Deputy Commissioner of Taxation v The Binda Group Pty Ltd (Subject to a Deed of Company Arrangement)
[2011] NSWSC 1282
•02 December 2011
Supreme Court
New South Wales
Medium Neutral Citation: Deputy Commissioner of Taxation v The Binda Group Pty Ltd (Subject to a Deed of Company Arrangement) & Ors [2011] NSWSC 1282 Hearing dates: 25 October 2011 Decision date: 02 December 2011 Before: Ball J Decision: 1. That the deed of company arrangement made on 24 March 2011 between The Binda Group Pty Limited ACN 102 652 344 (Administrators Appointed) (Binda), Ozem Azzam Kassem and Andrew James Barnden, Tony Louie Takchi, John Graham Kelly, Jim Charles Wehbe and Eddie John Takchi be terminated.
2. That the winding up of Binda pursuant to r 5.3A.07 of the Corporations Regulations 2001 proceed as a winding up by the court.
3. That the liquidator of Binda in the winding up be John Vouris.
4. That the plaintiff's costs of these proceedings be paid by Binda.
Catchwords: CORPORATIONS - application to terminate Deed of Company Arrangement - Corporations Act 2001 s 445D(1)(g) - principle that insolvent companies should not continue to trade - Deed of Company Arrangement will not extinguish all debts - problems with company's administration and question whether creditors will be any better off under Deed - exercise discretion in favour of termination Legislation Cited: Corporations Act 2001 (Cth)
Corporations Regulations 2001 (Cth)Cases Cited: Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235; 226 ALR 510 Category: Principal judgment Parties: Deputy Commissioner of Taxation (Plaintiff)
The Binda Group Pty Ltd (Subject to a Deed of Company Arrangement) ACN 102 652 344 (First Defendant)
Ozem Azzam Kassem and Andrew James Barnden (Second Defendants)Representation: Mr S M Golledge (Plaintiff)
No Appearance (First Defendant)
Mr T Russell (Second Defendant)
Australian Taxation Office (Plaintiff)
ERA Legal (Second Defendant)
File Number(s): 2011/175054
Judgment
This is an application by the plaintiff, the Deputy Commissioner of Taxation (the DCT ), for an order under s 445D of the Corporations Act 2001 (Cth) ( the Act ) terminating a deed of company arrangement executed on 24 March 2011 (the DOCA ) in relation to the first defendant ( Binda ) together with ancillary orders under s 447A, including an order that the winding up of Binda proceed as a winding up by the court and that Mr John Vouris, who has filed a consent to act as liquidator, be appointed the liquidator of Binda. Alternatively, the DCT seeks an order under s 600B of the Act setting aside the resolution passed at a creditors meeting on 3 March 2011 to the effect that Binda execute the DOCA and consequential orders on the making of that order.
Binda was incorporated on 29 October 2002. On incorporation, Mr George Hasham, Mr John Graham Kelly, Mr Jim Wehbe, Mr Eddie Takchi and Mr Tony Takchi were appointed directors. Binda carried on business as a property developer. It owns and has at all relevant times owned two developments. One was land near Goulburn, which it was proposing to subdivide and sell. The other was a block of 26 strata residential units located in Goulburn. The two projects were financed principally by loans advanced by Suncorp Metway. Suncorp Metway's loans were secured by mortgages over the real property as well as a fixed and floating charge over the whole of the assets of Binda and guarantees from its directors, two of whom secured the amounts payable under their guarantees by mortgages over real property owned by them.
Binda got into financial difficulties and it is likely that by October 2008 it was insolvent. It was subject to a taxation audit in 2009 and, as a result of that audit, additional liabilities of approximately $1 million were imposed on it.
On 26 March 2010, the DCT served Binda with a statutory demand under s 459G of the Act claiming an amount of $1,389,545.00. The day before, the two Messrs Takchi resigned as directors and, on 30 June 2010, Mr Wehbe and Mr Kelly also resigned, leaving Mr Hasham as its sole director. Mr Hasham was made a bankrupt on 6 April 2011.
On 8 July 2010, the DCT filed a winding up petition in the Federal Court relying on the unsatisfied statutory demand. The winding up application was adjourned on numerous occasions between July 2010 and February 2011.
