Deputy Commissioner of Taxation v Distinctive Enterprises Pty Ltd (Administrator Appointed) (In liquidation) ACN 097 860 547 No 2
[2007] FCA 2097
•30 November 2007
FEDERAL COURT OF AUSTRALIA
Deputy Commissioner of Taxation v Distinctive Enterprises Pty Ltd (Administrator Appointed) (In liquidation) ACN 097 860 547 No 2
[2007] FCA 2097CORRIGENDUM
DEPUTY COMMISSIONER OF TAXATION v DISTINCTIVE ENTERPRISES PTY LTD (ADMINISTRATOR APPOINTED) (IN LIQUIDATION) ACN 097 860 547
NSD2022 OF 2007
EMMETT J
30 NOVEMBER 2007 (CORRIGENDUM 15 JANUARY 2008)
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NSD2022 OF 2007
BETWEEN:
DEPUTY COMMISSIONER OF TAXATION
Plaintiff and First RespondentAND:
DISTINCTIVE ENTERPRISES PTY LTD (ADMINISTRATOR APPOINTED) (IN LIQUIDATION) ACN 097 860 547
Defendant and ApplicantDAVID KERR in his capacity as Official Liquidator of Distinctive Enterprises Pty Ltd (Administrator Appointed) (In Liquidation) ACN 097 860 547
Second Respondent
JUDGE:
EMMETT J
DATE OF ORDER:
30 NOVEMBER 2007
WHERE MADE:
SYDNEY
CORRIGENDUM
1.On page 7 of the judgment, delete the appearances and insert the following:
Counsel for the Plaintiff: Mr JT Johnson
Solicitor for the Plaintiff: Craddock Murray Neumann
Counsel for the Defendant and the Applicant: Mr CR Newlinds SC
Solicitor for the Defendant and the Applicant: Turks Legal
I certify that the preceding one (1) numbered paragraph is a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Justice Emmett. Associate:
Dated: 15 January 2008
FEDERAL COURT OF AUSTRALIA
Deputy Commissioner of Taxation v Distinctive Enterprises Pty Ltd (Administrator Appointed) (In liquidation) ACN 097 860 547 No 2
[2007] FCA 2097CORPORATIONS – application to adjourn winding up order – review of order of registrar – hearing de novo – whether in interests of creditors of company for company to remain in administration.
Corporation Act 2001 (Cth), s 439A
DEPUTY COMMISSIONER OF TAXATION v DISTINCTIVE ENTERPRISES PTY LTD (ADMINISTRATOR APPOINTED) (IN LIQUIDATION) ACN 097 860 547 AND ANOR
NSD2022 OF 2007
EMMETT J
30 NOVEMBER 2007
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NSD2022 OF 2007
BETWEEN:
DEPUTY COMMISSIONER OF TAXATION
Plaintiff and First RespondentAND:
DISTINCTIVE ENTERPRISES PTY LTD (ADMINISTRATOR APPOINTED) (IN LIQUIDATION) ACN 097 860 547
Defendant and ApplicantDAVID KERR in his capacity as Official Liquidator of DISTINCTIVE ENTERPRISES PTY LTD (ADMINISTRATOR APPOINTED) (IN LIQUIDATION) ACN 097 860 547
Second Respondent
JUDGE:
EMMETT J
DATE OF ORDER:
30 NOVEMBER 2007
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The application for an adjournment of the winding up application be refused.
2.The application for review of the decision of the Deputy Registrar made on 16 November 2007 be dismissed.
3.Mitchell Ball and the Company pay the Commissioner’s Costs of the application for review.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NSD2022 OF 2007
BETWEEN:
DEPUTY COMMISSIONER OF TAXATION
Plaintiff and First RespondentAND:
DISTINCTIVE ENTERPRISES PTY LTD (ADMINISTRATOR APPOINTED) (IN LIQUIDATION) ACN 097 860 547
Defendant and ApplicantDAVID KERR in his capacity as Official Liquidator of DISTINCTIVE ENTERPRISES PTY LTD (ADMINISTRATOR APPOINTED) (IN LIQUIDATION) ACN 097 860 547
Second Respondent
JUDGE:
EMMETT J
DATE:
30 NOVEMBER 2007
PLACE:
SYDNEY
REASONS FOR JUDGMENT
On 16 November 2007 a registrar of the Court made an order that the defendant, Distinctive Enterprises Pty Ltd (the Company), be wound up and that Mr David Kerr be appointed liquidator of the Company. The registrar also made an order fixing the costs for the plaintiff, the Deputy Commissioner of Taxation (the Commissioner). At the time of making the orders, the Company was the subject of voluntary administration. On 29 October 2007, Mr Mitchell Ball (the Administrator) had been appointed as administrator pursuant to the Corporations Act 2001 (Cth) (the Act). An application was then made for review of the registrar’s order. More specifically, the registrar had been asked to adjourn the hearing of the winding up application pursuant to s 440A(2) of the Act.
