Commissioner of State Revenue v McCabe (No 2)
[2024] FCA 662
•21 June 2024
FEDERAL COURT OF AUSTRALIA
Commissioner of State Revenue v McCabe (No 2) [2024] FCA 662
File number(s): QUD 99 of 2023 Judgment of: SARAH C DERRINGTON J Date of judgment: 21 June 2024 Catchwords: CORPORATIONS – voluntary administration – resolution of creditors of corporate group to execute Deed of Company Arrangement (DOCA) – application by Commissioner of State Revenue under ss 445D(1) or s 447A of the Corporations Act 2001 (Cth) to set aside DOCA
CORPORATIONS – whether DOCA continuing on foot is against public interest and commercial morality – construction of public interest and commercial morality – whether DOCA subverts object of Pt 5.3A of the Corporations Act – whether DOCA shields directors from scrutiny and possible claims for breaches of duty – whether better prospects of recovery for creditors in a liquidation than under DOCA
CORPORATIONS – whether Report to Creditors false and misleading for non-disclosure of material information about payroll tax liabilities details of the companies’ solvency – whether companies failed to maintain books and records in breach of s 286 of the Corporations Act – whether material omission from the Report to report on or to conduct investigations into companies’ taxation liability or failing to adjourn Second Meeting of Creditors to enable such investigations
CORPORATIONS – whether DOCA unfairly discriminatory against Commissioner as creditor within the meaning of s 445D(1)(f)(i) of the Corporations Act
CORPORATIONS – alternative order sought that Administrators’ casting vote be set aside under s 75-42 of the Insolvency Practice Schedule (Corporations) 2016, Schedule 2 to the Corporations Act – whether Administrators’ exercise of casting vote appropriate and DOCA should be deemed not to have passed at Second Meeting
Legislation: Australian Securities and Investments Commission Act 2001 (Cth) ss 12CA, 12 CB
Corporations Act 2001 (Cth) ss 9, 180, 181, 182, 183, 206C, 286, 334(1), 411(1), 436A, 445D, 445D(1)(a), 445D(1)(b), 445D(1)(c), 445D(1)(f), 445D(1)(g), 447A, 447A(2), 533, 534, 588G, 596A, 596B, 600B, 1317E, 1317H, Pt 5.3A, Pt 5.7B
Corporate Law Reform Act 1992 (Cth)
Taxation Administration Act 1953 (Cth) Sch 1, s 350-10
Income Tax Assessment Act 1936 (Cth) s 260
Absent Debtors Act (4 Vict No 6)
Construction Contracts (Security of Payments) Act 2004 (NT)
Insolvency Act of 1841 (5 Vict No 17)
Insolvency Practice Schedule (Corporations) 2016, Schedule 2 to the Corporations Act, s 75-42
Joint Stock Companies Winding-up Act of 1844 (7 & 8 Vict c 111)
Payroll Tax Act 1971 (Qld) ss 51A, 93, Pt 4
Right to Information Act 2009 (Qld)
Statute of Bankrupts 1542 (34 & 35 Henry 8 c.4) s 2
Taxation Administration Act 2001 (Qld) ss 34, 47, 50, 63, 64, 80, 111, 132, 132(1), 140, 140(5), Pt 7, Sch 2
Winding-up Act of 1847 (11 Vict No 19)
Corporate Law Reform Bill 1992 (Cth)
Cases cited: Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to Deed of Company Arrangement) (No 4) [2019] FCA 1846
Attorney-General (Cth) v Alinta Ltd [2008] HCA 2; 233 CLR 542
Australasian Memory Pty Ltd v Brien [2000] HCA 30; 200 CLR 270
Australian Securities and Investments Commission v Kobelt [2019] HCA 18; 267 CLR 1
Australian Securities and Investments Commission v Midland Hwy Pty Ltd (admin apptd) [2015] FCA 1360; 110 ACSR 203
Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510
Blacktown Concrete Services Pty Ltd v Ultra Refurbishing & Construction Pty Ltd (in liq) (1998) 43 NSWLR 484
Blatch v Archer (1774) 1 Cowp 631; 98 ER 968
Britax Childcare Pty Ltd v INFA Products Pty Ltd [2015] FCA 848; 115 ACSR 322
Canstruct Pty Ltd v Project Sea Dragon Pty Ltd (Subject to a Deed of Company Arrangement) (No 4) [2024] FCA 112
Commissioner of State Revenue v McCabe [2024] FCA 496
Commonwealth v Rocklea Spinning Mills Pty Ltd [2005] FCA 902; 145 FCR 220
Cridland v Federal Commissioner of Taxation (1977) 140 CLR 330
CSR Limited, in the matter of CSR Limited [2010] FCA 33; 264 ALR 461; 76 ACSR 454
Decon Australia Pty Ltd v TFM Epping Land Pty Ltd (No 2) [2021] FCA 32
Decon Australia Pty Ltd v TFM Epping Land Pty Ltd [2022] FCAFC 54
Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41; 237 CLR 473
Deputy Commissioner of Taxation v TMPL (No 3) [2011] FCR 1403; 289 ALR 69
Deputy Commissioner of Taxation v Wellnora [2007] FCA 1234; 163 FCR 232
Deputy Commissioner of Taxation v Woodings (1995) 13 WAR 189; 16 ACSR 266
Eco Heat (Vic) Pty Ltd v Syndicate Forty Four Pty Ltd (Subject to Deed of Company Arrangement) [2018] VSC 156
Elliot v Australian Securities and Investments Commission [2004] VSCA 54
Emanuele v Australian Securities Commission (1995) 63 FCR 54
Ex parte Hester (1889) 22 QBD 632
FederalCommissioner of Taxation v All Suburbs Car Repairs Pty Ltd [1994] FCA 1393; 14 ACSR 753
Federal Commissioner of Taxation v Westraders Pty Ltd (1980) 144 CLR 55
Gambro Pty Ltd v Fresenius Medical Care Australia Pty Ltd [2007] FCA 1828; 245 ALR 14
Habrok (Dalgaranga) Pty Ltd v Gascoyne Resources Ltd [2020] FCA 1395
Hagenvale Pty Ltd v Depela Pty Ltd (1995) 17 ACSR 139
Hansen Yuncken Pty Ltd v Ian James Ericson trading as Flea’s Concreting [2012] QSC 51
Kalon Pty Ltd v Sydney Land Corporation Pty Ltd (No 2) (1998) 26 ACSR 593
Khoury v Zambena (1997) 23 ACSR 344
Macquarie Health Corp Ltd v Commissioner of Taxation (1996) 96 FCR 238
Mediterranean Olives Financial Pty Ltd v Loaders Traders Pty Ltd (Subject to Deed of Company Arrangement) (No 2) [2011] FCA 178
Metledge v Bambakit Pty Ltd [2005] NSWSC 160
Paciocco v Australia & New Zealand Banking Group Ltd [2016] HCA 28; 258 CLR 525
Plumbers Supplies v Firedam Civil Engineering [2011] NSWSC 325
Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; 194 CLR 355
R v Bradford Metropolitan City Council; ex parte Corris [1981] 3 All ER 156
Re Carey Builders Pty Ltd (1997) 23 ACSR 754
Re CSR Ltd [2010] FCAFC 34; 183 FCR 358
Re Denistone Real Estate Pty Ltd [1970] 3 NSWLR 327
Re Flatau [1893] 2 QB 219
Re Mascot Home Furnishers Pty Ltd [1970] VR 593
Re Octaviar Ltd (No 8) [2009] QSC 202; 73 ACSR 139
Re Telescriptor Syndicate Limited [1903] 2 Ch 174
Relwood Pty Ltd v Manning Homes Pty Ltd (No 2) [1992] 2 Qd R 197
Secure Funding Pty Ltd v Bettini [2011] NSWSC 557
Sino Group International Limited v Toddler Kindy Gymbaroo Pty Ltd [2023] FCAFC 110
Swain v Waverley Municipal Council [2005] HCA 4; 220 CLR 517
TiVo Inc v Vivo International Corporation Pty Ltd [2014] FCA 789
Vero Insurance Pty Ltd v Kassem [2011] NSWCA 381
Winterton Constructions Pty Ltd v M A Coleman Joinery Co Pty Ltd (1996) 20 ASCR 671
Wood v Laser Holdings Pty Ltd (1996) 14 ACLC 801
Division: General Division Registry: Queensland National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 243 Date of last submissions: 12 June 2024 Date of hearing: 22-24 April 2024, 29-30 April 2024, 2-3 May 2024 Counsel for the Plaintiff: Ms A Wheatley KC with Mr A Psaltis and Mr W McIntosh Solicitor for the Plaintiff: Crown Law Counsel for the First Defendant: Mr L Kelly KC with Mr J Raftery Solicitor for the First Defendant: Pinsent Masons Counsel for the Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, Nineth, Tenth, Eleventh, Fifteenth, Sixteenth, Nineteenth, Twentieth, Twenty-Second, Twenty-Third, and Twenty-Sixth Defendants: Mr S Golledge SC with Mr D Krochmalik Solicitor for the Second, Third, Fourth, Fifth, Sixth, Seventh, Eighth, Nineth, Tenth, Eleventh, Fifteenth, Sixteenth, Nineteenth, Twentieth, Twenty-Second, Twenty-Third, and Twenty-Sixth Defendants: Brown Wright Stein Lawyers Counsel for the Twenty-Fourth, Twenty-Fifth, Twenty-Seventh, Twenty-Eighth, and Twenty-Nine Defendants: Mr M Martin KC with Mr S Lee Solicitor for the Twenty-Fourth, Twenty-Fifth, Twenty-Seventh, Twenty-Eighth, and Twenty-Nine Defendants: HWL Ebsworth Lawyers Counsel for the Twelfth, Thirteenth, Fourteenth, Seventeenth, Eighteenth and Twenty-First Defendants: The Twelfth, Thirteenth, Fourteenth, Seventeenth, Eighteenth and Twenty-First Defendants did not appear ORDERS
QUD 99 of 2023 BETWEEN: COMMISSIONER OF STATE REVENUE
Plaintiff
AND: ANDREW MCCABE AND JOSEPH HAYES IN THEIR CAPACITY DESCRIBED IN SCHEDULE 1 AND OTHERS NAMED IN SCHEDULE 1
First Defendant
COMLEK GROUP PTY LTD (ADMINISTRATORS APPOINTED) ACN 143 586 967
Second DefendantCOMLEK TIC PTY LTD (ADMINISTRATORS APPOINTED) ACN 143 729 971 (and others named in the Schedule)
Third Defendant
ORDER MADE BY:
SARAH C DERRINGTON J
DATE OF ORDER:
21 JUNE 2024
THE COURT NOTES THAT:
1.The first defendant paid a dividend in the total sum of $22,019.71 to priority creditors on 27 March 2023, in accordance with the Notice to Declare Priority Dividend dated 3 March 2023.
2.The first defendant has agreed to delay distribution of the final dividend to unsecured creditors until 7 days after expiry of the period for filing an appeal from these Orders, unless earlier agreed, or ordered, to be extended.
THE COURT ORDERS THAT:
1.The application be dismissed.
2.The plaintiff pay the defendants’ costs of the proceeding to be taxed, if not agreed.
3.Orders 1 and 2 be stayed until 7 days after the expiry of the period for filing an appeal from these Orders, unless earlier extended.
