Deputy Commissioner of Taxation v Rohy's Contracting Pty Ltd

[2010] NSWSC 782

CITATION:	Deputy Commissioner of Taxation v Rohy's Contracting Pty Ltd [2010] NSWSC 782
HEARING DATE(S):	09/07/10
JUDGMENT DATE :	9 July 2010
JURISDICTION:	Equity Division Corporations List
JUDGMENT OF:	Barrett J
EX TEMPORE JUDGMENT DATE:	9 July 2010
DECISION:	1. The adjournment application is refused. 2. I order that Rohy’s Contracting Pty Ltd ACN 119 241 486 be wound up in insolvency. 3. I order that Sule Arnautovic of Jirsch Sutherland of Level 4, 55 Hunter Street Sydney, an official liquidator, be appointed liquidator of Rohy’s Contracting Pty Ltd. 4. I order that the plaintiff’s costs of the proceedings be fixed in the sum of $566.11. 5. I order that the plaintiff’s costs of the proceedings be paid by the defendant.
CATCHWORDS:	CORPORATIONS - winding up - pending application for winding up in insolvency - administrators appointed - whether winding up application should be adjourned - where deed of company arrangement proposed which is highly discriminatory - adjournment refused - winding up order made
LEGISLATION CITED:	Corporations Act 2001 (Cth), Part 5.3A, ss 440A(2), 445D(1)(f)
CATEGORY:	Principal judgment
PARTIES:	Deputy Commissioner of Taxation - Substituted Plaintiff Rohy's Contracting Pty Ltd - Defendant
FILE NUMBER(S):	SC 2009/291801
COUNSEL:	Mr C Lee - Substituted Plaintiff Mr B M Zipser - Defendant
SOLICITORS:	ATO Legal Services Branch - Substituted Plaintiff Buttar, Caldwell & Co - Defendant

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
CORPORATIONS LIST

BARRETT J

FRIDAY 9 JULY 2010

2009/291801 - DEPUTY COMMISSIONER OF TAXATION v ROHY'S CONTRACTING PTY LTD

JUDGMENT

1 I have before me an application by the Deputy Commissioner of Taxation as substituted plaintiff for a winding up order in respect of Rohy's Contracting Pty Limited. The application was filed on 7 May 2010. While the application was pending on 7 June 2010, an administrator was appointed to Rohy's Contracting under Part 5.3A under the Corporations Act 2001 (Cth).

2 The winding up application came before the registrar on 15 June 2010 and was on that occasion adjourned so that progress of the administration might be monitored. The matter is back before the court today in circumstances where, on 5 July 2010, the administrator circulated to creditors his report for the purpose of the second meeting of creditors. That meeting is to be held next Tuesday 13 July 2010.

3 There was another application today for the adjournment of the winding up application. That application was made by the defendant company through its administrator.

4 The basic proposition put is that, in terms of s 440A(2) of the Corporations Act, the court should be 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 argument that that is so is based on an assessment of a deed of company arrangement proposal outlined in the report of 5 July 2010 that creditors will have before them at the meeting on 13 July.

5 Under that proposal as it is outlined in the report, a deed fund of $140,000 will be assembled over 12 months at the rate of $11,667 per month out of the company's revenues. The deed fund will also include monies sufficient to cover trading liabilities and operating expenses incurred during the voluntary administration. These will presumably also come from the company's future revenues.

6 After the deed proposal had been unveiled there was discussion between the representatives of the substituted plaintiff (Deputy Commissioner of Taxation) and the administrator which caused the sole director of the company to add features to the deed of company arrangement proposal. How those added features will be notified to the creditors in time to enable them to make an informed judgment whether they should attend the meeting or perhaps change their intentions regarding attendance and voting is not something that emerges from the correspondence.

7 One variation is that there will be an upfront payment of $40,000 into the deed fund and that this will come from the sole director and that only the balance of $100,000 will be paid by instalments with the instalments then being 11 monthly instalments.

8 Under both forms of the proposal, that is, the form notified to creditors in the report and the proposed revised form, the company sole director will, it is said, guarantee all obligations of the company under the deed, presumably the ongoing obligation to inject monthly payments. But there is no evidence whatsoever about the financial capacity of the sole director to perform any such guarantee.

9 When it was pointed out by the Deputy Commissioner of Taxcation to the administrator in the recent correspondence that this was a problem, there was what can only be described as a hasty revision to include the director's wife as a guarantor and an unsupported statement that she owns a house worth $400,000 which is subject to a mortgage of $300,000, thus implying a financial capacity of $100,000 – if there is time to sell the house, a buyer can be found and she has no other liabilities that might eat up that equity. There is no evidence about her other liabilities or about the extent of any other assets she has.

