Deputy Commissioner of Taxation v DPS Technology Pty Ltd No. Scciv-03-882

DEPUTY COMMISSIONER OF TAXATION
v
DPS TECHNOLOGY PTY LTD
[2003] SASC 328

JUDGE BURLEY. On 15 September 2003 I granted an adjournment of an application to wind up the defendant. These are my reasons for granting the adjournment.
The plaintiff has applied for an order for the winding up of the defendant (the company) on the ground that the defendant is insolvent. There is no dispute that the company is insolvent. The winding up application was filed in this Court on 14 July 2003. The plaintiff relies upon the deemed insolvency provisions in the Corporations Act arising out of the service of a Creditor’s Statutory Demand dated 27 March 2003 which was served on the defendant on that date. The amount of the debt is $453,912.29.
The plaintiff’s application first came before the Court on 26 August 2003. On that occasion, over the objection of the plaintiff, the application was adjourned to 9 September 2003. By then Mr A R M Taylor, who had been appointed as the voluntary administrator of the company on 20 August 2003, had entered an appearance. In addition Cash Resources Australia Pty Ltd, a secured creditor to the extent of $250,760.00, also entered an appearance.
At the adjourned hearing, the administrator sought a further adjournment pursuant to s440A(2) of the Corporations Act on the basis that it was in the interests of the company’s creditors for the company to remain in administration rather than be wound up. On 9 September I did not have sufficient time to deal with the application for the adjournment so I adjourned that application to 12 September 2003 to enable further submissions to be put. It was necessary to adjourn the matter to a date prior to 16 September 2003 because a creditor’s meeting had been convened for that date.
Mr Taylor relied upon a number of affidavits to support his application for an adjournment. In his first affidavit of 22 August 2003 he confirmed that he had been appointed administrator on 20 August 2003 pursuant to s436A of the Act. He stated that the company has for the last eight or nine years conducted a precision tooling business supplying goods and services principally to the automotive and defence industries. The company currently employs 23 people and runs its operation from leased premises at Kilkenny. He stated that he had been advised by the directors that the company’s present financial difficulties arise from its expenditure and focus on the tooling required to produce a precision instrument known as the Manta Ray projector. He said:
“9I am advised and verily believe that the business for which this project was undertaken is a start-up venture and that it has been unable to pay its debt to the Company in full or meet anticipated demand for the Company’s services.
10The Directors have advised that it is their intention and desire to propose a Deed of Company Arrangement [DOCA] which, if accepted by the creditors, would allow the Company to trade on and which would pay DOCA creditors out of future profits. The Directors would like to ensure that over time, creditors recover a dividend of 100 cents in the dollar or a dividend close to that figure.
11I believe that rehabilitation of the Company’s business is possible and would ask that this Honourable Court support the Company and the Directors to put forward a DOCA proposal which would have the effect of securing a greater return to creditors than if the Company were to be wound up.”
Mr Taylor said that the company’s business is not a saleable proposition at present and the liquidation of the company’s assets would result in a substantial shortfall to the creditors, particularly unsecured creditors. He stated, however, that the company is turning over approximately $250,000.00 per month and the company, under administration, would continue to enjoy the support of its major secured creditor, Cash Resources Australia Pty Ltd. Mr Taylor was of the view that there was cause for optimism that the DOCA proposal which contemplates a payment to creditors out of future trading profits is sustainable.
The administrator’s application for an adjournment of the winding up application is supported by Cash Resources Australia Pty Ltd. According to the affidavit of its solicitor, Cash Resources holds a fixed and floating charge over the whole of the assets of the company. It has also purchased several debts which were owed to the company. The indebtedness of the company to Cash Resources is approximately $250,000.00. Cash Resources’ solicitor, Mr Randle, in his affidavit of 22 August 2003 said:
“5Cash Resources is aware that the directors currently propose that a Deed of Arrangement be put to creditors the provisions of which would make payment to unsecured creditors over a period of time.