4.There be liberty to apply on 3 business days’ written notice.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
SARAH C DERRINGTON J
INTRODUCTION
By its originating application filed on 21 March 2023, the Commissioner of State Revenue (plaintiff) seeks an order that a Deed of Company Arrangement executed on 9 February 2023 (the DOCA), and entered into by the second to twenty-first defendants (together, the Comlek Companies), of which it is a creditor, be terminated, under each of s 445D(1)(a), (b), (c), (f) and (g) or s 447A of the Corporations Act 2001 (Cth). Alternatively, the Commissioner seeks an order that the exercise of the casting vote of the Administrators (Mr Andrew McCabe and Mr Joseph Hayes) (first defendant) of the Comlek Companies in favour of the resolution that the Comlek Companies execute the DOCA be set aside, pursuant to s 75-42 of the Insolvency Practice Schedule (Corporations) 2016, Schedule 2 to the Corporations Act (IPSC). The second to eleventh, fifteenth, sixteenth, nineteenth, twentieth, twenty-second, twenty-third and twenty-sixth defendants are referred to as the Donaldson Defendants. The twenty-fourth, twenty-fifth and twenty-seventh to twenty-ninth defendants are referred to as the Gallagher Defendants. The twelfth, thirteenth, fourteenth, seventeenth, eighteenth and twenty-first defendants did not appear.
Although the Commissioner has scaffolded his case by reference to the various grounds specified in s 445D(1) on which a Court may order the termination of a deed of company arrangement, his primary submission, as expressed in opening submissions, was that it is detrimental to the interests of the public generally and commercial morality for the DOCA to remain on foot. Additionally, the Commissioner seeks that the Comlek Companies be wound up in insolvency, a declaration that they failed to keep written financial records in compliance with s 286 of the Corporations Act, and an order appointing persons nominated by the Commissioner, who have consented to such an appointment, joint and several liquidators of the Comlek Companies.
It appears to have become orthodox for an application under s 447A to be coupled with an application under s 445D: see Adelaide Brighton Cement Limited, in the matter of Concrete Supply Pty Ltd v Concrete Supply Pty Ltd (Subject to Deed of Company Arrangement) (No 4) [2019] FCA 1846 at [819], [1221] (Besanko J). The High Court acknowledged in Australasian Memory Pty Ltd v Brien [2000] HCA 30; 200 CLR 270 at [20] (Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ) that while the powers conferred by s 447A(1) may be broad, they are not “entirely without limit”. Notwithstanding this qualification, Beach J in Australian Securities and Investments Commission v Midland Hwy Pty Ltd (admin apptd) [2015] FCA 1360; 110 ACSR 203 (ASIC v Midland Hwy) outlined (at [64]-[67]) “uncontroversial principles” about the powers under s 447A, including that the provision allows “the Court … (to) make such order as it thinks appropriate about how Pt 5.3A is to operate in relation to a particular company”. His Honour also observed (at [65]) that s 447A provides the Court with “power to terminate an administration and to order a winding up in the public interest”, citing the decision in Deputy Commissioner of Taxation v Woodings (1995) 13 WAR 189; 16 ACSR 266, where, at 279, Wallwork J said that he was “satisfied that s 447A gives power to the court to order a winding up of the company in the public interest …” noting, too, that “[s]uch a power is not inconsistent with the provisions in Pt 5.3A …” (emphasis added).
In substance, and by its Amended Concise Statement filed 23 October 2023, the Commissioner advanced five reasons why the DOCA should be terminated. Primarily, the Commissioner contended that it should be terminated in reliance on s 445D(1)(g), the “other reason” being that it is in the public interest that the affairs of the Comlek Companies be investigated by a liquidator. This was said to be because the continuation of the DOCA would otherwise: (i) allow the voluntary administration process to subvert the purpose of Queensland taxation law; and (ii) shield the directors of the Comlek Companies from scrutiny and possible claims for breaches of duty, in circumstances where the Comlek Companies would retain the benefit of the unfair competitive advantage they are said to have obtained by failing to pay payroll tax between 2010 and 2022.
Secondly, the Commissioner relied on ss 445D(1)(a) and 445D(1)(b) of the Corporations Act, claiming that the Second Report to Creditors was false and misleading because it neither disclosed material information about payroll tax liabilities details of the Comlek Companies’ solvency, nor the alleged failure to maintain the books and records of the Comlek Companies, as required by s 286 of the Corporations Act, it being reasonably expected that such information would have been material to the creditors’ decision about whether to vote in favour of the DOCA.
Thirdly, the Commissioner relied on s 445D(1)(c), contending that there was a material omission from the Report, being the Administrators’ failure to report on or to conduct investigations into matters of the Comlek Companies’ taxation liability and solvency, or such further investigations that would have been undertaken by a reasonable and prudent administrator (including seeking an extension of time to the convening period, or alternatively, adjourning the Second Meeting of Creditors convened on 19 January 2023 to enable such investigations to be undertaken).
Fourthly, the Commissioner argued that the DOCA is “unfairly discriminatory” against him as a creditor within the meaning of s 445D(1)(f)(i), because he will receive less than if the return to creditors was distributed proportionately where there is no proper justification for the discriminatory approach, and, as the largest creditor, he voted against the DOCA.
Finally, and alternatively, by reason of the four matters above, the Commissioner contended that the Administrators’ exercise of their casting vote was inappropriate, and therefore should be set aside, with the consequence that the resolution voting in the DOCA be deemed not to have passed. The relief ultimately sought by the Commissioner is that the Comlek Companies be wound up, and that joint and several liquidators be appointed to those companies.
On 24 May 2024, three weeks after the conclusion of the hearing, the Administrators sought leave to file further submissions directed at an interlocutory judgment setting aside a notice to produce issued by the Administrators to the Commissioner: Commissioner of State Revenue v McCabe [2024] FCA 496. Those submissions were filed on 29 May 2024. The Commissioner’s responsive submissions were filed on 12 June 2024. As the Commissioner submitted, correctly, the judgment was interlocutory. To the extent that the Administrators have identified in the judgment observations as to factual matters that are said to be erroneous, they are obiter dicta and not binding on me. It was unnecessary for me to be concerned with the content of that judgment for the purposes of determining the issues raised at trial, and I have not had any regard to it.
For the reasons that follow, the DOCA should not be terminated, nor the casting vote set aside, and the Commissioner’s application must be dismissed.
BACKGROUND
Background to the Administration
The background to the current state of affairs can be relevantly summarised as follows. The Comlek business was commenced in 2008 by Mr Michael Donaldson (twenty-second defendant) and Mr Simon Gallagher (twenty-fourth defendant) as an engineering, electrical and labour hire services business to various industries in Queensland. It was operated by a partnership consisting of Donaldson (Mackay) Pty Ltd (Administrators Appointed) ACN 123 470 968 (twentieth defendant) as trustee for the Donaldson Family Trust and Mr Gallagher (later replaced by Simon Gallagher Pty Ltd ACN 143 583 395 (twenty-first defendant)) as trustee for the Gallagher Family Trust, both trusts being registered in 2007 (the Comlek Partnership).
In about May 2010, there was a corporate restructure. On 10 May 2010, there was a meeting between representatives of Wilson Ross Accountants, Mr Donaldson, Mrs Rebecca Donaldson (twenty-third defendant), Mr Gallagher and Mr Sean Diljore to discuss the details of that restructure. The following day, Comlek Group Pty Ltd ACN 143 586 967 (second defendant), Comlek Personnel Pty Ltd ACN 143 586 985, Comlek Personnel Alpha Pty Ltd ACN 143 592 652, and Mackay Test & Tag Pty Ltd ACN 143 592 643 (T&T) (sixth defendant) and Simon Gallagher Pty Ltd (both, now, with Administrators Appointed) were registered. Since about 2010, various other companies incorporated from time to time, and as early as January 2007, conducted, or were otherwise in connection with, the Comlek business:
(a)Brampton Personnel Pty Ltd Pty Ltd (Administrators Appointed) ACN 160 325 628 (ninth defendant);
(b)Cartel MKY Nightclub Pty Ltd (Administrators Appointed) ACN 603 808 037 (fourteenth defendant);
(c)Comek Pty Ltd (Administrators Appointed) ACN 155 603 633 (seventh defendant);
(d)Comlek Personnel Beta Pty Ltd ACN 150 071 677;
(Personnel, Alpha, and Beta are referred to as the Deregistered Entities)
(e)Comlek TIC Pty Ltd (Administrators Appointed) ACN 143 729 971 (third defendant);
(f)Comlek Engineering Pty Ltd (Administrators Appointed) ACN 609 245 758 (fourth defendant);
(g)Daydream Personnel Pty Ltd (Administrators Appointed) ACN 160 325 655 (thirteenth defendant);
(h)Donaldson Presto Avenue Trust (Donaldson (Mackay) Pty Ltd as trustee);
(i)Donaldson Property Investments Pty Ltd ACN 617 667 580;
(j)Donnie Investment Pty Ltd (Administrators Appointed) ACN 655 324 717 (fifteenth defendant);
(k)Gallagher Presto Avenue Trust (Simon Gallagher Pty Ltd as trustee);
(Donaldson (Mackay) Pty Ltd and Simon Gallagher Pty Ltd, together in their respective capacities as trustees of Donaldson Presto and Gallagher Presto, are referred to as the Presto Avenue Partnership)
(l)Hamilton Personnel Pty Ltd Pty Ltd (Administrators Appointed) ACN 160 325 940 (tenth defendant);
(m)Hayman Personnel Pty Ltd (Administrators Appointed) ACN 160 325 646 (eleventh defendant);
(n)International Switchboard Solutions Pty Ltd (Administrators Appointed) ACN 160 928 781 (ISS) (fifth defendant);
(o)Keswick Personnel Pty Ltd (Administrators Appointed) ACN 160 325 959 (eighth defendant);
(p)Long Personnel Pty Ltd Pty Ltd (Administrators Appointed) ACN 160 325 968 (twelfth defendant);
(Brampton, Hamilton, Hayman, Keswick and Long are referred to as the Island Entities)
(q)Nightclub Holdings No 1 Pty Ltd (Administrators Appointed) ACN 603 807 414 (sixteenth defendant);
(r)Nightclub Holdings No 2 Pty Ltd Pty Ltd (Administrators Appointed) ACN 603 807 423 (seventeenth defendant);
(s)Nomis 2 Pty Ltd ACN 651 907 078;
(Donaldson Property (as trustee for the Donaldson Property Trust) and Nomis 2 (as trustee for the Nomis 2 Trust) together are referred to as the Donaldson Nomis Partnership)
(t)Sigall Pty Ltd (Administrators Appointed) ACN 137 274 090 (eighteenth defendant); and
(u)Sparra Pty Ltd (Administrators Appointed) ACN 136 886 452 (nineteenth defendant).
(Various non-operating entities included Sparra, Sigall, Cartel, Donnie Investment, Nightclub 1, and Nightclub 2)
As at 21 July 2013, each of the Deregistered Entities had accrued liabilities to pay payroll tax as follows:
(a)Personnel was liable to pay payroll tax for the financial year ending 30 June 2011 in the sum of $88,808.09, for the financial year ending 30 June 2012 in the sum of $116,470.14, and for the financial year ending 30 June 2013 in the sum of $96,748.29, with those liabilities totalling $302,026.52;
(b)Alpha was liable to pay payroll tax for the financial year ending 30 June 2011 in the sum of $64,980.90, for the financial year ending 30 June 2012 in the sum of $102,806.86, and for the financial year ending 30 June 2013 in the sum of $95,787.42, with those liabilities totalling $263,575.18; and
(c)Beta was liable to pay payroll tax for the financial year ending 30 June 2012 in the sum of $86,308.97, and for the financial year ending 30 June 2013 in the sum of $96,956.43, with those liabilities totalling $183,265.40.
