be converted to shares, and they are in favour of the application to terminate the winding up of the Company.
The plaintiff has paid $150,000 into her solicitors' trust account and has given her solicitors an irrevocable authority and direction to pay those funds as follows within 2 days of an order being made terminating the winding up of the Company:
1. $64,069.93 to the ATO;
2. $655.00 to ASIC;
3. $85,275.07 to the Liquidators in full payment of past and future remuneration and costs.
The plaintiff deposed that the $150,000 sum was included in the debt owed to her by the Company to be converted into shares in the manner described above.
According to the plaintiff, the Company would have no creditors and would be solvent immediately following the capitalisation of the debts owed to the related creditors above by the proposed conversion deeds and the disbursement of the $150,000 fund in the manner described above.
Mr Smith expressed the same view in his affidavit. However, it is also plain from Mr Smith's evidence that the Company does not have any funds or other assets.
On 5 January 2021, the Liquidators issued proceedings in the Federal Court of Australia against the plaintiff, the other related creditors of the Company and the plaintiff's daughter, claiming that transactions relating to the sale of the Company's final property in February 2017 were uncommercial and unreasonable director-related transactions (the Part 5.7B proceedings).
Mr Smith deposed that, on or about 1 March 2021, the Liquidators reached an agreement with the plaintiff and the other related creditors that the Liquidators would depose to the solvency of the Company in support of the plaintiff's application to terminate the winding up if the related creditors contributed the sum of $150,000 to be applied to the debt owed to the Deputy Commissioner of Taxation and the Liquidators' remuneration and costs, and if the related creditors converted their debts to equity in the Company. The Liquidators also agreed to discontinue the Part 5.7B proceedings in the Federal Court if the winding up is terminated.
The plaintiff deposed that:
"If the winding up is terminated and the Company returned to me as director, the intention is for the Company to conservatively acquire a small number of properties, the rent from which will be sufficient to cover finance and other expenses and to make use of the aforementioned tax losses."
The "aforementioned tax losses" are the losses totalling $1,979,758 generated by the Company in the years up to and including the 2013-2014 income year, as referred to at [10] above.
The plaintiff did not elaborate on how the Company, with no funds and no assets, would acquire a small number of properties. As the plaintiff's solicitor acknowledged, any financier would be likely to lend only approximately 75% of the purchase price, with the Company contributing the remainder of the funds required to acquire the properties.
Nor did the plaintiff elaborate on what steps the Company would take in order to ensure that the rental income from those properties would be sufficient to cover finance costs and other expenses that the Company would incur. There is no evidence of the reasons why the Company incurred heavy losses in the years up to the 2013-2014 income year. It is therefore impossible to have any confidence that those circumstances would not be repeated. If those circumstances were to be repeated, the Company would likely become insolvent again.
It was submitted on behalf of the plaintiff that these losses were the consequence of the manner in which the Company had been managed by its previous director prior to the plaintiff becoming the sole director in October 2009 and I should infer that the circumstances would not be repeated under the plaintiff's management of the Company. I reject that submission. As I have said, there is no evidence of the reasons for the Company's past losses. There is no basis to infer that the losses were attributable to the management of the Company prior to 2009. Almost half of the losses were incurred in the 2013-2014 income year alone, some four years after the plaintiff became the sole director. It is proposed that the plaintiff will act as the sole director of the Company if the winding up is terminated.
It was also submitted on behalf of the plaintiff that these past losses were not a matter of significance in the exercise of the Court's discretion whether to terminate the winding up, in circumstances where the evidence demonstrated that the Company would be solvent within days after the proposed termination because the related creditors' debts would have been converted to equity and the other creditors would have been paid out the $150,000 fund.
I reject that submission. I do accept that the most significant consideration in the determination of the plaintiff's application is that, the Company will be solvent if the winding up is terminated: Re SNL Group Pty Ltd (in liq) [2010] NSWSC 797 at [24]; Re Glass Recycling Pty Ltd [2014] NSWSC 439 at [18]; Re Spartan Pastoral Company (supra) at [30]. However, there are other very important considerations. Where the Court's discretion to terminate a winding up is invoked, the Court seeks some comfort that a similar state of affairs is not likely to recur in the future. The Court therefore requires evidence demonstrating not only that the company in question is solvent, but also that it is likely to remain solvent: Re Glass Recycling (supra) at [20]-[22]. As Barrett J said in Re Pine Forests of Australia (Canberra) Pty Ltd [2010] NSWSC 1127 at [3]), a central question is:
"Whether the company's financial health is such that it may safely be released from the form of external administration focussed mainly on the interests of creditors and returned to the mainstream of commercial life where it may, under the control of its directors, incur new debts that have to be paid as and when they fall due. A capacity to operate in a financially sound and responsible way and to service foreseen indebtedness is central to the inquiry."