6Cash Resources sees that such a proposal would be in the interests of creditors generally and as long as its securities can be safeguarded (which appears to be the case) it would be prepared to continue to provide finance by factoring debts to the extent necessary to enable the company to keep going and carry out the terms of the arrangement that it proposes with creditors. Accordingly as at the date hereof indications are that it is likely that Cash Resources would support the deed.”
The plaintiff, which opposes the adjournment, seeks an order for the winding up of the defendant. It is common ground that if the application for an adjournment is refused, it must follow that the company be wound up. The plaintiff relies on a number of affidavits. I refer firstly to the affidavit of Mr M S McCarthy sworn on 26 August 2003. Mr McCarthy is a taxation officer employed by the Australian Taxation Office (ATO). Exhibited to his affidavit is a copy of a facsimile transmission from the administrator to the ATO to which are attached financial statements. In the facsimile, Mr Taylor advised the ATO that profit to 31 March 2003 before depreciation was $113,135.68 and that profit after depreciation to 31 March 2003 was $10,241.68. For the period ended 30 June 2002 profit before depreciation was $130,279.66 but when depreciation of $164,407.00 was taken into account the company sustained a loss of $34,127.34.
In his affidavit of 9 September 2003 Mr Taylor was able to provide more detailed information. He stated that if the company went into liquidation, there was a prospect of a return to priority superannuation and employee claims but little or no prospect of any dividend for the balance of unsecured creditors. He referred to the other secured creditor of the defendant, CBFC Limited. It holds a first ranking debenture. If the property the subject of the debenture was subject to a forced sale, there would be a shortfall of approximately $112,000.00 based on values obtained by Mr Taylor. He has stated that CBFC has advised him that it will not seek to enforce its rights pursuant to the debenture provided that the company continues to meet its leasing payments from ongoing trading.
Mr Taylor has also taken into account the possibility that if the company goes into liquidation, the liquidator may recover damages from the directors based on insolvent trading. Mr Taylor is of the view that the directors do not have any significant capacity to satisfy any such claim.
After Mr Taylor’s appointment as administrator, he engaged a Mr Brian Coucill to prepare a report in relation to improving the company’s profitability and cash flow. A copy of that report is exhibited to his affidavit. Of that report Mr Taylor says:
“9The report shows that the major problem in the business is that some 29% of the costs incurred in producing jobs are not being charged to the customer for a variety of reasons. The report also indicates that by introducing disciplines and controls that do not currently exist, by developing key performance indicators that management can use to monitor efficiencies, by supplementing the operational focus of the existing management team with broader skills and finally by improving productivity and marketing, the business is able to return to profitability over time.”
Mr Taylor is of the view that if the company is permitted to continue to trade under a DOCA and that if the recommendations of Mr Coucill are implemented there would be provided “a significant opportunity to generate a dividend to the unsecured creditors of the Company that would not otherwise be likely”.
The proposal for the Deed of Company Arrangement is exhibit ARMT3 to the affidavit of Mr Taylor of 9 September 2003. It is as follows:
“Dear Sir,
Proposal: Deed of Company Arrangement (DOCA)
1Term of 3 years.
2No Payment to creditors unless circumstances permit within 12 months. At expiry of 12 months Administrator to address capacity to pay and recommend a variation of the DOCA accordingly.
3Intercompany loans from DPS Tooling Pty Ltd and DPS Wirecutting Pty Ltd to be deferred until terms of DOCA are performed.
4Directors claims deferred until DOCA performed.
5Damian Feleppa to pay in no less than $90,000 within 6 months of the execution of the DOCA. Such a loan to be deferred until terms of DOCA performed.
6Brian Coucill to be engaged by the company to implement identified changes.”
In relation to the DOCA Mr Taylor says:
“14The restructure of the business as contemplated by the DOCA does not disadvantage creditors. It is anticipated that the trading of the business during the period of its restructure will not lead to a deterioration in the financial position of the Company.
15The DOCA contemplates the ex gratia payment of $90,000.00 from the directors’ son. The son has no financial involvement with the business other than as an employee. The proposal also contemplates the subordination of at least $230,000.00 of related party debt.