None of the Deregistered Entities lodged any returns to the Commissioner in respect of payroll tax. Despite each of them having outstanding liabilities for payroll tax as set out above, each was deregistered on 23 September 2013, upon applications dated 18 July 2013 being made by their directors – Mr Gallagher (in respect of Personnel and Alpha) and Mr Donaldson (in respect of Beta).
As at 28 September 2022, the total payroll tax liability for the Deregistered Entities, including unpaid tax interest, was $1,483,541.17, comprising:
(a)$604,054.66, in respect of Personnel;
(b)$524,394.56, in respect of Alpha; and
(c)$355,091.95, in respect of Beta.
The payroll tax liabilities of the Deregistered Entities were summarised by accounting firm Bell Partners, identifying the amounts set out above, in a document provided to the Administrators on 26 October 2022, over a month before the Administrators were appointed to the Comlek Companies on 5 December 2022.
As at 21 July 2021, each of the Island Entities accrued liabilities to pay payroll tax for each of the financial years ending 30 June 2014 to 30 June 2021 inclusive.
Despite each of the Island Entities having accrued such liabilities, applications for voluntary deregistration of each of them were lodged with the Australian Securities and Investments Commission (ASIC):
(a)for Brampton, the application dated 7 September 2022 indicated as having been signed by Ms Brooke Donaldson (twenty-sixth defendant) was lodged that day;
(b)for Hamilton, the application dated 23 August 2022 indicated as having been signed by Mr Donaldson was lodged that day;
(c)for Hayman, the application dated 5 September 2022 indicated as having been signed by Mr Donaldson was lodged that day;
(d)for Keswick, the application dated 23 August 2022 indicated as having been signed by Mr Donaldson was lodged that day; and
(e)for Long, the application dated 22 August 2022 indicated as having been signed by Mr G Gallagher was lodged that day.
Various other payroll tax assessments are recorded as having been issued between 15 August 2016 and 21 July 2022 for financial year periods between 1 July 2015 and 30 June 2022. Between 19 August 2016 and 7 November 2022, various of the Comlek Companies paid a total of $993,497.03 in payroll tax.
On 26 and 27 September 2022, the Commissioner issued default assessment notices and reassessment notices for each of the Comlek Companies (except Sparra, Sigall, Nightclub 1, and Nightclub 2) and the Comlek Partnership, relating to the financial years ending 30 June 2010 to 30 June 2022 inclusive. The total liability of the Comlek Companies, and the Comlek Partnership, as a result of those assessments, was $10,073,318.28 (the Queensland Revenue Office (QRO) debt). These amounts had not been recorded in the books of the Comlek Companies.
Subsequently, on 28 September 2022, the Commissioner issued Notices of Investigation under the Taxation Administration Act 2001 (Qld) (TAA) to Brampton, Cartel, Comek, Engineering, Comlek Group, TIC, Daydream, Donaldson, Hamilton, Hayman, ISS, Keswick, T&T, Sparra, and – on 29 September 2022 and 5 October 2022 – to Sigall and Long, respectively. Those Notices of Investigation asserted that the Comlek Companies formed a “group” for the purposes of Pt 4 of the Payroll Tax Act 1971 (Qld), and stated that the Commissioner had formed a reasonable belief that the said companies had engaged in deliberate tax default and business structuring, in concert with other companies in the group, to avoid detection and payment of payroll tax. Additional Notices of Investigation were issued by the Commissioner on 4 January 2023 to Ms B Donaldson, Mr Donaldson, Mrs Donaldson, Mr G Gallagher, Mr Scott Gallagher (twenty-ninth defendant), Mr Gallagher and Mr Brijesh Sorout (twenty-fifth defendant), alleging their membership of the relevant group, and that they were joint and severally liable. The Commissioner relies on s 51A of the Payroll Tax Act, and s 47 of the TAA as the operative provisions for imposing joint and several liability on each member of the group.
On 30 September 2022, the Commissioner issued various point in time and/or enduring garnishee notices under s 50 of the TAA to, relevantly:
(a)the National Australia Bank (NAB) in respect of payroll tax debts owed by Brampton, Cartel, Comek, Comlek Group, the Comlek Partnership, the Presto Avenue Partnership, Daydream, Donaldson (ATF Donaldson Presto), the Donaldson Nomis Partnership, Engineering, ISS, Sigall, TIC, and T&T; and
(b)Westpac Banking Corporation / St George Bank in respect of the payroll tax debt owed by Sparra.
That same day, $70,465.57 was garnished from the bank account of Sparra. On 3 October 2022, the following amounts were garnished from the entities referred to below:
(a)$20,372.98 from the ISS bank account;
(b)$45,360.27 from the T&T bank account;
(c)$337,916.65 from the Comek bank account;
(d)$47,616.91 from the Cartel bank account; and
(e)$14,487.02 from the Comek Group bank account.
On 4 October 2022, the Commissioner sent a Notification of Garnishee Notice, and each of the garnishee notices described above at [22], to each of the entities in respect of which a garnishee notice had been issued. On 5 October 2022 and 7 October 2022, $60,479.89, and $14,653.26 was garnished from the bank accounts of TIC and Engineering, respectively.
Subsequently, on 28 November 2022, $2,620.49, $2,062.73, and $5,608.47 was garnished from ISS, T&T and Comlek Group, respectively.
The appointment of the Administrators and the Administration
Having received the assessment notices and been subject to the garnishees, the directors of the Comlek Companies sought advice from their then accountants, Bell Partners. In or around October 2022, the directors also engaged Brown Wright Stein Lawyers and PPM Tax & Legal.
An attempt was made by Mr Donaldson to take steps to satisfy the assessment notices. On 11 November 2022, he proposed a payment arrangement, pursuant to s 34 of the TAA, whereby certain specified entities would repay an amount of $10,026,780.18 to the Commissioner by monthly repayments of $40,000.00. On 21 November 2022, that proposal was rejected by the Commissioner, on the basis that, inter alia, the monthly repayment amounts were too low. As at that date, the Commissioner stated that the quantum of outstanding liabilities was $9,321,150.11, accounting for payments received by garnishee notices totalling $810,984.24.
Upon the Commissioner’s refusal to enter into the payment plan, the directors accepted the advice of their accountants and lawyers that the Comlek Companies were likely trading insolvent, and that an administrator needed to be appointed. On 5 December 2022, the directors of each of the Comlek Companies (Mr Donaldson, Mr Gallagher, Mr Sorout, Mr Andrew Gardso, Mrs Donaldson, Ms B Donaldson, Ms Maddison Gallagher (twenty-seventh defendant), Mr G Gallagher, and Mr S Gallagher) resolved to put the companies into administration, pursuant to s 436A of the Corporations Act.
On the same day, at a meeting of the Comlek Companies, the Administrators were appointed as voluntary administrators of the Comlek Companies, pursuant to s 436A. It was also resolved that, in the opinion of the directors, the Comlek Companies were insolvent. The same day, the Administrators issued their Initial Report to Creditors, which set out information about the voluntary administration of the Comlek Companies, and the rights of creditors.
On 6 December 2022, the Administrators issued a circular to customers which advised of their understanding that a deed of company arrangement was to be proposed by the directors of the Comlek Companies, among other matters. On 6, 7, and 12 December 2022, the Administrators spoke via teleconference with, and met with in person, representatives of the Commissioner.
On 15 December 2022, the First Meeting of Creditors was held, to consider, if proposed, the removal and re-appointment of the current administrators, and whether a Committee of Inspection should be appointed for the Comlek Companies (and if so, its membership). Neither resolution passed. On the same day, the Commissioner lodged proofs of debt with the Administrators for each of the Comlek Companies, which were later supplemented by further proofs of debt lodged on 16 December 2022, and which were admitted in full for voting purposes, in the sum of $9,365,924.01.
On 11 January 2023, the Administrators issued the Report. It referred to two separate proposals for a deed of company arrangement (the directors’ DOCA proposed by Mr Donaldson, and an alternative deed of company arrangement proposed by a key competitor of the Comlek Companies). The Report recommended the directors’ DOCA, primarily for the reason that it “[provided] enhanced prospects [for] the ongoing viability of the Companies and continued employment for [their] staff”.
On 12 January 2023, the Administrators again met via Microsoft Teams with representatives of the Commissioner, Ms Saskia Broekhuizen (Manager, Debtor Enforcement Collections Division – QRO) and Mr Kim Easton (Director, Collections Division – QRO). The Administrators’ recommendations were discussed, including as to voting in the Report.
On 17 January 2023, the Administrators prepared a cash flow forecast showing a shortfall of $314,760.00 by 13 February 2023, after the Administrators’ fees and expenses, being $761,303.00.
On 18 January 2023, the day prior to the Second Creditor’s meeting:
(a)Mr McCabe received an email from Mr Easton, requesting a meeting at 10.30am. He subsequently attended a meeting via Microsoft Teams with Mr Easton, Ms Broekhuizen, and Mr Ben Tyler-Whiteman (Manager, Review and Dispute Resolution Division – QRO). The topics discussed included the QRO’s duty to consider the public interest, such that the QRO would be unable to vote in favour of the directors’ DOCA. The QRO requested an adjournment of the Second Meeting of Creditors;
(b)at 9.13pm, the Administrators sent a letter to the Commissioner, setting out, among other things, the basis upon which it was asserted that the Administrators would exercise their casting vote to enable the passing of the resolution proposing entry into the directors’ DOCA. The letter also noted that trading costs were estimated to be $520,000 per week, and invited the Commissioner to provide an indemnity in the amount of $430,000.00 “in order to consider any adjournment of the Second Meeting to 10am (AEST), Monday 23 January 2023” so as “not to prejudice the unsecured creditors and to meet the ongoing costs of the Administration”; and
(c)at 10.20pm, the Commissioner responded to the Administrators by letter (the 18 January Letter), setting out the Commissioner’s concerns: first, that the return to the Commissioner under the directors’ DOCA was unfairly discriminatory; and secondly, that there existed matters concerning public interest and commercial morality that “strongly indicate why it is appropriate for the Companies to be placed into liquidation”. The 18 January Letter did not engage with the invitation to provide an indemnity for the consequences of an adjournment, nor was the request for an adjournment reiterated.
The Second Meeting of Creditors
On 19 January 2023, at the Second Meeting of Creditors, it was recommended that the directors’ DOCA be executed. Reasons for that view were provided at the meeting, consistent with the reasons contained in the Report, which was also tabled at the meeting. Subsequently, creditors voted on a resolution for the Comlek Companies to enter into the directors’ DOCA.
The Commissioner was the sole creditor who voted against the resolution for all of the Comlek Companies, save in the case of Comlek Group, where three voted against fifty in favour of the resolution. Neither of the two representatives of the Commissioner who were in attendance, Mr Easton, and Ms Melissa Daly, spoke against the directors’ DOCA, nor asked any questions, despite Mr McCabe having twice invited questions.
The result of that vote was that a majority in number of creditors of each of the Comlek Companies was in favour of the resolution, but a majority in value voted against the resolution. In those circumstances, Mr McCabe exercised his casting vote, having previously discussed the matter with Mr Hayes due to its importance, thereby enabling the resolution to pass.
On 9 February 2023, the directors’ DOCA was executed by the Administrators and control of the Comlek Companies subsequently reverted to their directors.
On the same day, the Administrators called for formal proofs of debt. A circular was issued by the Administrators which, among other things:
(a)confirmed that the directors’ DOCA had been executed on 9 February 2023;
(b)outlined that the operational control of the Comlek Companies had reverted to their directors; and
(c)stated that the directors were required to provide a contribution fund of $2.3 million within 45 days of the execution of the directors’ DOCA.
On 27 February 2023, following correspondence between a representative of the QRO and Mr McCabe, a proof of debt for the QRO was provided to Mr McCabe for the State Penalties Enforcement Registry, to the value of $6,978.00.