By that provision, the Court must adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company’s creditors for the company to continue under administration rather than be wound up. The reason why the Company had sought an adjournment under s 440A(2) is that a meeting of creditors had been convened for 23 November 2007 for the purpose of considering a proposal that the Company enter into a Deed of Company Arrangement.
The application for review came before me on 19 November 2007 when I made orders that the orders of the Deputy Registrar be stayed up to 5 pm on 23 November 2007. The Administrator gave undertakings to the Court that he would not sign any Deed of Company Arrangement prior to 5 pm on 23 November 2007. On 23 November 2007, the meeting of creditors was held at which approval of a somewhat varied proposal was given. Later in the day I adjourned the hearing of the application for review to today and extended the stay up to and including today.
I have now heard full argument on behalf of the Company and the Commissioner on the question of the review. The review is by way of hearing de novo, on the basis that the Court hearing the review must exercise whatever discretions were to be exercised by the registrar originally exercising power. That in effect requires the Court, on the basis of the evidence before it at the hearing of the review, to determine whether the application for an order to wind up the company should be adjourned on the basis that the Court is satisfied that it is in the interests of the Company’s creditors for the Company to continue under administration rather than be wound up.
The Company indicated that, if the Court is not satisfied that all of the prerequisites for the making of the winding up order are satisfied, it would consent, to the extent necessary, to the waiver of any rules or other formal requirements necessary for the making up of winding up order.
The object of Part 5.3A, which deals with the administration of a company’s affairs with a view to executing a Deed of Company Arrangement, is to provide for the business, property and affairs of an insolvent company to be administered in a way that maximises the chances of the company, or so much as is possible of its business, continuing in existence or, 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.
At the meeting of creditors of thr Company held on 23 November 2007, the Administrator rejected proofs of related creditors on the basis that there was insufficient evidence to support those proofs. The Administrator admitted proofs of debt for each of the other creditors as follows:
The Commissioner $ 1,296,343.82
Office of State Revenue $ 83,301.22
Mack Partnership Accountants $ 30,000.00
Koppa Cleaning $ 38,842.66
Z & M Corporate Cleaning $ 47,000.00
Rubinco Stojceski, a director of the Company $ 1,718,180.00
The Administrator declared that:
·a quorum was present;
·the meeting was being held at a time and place convenient to the majority of the creditors; and
·the Administrator’s report pursuant to s 439A of the Act had been issued and sent to creditors within the time limits provided for in the Act.
The Administrator tabled his report and informed creditors that one of their options was to adjourn the meeting to consider the proposal in more detail. The Administrator also referred creditors to a written statement prepared on behalf of the Commissioner, which had been circulated to creditors, urging them to vote against the proposal for the Company to execute a Deed of Company Arrangement.
The Administrator also tabled a copy of a licence agreement between the Company and Distinctive Cleaning Enterprises Pty Limited (Cleaning Enterprises). Under that licence, Cleaning Enterprises agrees to perform the Company’s obligations under cleaning contracts entered into with Westfield Shopping Centre Management Co Pty Ltd. That appears to be necessary because the Company no longer has any fixed assets with which it could perform its obligations under the cleaning contracts and it appears that the Company no longer has any employees. Indeed, there is evidence that the Company’s fixed assets were transferred to Cleaning Enterprises at some time in the reasonably recent past for a sum of $800,000. The precise circumstances in which that transfer took place are not clear.
A balance sheet of the Company as at 30 June 2007, which shows comparative figures as at 30 June 2006, indicates that the Company’s non-current assets as at the latter date included the following:
Plant and equipment at depreciated value $563,108.
Motor vehicles at depreciated value $ 83,708.
Office furniture and equipment at depreciated value $ 22,528.
The balance sheet as at 30 June 2007 shows no such assets. The accounts also show a liability of the Company for “Directors Loan”. The liability as at 30 June 2006 was $2,037,931 and as at 30 June 2007 was $1,718,180. The circumstances of the reduction are by no means clear and the connection between the deduction and the disposal of the Company’s fixed assets is also unclear.