16In the trade-on situation, which avoids the crystallisation of other employee entitlements, the $90,000.00 contribution, together with identified operational savings, is expected to enable the payment in full of the priority superannuation claim at the expiry of twelve months. Thereafter, the return to unsecured creditors will exceed the return in a liquidation today.”
The first meeting of creditors under the administration was held on 27 August 2003. A committee of creditors was appointed.
The committee met on 5 September 2003 and after extensive discussion the committee agreed to support a DOCA that facilitated the restructure and rehabilitation of the business. Although the plaintiff is a member of that committee, there was no representative of the plaintiff at that meeting.
Mr Taylor was subsequently advised by the plaintiff that the plaintiff would not support a restructure of the business.
In his affidavit of 9 September 2003 Mr Taylor said:
“23I seek an order from this Honourable Court adjourning the winding up application to a date after 16 September 2003 in order for the second meeting of creditors to be convened. At that meeting the wishes of all the creditors can be ascertained and the creditors can vote upon the proposal with respect to the Company’s future.
24I believe that rehabilitation of the Company’s business is possible and would ask that this Honourable Court support the Company and the Directors to put forward the DOCA proposal to the second meeting of creditors.
25I believe that the DOCA will have the effect of securing a greater return to creditors than if the Company were to be wound up and accordingly I submit that it is in the interest of creditors for the administration to continue rather than the Company being immediately wound up.”
In opposing the application for an adjournment, the plaintiff relied upon the affidavit of Mr N A Eckermann sworn on 11 September 2003. Mr Eckermann is a taxation officer and in his affidavit has set out the previous dealings between the plaintiff and the defendant in relation to the defendant’s liability for various forms of taxation to the plaintiff. The plaintiff relies upon that affidavit to support the contention that the defendant has been insolvent for a number of years and that that history of insolvency is a clear indication that the defendant will be unable to trade its way out of its difficulties and that consequently there is no point in the creditors pursuing the proposed DOCA. It is clear from Mr Eckermann’s affidavit that at least since October 2001 the defendant has had difficulty in meeting its indebtedness to the plaintiff with the result that amounts totalling approximately $800,000.00 are now owing by the defendant to the plaintiff.
Mr Eckermann has also referred to his investigations as to the ability of Damian Feleppa to make the promised payment of $90,000.00. I understand the plaintiff’s position to be that given Damian Feleppa’s liabilities when compared with his income, it is unlikely that he would be able to afford repayments on a loan of $90,000.00 taken out to satisfy that aspect of the proposed DOCA.
This aspect of the matter has not been the subject of any detailed submission by the parties. I do not mean any criticism of the parties when making that observation. There was unfortunately limited time available at the adjourned hearing on 12 September and consequently the parties’ ability to address both the factual and legal matters relevant to the application for the adjournment was restricted. I am therefore not in a position to make any detailed findings as to whether or not Mr Damian Feleppa will be able to meet the DOCA requirement of the payment of $90,000.00. I can only say that on the affidavit material before me from Mr Eckermann, there is doubt about whether or not Mr Damian Feleppa will be able to pay the $90,000.00 within the six month period or at all. This reservation applies notwithstanding Mr Taylor’s reference, in his affidavit sworn on 11 September 2003 to steps taken by Damian Feleppa to obtain the necessary funds.
In the administrator’s report to creditors, a copy of which is ARMT4 to the affidavit of Mr Taylor sworn on 11 September 2003, he has reported to the creditors as follows relating to the proposed DOCA:
“THE COMPANY’S PROPOSAL
The company proposes to enter a Deed of Company Arrangement (DOCA) that is intended to provide a better return to creditors than would be the case if the company were liquidated.
The main provisions of the DOCA are:
·Term of three years;
·Unsecured and non-refundable equity investment of at least $90,000 by Mr Damian Feleppa within six months of commencement of the DOCA;
·The Directors to waive any claims that they have against the company (approximately $99,400) until the DOCA is performed;
·Any claims for monies owing to DPS Tooling Pty Ltd and DPS Wire Cutting Pty Ltd (approximately $183,944) to be deferred until the DOCA is successfully performed;
·The day to day running of the business to be overseen by and [sic] independent consultant, Mr Brian Coucill. Mr Coucill is an independent consultant with a background across a range of industries including engineering and tool making, and he had particular experience in facilitating turnaround and operational management. The DOCA would provide that Mr Coucill work with the company for around two days per week over the first three months and reducing this to one and a half days as the necessary changes are made.