On 8 March 2023, an amount of $20,362.88 was garnished from the bank account of ISS.
On 17 March 2023, the Commissioner commenced these proceedings.
Three of the ‘Trading Entities’ of the Comlek Companies (as defined in the Report) have continued to trade and actively carry on business since the DOCA was entered into – Comlek Group, TIC, and T&T (the Trading Companies). The Trading Companies employ approximately 88 employees across Brisbane, Mackay, and Emerald. The profit and loss summary ending February 2024 for the Trading Companies reveals that they traded profitably to that date, recording a profit of $2,728,824.
Since 26 May 2023, and up until 5 April 2024, a total of $805,626.10 in payroll tax has been paid to the QRO, accounting for $12,198.16 in refunds by the QRO for overpayment.
IS THE TERMINATION OF THE DOCA IN THE PUBLIC INTEREST (445D(1)(G))?
As the Commissioner submitted, there is a two-step approach to the application of s 445D(1). First, the Court must be satisfied of at least one of the statutory criteria prescribed in s 445D(1). Secondly, on being so satisfied, the Court must determine, in the exercise of its discretion, whether it is in the interests of creditors as a whole to set aside the DOCA, or whether allowing it to continue is contrary to the public interest. It is at this point that the Court may have regard to factors not expressed in the legislation, but which are, nonetheless, relevant to the exercise of the discretion.
The Commissioner put his case squarely as one that should succeed as a matter of public interest, and in the interests of upholding commercial morality. He, therefore, bears the onus of establishing that it is in the public interest that the DOCA be terminated: Decon Australia Pty Ltd v TFM Epping Land Pty Ltd [2022] FCAFC 54 at [68], citing Decon Australia Pty Ltd v TFM Epping Land Pty Ltd (No 2) [2021] FCA 32 at [125] (McKerracher J).
The Commissioner has formed the view that there have been deliberate tax defaults and tax evasion. The Commissioner relied on the default assessment and reassessment certificates issued by him to each of the Comlek Companies on 26 and 27 September 2022 to prove the extent of liability of each of the Comlek Companies to pay payroll tax, interest, and penalty tax (as provided for within) and the systemic failure to account for payroll tax. Those default assessments and reassessments are conclusive evidence of the debts relevant to these proceedings: TAA s 132; see Taxation Administration Act 1953 (Cth) Sch 1, s 350-10. However, it was accepted by the Commissioner that the conclusive effect of the certificates does not establish deliberate tax default.
On 31 January 2023, the Comlek Companies, through their legal representatives, lodged an Objection with respect to the default assessments, pursuant to ss 63 and 64 of the TAA. The Donaldson Defendants and the Gallagher Defendants did not demur from the Commissioner’s contention that an objection to an assessment does not alter the conclusive nature of such certificates: Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41; 237 CLR 473 at [9], [22], [28]-[29], [33], [40]-[44], [51]-[52] and [55] (Gummow ACJ, Heydon, Crennan and Kiefel JJ). I interpolate, however, that the Objection was not resolved, one way or the other, prior to the commencement of these proceedings some seven weeks later.
To the extent that the Commissioner relied on commercial morality, or rather the absence thereof, as the reason why it was in the public interest to terminate the DOCA, these allegations were central. There is an obvious stench to deliberate tax fraud and evasion, which casts a burden on all taxpayers.
These proceedings are not, however, brought under the Payroll Tax Act, nor the TAA. The Court was not invited to interrogate whether there has been any actual wrongdoing on the part of the Comlek Companies, or their directors, in respect of their payroll tax liabilities.
Rather, the Commissioner submitted that the evidence before the Court “suggests a systemic failure to properly account for and pay, and possibly evade (or deliberately avoid), payroll tax liabilities as far back as 2010” (emphasis added). This submission was made in the face of correspondence between the Commissioner and the Administrators that was in evidence, by which the Commissioner positively asserted there had been deliberate tax evasion by the Comlek Companies.
As such, it was submitted that the conduct “may also be found to contravene Corporations Act duties such as the statutory directors’ and officers’ duties in sections 180-182 of the Corporations Act, as well as liability for trading the Comlek Companies (or some of them) whilst insolvent in contravention of section 588G of the Corporations Act”. The Commissioner argued that the conduct that may be found to be in breach of the Corporations Act will escape scrutiny if the DOCA remains on foot and, by extension, subvert the purposes of Pt 5.3A, contrary to the public interest. In these circumstances, and as a statement of what the Commissioner was required to prove in order to show that termination of the DOCA was in the public interest, he relied on the observations of McMurdo J in Re Octaviar Ltd (No 8) [2009] QSC 202; 73 ACSR 139 at [182], subsequently adopted by Beach J in Midland Hwy at [68], citing Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510 at [287]:
A winding up will be beneficial from a public interest perspective where investigations and recovery proceedings are likely to be funded and the investigations and appropriate recovery proceedings could realistically lead to the relevant persons who have engaged in the suspect transactions being brought to account.
(Emphasis added. Citation omitted.)
In the later decision of Habrok (Dalgaranga) Pty Ltd v Gascoyne Resources Ltd [2020] FCA 1395 at [410], Beach J said that:
… generally speaking, one should not terminate a DOCA and order a company to be wound up if the DOCA will restore the company to financial health and the DOCA does not have the purpose or effect of unjustifiably quarantining third parties from investigation. If the company is trading and it is likely that its business will continue, then unless there are real public interest concerns, termination of a DOCA and causing a company to be wound up are inappropriate outcomes. The interests of creditors should be the primary consideration, but they may be outweighed if the DOCA has a fraudulent or wrongful purpose.
Public interest (and commercial morality)
The content of the “public interest” invoked under s 445D(1)(g) does not differ from that which is relevant to the exercise of the Court’s discretion under s 445D(1) generally, or under s 447A, nor in respect of the power to set aside the casting vote on a DOCA pursuant to s 75-42 of the IPSC. Accordingly, if “public interest” is the basis on which termination is sought under s 445D(1)(g), there will be little to distinguish as between an application brought under s 445D(1)(g) or s 447A. In Midland Hwy, on the matter of “the [broad] ambit of s 447A”, Beach J observed, at [69]:
Section 447A can be used to make the orders sought by ASIC, whether or not any element of s 445D could be hypothetically or contingently invoked, although I accept that s 445D(1)(g) is broad and on one view unconstrained, save by its context and s 435A generally, such that this proposition may only be of theoretical interest. But it is correct to say that even if none of the elements of s 445D could be satisfied, the orders sought could still be made under s 447A.
In the exercise of the Court’s discretion under either s 445D(1) or s 447A, the authorities are agreed that the same factors are relevant to determining the question of “public interest”: Bidald at [287]; TiVo Inc v Vivo International Corporation Pty Ltd [2014] FCA 789 at [60]; Midland Hwy at [65]; Adelaide Brighton at [1199], [1231], [1379]; Sino Group International Limited v Toddler Kindy Gymbaroo Pty Ltd [2023] FCAFC 110 at [72].
The authorities do not, however, disaggregate “commercial morality” and “public interest” – rather, “public interest” includes considerations of commercial morality: Bidald at [287]; TiVo at [60]; Midland Hwy at [68] (emphasis added). To the extent that Besanko J referred to matters relevant to “public interest and commercial morality” in Adelaide Brighton at, for example, [1394], his Honour should not be taken to have expressed a view different from that of Gordon J in TiVo at [60], to which he referred in the paragraph immediately preceding his observations, at [1393], acknowledging the interplay between “the public interest and within that concept considerations of commercial morality”. It is unhelpful, therefore, to attempt to discern issues of commercial morality distinct from, and not otherwise encompassed within the notion of, public interest.
In Re CSR Ltd [2010] FCAFC 34; 183 FCR 358, Finkelstein J said:
[82]There has crept into Australian jurisprudence the view that a court will not confirm a scheme if it is contrary to “public policy” or is not consistent with “commercial morality”. A consideration of what is contrary to “public policy” cannot extend beyond considering the interests of members, creditors and persons who in the future might deal with the scheme company or invest in its shares. Their interests are, however, adequately protected by an inquiry whether the scheme is fair or reasonable. So, considerations of public policy seem to add nothing to existing principles.
…
[84]There is a real problem with “commercial morality” being applied to discretionary decision-making. It suggests the existence of a fixed set of standards by which the community assesses conduct to be legitimate or acceptable. Putting to one side the obvious difficulty which confronts a judge in attempting to discover what are the relevant community standards, the fact is that many so-called standards, when they exist, are not fixed. They are constantly changing.
…
[86]In my opinion, notions of commercial morality should be jettisoned from the matters to be considered in approving a scheme. It is dangerous to bring to decision-making an ill-defined and largely subjective set of criteria purporting to represent the view of the community when, in reality, no one can be sure of that.
(Emphasis added.)
With respect, I agree. It invites a search for some level of “moral obloquy”, in addition to the factors stipulated in s 445D, read in the context, and having regard to the purpose, of Pt 5.3A.
The notion of a court having regard to “commercial morality” when concerned with insolvencies appears to have arisen first in the context of a court’s jurisdiction to rescind a receiving order in circumstances where all creditors have consented to the rescission. In Ex parteHester (1889) 22 QBD 632, in dismissing an appeal he described as “based on the idle notion that the Court is bound by the consents of the creditors”, albeit not at a meeting of the creditors but nevertheless after full and open discussion of the rights and interests of the parties, Fry LJ said, at 641:
The Court has far larger and more important duties to perform than merely to consider whether the creditors have consented to the rescinding of the order. We are bound in the exercise of our discretion in such a matter, and I think I might almost say in all matters under [the Bankruptcy Act 1883], to take a wider view. We are not only bound to regard the interests of the creditors themselves, who are sometimes careless of their best interests, but we have a duty with regard to the commercial morality of the country.
In the subsequent decision of ReFlatau [1893] 2 QB 219 at 223, Lord Esher, who had been a member of the Court in Ex parte Hester, referred to what his Lordship had said in the earlier decision (Ex parteHester at 693):
The Court has gone still further, and I think rightly so, and has said that under the present Bankruptcy Act it will consider not only the whether what is proposed is for the benefit of the creditors, but also whether it is conducive to or detrimental to commercial morality, and to the interests of the public at large, and they will take into consideration the position of the bankrupt with regard to his creditors, and see whether what is proposed will not place his future creditors, who must come into existence immediately, in a position of imminent danger.
His Lordship continued, at 223:
The meaning of that is that if the debtor has behaved in an unbusinesslike way, or worse, even although his present creditors may be quite satisfied, and no harm can come to them, yet, if he has so acted in business that it is likely he will do again to other creditors what he has done to his present creditors, the Court will not allow the receiving order to be rescinded. All this has to be considered even though all the present creditors are fully satisfied, and are entirely indemnified.
These decisions, of course, pre-date any notion of corporate insolvency law, which goes back no further than 1840, when the Governor of New South Wales passed the Absent Debtors Act (4 Vict No 6). That legislation was designed to deal with joint stock companies and permitted the institution of actions at law against one or more of the members of a co-partnership as representative of all the members. This was followed by the Insolvency Act of 1841 (5 Vict No 17), an early attempt to bring companies within the scope of the law of bankruptcy. The first iteration of what is, today, recognisable as corporate insolvency law was the enactment in the United Kingdom of the Joint Stock Companies Winding-up Act of 1844 (7 & 8 Vict c 111). A materially identical statute was subsequently enacted in New South Wales – the Winding-up Act of 1847 (11 Vict No 19): for the legislative history of insolvency law in Australia, see B H McPherson, The Law of Company Liquidation (2nd ed, The Law Book Company, 1980) at 9-22.