The proposal that was put to the creditors on 23 November 2007, which was different from that which had been foreshadowed, was as follows:
(a)There would be established a deed fund of $250,000;
(b)The deed fund would be paid in full on or before the execution of the Deed of Company Arrangement, being not more than 21 days from the date of the resolution;
(c)There be no security offered for the payment of the deed fund;
(d)The director woul discharge a Director Penalty Notice liability to the Commissioner of approximately $160,000 within 30 days of execution of the Deed of Company Arrangement and if he does not, the deed will terminate;
(e)The director and related creditors will not prove for their debts in the deed fund;
(f)The Commissioner’s legal costs, to a maximum of $10,000, will be paid in addition to the deed fund;
(g)The official liquidator’s remuneration and expenses of $1,291 will be paid in addition to the $250,000;
(h)The director will convert his loan account of $1,718,180 into equity and will also convert into equity the amount that he pays under the Director Penalty Notice.
When the proposal was put to the meeting, four creditors voted in favour, being Mack Partnership, Koppa Cleaning, Z & M Corporate Cleaning Services and the, for debts totalling $1,834,022.66. The two other creditors who were present, being the Commissioner and the Office of State Revenue, voted against the proposal in respect of debts totalling $1,379,645.04. The Administrator therefore determined that the resolution was passed.
It is by no means clear how the director proposes to pay the amount of the Director Penalty Notice. The extent of his assets is uncertain. Inconsistent information has been provided at different times concerning his assets. The most recent information indicates an asset of some $800,000 owing by Cleaning Enterprises. That may well be the amount of the consideration received by the Company for the sale of its fixed assets. However, as I have said, the loan account of the director is quite uncertain as are the transactions that have affected it in the recent past.
The licence agreement to which I have referred operates only for so long as the Administrator acts in that capacity. It would not continue after the proposed Deed of Company Arrangement is entered into. The Commissioner suggests that, therefore, the objects of s 439A would not really be achieved. On the other hand, one of the objects is to ensure that, if it is not possible for the Company or its business to continue in existence, there is a better return for the Company’s creditors and members than would result from an immediate winding up of the Company. The answer to that question is by no means clear.
The Administrator estimates a possible return of slightly in excess of 13 cents in the dollar to creditors if the liabilities are as he understands them and the Deed of Company Arrangement proceeds. On the other hand, if the Company goes into liquidation at present it has a deficiency of assets to liabilities of some $2,060,838. Further, it has an operating loss for the year ended 30 June 2006 of $366,046 and for the year ended 30 June 2007 of $588,252. The material presently available does not indicate how the Company came to incur those losses and why it continued to trade in circumstances where it was incurring such losses.
Thus it cannot be said that, if the Company went into liquidation, there would necessarily be no return to creditors. Certainly the assets of the Company as they presently stand would not result in any return. However, the solicitors for the Commissioner have indicted to the Administrator that, after an appropriate investigation has been conducted by a liquidator, the Commissioner would be prepared to consider any application made for funding to proceed against the director for insolvent trading, voidable transactions or unreasonable director related transactions. It is by no means totally clear, therefore, that the creditors are better served by the proposed Deed of Company Arrangement. Further, the return of 13 cents is dependent upon the payment by the director of the amount of the Penalty Notice Payment thereby reducing the liability of the Company to the Commissioner.
The Commissioner also points to other matters as being contrary to the public interest and possibly contrary to the interests of creditors as a whole. The proposal that was put to the creditors involves the director not foregoing his debt but capitalising the debt. Further, the provision of the deed fund of $250,000 is to be by way of loan by the director. Thus it is theoretically possible that, if the Company became profitable, the director would be repaid in full, whereas the present creditors would have no more than at best the 13 cents in the dollar.
However, those are not matters which are directly relevant to the interests of creditors. On the other hand, the question of whether $160,000 will be paid and the possibility of a claim against the director in respect of the transfer of fixed assets and insolvent trading, do not persuade me that it is clear that the creditors are likely to receive more by reason of the proposed Deed of Company Arrangement. In any event it would always open to the director to put a proposal to a liquidator that involved a Deed of Company Arrangement and a termination of the winding up if, after appropriate inquiry, the liquidator was satisfied that there was no prospect of further recovery. It may well be that that is unlikely and that the only reason why the director is prepared to put forward the present proposal is in order to avoid investigation. That is a matter of speculation.
I am not persuaded that it is in the best interests of the creditors for the Company to remain in administration. Accordingly I would conclude that there ought to have been no adjournment of the winding up application. It follows that, on review of the application for an adjournment, I would refuse the adjournment. It also follows therefore that the winding up order that was made on 16 November 2007 would stand and when the stay ceases that would become an effective order.
I certify that the preceding twenty (20) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate:
Dated:14 January 2008
Counsel for the Plaintiff: Mr CR Newlinds SC Solicitor for the Plaintiff: Craddock Murray Neumann Counsel for the Defendant: Mr JT Johnson Solicitor for the Defendant: Turks Legal Date of Hearing: 30 November 2007 Date of Judgment: 30 November 2007
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