Mr Coucill has, under my instruction, carried out an independent review of the company’s operations and has identified a number of areas where the company’s performance could be improved. The proposal would be that the company would retain Mr Coucill on a monthly basis, with an initial commitment by both parties of at least three months; and
·No payments to unsecured creditors in respect of amounts owing prior to 20 August 2003 unless circumstances permit otherwise within twelve months. At the expiry of twelve months I will then assess the capacity of the company to pay and recommend an appropriate variation of the DOCA. During the first twelve months it is expected that the $90,000 contribution plus the realisation of equity in debtors over and above the factored debt of $62,690 ($313,450 less $250,760 factored), being $152,690 in total, together with identified operational savings, will allow the priority superannuation debt of $173,528 to be paid.
During the twelve month period immediately post-implementation of the DOCA, the performance of the company will be monitored by me through the achievement or otherwise of certain key performance indicators. These will be reviewed monthly and will include:
·Actual sales versus budget
·Employee productivity
·Timely payment of trade creditors
·Timely payment of GST, Superannuation and Pay as You Go liabilities;
·Analysis of the working capital position of the company;
·Value of the company’s order book for future work;
·Profits or losses generated by the company.
Should the company materially under perform against budgeted figures for any of the above items then I would have to assess at that time whether the terms of the DOCA require to be varied or whether the company should be wound up.
Control of Company
The proposed DOCA provides that Mr Brian Coucill would be involved in the DOCA and his role would be to implement operational changes in certain of the company’s working practices as well as to improve its financial and management reporting regime.
It is envisaged that these changes will take between three and six months before their long term benefit can be measured effectively. As noted above, I will be monitoring the performance of the company subject to it operating within certain pre-agreed covenants.
Should the implementation of these changes be successful over the initial twelve month period, the day to day running of the business would gradually revert to the current directors. For the avoidance of doubt, once the DOCA is implemented, control of the company would be handed back to the directors with Mr Coucill’s involvement. My role would be to monitor the company’s activities on a regular basis, but not on a day to day basis as at present.”
It is apparent from my brief review of the facts that the application for an adjournment is made in the context of the administrator wishing to put a proposal to the creditors whereby the company would not be wound up but would continue to trade in accordance with the provisions of the DOCA. Thus, this is not a situation where a short adjournment is sought to enable proposals for a DOCA to be formulated. Rather, the application involves the deferral of a winding up order to enable the creditors to vote on a specific proposal. This is the situation which confronted Hamilton J in TCS Management Pty Ltd v CTTI Solutions Pty Ltd [2001] NSWSC 830, an unreported decision delivered on 17 August 2001, and Parkinson JR in Fullview Pty Ltd v WLW Pty Ltd [1997] 972 FCA, an unreported decision delivered on 17 September 1997.
In Fullview Parkinson JR said (at page 4):
“The respondent administrator bears the onus of satisfying the Court that it is in the interests of the company’s creditors that the administration continue. I accept that the only material in the affidavit of Mr McDonald, which would show cause for the view adopted by him as to the best interests of the creditors, is that pertaining to the proposed deed of arrangement, and possible outcomes of property and asset sales. However despite the deficiencies in the affidavit material and in view of the continuing concurrent meetings of creditors, I am satisfied that a mere possibility of a return to creditors is sufficient basis for the exercise of the discretion in s440A(2) at this point in time. I am conscious that the second meeting of creditors had not been concluded at the time of this hearing and that is a matter which I have taken into account.”

This passage was referred to by Santow J in Waste Recycling and Processing Services of New South Wales v Local Government Recycling Co-operative Ltd (1999) 32 ACSR 194 at 199. In referring to Fullview Pty Ltd Santow J said (at 199, para 17):
“Significantly, in that case the administrators, having examined the affairs of the companies in question, had already reported to the creditors recommending that a deed of company arrangement be executed to be conditional upon the outcome of various creditors’ meetings.”