The decisions in Ex parte Hester and ReFlatau were relied on by Buckley J in Re Telescriptor Syndicate Limited [1903] 2 Ch 174, albeit in relation to a corporate winding-up, not a personal bankruptcy. Buckley J said, at 181, that in exercising the analogous jurisdiction in respect of the winding-up of a company, he considered it desirable “not to assume a different attitude or act upon a different principle” from that articulated by Fry LJ in Ex parte Hester.
Subsequent to that decision, the consideration of public interest, including commercial morality, has been one to which courts have had regard in considering whether a court should terminate a winding up. An example is the decision of Barrett J in Metledge v Bambakit Pty Ltd [2005] NSWSC 160. The opposition to the making of an order to terminate the winding up was based on the proposition that “considerations of public interest and commercial morality indicate that [the company] would be in unsafe hands and subject to genuine jeopardy if control of it at director level were restored to [the sole director]”: Metledge at [6].
Barrett J identified two factors relevant to commercial morality in this context. First, that as a matter of public policy or commercial morality, the Court “will not countenance the return of an insolvent company to the mainstream of commercial life”: Metledge at [31]. Secondly, at [40], in circumstances where the director had made no real attempt to deal conscientiously with his responsibilities that accrued by reason of the making of the winding up order, it would be contrary to commercial morality to restore the management of the company:
… either directly or more remotely to someone who, on his own admission, does not appreciate the difference between his own affairs and interests and those of the company, who has been responsible for a failure to maintain proper corporate books and records and who refused to face up to the responsibilities owed by him to the liquidator even after threatened with prosecution and subsequently convicted.
The latter factor, which might best be described as a failure of corporate governance, is important and appears to have been adopted by courts when the analogy was extended beyond applications concerning bankruptcies and windings up to applications under Pt 5.3A of the Corporations Act. An early example is the decision in Emanuele v Australian Securities Commission (1995) 63 FCR 54, where the Full Court said, at 69:
The fate of the deed, and of the company, on an application under s 445D or 445G rests with the Court. The powers of the Court under these sections are discretionary, and are to be exercised having regard both to the interests of the creditors as a whole, and in the public interest. An analogy may be drawn between the powers of the Court arising under these sections and the power of the Court to refuse a stay of a winding-up order considered in Re Data Homes Pty Ltd [1972] 2 NSWLR 22 at 26 where Mason JA (as he then was), in whose judgment Holmes and Hardie JJA agreed, said:
“It has been held here and in the Supreme Court of Victoria that, in considering an application under s 243 of the Companies Act 1961 (Cth), the Court should have regard, not merely to the interests of creditors, but also to the public interest, including the question of whether the granting of a stay would be detrimental to commercial morality: Re Denistone Real Estate Pty Ltd [1970] 3 NSWLR 327; Re Mascot Home Furnishers Pty Ltd [1970] VR 593…”
(Emphasis added.)
The case of Re Mascot Home Furnishers concerned applications to stay proceedings in an insolvency and applications for approval of schemes of arrangement. Having accepted the views of Buckley J in Re Telescriptor Syndicate, Gillard J refused to stay the liquidation proceedings or to sanction the schemes in relation to the relevant companies, which his Honour described as being “hopelessly insolvent”, and whose business had ceased at least a year prior to the applications, stating, at 597:
Whatever may be said in relation to approving schemes under s 181, the most potent influence, in my view, when considering what should be done under s 243 is that the Court’s initial approach should be that hopelessly insolvent companies should be wound up. No countenance should by exercising powers under s 243 be given to any suggestion that the Court was condoning or encouraging persons in our commercial community to carry on business activities in a company which was handicapped by a heavy burden of indebtedness and thereby unable to pay its debts in full at any given period.
In respect of a similar application in Re Denistone, Street J referred to Lord Esher’s affirmation in Re Flatau that the Court will consider whether what is proposed is “conducive or detrimental to commercial morality”, “the interests of the public at large”, “the position of the bankrupt with regard to his creditors”, and “whether what is proposed will not place his future creditors … in a position of imminent danger”: Re Denistone at 330. His Honour continued:
Speaking generally, the staying of proceedings in a winding-up in a situation where a company is clearly insolvent is not consistent with the due preservation of the policy of the legislation and of the law that, in the public interest, an insolvent company ought to be wound up.
No invocation of commercial morality, as distinct from the public interest in having the law applied in accordance with legislative policy, was thought necessary by his Honour, presciently pre-empting the decision in Project Blue Sky Inc v Australian Broadcasting Authority [1998] HCA 28; 194 CLR 355.
The relevance of Project Blue Sky to invocations of commercial morality was made clear by the Full Court in Re CSR, that case being concerned with a proposal by the applicant, CSR Ltd, to demerge its various businesses in order to create two new companies. The demerger involved a reduction in the capital of the company and a scheme of arrangement between the company and its existing shareholders. At first instance, the primary judge dismissed the application for orders pursuant to s 411(1) of the Corporations Act for the convening of a meeting of shareholders to consider a scheme of arrangement, on the basis that she could not be satisfied that the scheme was consistent with “commercial morality”: CSR Limited, in the matter of CSR Limited [2010] FCA 33 at [4].
One of the grounds upon which the decision was appealed at first instance was that the “primary judge acted on a broad view of ‘public policy’ or ‘commercial morality’ without articulating the particular aspects of public policy or commercial morality relevant to the discretion in s 411(1)”: Re CSR at [33]. In allowing the appeal, Keane CJ and Jacobson JJ observed, at [51], that “the particular content of ‘public policy’ or ‘commercial morality’ relevant to the exercise of the discretion in s 411(1) of the [Corporations] Act is to be discerned from the text and subject matter of the Act”, citing Project Blue Sky at [69]-[70] and Attorney-General (Cth) v Alinta Ltd [2008] HCA 2; 233 CLR 542 at [147]. Whilst observing that the broad policy of the Corporations Act is that a company must use its capital for business purposes, and not simply return it to shareholders, their Honours observed that the policy is not pursued single-mindedly and, rather, expressly contemplates that reductions of capital may occur for the benefit of shareholders in certain circumstances. Consequently, their Honours framed the issue in the following way, at [54]:
For the purposes of the present case, the terms of s 256B(1)(b), 1324 and (1B) of the Act provide clear guidance as to how far the Act goes in its insistence upon the policy that the capital of a company must be preserved. The “public policy” or “commercial morality” which informs s 256B and its analogues is concerned with the interests of shareholders and creditors. This was explained by Professor Ford: “So long as the reduction will not prejudice creditors or shareholder the court is not concerned with any ulterior purpose for which the reduction is being made …” (Ford, Company Law (1974) p 159).
None of the foregoing should be taken to suggest that there is never cause for a court to search for and have regard to underlying societal norms and values, but when the Parliament has spoken and when, as in this case, the process is one of statutory interpretation, the words of the statute “must be read with a recognition of their social context”: James Allsop, “Conscience, Fair-dealing and Commerce – Parliaments and the Courts” in Tim Bonyhady (ed), Finn’s Law (The Federation Press, 2016) 92 at 99-100.
The intersection between statutory language and the fundamental values and norms that underpin commercial transactions was squarely before the High Court in Australian Securities and Investments Commission v Kobelt [2019] HCA 18; 267 CLR 1. The Court in that case was concerned with the statutory standard of unconscionability in s 12CA of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), which “gives statutory expression to the equitable concept of unconscionable conduct” within the meaning of the unwritten law but, by reason of s 12CB, does not confine that concept to conduct that is remediable on that basis by a court exercising jurisdiction in equity: Kobelt at [82]-[83], per Gageler J.
Although Gageler J regretted his prior use of the “arcane terminology” of “moral obloquy” in Paciocco v Australia & New Zealand Banking Group Ltd [2016] HCA 28; 258 CLR 525 at [188] (Kobelt at [91]), his Honour nevertheless said that what he meant to convey by the reference was, at [92]:
that conduct proscribed [by 12CB of the ASIC Act] as unconscionable is conduct that is so far outside societal norms of acceptable commercial behaviour as to warrant condemnation as conduct that is offensive to conscience.
(Emphasis added.)
In Kobelt, Keane J also observed, at [119]:
The legislative choice of “unconscionability” as the key statutory concept, rather than less morally freighted terms such as “unjust”, “unfair” or “unreasonable”, confirms that the moral obloquy involved in the exploitation or victimisation that is characteristic of unconscionable conduct [as understood in equity] is also required for a finding of unconscionability under s 12CB.
Turning, then, to the text, context, and purpose of Pt 5.3A of the Corporations Act.
Parts 5.3A and 5.7B of the Corporations Act, which established the voluntary administration and insolvent trading regimes, respectively, were introduced by the Corporate Law Reform Act 1992 (Cth), subsequent to the General Insolvency Inquiry (ALRC Report No 45, 1988) (the Harmer Report). The Explanatory Memorandum to the Corporate Law Reform Bill 1992 (Cth) (EM) said, at [14]:
The reforms to be effected in implementing recommendations of the Harmer Report (Part 4) are many and varied. Their overall aim, however, is to make Australia’s corporate insolvency laws operate more efficiently and effectively than they have done in recent years.
Pt 5.3A was described in the EM as being “[o]f particular importance”. The EM stated, at [15]:
The aim of that scheme is to save companies and businesses which are experiencing solvency difficulties, rather than destroy them in the way the current law all too often does.
The key elements of the proposed procedure for voluntary administration of insolvent companies under Pt 5.3A were said to be, at [22]:
· allowing directors to appoint an independent administrator;
· allowing the administrator up to 35 days to develop a proposed scheme of arrangement for consideration by the company and its creditors;
· giving force to the arrangement if the creditors and the company support it;
· giving protection to the rights of creditors by:
oenabling a committee of creditors to require information from the administrator;
oenabling creditors to vote to replace an administrator;
oallowing a creditor secured over the whole or substantially the whole of the company’s assets a short period during which the creditor may elect to enforce the security, notwithstanding the appointment of an administrator;
orequiring the court to ensure the adequate protection of any creditors in certain situations;
oproviding that a secured creditor who considers that a scheme is oppressive to challenge the scheme in court;
· where the administrator or the meeting of creditors concludes that the company should be wound up, providing for a smooth and efficient transition to a winding up process.
The Full Court of the Court of Appeal in Kalon Pty Ltd v Sydney Land Corporation Pty Ltd (No 2) (1998) 26 ACSR 593 at 596 noted that s 445D “must be read together” with s 435A. That provision sets out the Object of Pt 5.3A, as follows:
435A Object of Part
The object of this Part, and Schedule 2 to the extent that it relates to this Part, is to provide for the business, property and affairs of an insolvent company to be administered in a way that:
(a) maximises the chances of the company, or as much as possible of its business, continuing in existence; or
(b) if it is not possible for the company or its business to continue in existence—results in a better return for the company’s creditors and members than would result from an immediate winding up of the company.
In describing the Object of the Part, the EM explained, at [448]:
The insertion of the new Part is primarily designed to redress concerns that Australia’s current corporate insolvency laws are inflexible and that they too easily and too often lead to the liquidation of companies, when some such companies could have been saved.
The EM also identified, at [538], “an important theme of the proposed new Pt 5.3A” that “directors are to be encouraged, in a variety of ways, to take the earliest possible action to tackle solvency difficulties”.