On 28 January 2011, the second defendants, Messrs Kassem and Barnden, were appointed joint and several administrators of Binda pursuant to a resolution of Mr Hasham in accordance with s 436A of the Act. Mr Barnden took principal responsibility for the administration, although he resigned as administrator on 30 September 2011, after leaving the firm of which he and Mr Kassem were partners.
Binda had failed to lodge income tax returns for the years ending 30 June 2008, 30 June 2009 and 30 June 2010 as well as business activity statements for the quarters ending 31 March 2009, 30 September 2009 and 30 September 2010. Its financial records are in a very poor state. It has not produced management accounts or financial statements since June 2007. It has no general ledger or creditor or debtor's ledger. The accounts for the year ended 30 June 2007 revealed a net asset deficiency of $5.8 million and a trading loss for the year of $4.3 million.
The Administrators' report as to affairs, which was issued on 23 February 2011, estimated a shortfall in the loan granted by Suncorp Metway on the sale of the real property as being between $1.46 million and $1.85 million. It identified creditors, other the DCT, as being owed $200,000 and a total deficiency of $3.5 million.
Following the appointment of Messrs Barnden and Kassem, Mr Hasham and the former directors of the company proposed the DOCA.
Under the terms of the DOCA:
(a) A deed fund was to be created for the purpose of dealing with moneys payable pursuant to the deed;
(b) Mr Tony Takchi, who became the sole director of the company, was to contribute $65,000 to the fund on execution of the deed and each of he, Mr Kelly, Mr Wehbe and Mr Eddie Takchi were to contribute $35,000 within 12 months of the date of the execution of the deed. Their liability to do so was several. The administrators were given an unregistered mortgage, supported by caveats, over land to secure those payment obligations;
(c) while the deed remained in force, there was a moratorium on the creditors pursuing their claims;
(c) participating creditors (which excluded Suncorp Metway to the extent that it was secured, Mr Tony Takchi, former directors, any related person of the company and the Chief Commissioner of State Revenue in respect of any claim for land tax) were required to accept their entitlements under the deed in full satisfaction of their claims. The release was effective whether or not a creditor received any dividend. Claims by other creditors, including claims by related parties, were not extinguished by the DOCA;
(d) control of the company reverted to Mr Tony Takchi.
The meeting of creditors to consider approval of the DOCA was convened on 3 March 2011 and was attended by 8 creditors. Those creditors and the amounts for which their proofs of debt were admitted were:
| (a) DCT | $1,533,489.01 |
| (b) Binda's accountants | $15,000.00 |
| (c) Real Estate Agent | $23,265.00 |
| (d) Local Council | $618.15 |
| (e) Binda's former lawyers | $15,162.40 |
| (f) Southern Star Pty Ltd, a company associated with Mr Kelly | $606,634.73 |
| (g) Eddie Takchi | $1.00 |
| (h) Tony Takchi | $1.00 |
Both Messrs Eddie and Tony Takchi lodged proofs of debt for $100,000.00, but the administrator admitted those claims for $1.00 each.
The administrators' s 439A report estimated that participating creditors would receive a dividend of between 3.76 cents and 7.42 cents in the dollar depending on whether Suncorp Metway incurred a shortfall on its securities and sought to prove for that shortfall. The report said that a pessimistic estimate of the amount unsecured creditors would receive if Binda were placed into liquidation was nothing and that the amount of an optimistic assessment was unknown. The report recommended that it was in the best interests of the creditors to resolve to accept the DOCA. The administrators summarised their reasons in these terms:
The estimated distribution under the DOCA scenario provides for a certain better return to creditors of the Company than under the optimistic or pessimistic liquidation scenarios;
In a liquidation scenario, it should be noted that legal recoveries with respect to insolvent trading and/or voidable transactions will increase the fees and expenses of the winding-up and it is difficult to accurately estimate these costs.
The ability of the directors and former directors to meet any insolvent trading claim is minimal, especially in the circumstances where they have guaranteed the significant debt due to the secured creditor.