Hamilton J also referred to the decision in Fullview. In relation to the passage cited above from Fullview, Hamilton J said (at page 6):
“It is in my view important that that formula not be elevated into a general criterion. It should be borne in mind that the adjournment which the Judicial Registrar granted on that occasion was an adjournment of less than a month, to 13 October 1997, and that context must be borne in mind in viewing the significance of the words.”
Hamilton J also referred to the decision of the Court of Appeal of Queensland in Creevey v Deputy Commissioner of Taxation (1996) 19 ACSR 456. He said (at page 5):
“The judgment of the Court of Appeal was delivered by McPherson JA and his Honour said at 457:
‘In order to satisfy the court of the matter referred to in s440A(2) of the Corporations Law, one would expect that there would have to be some persuasive evidence to enable it to be seen that there were assets which, if realised under one form of administration rather than the other, would produce a larger dividend, or at least an accelerated dividend for the creditors.’ ”
McPherson JA was there referring to the obligation on the administrator to satisfy the Court that it is in the interests of the company’s creditors for the company to continue under administration rather than be wound up.
Having reviewed the authorities, Hamilton J eventually came to the conclusion that it had not been established that it was in the interests of the company’s creditors for the company to continue under administration rather than to be wound up. One of the factors which he took into account was the fact that the major creditor who opposed the application for the adjournment undertook, during the course of the hearing, to pay $100,000.00 towards the costs of any actions taken by the liquidator to recover damages for insolvent trading or for the recoupment of monies paid in circumstances which constitute a preference. During the course of argument I asked Mr Burton, counsel for the plaintiff, whether or not the plaintiff was prepared to provide financial support to the liquidator in relation to such actions should the company be wound up. He replied that he was not in a position to give such an undertaking but that such a request, if made by a liquidator, would be very carefully considered by the plaintiff.
In essence, the submissions both for and against the adjournment come back to the question of whether or not there may be some substance in the proposed DOCA such that the creditors should have the opportunity to consider whether or not they agreed with the proposals and thereby permitted the company to remain in administration as opposed to being wound up. It is clear from the cases that “a mere speculative possibility of a higher return to creditors” (see TCS Management Pty Ltd at page 9) was not sufficient. Again, to adopt the language of Hamilton J in TCS Management Pty Ltd (at 9) “there must be a real prospect of benefit from the adjournment”. But that does not mean “that that prospect must necessarily be … a comfortable satisfaction that a Deed of Company Arrangement will yield a greater amount than winding-up.” His Honour went on to say (at 9):
“Of course in some cases that may already be safely apparent whilst in others the company is so evidently a basket case that further delay of the inevitable would simply add to costs; see, for example, Yates v Deputy Commissioner of Taxation (1998) 26 ACSR 629.”
Applying that case to the application before me, I have come to the view that, despite having reservations about the sufficiency of the proposed DOCA, it is appropriate to grant the adjournment to enable the proposals to be put to the creditors at tomorrow’s meeting. In arriving at that conclusion I have taken into account the plaintiff’s concern that the probabilities are that the acceptance or rejection of the DOCA is likely to come down to the casting vote of the administrator in the context where the administrator supports the proposals. In my view there is nothing untoward in that process; it is a process which is specifically contemplated by the relevant provisions of the Corporations Act. There is nothing to suggest that the administrator is doing other than putting forward his views in good faith. Indeed, the position taken by the administrator in relation to the proposed DOCA has been an important factor in my decision to grant the adjournment requested.
Mr Burton informed me that he may be instructed to apply to terminate the DOCA if it is approved. The simple answer to that is that it is not for the Court at this stage to speculate about whether or not such an application would be successful: cf TCS Management.
For these reasons, I granted the adjournment to a date beyond 16 September 2003 to enable the creditors to consider whether or not the proposed DOCA should be accepted. I indicated that I granted the adjournment on the basis that a prompt decision will be made by the creditors in relation to whether or not the proposed DOCA is to be accepted.

[2003] SASC 328

19 September 2003