Division 11 of Pt 5.3A deals with the variation, termination, and avoidance of a DOCA. Section 445D(1) provides:
445D When Court may terminate deed
(1)The Court may make an order terminating a deed of company arrangement if satisfied that:
(a) information about the company’s business, property, affairs or financial circumstances that:
(i)was false or misleading; and
(ii)can reasonably be expected to have been material to creditors of the company in deciding whether to vote in favour of the resolution that the company execute the deed;
was given to the administrator of the company or to such creditors; or
(b) such information was contained in a document that accompanied a notice of the meeting at which the resolution was passed; or
(c) there was an omission from such a document and the omission can reasonably be expected to have been material to such creditors in so deciding; or
(d) there has been a material contravention of the deed by a person bound by the deed; or
(e) effect cannot be given to the deed without injustice or undue delay; or
(f) the deed or a provision of it is, an act or omission done or made under the deed was, or an act or omission proposed to be so done or made would be:
(i)oppressive or unfairly prejudicial to, or unfairly discriminatory against, one or more such creditors; or
(ii)contrary to the interests of the creditors as a whole; or
(g) the deed should be terminated for some other reason.
Section 447A is found in Division 13, and confers powers on the Court to make orders as to how Pt 5.3A is to operate. It relevantly provides:
447A General power to make orders
(1) The Court may make such order as it thinks appropriate about how this Part is to operate in relation to a particular company.
(2) For example, if the Court is satisfied that the administration of a company should end:
(a) because the company is solvent; or
(b) because provisions of this Part are being abused; or
(c) for some other reason;
the Court may order under subsection (1) that the administration is to end.
The EM described the power in s 447A as “a very general power to make orders about how proposed Pt 5.3A is to operate in relation to a particular company”: at [620]. By contrast, in relation to the ‘catch-all’ provision that is s 445D(1)(g), the EM stated, at [602]:
Proposed paragraph (1)(g) will allow termination where the Court considers the deed should be terminated for some other reason. It would not be appropriate to try to circumscribe more precisely the Court’s powers to terminate a deed in exceptional circumstances but, having regard to the width of the previous paragraphs in proposed subsection (1), it is anticipated that the Court’s power under proposed paragraph (1)(g) would be exercised at most very rarely.
The examples proffered in the Harmer Report of public policy reasons which may lead a court to terminate a deed were, at [123]:
· the proposal has a fraudulent or wrongful purpose
· the terms of an arrangement do not comply with the companies legislation generally (for example, the deed of company arrangement must not contain a provision indemnifying an insolvency administrator for wrongful action in administering the deed)
· the deed contemplates that the company would, after the arrangements set out in the deed had been carried out, continue commerce in an insolvent financial condition.
Contrary to the proscription of unconscionable conduct in the ASIC Act, nothing in s 445D or s 447A can be construed as requiring an inquiry into any higher standard of commercial behaviour than that which is already identified as falling outside relevant norms of conduct and, therefore, contrary to the public interest: material falsity or material omission, material contravention of the deed, injustice or undue delay in enforcing the deed, oppression, unfair prejudice, unfair discrimination, or contrariness to the wishes of the creditors as a whole. To the extent that “some other reason” is relied upon to set aside a deed, the reason will be assessed in the context of the statutory language used in s 445D and by reference to the purpose of the provision, being to preserve businesses, subject to any deed of arrangement’s not being contrary to the interests of the creditors as a whole. A deed that evidences a fraudulent, wrongful, or illegal purpose, consistent with the types of behaviour identified in s 445D, will obviously fall outside the relevant norms of conduct identified in that section as being reasons for termination of such a deed.
The matters said to favour termination in the public interest
The Commissioner contended that, in this case, the “other reason” for the termination of the DOCA is that its continuation is detrimental to the interests of the public generally and to commercial morality. The Commissioner submitted that the following circumstances establish the said detriment:
(a)The extent of the payroll tax debt and grouping of the Comlek Companies;
(b)The systemic failure to account for payroll tax;
(c)The Comlek Companies’ accountants’ involvement in the failure to so account;
(d)The likelihood that the Comlek Companies were insolvent much earlier;
(e)The misuse of the Pt 5.3A process; and
(f)The matters that may be revealed, and actions taken, by further investigation.
In the circumstances of the case, it is appropriate for (a), (b), (c), (d) to be addressed cumulatively, and (e) and (f) separately.
The extent of the debt; alleged systemic failure; involvement of accountants; date of insolvency
The Commissioner’s central contention is that the directors of the Comlek Companies permitted those companies to trade, for more than a decade, without declaring and paying the full extent of the payroll tax for which those entities were liable. Further, the Commissioner contended that the Deregistered Entities had accrued a tax liability and were then deregistered, and that applications for deregistration of the Island Entities were made for the purpose of avoiding accrued tax liabilities. In effect, the Commissioner contended that tax fraud and alleged phoenixing were a reason to terminate the DOCA.
However, the Commissioner eschewed that these proceedings concern breaches of Queensland Revenue laws (as defined in s 6 of the TAA). Consequently, the first two circumstances (being (a) and (b) above) are matters upon which no findings can be made without the application of those laws, and as to which this Court was not invited to make any findings beyond accepting the conclusive nature of the amounts recorded in the assessment certificates: see [48] above. Further, without making findings as to whether there was a systemic failure to account for payroll tax, nor can findings be made about any alleged responsibility on the part of the Comlek Companies’ accountants – who, it must be observed, were not party to these proceedings, and so have not been heard on the issue. Similarly, “the likelihood that the Comlek Companies were insolvent much earlier”, as contended, cannot be determined without the precise and careful application of the Payroll Tax Act, and the resolution of the outstanding Objection. Again, all parties, including the Commissioner, expressly disavowed that it was necessary in these proceedings for the Court to determine the date on which the Comlek Companies became insolvent, and I have proceeded on that basis.
What might be revealed by further investigation; will the conduct escape scrutiny?
In the circumstances described, and as the defendants submitted, it seems more than likely that the investigations which could lead to, at least some of the persons responsible, including the directors and accountants, being brought to account for an alleged “systemic failure to properly account for and pay, and possibly evade (or deliberately avoid), payroll tax liabilities as far back as 2010” could be undertaken by the Commissioner by his own decision to investigate.
Nevertheless, the Commissioner submitted that it was necessary for a liquidator to investigate breaches by the directors of the obligations arising as a result of ss 286 and 334(1) of the Corporations Act in relation to the keeping of records, their duties under ss 180-183, and their duties connected with insolvent trading under s 588G. This was said to be because of the civil penalty and disqualification consequences flowing from such breaches: Corporations Act ss 1317E, 1317H, 206C. It was also submitted that an important obligation on the part of a liquidator requires that he or she to report to ASIC if, inter alia, it appears to the liquidator that a past or present officer may have been, inter alia, guilty of an offence: Corporations Act s 533. The lodging of a report with ASIC enables a liquidator to bring prosecutions, in the event that ASIC chooses not to do so: Corporations Act s 534.
In opening submissions, Senior Counsel for the Commissioner indicated that the Commissioner was “prepared to give an undertaking” in an initial amount of $500,000 to fund a liquidator’s investigations into, and report to creditors about the affairs of, each of the Comlek Companies. This offer came as a surprise to the Administrators, the Donaldson Defendants, and the Gallagher Defendants. No terms of the offer were disclosed, and no actual undertaking was in fact given. The purpose of making such an offer on the first morning of the trial was unclear. In the course of the cross-examination of Mr Richard Jolly (Director, Review and Dispute Resolution Division – QRO), it emerged that he was aware that the Commissioner had decided in early April 2024 to make such an offer. However, prior to the Commissioner’s opening submissions on 22 April 2024, the existence of the proposed undertaking was unknown to the Court or to the defendants. In all the circumstances, it does not assist the Commissioner’s case.
What has been investigated?
Pt 7 of the TAA confers on the Commissioner broad powers to compel persons to give (either orally or in writing) information in the person’s knowledge about a stated matter.
Section 140 of the TAA contains the offence provision for an executive officer and relevantly provides:
140Liability of executive officer––particular offences committed by corporation
(1) An executive officer of a corporation commits an offence if—
(a)the corporation commits an offence against an executive liability provision; and
(b)the officer did not take all reasonable steps to ensure the corporation did not engage in the conduct constituting the offence.
Maximum penalty-the penalty for a contravention of the executive liability provision by an individual.
(2) In deciding whether things done or omitted to be done by the executive officer constitute reasonable steps for subsection (l)(b), a court must have regard to—
(3) whether the officer knew, or ought reasonably to have known, of the corporation’s conduct constituting the offence against the executive liability provision; and
(4) whether the officer was in a position to influence the corporation’s conduct in relation to the offence against the executive liability provision; and
(5) any other relevant matter.
(6) The executive officer may be proceeded against for, and convicted of, an offence against subsection (1) whether or not the corporation has been proceeded against for, or convicted of, the offence against the executive liability provision.
(Emphasis added.)
An executive officer of a corporation is defined in Sch 2 to the TAA to mean:
A person who is concerned in or takes part in the management of the corporation, regardless of the person’s designation and whether or not the person is a director of the corporation.
There is little doubt that the definition of executive officer is sufficiently broad to include the Comlek Companies’ accountants.
Section 140(5) of the TAA specifies which provisions of the Revenue laws are executive liability provisions, and which includes s 93 of the Payroll Tax Act. It provides that:
Any person who, by any wilful act, default or neglect, or by any fraud, art or contrivance whatever, avoids or attempt to avoid payroll tax or mental health levy imposed under this Act, shall be guilty of an offence.
Maximum penalty—20 penalty units and treble the amount of payroll tax avoided or attempted to be avoided and treble the amount of mental health levy avoided ot attempted to be avoided.
According to the Notices of Investigation that were in evidence, it appears that the Commissioner did, in fact, commence his own investigations. On 28 and 29 September 2022, and 5 October 2022, the Commissioner issued Notices of Investigation to the Comlek Companies, which indicated, inter alia, that the Comlek Companies were under investigation pursuant to Pt 7 of the TAA in relation to their liability for payroll tax, and that a ‘Mr Fox’ had been appointed as investigator under s 80 of the TAA. The Notices of Investigation stated, relevantly:
Deliberate tax default
The Commissioner has formed a reasonable belief that, for all periods of payroll tax liability and group membership, you:
· knew of your payroll tax obligations
· knew that you (either individually or as a group member) had breached the payroll tax wages threshold
· deliberately structured your business, in concert with other group members, so as to avoid detection by the Commissioner of your liability for payroll tax
· deliberately moved the employment of employees to other group employers so that the wages paid by you and other corporate employers did not separately breach the payroll tax threshold
· avoided the payment of payroll tax.
The Notices of Investigation also stated:
What happens next?
I will contact you in the week commencing 10 October 2022 to answer any questions you may have. I will also discuss documents, information, meetings or interviews I may require as part of my investigation and timeframes for your provision/scheduling of such. If needed, please feel free to contact me prior to this time.
(Emphasis added.)
On 28 October 2022, the QRO declined to provide further information to the representatives of the Comlek Companies, in response to a request dated 11 November 2022. Subsequent to further correspondence from the Comlek Companies dated 23 November 2022, the QRO noted, relevantly, by its letter dated 25 November 2022:
Until such time as reassessments are made, the current assessments stand, and your clients are required to comply with their statutory obligations…
…I also note that further investigation conducted by my colleague, Russell Fox, may result in reassessments increasing your clients’ liability for tax.
(Emphasis added.)
On 28 November 2022, an application on behalf of the Comlek Companies was lodged under the Right to Information Act 2009 (Qld), requesting that the QRO provide certain documentation relevant to the default assessments. That request was refused and has been upheld, on a preliminary basis, by the Queensland Office of the Information Commissioner.