A vote was taken in relation to the DOCA at the creditors meeting. The DCT voted against approval of the DOCA. The other creditors, who had given their proxy in favour of the chairman, voted in favour of the deed. Given the deadlock, Mr Barnden, who presided over the meeting, was called upon to consider exercising his casting vote. He cast his vote in favour of approval of the DOCA. The minutes record his reasons for doing so in the following terms:
The vast majority in number of the known creditors of the Company have voted for the motion that the Company execute a DOCA;
The vast majority in number of known unrelated creditors of the Company (4 to 1) have voted for the motion that the Company execute a DOCA:
The major creditor, Suncorp, who is the largest creditor and who will most likely become the largest unsecured creditor as a result of the shortfall on the sale of the real property of the Company, especially in circumstances where the Company is placed into liquidation and rectification costs will have to be incurred to allow the strata units to be sold, has abstained from voting and did not vote against the resolution and had advised that it intends to work with the director and former directors to realise the assets of the Company in an orderly fashion if a DOCA is executed;
From the Administrators' investigations to date, it appears that the execution of the DOCA would provide a certain and better return to unsecured creditors than under a liquidation scenario;
In the event that the Company is placed into liquidation and if any insolvent trading claim is successful, then from the information known to date, it is highly unlikely that the director and former directors of the Company will have the capacity to meet any claim against them as they have all personally guaranteed the shortfall (which is expected to be substantial) due to Suncorp;
If the casting vote is not used, then the resolution lapses and in such circumstances it may be appropriate to seek to have the meeting adjourned. This will see further unnecessary costs having to be incurred in the administration as an additional report to creditors will have to be issued, together with the convening of another meeting of creditors which would negatively impact the dividend payable to creditors;
As detailed on page eighteen (18) of the Report to Creditors dated 23 February 2011, the Administrators have provided an opportunity for creditors to fund any enquiries into insolvent trading claims. As at the close of business on 2 March 2011, no creditors have contacted the Administrators' office to express an interest in funding such enquiries; and
The Company will be allowed to continue in existence and achieve the objectives of Part 5.3 of the Act.
Section 445D(1) of the Act provides:
(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 report or statement under subsection 439A(4) that accompanied a notice of the meeting at which the resolution was passed; or
(c) there was an omission from such a report or statement 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 of the company as a whole; or
(g) the deed should be terminated for some other reason.
Section 445D(1) gives the court a discretion to set aside a DOCA provided the court is satisfied that one or more of the grounds set out in the section are satisfied. Consequently, it is necessary first to consider whether one or more of the conditions set out in s 445D(1) are satisfied and then to consider whether the court, in the exercise of its discretion, should set aside the DOCA: Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235; 226 ALR 510 at [270].
The DCT submits that, in this case, a number of the conditions set out in s 445D were satisfied. First, he submits that the s 439A report to creditors was misleading in various ways and that, in particular, it gave an overly optimistic assessment of the likelihood that creditors would receive 3.76 to 7.42 cents in the dollar. According to the DCT, there was considerable doubt concerning that matter both because of the risk that the directors would not contribute to the deed fund and the risk that Suncorp Metway would suffer a substantial shortfall on its securities for which it would prove against the fund. Second, the DCT submits that the report failed to disclose that, under the terms of the DOCA, some creditors, including related parties, would be free to pursue the whole of their debt against the company after the moratorium imposed by the deed came to an end. Third, he submits that the fact just mentioned meant that the deed was unduly discriminatory against those creditors who became bound by the deed. Fourth, he submits that there would be undue delay in the operation or fulfilment of the DOCA because there would be delays in Suncorp realising its security with the result that there would be delays in determining the dividend payable to all creditors. Finally, he submits that the DOCA would not enable the company to continue to trade and that that provided "some other reason" for terminating the DOCA.
In my opinion, it is not necessary to examine each of these allegations in detail. It is clear that one circumstance that satisfies the requirement that "the deed should be terminated for some other reason" is where the effect of a DOCA is to permit an insolvent company to continue to trade. As Campbell J (as his Honour then was) said in Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd [2005] NSWSC 1235; 226 ALR 510 at [261]:
The express words of s 445D(1)(g) are very broad, and should be applied in a way consistent with the policy of the Corporations Act and other public policies to which the law gives effect. Giving effect to the general policy of the corporations law that insolvent companies should not continue to trade is well within a legitimate use of s 445D(1)(g).