10 Nor is there any evidence about the primary source of money for the deed fund apart from what may now be the initial $40,000 to come from the director whose financial circumstances, as I have said, are entitled entirely unexplained and unsubstantiated. So far as the element coming from the company's future activities is concerned, there are no cash flow or profit projections and nothing on which to base a finding that the company will have the capacity to make the monthly payments. All there is is history. And this shows quite dramatically that the company is insolvent with a large deficiency and that it has had a very bad track record in taxation compliance. Why things would be different in the future, one cannot imagine.

11 A comparison between estimated deed and winding up outcomes is provided by the administrator in his report. There is an estimated deficiency of $368,801 on the optimistic winding up scenario and of only $237,467 on the deed scenario.

12 It is clear, however, that present liabilities are understated by $34,000 in relation to tax alone. The estimates refer to a certain number of cents in the dollar: 3 cents for winding up on the optimistic basis; zero for winding up on the pessimistic basis and $16.97 for the deed basis before any adjustments for items identified as in need of adjustment. But as the schedule of comparisons shows, the only creditor who will really participate in the deed fund is the present substituted plaintiff, the Deputy Commissioner of Taxation. I should explain this.

13 There are four classes of creditors recognised under the winding up scenario. For the deed scenario, however, there is only one identified as the Australian Taxation Office plus an unexplained "contingency" of $26,000. This may be explained by a particular feature of the deed proposal I have not so far mentioned. The director and his wife as creditors will stand back and not participate under the deed. In addition, pre-existing creditors designated “critical trade and supply creditors” (which is everyone else except the Australian Taxation Office) will be paid within 30 days apparently without resort to the deed fund and with the money coming from the sole director who indemnifies the company and the deed administrator against those debts.

14 The real effect of the proposed deed is thus that the sole director and his wife will forego their debts of about $35,000; all the trade and supply creditors will be paid off in full by the director promptly after the deed is adopted; a deed fund of $140,000 will be assembled (perhaps by 12 instalments, each of $11,667 per month or perhaps by initial payment of $40,000 and then 11 equal monthly instalments); the Australian Taxation Office alone will participate in that deed fund (except for preferred employee creditors who account for only $2,400 and will be treated as in a winding up); and the company will continue trading in an attempt to make the money necessary to see the Australian Taxation Office alone of all the creditors drip fed over a year and, whatever happens, eventually left with a very major deficiency.

15 The deed proposal is thus highly discriminatory. In fact, one would venture to say that it may well be so unfairly discriminatory against the Deputy Commissioner of Taxation that the deed would be liable to be terminated as soon as it was entered into: see s 445D(1)(f).

16 The deed scenario also opens up the possibility that the company will repeat its history of very poor tax compliance.

17 Under the deed proposal, of course, there will be no possibility of insolvent trading claims against the sole director or preference recovery actions. Those possibilities will be available under a winding up, however. The administrator has identified prospects in both fields; that is, insolvent trading and preference recoveries. In the latter respect, the administrator's report is specific to the extent of identifying potential recoveries of the order of $145,000.

18 The point is made by counsel for the administrator that these possibilities will be of benefit to creditors only if funding is available to a liquidator. It was pointed out that the Australian Taxation Office has not given any indication that it would provide any such funding. It, of course, would be the logical party with other claims, comparatively speaking, minor.

19 Mr Lee, who appeared for the Australian Taxation Office, has indicated that under protocols that prevail there, decisions on that kind of matter are not made at an early stage such as this and the matter would be appropriately addressed only if and when a winding up were in place.

20 The only other thing that one could say about this is that the financial exposure of the Australian Taxation Office is very significant and that, as a general commercial matter, it may well see that there is merit in at least giving favourable consideration to some funding proposal.

21 Given the various factors to which I have referred, and in particular, the highly discriminatory nature of the proposed deed and what I consider to be its very strong susceptibility to being set aside on that basis, I am not persuaded that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up where the only reason for that continuation would be to afford creditors an opportunity decide whether to put in place this highly discriminatory deed of company arrangement.

22 The adjournment application is therefore refused.

[The substituted plaintiff read evidence relevant to the winding up application. There was no evidence or submission from the defendant.]

23 I order that Rohy’s Contracting Pty Ltd ACN 119 241 486 be wound up in insolvency.

24 I order that Sule Arnautovic of Jirsch Sutherland of Level 4, 55 Hunter Street Sydney, an official liquidator, be appointed liquidator of Rohy’s Contracting Pty Ltd.

25 I order that the plaintiff’s costs of the proceedings be fixed in the sum of $566.11.

26 I order that the plaintiff’s costs of the proceedings be paid by the defendant.

27 The orders may be taken out forthwith.

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