By the terms of the Notices of Investigation issued to certain directors and ex-directors on 4 January 2023, informing them that were under investigation under Pt 7 of the TAA, there was no allegation of deliberate tax default made against any of the individuals, unlike the notices issued in respect of the Comlek Companies. Each was, however, told similarly that Mr Fox:
… will contact you in February 2023 to answer any questions you may have. I will also discuss documents, information, meetings or interviews I may require as part of my investigation and timeframes for your provision/scheduling of such. If needed, please feel free to contact QRO prior to this time.
(Emphasis added.)
There was no evidence that Mr Fox made any contact with the Comlek Companies, or the directors and ex-directors, in either October 2022, or in February 2023. Moreover, there is no evidence that the QRO has progressed any further investigations despite the Commissioner’s correspondence of 4 January 2023.
Neither of the lay witnesses called for the Commissioner – Mr Jolly and Ms Jessica Cliffe (Acting Team Leader Debt Resolution – QRO) – was able to say who made the decision to commence these proceedings. Neither could assist the Court with any information as to the nature and extent of the investigations that had, in fact, already taken place, or which remained to be undertaken. Mr Fox did not give evidence, despite the evidence of Mr Jolly that Mr Fox still worked for the QRO. Mr Jolly and Ms Cliffe were also unable to say whether there had been any follow up with the persons to whom the Notices of Investigation had been issued, in the terms specified in those notices. Nor could Mr Jolly rule out the possibility that the Commissioner was waiting until the conclusion of these proceedings before recommencing any investigations.
That is not to say that Mr Jolly and Ms Cliffe did not give their evidence honestly. They were placed in the unenviable position of being asked to produce affidavits which annexed internal documents, the relevance of which to the actual matters in dispute they knew nothing about. It remained unexplained why, as people holding senior roles, they agreed to do so. Neither Mr Jolly nor Ms Cliffe was the author of the 18 January Letter (conveying the results of the investigations said to have been undertaken), was involved in the day-to-day running of the litigation, or was even responsible for the preparation of their own affidavits. In fact, of the six people within the Commissioner’s office who did have some responsibility for the matter, none was called to give evidence, and none had reporting lines to Mr Jolly or Ms Cliffe in relation to this matter. Mr Jolly had no communication with any of those people about how the Commissioner should have voted at the Second Meeting of Creditors. The Court is entitled to expect that, even when evidence is being given on affidavit to adduce documentary evidence, the deponent has a working understanding of the documents and the case advanced. This is especially so when it is apparent from cross-examination that those who did have such knowledge could have been readily called by the Commissioner. More can, and ought reasonably, be expected of the Crown.
The Commissioner’s conclusion that the Comlek Companies, certain directors and accountants committed deliberate tax defaults, evaded tax, and misled the Commissioner, is said to be supported by a series of email communications between Mr Donaldson, Mrs Donaldson, Mr Gallagher and the Comlek Companies’ employees and former accountants. Troublingly, Mr Jolly could not confirm that the selection of emails exhibited to his affidavit, and from which the Commissioner asked the Court to infer that they were indicative of “a deliberate, conscious or reckless avoidance of the consequences of the grouping provisions by certain directors of the Comlek Companies and their accountants”, comprised the totality of the communications between the Comlek Companies’ accountants and directors. The communications exhibited are dated from 12 October 2011 and 17 November 2014. Taken as a whole, those communications are a relatively anodyne collection of messages between the directors and their accountants in which payroll tax issues are mentioned and reference is made to both the transfer of employees from Personnel, Alpha, and Beta to the Island Entities, and the deregistration of the former entities. The most damning appears to be an email of 19 September 2013 between two accountants, in which one says, “directors are only different to avoid PRT grouping”.
Nevertheless, for the reasons I have already given in relation to whether the DOCA should be terminated on public interest grounds, I decline to exercise my discretion to terminate the DOCA.
IS THE DOCA UNFAIRLY DISCRIMINATORY?
As to the Commissioner’s complaint that the DOCA is “unfairly discriminatory” against it within the meaning of s 445D(1)(f)(i), its basis is said to be threefold. First, the proposed return to the Commissioner was estimated to be between 7.8 and 17.4 cents in the dollar, as compared with the estimated return to all other admitted participating creditors of between 16.9 and 37.8 cents in the dollar. Although the estimated returns as between the Commissioner and the other admitted creditors differed, his overall share of the available pool was 60%, in circumstances where the Administrators admitted proofs of the Commissioner’s debt in its entirety, and where the assessments remained the subject of unresolved objection.
Secondly, the Commissioner is the majority creditor in value, who voted against entry into the DOCA. The second reason proffered goes nowhere towards establishing that the DOCA is “unfairly discriminatory”. Rather, it is no more than a statement of fact. To assert simply that the largest creditor by value did not get its own way does not establish unfair discrimination.
Thirdly, the Commissioner submitted that all creditors, other than the QRO, were better off under the DOCA than they would be in a liquidation, and that, consequently, the DOCA unfairly discriminated against the Commissioner.
In determining whether a DOCA is unfairly discriminatory (or unfairly prejudicial), courts have regarded factors such as: the object of Pt 5.3A; the interests of creditors, the relevant company and the public; the comparable position of the creditor in question on a winding up, compared with their position under the DOCA; and additional relevant factors, including the status of all creditors under the DOCA, the existence of a collateral benefit to the shareholders, and the whole effect of the DOCA itself: TiVo at [54], cited in Sino Group at [66].
The first reason advanced by the Commissioner seeks to invoke the principle of pari passu distribution. The pari passu principle can be traced back to s 2 of Henry VIII’s Statute of Bankrupts 1542 (34 & 35 Henry 8 c.4), under which the assets and debts of a bankrupt were to be identified and appraised, and the assets sold:
… for a true satisfaction and payment of the said creditors; that is to say, to every of the said creditors, a portion, rate and rate alike, according to the quantity of their debts …
In Goode on Principles of Insolvency Law (5th ed, Kristin van Zwieten, Sweet & Maxwell, 2018) at [8-02], the principle of pari passu distribution is explained in the following terms:
The most fundamental principle of insolvency law is that of pari passu distribution, all creditors participating in the common pool in proportion to the size of their admitted claims.
…
The principle is based on the notion that losses should be borne by unsecured creditors equally: as the Supreme Court has recently put it, the statutory provisions for rateable distribution embody “the fundamental principle of equality” [citing Re Lehman Bros (International) Europe (in administration) (No 4) [2017] 2 WLR 1497 at [20] per Lord Neuberger (with whom Lords Kerr and Reed agreed)].
As is made clear in this passage, the rationale for a pari passu distribution is to ensure that losses in an insolvency are borne equally. The concept is relevant to the distribution of a pool of assets. A DOCA puts in place what Finkelstein J referred to in Commonwealth v Rocklea Spinning Mills Pty Ltd [2005] FCA 902; 145 FCR 220 at [28], as a “de facto winding up”, such that:
there is usually no reason to depart from the manner of distribution that would apply in an actual winding up. A departure from the winding up model is likely to be unjust or unfair.
(Emphasis added.)
That does not mean, however, that there will never be circumstances in which a departure from the winding up model, leading to differential treatment of creditors, is neither unjust nor unfair. Finklestein J pointed to two matters in particular which might justify the differential treatment of creditors under a DOCA. The first is where the company is not the source of the funds that will go to creditors. The justification for this exception is that funds provided by a third party under a deed “would not be available to creditors in a winding up and there is no good reason why all creditors should be better off under a deed”: Rocklea Spinning Mills at [29]. The personal guarantees given by individuals who are no longer directors, referred to in [224] below, are relevant in this context. The second justification is where the purpose of the deed is to keep the company solvent. His Honour said, relevantly, at [30]:
When the object of the deed is to preserve the company’s business, the legislation does not assume that the creditors will be paid in full. To the contrary Pt 5.3A assumes that it might often be necessary to extinguish by composition or bar certain claims. And it makes no assumption that the creditors will be treated equally or that they will be given the same priority as in a winding up. The reason it makes no such assumption is that the equal treatment of creditors or the maintenance of priorities when there is not enough money for everyone can easily thwart the attempt to revive an ailing company.
The Commissioner submitted that no relevant justification was put forward by the Administrators as to why there was a differential return as between the Commissioner and the other creditors. Although it is true that no express rationale is to be found in the Report, it is relatively plain how the directors arrived at the 60:40 split. As is referred to in the Report, the directors’ ROCAP disclosed “other ordinary unsecured creditor claims of $6.5 million”. That figure represents 40% of the total amount of $15.9 million in outstanding debt, when account is taken of the $9.4 million said to be owed to the QRO.
Further, unlike any other creditor, the QRO has received $631,748.43 pursuant to its garnishees: that is, it has received 100 cents in the dollar for a portion of the QRO debt.
Relevantly, Mr Donaldson’s reasons for proposing the DOCA in the form presented to creditors have already been set out above: see [133] above.
The principles relevant to determining whether a DOCA is unfairly prejudicial or unfairly discriminatory against one or more creditors were stated by McKerracher J in Decon at [202]:
(a)Part 5.3A of the Corporations Act assumes that the creditors are best placed to judge their interests so a setting-aside will not be ordered lightly;
(b)the mere fact that a creditor is prejudiced by the operation of the deed is not a sufficient reason to terminate a deed. The mere existence of the deed procedure usually means that some creditors will gain something and some creditors will lose something out of the arrangement;
(c)the test under s 445D(1)(f)(i) is not merely discrimination or prejudice, but unfair discrimination or unfair prejudice. Some degree of discrimination is not necessarily unfair. Thus, it is clear that a DOCA may provide for differential dividends among creditors. Part 5.3A does not require a pari passu distribution. What is required is a better return to creditors than an immediate winding up. That object is met if some creditors are better off than in a winding up and none are worse off under the DOCA than they would be under a winding up; and
(d)when deciding whether a deed unfairly prejudices or discriminates against a creditor or group of creditors, consideration must be given to what those purportedly prejudiced creditors would receive, or would be likely to receive, on a winding up, and the reasonableness of any conclusions reached by the administrator on that question.
(Citations omitted. Emphasis added).
His Honour continued, at [203], by explaining how the Court determines what is unfairly discriminatory:
(a)there must be reasonable grounds for differentiation between creditors of an equal class (for example, ordinary unsecured creditors) that accord[s] with the object and spirit of Pt 5.3A. Circumstances may exist where certain creditors must be paid in full to ensure their continued support for the company to allow it to continue to trade;
(b)there will be circumstances when ordinary commercial common sense will demand, in the case of priority creditors, a loss of priority and, in the case of unsecured creditors, some degree of discrimination;
(c)where a deed proposes to preserve the company to achieve the objects of Pt 5.3A of the Corporations Act, there should be no expectation of equal treatment of unsecured creditors where such treatment would defeat that purpose;
(d)ultimately, if there is no prima facie evidence of misfeasance, concealment or a materially inadequate preliminary examination, and the DOCA offers both real financial benefits credibly estimated on preliminary investigation to exceed those available on liquidation, and indirect or collateral benefits from the survival of the company’s business; and no worthwhile avenues for further recovery in liquidation are identified, a major creditor’s curiosity or preference for further exploration of speculative claims is unlikely to render termination of the DOCA in the interests of the creditors as a whole.
(Citations omitted. Emphasis added.)
The Report stated the Administrators’ reasons for recommending a vote in favour of the DOCA. Those reasons included:
· greater certainty of the continuation of the business and retention of all 140 employees;
· payment of the entire Deed Contribution in one payment within 45 days of execution; and
· continues the employment of all employees and minimises redundancy claims which have a priority claim over unsecured creditors.