The above passage was cited and applied by Brereton J (as his Honour then was) in Re Glass Recycling (supra) at [22] and in Re CNL Transport Pty Ltd (in liq) [2017] NSWSC 291 at [24].
In the present case, the Company has a track record of trading at significant losses and having to sell its assets to avoid secured creditors exercising their powers of sale. There is no evidence that would give the Court comfort that, under the control of the same director who presided over the generation of those losses and distressed asset sales during the period from 2009 to 2018, the Company would operate in a financially sound and responsible manner going forward if the winding up is terminated. With the Company to have no assets or funds at the time of the proposed termination of the winding up, it is not clear how the Company will operate at all, much less how it will operate in a financially responsible manner. I do not accept the plaintiff's submission that this absence of evidence is inevitable because one is looking into the future. It would have been open to the Company to present to the Court some evidence of the manner in which it proposes to achieve the objectives described by the plaintiff. No such evidence was adduced.
It was submitted on behalf of the plaintiff that the Company's historical financial performance should not count against it because "the Company does not have a history of leaving creditors unpaid". It was submitted that I should infer that the Company managed to pay its debts in the past through a combination of the asset sales and support from shareholders or members of the Elias family. The plaintiff's solicitor submitted that I should infer that the plaintiff and her family would continue to provide financial support for the Company in the future.
I decline to draw this inference for two reasons. First, the Company does not have a track record of paying all of its creditors. The Deputy Commissioner of Taxation was not paid, and this resulted in the Company being wound up. Second, there was no evidence adduced of the willingness and ability of the plaintiff and her family members to provide financial support to the Company as and when required to pay its debts when they fall due in the future if the winding up is terminated: see Wily v Terra Cresta Business Solutions Pty Ltd [2006] NSWSC 1042 at [43].
For completeness, I note that the Liquidators' solicitor declined to make any submission on the hearing of the application as to the Company's ability to remain solvent in the future if the winding up is terminated.
The Company's failure to demonstrate its capacity to operate in a financially sound and responsible way, including paying its debts in a timely manner, if the winding up is terminated, is sufficient reason to decline to exercise the discretion to terminate the winding up. The proposed capitalisation of the debts owed to the Company's related creditors and the undertakings concerning the distribution of the $150,000 fund go to the position immediately upon the proposed termination of the winding up. However, those matters provide no comfort that the Company would be likely to remain solvent thereafter in all the circumstances of this case to which I have referred above.
The unresolved inconsistency in the evidence concerning whether or not the Company had complied with its statutory obligations to lodge income tax returns for a significant period prior to the winding up raises a serious question about whether the affairs of the Company were conducted in a manner contrary to commercial morality prior to the winding up. In my opinion, that is a further matter that weighs against the exercise of the discretion to terminate the winding up. However, this has not been decisive in view of the matters referred to at [25]-[37] above.
For completeness, I note that the ATO, having been made aware of the plaintiff's application for the first time on Thursday, 15 April 2021, had not expressed any view about the application prior to the hearing on Friday, 19 April 2021. I accept the plaintiff's submission that it is unlikely that the ATO would have opposed the application given that the undertakings in relation to the $150,000 fund would ensure that the debt owing to the ATO is paid in full. However, a confident guess about the ATO's attitude is no substitute for the Court knowing what that attitude is. It is not open to a plaintiff who fails to give notice of an application in a timely manner to assert that the attitude of the creditor should be assumed to be favourable to the plaintiff. If I had otherwise been minded to exercise the discretion to terminate the winding up, I would have nevertheless stood the matter over for a period of time for further consideration once the ATO had communicated its attitude to the plaintiff or to the Court.
For all of the reasons above, I make the following orders:
1. Proceedings dismissed.
2. The plaintiff is to pay the defendant's costs of the proceedings.
[2]
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: 22 April 2021