That principle applies in this case. The evidence is that Binda will have a large deficit after realisation of all its assets and termination of the DOCA. However, the effect of the DOCA will not be to extinguish all of its debts. In particular, debts owed to the Chief Commissioner of State Revenue and to related parties of Binda will not be released. The result is that Binda will continue to trade while it remains insolvent. In those circumstances, I do not think that it is correct for Mr Barnden to say in justification of the exercise of his casting vote in favour of the DOCA that the DOCA would "achieve the objectives of Part 5.3 of the Act". It is not an objective of that Part, nor is it in the public interest, that an insolvent company be permitted to continue to trade.
There are other reasons why the court should, in the exercise of its discretion, grant the relief sought by the DCT.
First, there are serious questions concerning the administration of Binda. The administrators' report to creditors suggests that the company may have traded whilst insolvent. In addition, it appears that the company did not keep any proper financial records after 2007, and it is clear that the company did not meet its statutory obligations to pay tax. Those matters make it inappropriate for control of the company to be returned to one or more of its former directors. They make it more appropriate that Binda be placed into liquidation so that those matters can be investigated by a liquidator, particularly if that is the course sought by its principal unsecured creditor.
Secondly, although it is important to compare the position creditors will be in as a consequence of the DOCA with the position they would be in absent it, there is no reason to suppose that creditors will be substantially better off under the DOCA. There is a question whether unsecured creditors will receive anything if Binda is placed into liquidation. Binda has no assets that are not the subject of security. Although it appears that the DCT will be prepared to provide some funding to a liquidator to investigate whether claims should be brought against Binda's directors, there is no certainty that those claims will be brought, that they will be successful or, if they are successful, that the directors will have any assets from which a judgment can be met. However, the position of creditors under the DOCA will not be substantially better. The estimated return to unsecured creditors is between 3.76 and 7.42 cents in the dollar. Neither of those amounts is large, and there must be a substantial risk that Suncorp Metway will suffer a large shortfall and seek to prove in respect of that shortfall, with the result that unsecured creditors will recover the amount of the lower estimate. Even that recovery depends on the former directors contributing the amounts they agreed to contribute under the DOCA. There is no certainty that that will happen.
Thirdly, it is relevant to consider the position of each unsecured creditor. The DCT is by far the largest creditor and he was opposed to the DOCA. Three of the remaining 7 creditors who voted in favour of the DOCA were related to Binda. One of those was a director, one a former director and one was a company associated with a former director. The director's and former director's proofs were only admitted for $1 each. The director and former directors had a clear personal interest in seeing that Binda was not placed in liquidation. As a result, they were able to avoid having their own conduct investigated. Under the terms of the DOCA, none of those creditors agreed to release Binda, although each agreed not to prove against the fund established by the DOCA and to a moratorium in respect of their debts. Of the remaining 4 creditors, the local council's debt was small ($618). That leaves the lawyers, accountants and real estate agent. Against this background, it seems to me an exaggeration for Mr Barnden to have said as justification for exercising his casting vote in favour of the resolution to say that "a vast majority" of creditors by number were in favour of the DOCA. That statement gives a very incomplete picture of the true position, and led him to give insufficient weight to the views of the DCT.
For those reasons the DOCA should be terminated. The effect of termination of the DOCA is that Binda is taken to have passed a special resolution under s 491 of the Act that it be wound up voluntarily: Corporations Regulations 2001 r 5.3A.07(1). It is appropriate having regard to what I have said that the winding up proceed as a winding up by the court and that Mr Vouris be appointed the liquidator.
The orders of the court are:
(1) That the deed of company arrangement made on 24 March 2011 between The Binda Group Pty Limited ACN 102 652 344 (Administrators Appointed) ( Binda ), Ozem Azzam Kassem and Andrew James Barnden, Tony Louie Takchi, John Graham Kelly, Jim Charles Wehbe and Eddie John Takchi be terminated.
(2) That the winding up of Binda pursuant to r 5.3A.07 of the Corporations Regulations 2001 proceed as a winding up by the court.
(3) That the liquidator of Binda in the winding up be John Vouris.
(4) That the plaintiff's costs of these proceedings be paid by Binda.
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Decision last updated: 05 December 2011
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