The Administrators also advised that the DOCA provided a better return than the mid-point range of the estimated liquidation scenario. The Report stated:
Based on our preliminary investigations since 5 December 2022, we estimate possible returns to creditors in the various individual liquidation scenarios could range from Nil up to 16.8 cents in the dollar within 2 to 3 years, subject to timing of any public examinations and litigation (noting that no return to creditors would be anticipated for the majority of the Companies).
The Deed Contribution was a cash contribution of $2.3 million funded by a chattel mortgage and a debt factoring facility entered into by Donaldson Mackay Pty Ltd (in its own right and as trustee of the Donaldson Family Trust) and Simon Galagher Pty Ltd (in its own right and as trustee of the Gallagher Family Trust). The facility was guaranteed by Mr Donaldson, Mrs Donaldson, Mr Gallagher, Comlek Group, T&T, ISS, Engineering, TIC, Sigall, and Sparra, with Scottish Pacific Business Finance Pty Limited. Comlek Group has also entered into a debtor financing facility with FactorONE, a division of Scottish Pacific, with a limit of $4 million. It, too, has been guaranteed by several parties.
Self-evidently, there is no certainty as to the potential quantum of any recovery in a liquidation. There is insufficient evidence to establish that any creditor, including the Commissioner, would be worse off under the DOCA than in liquidation. What evidence there is suggests that most creditors will indeed be better off under the DOCA and so, as explained by Sifris J in Eco Heat (Vic) Pty Ltd v Syndicate Forty Four Pty Ltd (Subject to Deed of Company Arrangement) [2018] VSC 156 at [57], where:
the return under the DOCA is not insubstantial or token and the public interest and commercial morality issues are unlikely to translate into a cause of action realistically worth investigating and pursuing, the scale may tip in favour of retaining the DOCA.
I am not satisfied that the Commissioner has discharged his onus of establishing that the DOCA is unfairly discriminatory within the meaning of s 445D(1)(f)(i) of the Corporations Act.
SHOULD THE DOCA BE TERMINATED UNDER SS 445D OR 447A?
For the reasons given above, the Commissioner has not discharged the onus of establishing that there is a reason, within the meaning of s 445D(1)(a), (b), (f) or (g), why the DOCA should be terminated. For the same reasons, the Commissioner has not established that there is “some other reason” why the administration should end, within the meaning of s 447A(2)(c).
The Commissioner has established that there was a material omission in the Report, being that the Commissioner had asserted in writing that, after investigating, he had concluded that the Comlek Companies had committed deliberate tax defaults and engaged in evasion of tax. Nevertheless, for the reasons given, I do not consider that it is in the interests of creditors as a whole to set aside the DOCA and I decline to do so.
SHOULD THE CASTING VOTE BE SET ASIDE?
The Commissioner submitted that, should the Court decline to terminate the DOCA, the Court should nonetheless set aside the exercise by Mr McCabe of his casting vote in favour of the DOCA at the Second Meeting of Creditors.
The Commissioner relies on s 75-42 of the IPSC, which provides relevantly:
75-42Creditors’ resolution passed because of casting vote – Court review
Application of this section
(1)This section applies if:
…
(a)the resolution is passed because the person presiding at the meeting exercises a casting vote.
Application to the Court
(2)A person…may apply to the Court for an order setting aside or varying the resolution, but only if:
(a)the person voted against the resolution in some capacity (even if the person voted for the resolution in another capacity); or
…
Court may make orders
(3)On application under subsection (2) and (3), the Court may:
(a)By order set aside or vary the resolution; and
(b)If it does so – make such further orders, and give such directions as it sees fit.
(4)On and after the making of an order varying the resolution, the resolution has effect as varied by the order.
It is accepted that the substantial similarity between the terms of s 75-42 and the provision of the Corporations Act which it replaced (the now-repealed s 600B), supports the application of the principles developed in relation to s 600B to the scope and operation of s 75-42: Adelaide Brighton at [1223].
The exercise of a casting vote
In Deputy Commissioner of Taxation v Wellnora [2007] FCA 1234; 163 FCR 232, Lindgren J, citing Neill LJ in R v Bradford Metropolitan City Council; ex parte Corris [1981] 3 All ER 156 at 160, said at [214]:
A person who has a second or casting vote is clearly under a duty to exercise it honestly and in accordance with what he believes to be the best interests of those who may be affected by the vote. Subject to this, however, it seems to me that the person presiding at a meeting is fully entitled to use his vote as he thinks fit.
(Emphasis added.)
In Adelaide Brighton, after reiterating the statement of principle identified by Lindgren J, and the formulation as to the Court’s approach adopted by Barrett J in Plumbers Supplies v Firedam Civil Engineering [2011] NSWSC 325, at [41]-[42], Besanko J said, at [1228]:
An administrator must act honestly and have regard to the best interests of the creditors. The administrator must appropriately consider and weigh the considerations that a reasonable and prudent insolvency practitioner would consider to be relevant.
Besanko J further observed, at [1230]:
The courts have made it clear that there is no general presumption or rule in favour of a majority creditor or the majority in value. The fact that a majority creditor or the majority in value opposed and oppose the DOCA is a relevant consideration, but it is not decisive.
The matters identified by the authorities, which the Court will consider when reviewing the exercise of the casting vote by an administrator, were listed by Besanko J at [1229]:
(1) whether the proposed DOCA is opposed by a major creditor, especially when there is a large proportion between the major debt and other debts;
(2)whether the proposed DOCA is supported by the directors, in circumstances where it will deliver some advantage to them;
(3) whether creditors who voted in favour of the proposed DOCA will be prejudiced if the Court sets aside the resolution;
(4)whether the administrator carried out adequate investigations before exercising the casting vote; and
(5)whether the administrator’s report contained misleading information.
Matters in favour of setting the casting vote aside
The Commissioner submitted that, in substance, there are two critical factors that the Court should weigh in favour of setting the casting vote aside:
(a)the matters of public interest and commercial morality, as pleaded by the Commissioner; and
(b)the information provided to creditors containing the allegedly false and misleading statements and omissions.
The Commissioner submitted that, when weighing these matters against the possibility that the DOCA may result in the continuation of the Comlek business, the Court should “steadily [bear] in mind” whether Mr McCabe’s opinion at the time of exercising the casting vote was directed to a course of action that was in creditors’ interests: see Adelaide Brighton at [1411].
For the same reasons that have led to my findings above on the matters of public interest and commercial morality, and the alleged false and misleading statements and omissions, neither factor raised by the Commissioner is sufficient in this case to warrant setting aside the casting vote.
Further, the Commissioner has neither presented any evidence to establish, nor was there any suggestion, that Mr McCabe’s decision-making process in exercising the casting vote was dishonest or not for a proper purpose in accordance with what he believed was in the best interests of the creditors as a whole. That decision-making process, and Mr McCabe’s subjective state of mind, were not challenged in cross-examination. Rather, the unchallenged evidence was that Mr McCabe considered his exercise of the casting vote by discussing the prospect of exercising the vote with Mr Hayes on 19 January 2023, prior to the Second Meeting of Creditors, in circumstances where he had communicated to the QRO why the DOCA would provide a better return for creditors than liquidation, the Commissioner was not prepared to provide an indemnity for the Administrators’ consideration of adjourning that meeting, and where no adjournment was pursued by the Commissioner at the Second Meeting of Creditors.
The Commissioner has not, on the evidence, satisfied the Court that the exercise of the casting vote should be set aside, and I decline to do so.
DISPOSITION
In the context of the scheme established by Pt 5.3A of the Corporations Act for the voluntary administration of companies, the Commissioner has not demonstrated that, in the circumstances of this case, it is in the public interest for the DOCA to be terminated, nor for the Administrators’ casting vote to be set aside, nor indeed for the Comlek Companies to be wound up and for liquidators to be appointed. The Trading Companies are presently trading profitably, current payroll tax obligations are being met, and approximately 88 people are gainfully employed. The Commissioner has other means by which to pursue his grievance with the Comlek Companies.
It is therefore appropriate that the Commissioner’s application be dismissed, with costs.
By correspondence received on behalf of the parties by my Associate on 20 June 2024, the parties requested that, regardless of the outcome of the proceeding, it would be appropriate for the Court to grant an interim stay of the Orders to allow any unsuccessful party to consider their position in relation to filing an appeal. Such a course is appropriate in a case such as this, where the position of the unsuccessful party at first instance would be irrevocably altered were a stay not granted. Accordingly, I will order that the Orders are to be stayed until 7 days after the expiry of the appeal period, unless extended, being the terms of the stay sought by consent. I will also grant liberty to apply.
I certify that the preceding two hundred and forty-three (243) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Sarah C Derrington. Associate:
Dated: 21 June 2024
SCHEDULE OF PARTIES
QUD 99 of 2023 Defendants
Fourth Defendant:
COMLEK ENGINEERING PTY LTD (ADMINISTRATORS APPOINTED) ACN 609 245 758
Fifth Defendant:
INTERNATIONAL SWITCHBOARD SOLUTIONS PTY LTD (ADMINISTRATORS APPOINTED) ACN 160 928 781
Sixth Defendant:
MACKAY TEST & TAG PTY LTD (ADMINISTRATORS APPOINTED) ACN 143 592 643
Seventh Defendant:
COMEK PTY LTD (ADMINISTRATORS APPOINTED) ACN 155 603 633
Eighth Defendant:
KESWICK PERSONNEL PTY LTD (ADMINISTRATORS APPOINTED) ACN 160 325 959
Ninth Defendant:
BRAMPTON PERSONNEL PTY LTD (ADMINISTRATORS APPOINTED) ACN 160 325 628
Tenth Defendant:
HAMILTON PERSONNEL PTY LTD (ADMINISTRATORS APPOINTED) ACN 160 325 940
Eleventh Defendant:
HAYMAN PERSONNEL PTY LTD (ADMINISTRATORS APPOINTED) ACN 160 325 646
Twelfth Defendant:
LONG PERSONNEL PTY LTD (ADMINISTRATORS APPOINTED) ACN 160 325 968
Thirteenth Defendant:
DAYDREAM PERSONNEL PTY LTD (ADMINISTRATORS APPOINTED) ACN 160 325 655
Fourteenth Defendant:
CARTEL MKY NIGHTCLUB PTY LTD (ADMINISTRATORS APPOINTED) ACN 603 808 037
Fifteenth Defendant:
DONNIE INVESTMENT PTY LTD (ADMINISTRATORS APPOINTED) ACN 655 324 717
Sixteenth Defendant:
NIGHTCLUB HOLDINGS NO 1 PTY LTD (ADMINISTRATORS APPOINTED) ACN 603 807 414
Seventeenth Defendant:
NIGHTCLUB HOLDINGS NO 2 PTY LTD (ADMINISTRATORS APPOINTED) ACN 603 807 423
Eighteenth Defendant:
SIGALL PTY LTD (ADMINISTRATORS APPOINTED) ACN 137 274 090
Nineteenth Defendant:
SPARRA PTY LTD (ADMINISTRATORS APPOINTED) ACN 136 886 452
Twentieth Defendant:
DONALDSON (MACKAY) PTY LTD (ADMINISTRATORS APPOINTED) ACN 123 470 968
Twenty First Defendant:
SIMON GALLAGHER PTY LTD (ADMINISTRATORS APPOINTED) ACN 143 583 395
Twenty Second Defendant:
MICHAEL DONALDSON
Twenty Third Defendant:
REBECCA DONALDSON
Twenty Fourth Defendant:
SIMON GALLAGHER
Twenty Fifth Defendant:
BRIJESH SOROUT
Twenty Sixth Defendant:
BROOKE DONALDSON
Twenty Seventh Defendant:
MADDISON GALLAGHER
Twenty Eighth Defendant:
GLEN GALLAGHER
Twenty Ninth Defendant:
SCOTT GALLAGHER
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